THE BUSINESS & MANAGEMENT REVIEW - The Academy of ...

ISSN 2047-2854
Academy of Business & Retail Management
THE BUSINESS &
MANAGEMENT REVIEW
Volume 2, Number 2
www.abrmr.com

Executive Board Members
Dr P R Datta, Executive Chair
Professor P R Banerjee, Head of Research & Development, ABRMR
Dr B.R.Chakraborty, Operations
Prof. G. Dixon, Review Editor
Prof. Lothar Auchte, Review editor
Prof. Ogenyi Omar, Review-Editor
Prof. Gairik Das, Review Editor
Dr Soumitra N.Deb, Review Editor
Prof. Fon Sim Ong, Review Editor
Editorial Advisory Board
Prof. G. Dixon, Prof. A. Jayakumar, Professor N.P Makarkin, Dr. Sudaporn Sawmong, Dr. John
Dung-Gwom, Prof. Victor Braga, Prof. Luiz Alberto Alves dos Santos
Prof. Mariia Sheluntcova, Professor N.D Gooskova, Professor P R Banerjee, Prof. Dr. Hayri
Ulgen, Dr. Saumitra N. Deb, Professor Gairik Das, Professor A.C Panday, Dr Nripendra Singh,
Prof. Fon Sim Ong, Prof. S. Rangnekar, Prof. C. Michael Wernerheim, Prof, srini Srinivasan
Session Chairs
Corporate Governance and Business Ethics
Prof. Sal AmirKhalkhali
The Growth and Economic Development
Prof. Prof. Marek Dziura
HRM, Marketing and Information Technology
Dr. P.R.Datta
Ashru Bairagee-Project Manager & Research Fellow
M Agalya-Research Executive
i

Corporate Governance and Business Conference (CGBC)
19-20 th July 2012
Holiday Inn Boston-Somerville,
30, Washington Street,
Boston, MA, 02143, USA.
Dear Conference Participants,
It is my very great pleasure to welcome you to CGBC – Boston 2012. For some of you this will be
your first visit to Boston and we trust that during your time with us you will gain fresh insights,
engage in healthy discussions and forge new friendships in a spirit of academic enquiry. No one
here present can be under any illusion that for many these are challenges times and the nature of
the global economy is such that it is beholden on academics to seek a broader understanding of
common themes and theories. The fall-out from the recent world economic crisis has been such
that the issue of governance has moved centre stage. This 2 nd Boston conference on Corporate
Governance and Business affords an opportunity to explore pressing issues in an international
environment conducive to robust discussion and debate.
I believe that we will all benefit from our engagement with the Conference and I trust that all
concerned will have stimulating and intellectually enriching stay in Istanbul.
With every good wish,
Professor P. R. Banerjee
Head of Research and Development
Academy of Business and Retail Management (ABRM)
ii

Sr.
No.
Contents
Agenda & Articles
Corporate Governance and Business Conference (CGBC)
19-20 th July 2012
Articles
Agenda for Corporate Governance & Business Conference
1 Board Governance Development for Civil Society Organisation: A Strategy for Systems
1
Strengthening and Sustainability
2 Are Singapore Boards Global 7
3 Corporate Governance in the Value Based Management Concept 13
4 Investors` Reaction to the Implementation of Corporate Governance Mechanisms -
5 Corporate Governance in Public Sector Banks-Tapping the Bee Hive 21
6 Financial Reporting Standards as a Tool in Order to Ensure Corporate Transparency: The 25
Case of Turkey
7 Boardroom Pay, Performance and Corporate Governance in Malaysia 27
8 An Analysis of Performance Appraisal Systems of Merchantile bank Limited 52
9 On the Effectiveness of Quality Regulation: Some Empirical Results 53
10 Compliance Versus Volatility of Performance in 2012, Corporate Influence in Bureaucratic
Systems. Where Should the Focus for America lay Most
59
11 Exposing MBA Students to Corporate Governance 61
12 Enterprise Restructuring in the Conditions of the Crisis and the Globalization Challenges.
Based on the Experiences of the Polish Economy
13 Corporate Governance and Performance of Commercial Banks in Nigeria 63
14 Profit creation, intra and inter-generational Equity: Need for New Company Law 64
15 The Publishing Scramble for Africa: A salutary tale of opportunity, bribery and censure 65
16 A Panel Cointegration Approach to FDI and Growth in Africa: Evidences from ECOWAS,
ECCAS, UMA, EAC and SADC Regions
17 Technology Systems for Sustainable Development in Poland 78
18 Risk in the Enterprise Value Creation 88
19 Analysis of Causes and Consequences of the Global Economics Crisis –Poland`s Perspective 94
Page
20 The Disharmonies, Dilemmas and Effects of the Transformation of the Polish Economy 103
21 Low Economic Awareness and Its Consequences: The Case of Turkey 112
22 Ranking Indian States on Social Welfare & developmental Status in Globalisation Era using a
MCDM Approach
119
23 Creating Consumer Based Brand Equity in Indian Sport Shoe Market 131
24 A Conceptual Framework of Customer Retention Strategy (CRS) 139
25 Reward or Penalty Inter-temporal Pricing of Decentralized Channel Supply Chain Under
Asymmetric information Condition
26 Succession Planning in Management Institutes: A critical Study 141
27 Cultural Intelligence as Core Competency to Employability 142
28 Opinion-Leading Role of Politically Aware Consumer 143
62
66
140
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Contents
Agenda & Articles
International Conference on Business & Economic Development (ICBED)
23-24 th July 2012, Las Vegas, USA
Sr.
No.
Articles
Page
Agenda for International Conference on Business & Economic Development
1
How Does Employee satisfaction Impact Information Flow during order fulfillment
process
151
2
An Exploration of Consumer Misbehaviours and their influences on Retail stores: An
Application of the theory of Justice
156
3
How Do Online Consumer Review Sentiments affect E-commerce Sales A Text Mining
Analysis
157
4 Geographic Distribution of Population and Labor Force in Saudi Arabia 158
5
The Relationship Between Leadership and Learning Organisation: A Review of the
Literature and Research Proposal
168
6 Relationship Marketing: Towards a Definition 174
7 ERP System Implementation CSFs for Korean Organisations: A Delphi study 182
8
The Effects of Extrinsic Cues on the Relationship Between Brand Image and Purchasing
Intention-Evidences from Chinese Exchabge Students` Perspective
189
9
Employee Stock ownership and Employee Psychological ownership: The Moderating Role
of Individual Characteristics
190
10 Adoption of Job Rotation as a Component of Staff Development in Polytechnics In Ghana 198
11
Water – The missing ingredient in real and sustained economic development
209
12
Markets in Financial Instruments Europe Directive (MIFID): A Method of Controlling
Ethical Banking
210
13
Efficiency of EC Greenhouse Gas Abatement Measures and Firms in the European Union:
Evidence from Plant Level Allocations and Surrendered Permits.
220
14 Corruption, Democracy and Tax Compliance: Cross-country Evidence 221
15
Are High Interest Loans a Debt Trap or Access to Credit Evidence from a Field
Experiement of Payday Borrowers.
231
16
The Expectations of Potential Acquirers of Real estate rights and decisions to Purchase
property in times of Recesion
232
17
The Role of Micro and Small Enterprise in Employment Opportunity and Poverty
reduction in addis Ababa, Ethiopia: The Case of Addis ketema Sub City
233
18 Innovation Policy in Poland – Challenge for Intensive Growth 234
19 Structural Changes and Development of the SME Sector in Poland after EU Membership 243
20
21
22
The Identification and Measurement of Financial Threats Vs the Causes of Insolvency in
the period of Poland`s Economic Transformation
Challenges of Sustainability and Urban Development in Nigeria: Reviewing the
Millenium Development Goals
Incentives to Encourage Social Environmental Responsible Corporate Actions:
Willingness to pay for non-use value of Land-Case of Backpackers in Fiji
255
264
265
iv

Sr.
No.
Articles
Page
23
Testing the Export-led Growth Hypothesis for Sub Saharan Africa Countries (SSA). A
Panel Data Analysis
24 Cross Country Analysis of GCC Economic Risk 267
25 How to Transfer Knowledge to your work 278
26 Enterprise Development under Globalisation and the New Economy Conditions 279
27 Innovation in Enterprise Development Strategy 287
28
Research of Influencing Factors for Usage of Facebook Willingness-A case Study on
College Students in the Tamsui Area
29 Scientific Advance and Perceptions about the Effectiveness of Democracy in MENA 306
30 What Explains Innovative Outcomes at the Start Up Stage 320
31 Does Vice Pay A Traditional Investigation of “Irresponsible” Investing 321
266
296
v

Corporate Governance and Business Conference (CGBC)
19-20 th July 2012
Holiday Inn Boston-Somerville,
30, Washington Street,
Boston, MA, 02143, USA.
SCHEDULE FOR THE CONFERENCE 2012
Tuesday 17 th July, 2012, thru Wednesday 18 th July, 2012
Arrival and Independent traveling days in Boston, USA
Thursday, 19 th July, 2012
8.00 AM -9.00AM Registration
Thursday 19 th July, 2012
9.00AM-9.15AM
OPENING ADDRESS & WELCOME
9.15AM-13.00 PM
Track: Corporate Governance and Business Ethics
Session Chair: Sal AmirKhalkhali
I
II
III
IV
V
Board Governance Development for Civil Society Organisation: A Strategy for Systems
Strengthening and Sustainability
Anisa Ari Amunega, Sandra Osanmer and Abubakar Kurfi, Management
Sciences for Health, Nigeria
Are Singapore Boards Global
Shital Jhunjhunwala and R.K Mishra, Institute of Public Enterprise, India
Corporate Governance in the Value Based Management Concept
Tomasz Rojek, Cracow University of Economics, Poland
Investors` Reaction to the Implementation of Corporate Governance Mechanisms
Nousheen Tariq Bhutta and Syed Zulfiqar Ali Shah, International Islamic University,
Islamabad, Pakistan
Corporate Governance in Public Sector Banks-Tapping the Bee Hive
Mridula Sahay and S. Shiva Kumar, Amrita School of Business, Amrita Nagar, India
vi

VI
VII
VIII
IX
X
XI
XII
XIII
XIV
Financial Reporting Standards as a Tool in Order to Ensure Corporate Transparency: The Case of
Turkey
N. Ata Atabey, Department of Business Administration, Selcuk University, Turkey and
Huseyin Cetin, Department of Tourism management, Necmettin Erbakan University,
Turkey
Boardroom Pay, Performance and Corporate Governance in Malaysia
Puan Yatim, UKM-Graduate School of Business, University of Kebangsaan, Malaysia
An Analysis of Performance Appraisal Systems of Merchantile bank Limited
Sheikh Abdur Rahim, Daffodil International University, Bangladesh
On the Effectiveness of Quality Regulation: Some Empirical Results
Sal AmirKhalkhali and Atul Dar, Saint Mary`s University, Halifax, Canada
Compliance Versus Volatility of Performance in 2012, Corporate Influence in Bureaucratic
Systems. Where Should the Focus for America lay Most
David M Chapinski, School of Public Affairs and Administration, Rutgers University,
Newark, USA
Exposing MBA Students to Corporate Governance
Patricia Miller Selvy, Bellarmine University, USA
Enterprise Restructuring in the Conditions of the Crisis and the Globalization Challenges. Based
on the Experiences of the Polish Economy
Ryszard Borowiecki and Barbara Siuta-Tokarska Department of Economics and
Organization of Enterprises, Cracow University of Economics, Poland
Corporate Governance and Performance of Commercial Banks in Nigeria
Olagunju Adebayo and Oluwa Temitope Mariam, Redeemer`s University,
Nigeria
Profit creation, intra and inter-generational Equity: Need for New Company Law
Olawale Ajai, Lagos Business School, Pan African University, Lagos, Nigeria,
13.00-14.00
BREAK FOR LUNCH
Thursday 19 th July 2012
14.00 PM-14.25 PM
Key Note Speaker
Mark T Jones
Mark is a fervent internationalist, who is widely travelled. He has had a distinguished career in
education and currently serves as the Director of External Affairs for Park Royal College. In the
year 2000 he initiated and oversaw a major humanitarian venture into war-torn Sierra Leone,
and then spent two years in the Middle East where he worked in Jordan (2002 – 2004). He
vii

writes and speaks on a variety of subjects ranging from corporate governance to women’s health
in the developing world.
As well as being an orator of distinction, Mark believes that it is essential that we articulate our
convictions with passion; in this regard he is eager to help the voice of others to be heard. He is a
Legislative Leadership Training specialist, as well as being an advisor on Diaspora community
engagement. He is the Co-Founder & Executive Director of the Horn of Africa Business
Association (HABA) as well as sitting on the Board of the Kitenge Africa Foundation (Uganda),
the Advisory Committee of the Expertise Forum (A Think Tank Society focusing on the
Sustainable Development of South Asian Countries) and being Chair of Trustees of Daughters of
Eve. In 1994 he was elected a Freeman of the City of London, and is also a Fellow of the
Chartered Management Institute.
14.30 PM – 17.30
Track: The Growth and Economic Development
Session Chair: Prof. Marek Dziura
I
A Panel Cointegration Approach to FDI and Growth in Africa: Evidences from ECOWAS,
ECCAS, UMA, EAC and SADC Regions
Rasheed Olajide Alao, Department of Economics, Adeyemi College of Education, Ondo,
Nigeria
II
III
IV
VI
VII
VII
Technology Systems for Sustainable Development in Poland
Marek Dziura, Cracow University of Economics, Poland
Risk in the Enterprise Value Creation
Andrzei Tomasz Jaki, Cracow University of Economics, Poland
Analysis of Causes and Consequences of the Global Economics Crisis –Poland`s Perspective
Ryszard Borowiecki, Cracow University of Economics, Poland
The Disharmonies, Dilemmas and Effects of the Transformation of the Polish Economy
Jarosxaw Kagzmarek, Cracow University of Economics, Poland
Low Economic Awareness and Its Consequences: The Case of Turkey
Murat Arici, Department of Philosophy, Konya N.E University, Turkey
Ranking Indian States on Social Welfare & developmental Status in Globalisation Era using a
MCDM Approach
Ayan Chattopadhya, IISWBM (aafiliated to Calcutta University), Kolkata, India and
Arpita Banerjee Chattopadhya, Budge-Budge College (affiliated to Calcutta University),
India.
17.35PM
CLOSING SPEECH FOR THE 1 st DAY CONFERENCE
viii

Friday 20 th July, 2012
10.00AM-10.15AM
OPENING ADDRESS FOR DAY 2
10.15 AM -13.00 PM
Track: HRM, Marketing and Information Technology
Session Chair: Dr P R Datta
I
II
III
IV
V
VI
Creating Consumer Based Brand Equity in Indian Sport Shoe Market
Ravindar Reddy and Chandrajeet Kumar, School of Management, National Institute of
Technology, Warangal, India
A Conceptual Framework of Customer Retention Strategy (CRS)
Palto Ranjan Datta, University of Hertfordshire, UK
Reward or Penalty Inter-temporal Pricing of Decentralized Channel Supply Chain Under
Asymmetric information Condition
Weiping Liu, Department of Business Administration, Eastern Connecticut State
University, USA
Lindu Zhao, Southeast University, Nanjing, China
Succession Planning in Management Institutes: A critical Study
Priyanka Kulkarni and Arun Mokashi, MIT CoE, Centre for Management Studies and
Research, Pune, India
Cultural Intelligence as Core Competency to Employability
Ruey-FaLIN, Nattawadee Korsakul and Nattharuja Korsakul, FengChia University,
Taiwan
Opinion-Leading Role of Politically Aware Consumer
Mirza Ashfaq Ahmed, University of Gujrat, Pakistan and Suleman Aziz Lodhi
Faculty of Management Sciences, Lahore Leads University, Pakistan
13.00-14.00
BREAK FOR LUNCH
16.05 PM CLOSING SPEECH FOR THE CONFERENCE
21 st April 2012
There will be no session or function scheduled for today. Please take this opportunity to
explore Boston.
ix

Board Governance Development for Civil Society Organizations:
A Strategy for Systems Strengthening and Sustainability.
Anisa Ari Amunega, Sandra Osanmor and Abubakar Kurfi
PLAN -Health project, Management Sciences for Health, Abuja, Nigeria
Keywords
Board development, civil society organizations; sustainability, systems
Abstract
Civil Society Organizations (CSOs) in Nigeria play a critical role in transparency, accountability and
responsiveness in the multi-sectoral approach to HIV/AIDS. CSO board members often lack knowledge of their roles
and responsibilities and when they do fail to carry them out, which impacts negatively on organizational
effectiveness. Management Sciences for Health (MSH), through the USAID-funded PLAN-Health Project in
Nigeria, has developed an intervention to ensure strategic board governance programs promote transparency, social
participation and accountability within Civil Society Organizations.
Our strategy is rooted in a three stage process: defining roles and responsibilities; increasing knowledge and
skills; and improving performance of board member’s roles and responsibilities. In the course of MSH PLAN-Health
program implementation, organizations identified to receive technical support to strengthen their board were
interviewed to ascertain the areas and level of support required. This resulted in a training programme to close
identified governance gaps within these organizations.
A total of thirty Board members were trained across two organizations. The structure of the training
provided the opportunity for board members to start from the basic; vision, mission, and value statement which are
the pillars of any organization. Members were also taken through various tools that will aid planning, scheduling
and oversight in order to improve organizational performance.
Capacity-building of Board members is a critical step to health systems strengthening and sustainability of
HIV Service Organizations in resource poor settings like Nigeria.
Introduction
Nigeria is the most populous country in Africa and was ranked third worst affected by
HIV/AIDS in the world in 2003. Since the first case of HIV/AIDS in Nigeria was reported in 1986, there
has been rapid increase in the total number of people living with HIV/AIDS (PLWHA). The national
prevalence rose from 1.8% in 1991 to 5.8% in 2001 and reportedly declined to 5% in 2003 and 4.6% in 2008.
Not only HIV but numerous other health indicators and outcomes have remained dramatically low in the
country with the health related millennium development goals becoming obviously difficult and
unrealistic to meet. The health sector in the country is characterized by the lack of stewardship;
inadequate financing, weak health infrastructure and poor and ineffective coordination among all sectors
in the nation’s health care system. In view of these challenges it is obvious that government alone cannot
handle the complex task of providing affordable and qualitative health care to the populace, hence the
need for the involvement of all stakeholders especially the civil society organizations.
Civil society organizations denotes all those civil associations ; organizations, and networks that
occupy the social space between governments and the families and the communities, this includes,
community based organizations, faith based organizations and other channels of interactions like the
traditional institutions that play a role in providing services to the populace such as private or voluntary
unions, civic clubs, trade unions, gender clubs, cultural and religious groups, charities, social and sports
clubs, cooperatives, environmental groups, professional groups, consumer organizations and the media.
Even though in Nigeria quantitative data on practically everything is difficult to come by, but there are
The Business & Management Review, Vol.2 Number 2, July 2012
1

indications That the civil society movement is one of the fastest growing sectors in the country, however
growth and evolution of the civil society organizations is more dependent on the flow of foreign aid than
on interests in specific areas of national development 6 .
Civil society organizations play a critical role in translating government’s policies into actions by
bridging the gap between public policy formulation and utilization ; they also serve as a pathway for
facilitating community mobilization and sensitization as well as ensuring social and political
accountability in the delivery of health services. In the multi-sectoral response to HIV and AIDS in
Nigeria, civil society organizations help mostly in supporting the local and grass root dimension to the
response in the country, with many of the most innovative initiatives to address HIV/AIDS been
designed and implemented by civil society groups with little or no external support 7 .
The increasing role of HIV and AIDS to global morbidity and mortality has led to the huge outcry
by people for involvement in the affairs of HIV/AIDS response globally and at national level. Civil society
have been seen as a way of enforcing the bottom up pathway of health care provision where people will
be responsible for taking the initiative to determine the type of health care they need which led the WHO
to form the first civil society platform by the world health organization in 2001 8 . Civil society if rightfully
engaged can be a veritable platform for bringing in more equity into health service provision bearing in
mind that governments and international donor organizations have largely failed to reach the most
vulnerable and hard to reach populations which is a major prerequisite in providing health care for all.
HIV/AIDS has become a manageable chronic illness rather than the terminal illness it was
perceived to be in the past, this is mainly due to increased availability of ART. It has therefore become
necessary for such gains to be sustained as this is a very important determinant of patient outcome. Civil
society is vital in ensuring that patients have the best in terms of care and support and overall service
provision. Being a chronic illness with a lot of stigma still associated with it, HIV/AIDS has social and
economic implications on patients on ART, even though the drug itself is free in most settings. It is
important to get the perspectives of those accessing and taking the treatment to inform policy; and indeed
also obtain the perspectives of those delivering and funding the treatment programs, civil society
organizations can do just this and more.
Efforts by non-governmental organizations have been criticized by numerous stakeholders as
been non sustainable in view of dwindling global support for HIV and AIDS services. But these comments
tend to assess the local approaches of civil society engagement in isolation from wider factors, such as the
existence or absence of supportive national health policies that attempts to insulate the csos from this
challenges 7 . The predominant challenges confronting civil society engagement in Nigeria are numerous;
some of which include lack of coordination among them, weak or dwindling funds; inadequate human
resources, exclusion of civil society from the decision making process at the national level and above all
poor or deficient oversight by the members of the board of these organizations. The board is a sine qua
non to the evolution, development and functionality of civil society organizations and is responsible for
maintaining and making strategic decisions on the organizations objectives, policies and procedures as
well as ensuring proper compliance with laid down rules and regulations for the overall success of the
organization. Every nonprofit organization needs a strong foundation of compliance and a broad
organizational awareness of laws and regulations related to fundraising, Conflict of interest, financial
accountability, human resources, lobbying, political advocacy and taxation. However, the information and
concepts apply broadly to all types of nonprofit boards. Because of the diversity by size and maturity of
different Organizations, each organization must determine whether or not an individual practice is
appropriate for its current situation. Board members and employees become involved with a nonprofit
because of the organization’s public benefit mission. Therefore the continued success of nonprofit
organizations requires broad public support and confidence which is the specific remit of board members.
The Business & Management Review, Vol.2 Number 2, July 2012
2

The principles for good governance and ethical practice, which are designed to guide board
members and staff leaders of every non -profit organization as they work to improve their own operations
enables the board and staff leaders of every organization to examine these principles carefully and
determine how best they should be applied to their own operations. Many organizations will find that
they already follow—or go beyond—these principles. Others may wish to make changes in their current
practices over time, and some may conclude that certain practices do not apply to their operations. The
purpose is to reinforce a common understanding of transparency, accountability, and good governance
for the sector as a whole—not only to ensure ethical and trustworthy behavior, but equally important, to
spotlight strong practices that contribute to the effectiveness, durability, and broad popular support for
organizations of all kinds. Still, given the wide, necessary diversity of organizations, missions, and forms
of activity that make up the nonprofit community, it would be unwise, and in many cases impossible, to
create a set of universal standards to be applied uniformly to every organization Instead, it is
recommended that the following set of principles serve as a guideposts for every organization, adopting
specific practices that best fit its particular size and organization’s purpose to evaluate their current
standards.
This study attempts to highlight those critical steps necessary for the designing and
implementation of a capacity building intervention for the board of civil society organizations in low
income nations like Nigeria as designed by Management Sciences for Health, and how if rightly applied
this process can lead to the strengthening of the systems of these organizations to effectively govern
themselves and scale-up HIV service-delivery, improve country-ownership, and promote long-term
sustainability.
Methodology
Numerous Board members were trained across various organizations providing HIV and AIDS services in
Nigeria, with support from the USAID funded PLAN Health project that is being implemented by
management sciences for health. Our intervention strategy was based on the assumption that Board
members will progress through three major stages:
Analysis of the stages:
As an entry point, the governance team carries out a consultative visit to better understand the
governance structure, in terms of composition and how the Board carries out its operations as well as the
Boards mental models, this of course varies bearing in mind the different contexts and dynamics of these
organizations. This is imperative to understand the internal and external factors affecting the governance
systems.
The second step is conducting an assessment using governance assessment tool. This is a tool
which gives an in depth exposition of the gaps in the board composition and operations. Prior to this,
there is an overall organizational assessment conducted using the Management Sciences for Health
The Business & Management Review, Vol.2 Number 2, July 2012
3

Management and Organizational Sustainability Tool (MOST), this is a participatory assessment process
for identifying an organization’s management needs and making concrete plans for improvement. The
MOST tool brings out the basic gaps at the periphery and actually identifies the organizational systems
that needs to be strengthened, that is why the team has to go further in administering the Board
governance assessment tool to illuminate specific gaps in governance practices.
The third step is the design of intervention, basically the results from the assessment informs the
design of intervention. This guides the team on what needs to be addressed, the area of focus for
strengthening and what type of intervention will be appropriate. For some organizations, it could be just
providing technical assistance in form of coaching and mentoring while for some it could be training in
workshop setting or both. We could even go further in providing technical assistance in developing
governance/guidance documents and support in governance enhancement plans. This stage of designing
intervention is really critical because a whole lot of factors and determinants need to be considered for
example, the Board composition, in terms of the level of literacy, mental models, and priorities.
Simultaneously, the variable the capacity building team wants to change is key.
The fourth step is the actual implementation of the intervention depending on what is most
appropriate for the organization. The team mostly utilized training in a workshop setting and makes it
participatory and really interactive, with a shift from the traditional training program which places so
much emphasis on theories, to a program designed specially to have a real life impact on the participants
with an eye on the beneficiaries, that is the organization and the community at large. It involves learning,
reflecting and practicing what they have learnt. Information from the first visit gives the facilitator some
sort of internal connection to the standards and operations of the organization and helps in linking their
mission, vision, values and goals to the training, and from experience, it has made the training climate
relaxing and intriguing. . A Standard of ethics manual for Board operations was adapted and used during
the trainings. This document is designed to support the effective functioning of non-profit boards by
recommending specific best practices, which are designed to guide board members and staff leaders of
every non -profit organization as they work to improve their own operations, it also enables the board and
staff leaders of every organization to examine these principles carefully and determine how best they
should be applied to their own operations. At the end of the trainings, the Board develops an action plan
or Board work plan to close identified governance gaps within the organizations .This forms the Board
calendar that guides Board activities and timelines for a year or six months (also depends on what the
organization wants).
The fifth step is basically following up with the action plans developed and providing feedback
on how responsive they are in its implementation. Technical assistance is provided to support the Board
on areas that they might be facing challenges. This is a continuous process until the governance system is
really functional, both financially and programmatically. At this point, they are left to sustain the
intervention themselves. (The PLAN –Health Project calls this “weaning off”)
Board governance training methodology/process
The Business & Management Review, Vol.2 Number 2, July 2012
4

Early Indicators of success
An immediate result gotten from this intervention was an increase in knowledge and
understanding of their roles and responsibilities evidenced by improved governance cycle of the
organization. The governance practices and processes improved evidenced by locally-led development of
Board policy manuals, fundraising policies, organizational plans and other governance documents. The
Boards were also able to rebrand the image of the organizations, developed and reviewed vision, mission
and value statements and had documented delineations of roles and responsibilities. The latter fostered
team vitality and cohesion which is essential for any form of progress in achieving the goals of the
organization and having a real impact on the beneficiaries
The overall systems of the organizations have also been affected, no doubt by the shift in mental
models of the Board. Policies never used have been reviewed and usage encouraged and enforced with
more coordinated way of carrying out activities with a focus on results. This has eventually to an
improvement in the provision of comprehensive HIV and AIDS services to the communities.
Discussions
Our methodology towards strengthening Board governance for civil society organizations in
Nigeria focuses on building accountability, transparency, ownership, community linkages/engagement,
Board activism and leadership. The success of this methodology counters the other methodologies that
focus on only governance or operation practices of Board. The PLAN-Health approach challenges nonprofit
to consider alternative approaches to building organizational Board governance outside the
traditional theoretical method of Board development to a more practical way that will have a huge and
lasting impact on the Board, where creativity and problem solving practices is encouraged through a
process of reflection and putting into practice what they have learnt towards achieving their overall
organizational goals.
From our experience board trainings with high dependency on theoretical means only serves as a
quick fix as it is common to have re-occurring problems that perpetuate Board dysfunctions which is
evidenced in poor team spirit, poor understanding of roles and responsibilities and ultimately poor Board
performance. But our approach which hinges more on experiential method in the delivery of training
allows members, who have not had the chance to work with other members to feel relaxed and open to
share, learn, internalize and find ways to improve the boards operations and governance practices.
Sadly, the state of the board governance development has not moved forward as have other areas
of nonprofit capacity building. Many boards still look to “board training” as the solution to its problems
and far too many consultants continue to rely on outdated generic tools that go for the “quick fix,” rather
than address underlying problems with the governance structure. The structure of most of the boards we
have worked with are such that it is difficult to clearly state their roles and responsibilities, this is evident
in the operations of the Board as board members involve themselves in the day to day management of the
office and the implementation of programs. It is therefore important for board trainings to be adapted to
meet the peculiar gaps identified following the board assessment. MSH –PLAN-health designs its
trainings to suit the needs of specific boards, which is not a quick fix method as board members a involve
in identifying their challenges and proffering actionable steps to address them.
Conclusion
In financial constraint settings, it is essential for the leaders of non-profit organizations to govern
and lead their organizations in ways that will continuously build the confidence and trust of its
beneficiaries, staff, funders, community and stakeholders at large. This is imperative if such organizations
would stand the test of time and provide sustainable interventions because invariably, development funds
and partners will not always be there. Therefore, Capacity-building of Board members is a critical step to
health system strengthening and sustainability of HIV Service Organizations. The organizations we have
The Business & Management Review, Vol.2 Number 2, July 2012
5

worked with demonstrated this as they effectively carry out their roles and responsibilities towards the
board and the organization at large.
Research limitations and directions for future research
1. Even though the findings have shown that board development is critical to effective functioning of
civil society organizations; the challenge of organizations depending mostly on donor agencies to
finance this kind of interventions makes it difficult to sustain.
2. The research is more of a description of the process and the early indicators of success for the board
development of these organizations, there is need to carry out further research to track how this
interventions have directly benefited the communities these organizations serve.
3. The challenges of funding to scale up the provision of such support to other grass root community
based organizations and faith based organizations working in all sectors of health care not just HIV
and AIDS in view of the obvious gains arising from it.
4. Civil society organizations do not exist in isolation as a result they are subject to the influence of all
the factors affecting the health system of the nation. This may affect the nature and benefit of this
kind of intervention
References
Federal Ministry of Health, Nigeria; National Situation Analysis of the Health Sector Response to HIV and
AIDS in Nigeria; FMOH/NASCP 2005; 1-198.
UNAIDS AIDS epidemic update: Global summary of the AIDS epidemic 2009
World Health Organization, UNAIDS and UNICEF 2010. Towards Universal Access: Scaling up priority
HIV/AIDS interventions in the health sector. 2010 Progress Report. World Health Organization, UNAIDS and
UNICEF 2010
Gladys M, D. Mukurazita H. Jackson A; A review of household and community responses to the HIV/AIDS
epidemic in the rural areas of sub-Saharan Africa (UNAIDS: Geneva, 1999), available at http://
www.unaids.org/publications/documents/economics/agriculture/una99e39.pdf, last accessed 2 June 2012.
B Rau; Politics of Civil Society in Confronting HIV and AIDS; Journal of International Affairs; 82.2 ; 2006
Greet P; Laura M; Mary A. T; Saly S M; Sofia G; Increasing Civil Society Participation in the National HIV
Response: The Role of UNGASS Reporting; J Acquired Immune Deficiency Syndrome Volume 52, Supplement 2,
December 1, 2009
Abdulazeez Y, Ismail B, Institutional Responses and the People Living with HIV/AIDS in Nigeria: The Gaps in
Sustainable Prevention, Mitigation, Care and Support; European Journal of Social Sciences – Volume 17, Number 3
(2010)
Action Aid Nigeria; Integrated HIV /AIDS , Tuberculosis and Malaria (ATM) response resource kit for civil
society organizations in Nigeria; 2010
Judy Transforming the works of the Boards; Moving toward community driven governance, December, 2005
Principles and practices of non-profit excellence; A guide for non-profit Board members, managers and staff.
Minnesota Council of non-profit, 2010
Acknowledgement
The authors wish to acknowledge all the staff of the Program to build Leadership and Accountability in the
Nigerian Health sector (PLAN-Health), Management Sciences more specifically Barry Smith, who believed in me and
generously shared insights , wisdom and materials gathered from vast experience working in various international
Boards. I would also like to thank Ochanya Iyaji-Paul, a HIV/AIDS community care advisor, with the PROACT
project who prodded me to document the work I carry out with the Board of organizations.
Special gratitude goes to the Board and members of Gede foundation and Lawanti Community Development
Foundation who were open to learning and created an enabling environment for this intervention.
Source of Funding
The intervention that gave rise to this article was supported by the United States Presidents’ Emergency Plan
for AIDS Relief (PEPFAR), through the United States Agency for International Development (USAID) under the terms
of the Program to build Leadership and Accountability in Nigeria’s Health System (PLAN-Health), Associate award
No. 620-A-00-10-0009-00 under the Cooperative Agreement No. GPO-A-00-05-0024
The Business & Management Review, Vol.2 Number 2, July 2012
6

Are Singapore Boards Global
Shital Jhunjhunwala
Institute of Public Enterprise, India
&
R.K. Mishra
Director, Institute of Public Enterprise, India
Keywords
Regional Diversity, Board Diversity, International Directors.
Abstract
While there is a rising acceptance that to be effective boards should be diverse, study of diversity is mostly limited to
race or gender. This paper examines regional diversity of corporate boards of Singapore. Singapore boards do not
have global representation but are biased towards local directors. Need for relevant talent on board appears to be a
major reason to appoint international directors. The study did not find a strong relationship between boards’
globalization and its size.
Research Need and Objective
There is a growing belief that heterogeneous boards with wide range or skills, view points,
experience and different ways of thinking will result in higher levels of boards’ productivity and
effectiveness. Research in this respect has mainly focused on gender and race diversity suggesting that
increase of women and minorities on boards improves their performance. Diversity goes beyond race and
gender to encompass age, experience, ethnicity, lifestyle, culture, education, religion and many other
facets that make each of us unique as individuals.
In this paper we examine whether Singapore Boards are regionally diverse in terms of having
global representation. People from different countries have different cultural and upbringing background.
Further as businesses are now global, having a board that understands how different countries operate,
their business environment and people is a necessity.
Research Methodology
To explore regional diversity in Singapore boards we asked the following research questions -
1. Level of Global Representation
2. Does talent and skill need increase regional diversity
3. Impact of Board Size on Regional Diversity
The sample consisted of 302 directors from 29 of the 30 Straits Times Index (STI) companies, the
major index of Singapore for the year 2010. (Information on one company could not be obtained). Data
was collected using Content analysis from annual reports and websites of the companies under study. The
country with which they spent the early years of life (referred to as country of origin or belonging
henceforth) has been considered and not the country of residence or citizenship. There country of origin
has been estimated based on appearance, name, and early education. Country of 28 directors of the 302
directors could not be identified making the final sample size of directors 274.
Level of Global Representation
As many as 24% of the boards have directors only from Singapore and more than ¾ had at list one
international Director. (Figure 1) 55% of the 200 largest US companies have no non-US director 1 . At the
same time 28% of the Singapore boards have directors representing 5 or more countries. Thus Singapore
boards are more regionally disperse than US companies with some boards being more regionally diverse
than others.
The Business & Management Review, Vol.2 Number 2, July 2012
7

Figure 1
Regional Diversity of Boards
NA
10%
6 Countries
14%
5 Countries
14%
4 Countries
14%
3 Countries
10%
2 Countries
14%
1 Country
24%
Figure 2
Regional Dispersion
0.7
0.8
0.7
0.6
0.6
0.5
0.4
0.3
0.2
0.5
0.1
0
Proportion of Directors
0.4
0.3
0.2
Local
SEA & China & Singapore
Other Asian Counties
UK
USA & Canada
Europe
Africa
Australia & New Zeland
South America
0.1
0
Singapore SEA & China Other Asian
Counties
UK USA & Canada Europe Africa Australia &
New Zeland
Region
South America
As expected more than 60% of the directors belong to Singapore. (Figure 2) With South East
Asian countries being the number two with almost 13 % share. More than 1/3 of the directors were from
other countries. Only 6% of US directors are non-US. Some of the companies listed on STI are based in
other countries particularly Hong Kong, Malaysia & Indonesia. When comparing directors’ country to
country of the company the share of directors being local increased by about 4% (64.6 % to 68.2%).
Unmistakably companies prefer local directors to directors from foreign countries. More than 82% of the
directors were from Asia. Another 13% were from USA or UK. Less than 5% come from other parts of the
world. The study of US companies had shown the of the non- US directors about 50% were from UK or
Canada, 20% from Europe (Germany, France and Netherlands) and another 8% from Australia all western
countries with little representation from Asia.
Gender inequality is obvious with female directors being restricted to Singaporeans. In case of male
directors only 62 % of the directors were from Singapore.
The Business & Management Review, Vol.2 Number 2, July 2012
8

Table 1: Duration on Board
Home
Duration years Country Other Countries
Average 7 6
Maximum 44 22
Less Than 1 year 13% 20%
1-20 years 79% 76%
More than 20 years 8% 5%
Directors from home country had served on the board of the company longer than directors from
others countries with the maximum duration being double. (Table 1) 7% more of the directors from other
countries had been on the board for less than one year and 3% less had been serving the board for more
than 20 years implying a bias in favour of directors from home country. It also suggests that globalization
of Singapore Boards has gained prominence only in recent years.
Figure 3
Regional Represention by Status
100%
90%
80%
2%
0%
2%
2%
13%
9%
0%
8%
12%
8%
2% 0%
2%
2%
5%
5%
3%
9%
80%
70%
60%
50%
40%
30%
Executive
Non-
Executive
Independent
Percentage of Directors
70%
60%
50%
40%
30%
28%
12%
60%
72%
20%
10%
0%
Other Asian Counties
Local
SEA & China & Singapore
UK
USA & Canada
Europe
Africa
Australia & New Zeland
South America
20%
45%
Singapore
Other Asian Counties
SEA & China
UK
10%
USA & Canada
Europe
Africa
Australia & New Zeland
0%
Executive Non-Executive Independent
Status
South America
As almost 65% of the directors are from Singapore it is no surprise that 60% of non- executive and 72% of
independent directors were from Singapore. What appears unusual is that only 45% of the executives are
from Singapore. Executive directors tend to be from the same country as the where the company is based.
In fact 64% of the executive directors are of local origin. (Figure 3)
Table 2: Status break up for regions
Non-
Region
Executive Executive Independent
Singapore 12% 20% 68%
Local 16% 21% 63%
SEA & China 37% 20% 43%
SEA & China & Singapore
16% 16% 68%
Other Asian Counties 29% 36% 36%
UK 29% 33% 38%
USA & Canada 7% 33% 60%
Europe 20% 0% 80%
Africa 0% 0% 100%
Australia & New Zealand 0% 0% 100%
South America 100% 0% 0%
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9

Of all the Singaporeans on boards 12% are executives, 20% non-executives and as much as 68%
are independent directors. (Table 2) 35% of Asians directors (other than Singapore) were executive
directors. This suggests that in selection of executive directors’ talent and ability to run the company gets
more importance than country they belong to.
Figure 4:
Country of Chairman and CEO/MD
Chairman
CEO/MD
UK, 10%
SEA, 10%
India, 0%
HK/China,
7%
Others/NK
, 0%
Singapore,
72%
Others/N
K, 18%
UK, 4%
SEA, 4%
India, 7%
HK/China,
14%
Singapore
, 54%
Singapore
HK/China
India
SEA
UK
Others/NK
When it came to selection of Chairman, Singaporeans were definitely the first preference (72%).
In contrast about half the Chief Executive Officer (CEO) /Managing Director were not from Singapore.
Table 3: Top Man: Local or Global
Home Country Other Countries
Chairperson 97% 3%
CEO/MD 77% 23%
*UK Chairpersons to Hong Kong based companies were considered as home Country as these
companies were build and grew during the period HK was under the control of UK
Is the top man from the home country With the exception of one company (Singtel) chairman
was from the home country of the Company. CEO’s were slightly more broad-based with 23% being
foreigners.
Talent and Skill
Companies are besieged with a huge talent gap that extends all the way up to the boardroom.
Companies need talented, experienced and able directors who have the skills to meet new challenges and
add immense value to the organization. The question arises that do companies widen their search to
include international directors to fill this need.
Figure 5
Qualification vs Country
45%
44%
40%
35%
30%
34%
25%
27%
23%
20%
21%
18%
15%
14%
10%
5%
9%
3% 0%
3% 4%
0%
Doctorate Professional Post Graduate Graduates Civil Servants Diploma
Qualification
Home Country Other Countries
*Only highest qualification considered
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10

Comparison between directors from home and other countries show that international directors
are given preference if they have higher qualifications. 5% and 11% more foreign directors were
doctorates or post graduates respectively than local directors. 44% of the local directors were graduates
against 27% of the foreign directors. (Figure 5)
The experiences of directors are classified into four categories. First those directly related to
business, say marine experience of a board member in companies doing marine business. Secondly,
experience that is closely associated to the company’s business, for instance investment experience of a
director in a banking company or a board member in a company in the resort business who is an architect
is considered related experience. Third are Directors with functional experience like accounting,
marketing and law. Finally those directors whose experience is unrelated have no obvious linking to the
nature of company’s business.
Figure 6
Experience vs. Country
40%
35%
30%
25%
20%
15%
10%
37%
5%
0%
7%
27%
8%
34%
Direct
Related
Functional
Nature of Experience
40%
31%
Not Related
16%
Other Countries
Home Country
37% of international directors had experience directly related to the business of the company and
40% had functional expertise. 10% less local board members had direct experience and almost double had
experiences not related to the company activities. (Figure 6) Further all foreign CEO’s had significant
expertise in the company’s business.
An analysis of the age of board members suggests that directors from foreign countries are
younger on an average by 3 years. 15% of local directors were more than 70 years old in contrast, only 6%
international directors were more than 70 years old. 16% of international directors were young (less than
50 years), double the local (8%) young directors. (Table 4)
Table 4: Board Age
Home
Age
Country Other Countries
Minimum 43 39
Maximum 82 74
Range 39 35
Average 60 57
Less than 50 8% 16%
50-69 years 77% 77%
70 or more 15% 6%
* based on 107 directors
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Singapore companies are definitely including international directors to bring more talent and skill
on board both in terms of qualification and experience. Younger international directors are being
appointed who can help the board gear up to face challenges of the modern world.
Board Size and Regional Diversity
Table 5 shows no evident relationship between board size and regional diversity. The correlation
between board size and number of countries was only 0.46. The regression equation formed was
y =0.5x - 1.93 at .019 significance level
Table 5: Board Size and level of Regional Diversity
Board Country per Director Total
Size

Corporate Governance in the Value Based Management Concept
Tomasz Rojek
Cracow University of Economics, Poland
Keywords
Corporate governance, investor relations, value based management, enterprise stakeholders, agency
theory
Abstract
Market economies of 21st century characterize with a distinct change in the priorities of business,
expressing itself in implementing by enterprises strategies focused on the multiplication of wealth of their owners, as
well as the common domination of so-called investor capitalism. The consequence is the occurrence of considerable
dispersion of ownership, the isolation of the ownership function from the enterprise management function and
dominating enterprise ownership structures by institutional investors. In these conditions, conflicts between the
interests of owners and the interests of executives managing enterprises arise. All the more that the limitation of
exercising control function by the first ones is increased both by the dispersion of the titles of ownership and the very
character of institutional owners on behalf of which hired managers perform ownership functions. Such a conflict,
defined as the “agency problem”, primarily results from the diversification of the owners’ and the managers’ goals.
In this situation it was necessary to search for instruments which could effectively integrate the goals of both of these
groups and thus foster enterprise development, an increase in the effectiveness of its functioning and the
maximization of its market value. In such conditions, the concept of value based management was born, the systems
of active corporate governance began to be created, and the process of re-including “hired” managers in the circle of
the enterprise owners in order to create conditions motivating them to take decisions supporting the processes of the
multiplication of enterprise market value was initiated.
Thus, the paper will present the essence and the characteristics of the corporate governance system, its
models and assumptions, as well as elements which are convergent and divergent with the value based management
concept. In particular, attention will be paid to the fact that activities focused on creating value for the owners on the
one hand enable to satisfy claims of all the interested enterprise stakeholders, and on the other hand allow to create its
value.
Introduction
An era of so-called managerial capitalism, ongoing in the world economy, characterizes, among
others, with a significant separation of the ownership function from the managerial function. Due to a
clash among various groups of interest in an enterprise (the owners, the managers, the employees) and
external entities, a conviction has established that the main aim of an enterprise is survival and
development followed by the maximization of profit and value. An attempt to reconcile the mentioned
three groups of interest in an enterprise requires the simultaneous implementation of economic and social
tasks by it. In practice, it is extremely difficult. The multitude of these tasks seriously restricts efficient
enterprise management, at the same time becoming a base for endless discussions on whose interests
should be realized first.
Enterprises which function according to this model have problems, among others, with making
plans and settling results. In consequence, they may operate not effectively enough, which may bring
negative universal social consequences as it may lead to the waste of resources and the slowdown of the
development of the national economy. Imposing the implementation of divergent goals on an enterprise,
such as: manufacturing goals, goals connected with the multiplication of capital, educational, cultural,
ecological goals, etc., is the reason for which enterprises, wanting to implement a lot of goals, in practice
do not implement any of them well, and they do not implement many of them at all. Moreover, the
multiplicity of goals creates serious barriers for efficient management, such as: an inability to create
consistent and long-term strategic plans, blurring the effectiveness of measurement systems, and, what
The Business & Management Review, Vol.2 Number 2, July 2012
13

follows, it brings about difficulties in building motivation systems. The questions: whose interests should
be taken into consideration in the first place and how it is possible to reconcile conflicts within this scope
are always a subject of heated debates. In practice, it is the bargaining power of a specific group connected
with the enterprise that decides whose interest is the most important, often with harm or complete
disregard for the interest of other groups.
The biggest problems with establishing the hierarchy of goals concern primarily medium-sized
and large enterprises in which the separation of ownership and managerial functions has occurred. In
smaller enterprises, where owners very often also deal with management, at the same time performing
ownership and managerial functions, the problems occur to a smaller extent. The question of defining the
basic goal for the existence of the enterprise, and the balance of power of individual groups of interest
depend on a corporate governance (CG) model adopted in a given enterprise, defined as an organization
of relations among the owners, the management board and the employees in the process of exercising
control over the enterprise. To be more specific, it is a system of assessing activities of the enterprise
management bodies in the process of its value creation and the development for stakeholders, conditioned
institutionally and customarily. Stimulating development and creating enterprise value, harmonizing
interests of the parties involved in it, and ensuring investment attractiveness are considered the main
objectives of CG. Thus, on the one hand, it enables effective ownership control, and on the other hand it
creates a mechanism which integrates the goals of individual stakeholders of the enterprise.
To a great extent, the CG tasks presented above are compatible with the assumptions of the value
based management concept whose general model assumes the existence of balance between diverse goals
of the individual groups of interest. Value based management, by its nature focused on the maximization
of this value for the owners, does not mean that building strong loyalty bonds within its framework,
which fosters gaining benefits from mutual cooperation with all the other stakeholders is less important.
This fact is the reason for which the value based management concept is accepted by all entities of the
enterprise’s environment, and is now considered a kind of a standard of strategic management of an
organization, being one of the few management philosophies which, focusing on the implementation of
the enterprise owners’ goals, strives at its development and conduces the improvement of effectiveness,
and at the same time creates benefits for other stakeholders.
The essence and the models of corporate governance
Corporate governance is a phenomenon which is currently common in the economic practice,
consisting in ensuring balance between the interests of all the entities which are directly or indirectly
involved in enterprise activity. Functioning of corporate governance may be discussed on two levels: a
formal level and an informal one.
The informal level is formed by cultural factors and national tradition influencing colloquial
understanding of the corporate governance notion and the shape of its everyday practice.
On the formal level, corporate governance is shaped by legal regulations. They include
regulations of commonly mandatory character, such as the Business Activity Act, civil law, the
Accounting Act, as well as internal documents of an enterprise, such as the statute, and other acts
regulating the activity of the enterprise bodies or the rules of good practice being in effect in the
enterprise, including the suggestions of actions, in particular practical situations, and thus ordering
activities of the enterprise bodies and their members.
In various countries, various factors shape the formal and the informal level of corporate
governance, giving shape to its mechanism and practice. The systematization of the differences mentioned
above brought about the isolation of so-called national models of corporate governance defining the rules
of the corporate governance organization in the groups of states in which there are significant similarities
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14

etween the conditions of enterprise functioning (Lis/Sterniczuk 2005). In the literature on the subject, the
following national models are distinguished:
1. The German model. The assumptions of the German model were applied while designing the
system of the corporate governance bodies in Germany, Holland, Switzerland, Sweden, Austria,
Denmark, Norway and Finland, Central European countries and the Baltic states. Its elements are
also present in the Polish corporate governance system. Corporate governance bodies in the
German model consist of the Supervisory Board and the Management Board. The responsibility of
the Supervisory Board is to control the enterprise management, exercised in the shareholders’
interests, and the protection of public interest. It seems that in the German model the interests of
the groups of owners are not protected to the same extent, e.g. the protection of minority
shareholders’ interests is relatively weak.
2. The Latin model. The assumptions of the Latin model are present in the corporate governance
systems of France, Italy, Spain and Belgium. It is estimated that the rules and the mechanisms of
corporate governance in these countries are relatively poorly developed. The Latin model allows
two forms of the corporate governance body structure. The first one, in which there is a single
organ of corporate governance, namely the Board of Directors, which is modeled on the British or
American model. The other possibility is designing corporate governance body on the German
model, namely dividing duties resulting from exercising corporate governance between two
organs - the Management Board and the Supervisory Board. The decision about the choice of
structure belongs to the enterprise owners.
3. The British model. The practice of corporate governance in the British model is based on the
mechanisms of self-regulation which do not provide for a necessity of the external interference
from the state in enforcing the rules of corporate governance.
4. The American model. The basic value that the mechanisms of the American system of corporate
governance are subject to is the transparency of information on the doings of an enterprise. The
corporate governance body whose task is to control the enterprise’s operations is the Board of
Directors which includes managing directors, that is executives, and external independent
directors who represent shareholders.
5. The Japanese model. In Japan, the corporate governance body is the Board of Directors appointed
by shareholders. The Board of Directors employs and controls the Management Board of the
enterprise. The code of good practice is the basic document regulating the rules of corporate
governance.
It is estimated that the organization of corporate governance in the European countries is based on
the assumptions of the German and Latin models. Moreover, it should be emphasized that the theoretical
models mentioned above refer to the rules of the organization of corporate governance in all enterprises
without differentiating their ownership status. On the basis of the general assumptions, characteristic for a
given model, the states adopt specific solutions concerning the ownership supervision, sometimes
different from the ones functioning in the private sector. At the same time, we must remember that the
models presented above keep evolving and undergo deliberate reforms. Supporters of the reforms in
corporate governance postulate that they should lead to the following beneficial model changes (Porter
1997):
1. An increase in the real ownership in economy by enabling owners to perform the function of a
long-term, active role in companies;
2. Better synchronization of the interests of shareholders, corporations, managers, workers and the
society;
3. Improvement in the quality of the information used while taking investment decisions;
4. Enabling investors more effective supervision over the results of managers’ activities based on the
criteria which are adequate for the enhancement of competitiveness;
5. Ensuring greater accordance of internal management processes with the sources of enterprise
competitive advantage.
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The origin and the role of corporate governance in an enterprise
What underlies the emergence of the corporate governance concept is the agency theory,
formulated and popularized in the American model. The agency (representation) relation occurs when
one entity (a mandatary, a principal) employs another person (an agent) to act in its interest, at the same
time delegating its authority to make decisions the consequences of which will relate to its property
sphere. Its consequence, however, is moving away the principal from the forefront of activities with the
simultaneously growing degree of the agent’s freedom. The separation of the principal from the main
stream of events limits both the certainty of the realization of its interests, and the possibility to influence
the agent.
From the economic point of view, the principal - agent relation takes place between the
shareholders and the managers of a public company: the shareholders entrust their capital with the
managers and delegate their right to manage and administer it in their interest. The base for this
“fiduciary” transfer of rights to dispose the capital is “the implicit contract” between the shareholders and
the managers. By entrusting their capital with the managers, the shareholders expect that the latter will
manage it in their interest, with due diligence and loyally to them. In other words, the managers are
“agents” who manage somebody else’s capital, namely the capital of the shareholders who are their
economic “principals”. On the grounds of this theory, a company is a legal fiction - an artifact enabling the
accumulation of capital to implement specific economic ventures with the use of the existing
specializations of the parties to the agency relation. Shareholders have capital at their disposal but they do
not have time, knowledge or experience to use it effectively. Therefore, they entrust it with professional
managers having adequate knowledge, skills and experience within this scope. In this way, the separation
of ownership and control (management) over the company occurs. This separation enables economically
effective “division of work” and the use of the specializations of the existing entities employed in the
corporation, particularly the professionalism of the managers and the financial abilities of the investors.
However, the agency relation is also connected with a significant threat for the shareholders. Managers
may use the authority they are given to fulfill their individual (private) aims which do not agree with the
shareholders’ interests and aims as the economic owners of the company. Some significant problems of
the relations between the company shareholders and managers result from that, namely:
1. The problem of information asymmetry between principals (shareholders) and agents (managers,
members of the Management Board) expresses itself in the advantage the managers have in the
access to information on the company doings and in the limited ability of shareholders to verify
reports prepared by the managers and to monitor their operations.
2. The problem of the representative’s hidden action - the manager, acting as a rational homo
oeconomicus, first of all strives at the maximization of his personal usefulness (the fulfillment of his
individual interest) with the least possible amount of labour, trying to hide it from his
“principals”. He may justify his failures with objective circumstances (e.g. unfavourable market
situation). There is also a danger of the opportunistic behaviour of the managers - opportunism
prompts the agent to minimize his contribution (effort) and maximize his individual wealth and
extra-financial benefits.
3. The problem of risk division, which is connected with different preferences of the principal and
the agent. Shareholders have small block of shares in a large number of companies, risk
diversification favours adopting a more open attitude to risky investment. On the other hand,
managers engage all their time and skills (human capital) into one enterprise, hence, the
unwillingness to undertake too risky ventures (aversion to risk), as well as the inclination to keep
profit in the company creates balance reserves and limits the size of dividend to be paid to
shareholders. The reason for that is that the payment of disposable resources decreases the scope
of the power of managers in big enterprises, and keeping profit in the company makes them
independent from the control of the capital market - by treasuring profit, the managers do not
have to search for additional funds from shareholders. Then, the managers may allocate
disposable funds to investment aiming at the “horizontal” extension of the company or the whole
concern, e.g. the takeover of other companies or the acquisition of enterprises from other
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16

industries whose reorganization or development requires further, considerable investment
expenditure. However, such investment does not create additional shareholder value, and the
motive underlying the managers’ decision to undertake it is often the strive at an increase in their
power and significance in the business environment (so-called empire building).
To sum up, the agency conflict between shareholders and managers boils down to the problems
of threefold kind:
Firstly, the problem of the lack of managers’ loyalty to the company and shareholders, expressing
itself in a danger of overusing the managers’ direct influence on the company in order to
maximize their individual interests at the expense of the shareholders’ interests.
Secondly, the danger of not exercising due diligence when conducting the company business and
using their information advantage in order to free themselves from responsibility for the
economic failures of the company.
Thirdly, various degree of aversion to risk which is characteristic for portfolio investors and
managers, which results from various character of “contributions” brought into company by them
and various possibilities of diversifying this risk.
Apart from the mentioned conflicts between the owner and the manager, there are also other conflicts
referring to all stakeholders, which jointly include:
shareholders – contribute financial capital, they are interested in the maximum return on the
value of the investment made (dividend, an increase in the share price),
employees – contribute their work, time, skills; they are interested in remuneration, permanency
of employment relationship, good conditions of work. Employees develop particular
qualifications, specific for a given organization, counting that they will be able to use the acquired
skills working in a given corporation. Passing to another firm often forces them to the repeated
investment into the development necessary to perform different functions;
managers - contribute knowledge, time, skills and other components of human capital,
lenders - bring funds, expect regular remuneration in the form of interest,
suppliers - provide services, sell necessary resources, they are interested in fruitful and long-term
cooperation,
insurers - offer protection services, they are interested in stable and safe development of the
enterprise, which translates into an increased value of insurance premiums (Pukaa 2011),
local societies - ensure local infrastructure, expect the improvement in the quality of living,
creating workplaces.
Both the partners and the employees, as well as the company creditors, and the social environment in
which the enterprise operates, are interested in the long-term development of the company, increasing its
profitability and competitiveness, which enables to maintain permanent legal and economic relations with
it and assures settling their claims against the company by it. However, due to a different character of
“contributions” made by them in the company (namely, the way in which they contribute to its economic
success) and a different character of their claims for their assets, there may be situations in which the
interests of the total number of stakeholders or certain categories of stakeholders may be in conflict with
the interests of other entities connected with the company:
employees, creditors, suppliers - are interested in keeping workplaces, payment of regular
remuneration and possibly its raise. In the interest of these entities will be conducting cautious
dividend policy, treasuring profit in the company, cautious asset valuation and creating balance
reserves. They will rather prefer the company’s engagement into ventures which are less risky but
guarantee the settlement of the defined a priori claims against it. In extreme cases, the employees
and the trade unions representing them, aiming at the maintenance of a high level of employment
in the company may, however, impede or even prevent its necessary restructuring, which is
related to the necessity of redundancies or reducing the employees’ remuneration.
shareholders - are interested in obtaining return rate on investment in the company shares, either
in the form of an increase in their stock price index or in the form of the payment of dividend;
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17

conducting the company management policy by the management board whose aim will be to
increase its shareholder value.
To sum up, the rules and the instruments of corporate governance have been created and are applied
to neutralize the conflicts mentioned above which occur between the stakeholders of an enterprise. Thus,
the basic role of corporate governance is to build economic value cooperation between the stakeholders,
which is to serve the interests of a corporation since it constitutes contribution towards its long-term
success. The basic goals of the system of control and supervision over the corporation, the expression of
which are corporate governance rules, include:
harmonizing interests of entities being the parties participating in the corporation functioning;
provide the owners and the stakeholders with effective procedures and the institution of
monitoring the Management Board and correcting its mistakes,
gradual increase in the enterprise value from the point of view of the owners and other interested
entities,
creating investment attractiveness and ensuring the supply of funds enabling the enterprise
development.
Value based management versus corporate governance in the enterprise
Value based management is considered a concept well conveying the need to define enterprise goals,
and favouring the integration of managers’ and enterprise owners’ goals (Jaki 2008). It indicates a need to
maximize value for all stakeholders owing to which it is regarded universal. It is also an element binding
the enterprise strategy and the financial results achieved by it.
Value based management is a philosophy of enterprise management according to which enterprise
activity and management processes are focused on maximizing its value from the point of view of the
owners and the capital engaged by them (Szczepankowski 2007). The concept assumes taking such
strategic, operating and investment decisions in the enterprise which will help to achieve its main goal,
namely the growth of value. Enterprise value creation is nowadays one of the strategies of conducting
business activity, and triggering adequate management processes is necessary to include it in the rules of
enterprise functioning. And although an increase in the enterprise value is not always equal to an increase
in the owner value (they are not synonymous notions), ensuring an increase in the owner value usually
also requires satisfying the needs of other interested groups, recipients, employees or contractors, for
example, which at the same time leads to the growth of the enterprise value. Increasing the owner value
as a goal of the enterprise activity is advantageous because achieving it means also the fulfillment of other
goals set to the enterprise. Therefore, this process may be perceived as a kind of a compromise between
variously defined goals, reconciling even conflicting goals and giving the best result in the long term.
Some theories of enterprise (managerial theories and agency theory, among others) emphasize the
meaning of conflict of interests between the managers and the owners of an enterprise, which finally
causes distortions of the goals implemented by the company. Enterprise value management puts a lot of
pressure on diluting or even eliminating this conflict. It is achieved owing to an adequate structure of
motivation systems, connecting the managers’ interest with the owners’ interest, and basing management
on proper measures. Also the fact that the focus on increasing value in a long term is compliant with the
postulate of balancing interests of all stakeholders is also helpful. Thus, aiming at creating the owner
value may be regarded the leading goal of the enterprise, on the condition of understanding its essence by
other stakeholders whose expectations may initially seem divergent. This initial divergence of interests of
individual groups being in a relationship with the enterprise must be always remembered. Consumers
want low prices and high quality, employees want high salaries and good conditions of work, suppliers
want low risk and high return rate, creditors want low risk and high interest rate, local community wants
high environmental fees, donations to charity and numerous workplaces. The postulates of balancing
interests of all the entities related to the enterprise often make it simpler for the managers to justify noneconomic
diversification or excessive investing in the core activity being in the decline phase, since these
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18

operations will be positively assessed by entities other than the owners (Rappaport 1999). However, there
is an alternative approach to various groups of interest connected with the enterprise, convergent with the
interests of the owners, compliant with the rule of competitiveness and the rules of conduct taking into
consideration social responsibility. This approach assumes a necessity to maintain competitiveness of the
enterprise if it is to serve the interests of all the entities linked to it. The fact that the fate of the enterprises
in a long term depends on the financial relations with all the stakeholders is considered here. In order to
satisfy their claims or expectations, the enterprise has to generate cash, maintaining a proper level of the
effectiveness of activity.
Focusing on financial flows in the long-term constitutes the content of the an increase in the enterprise
value policy model. This value is also based on the sum of long-term surpluses of stakeholder value. It is
not possible to create a long-term value at the same time ignoring all the interested stakeholders because
value is created when an enterprise has some market share, loyal recipients and suppliers, motivated
workforce, friendly local community, etc. It all translates into the value of financial flows. The
maximization of enterprise value causes also the growth of the wealth rate for the whole society. It is
possible when the effects of enterprises’ activity (the recipient value) are on a higher level than the value
of contributions (the supplier value). Therefore it is true that without customer value we cannot talk about
shareholder value. Thus, the source of long-term cash flows are satisfied recipients of goods and services.
This satisfaction automatically translates into an increase in shareholder value. It is possible only when
total earnings exceed total costs. Thus, the owners should have full information on what revenues and
costs connected with the conducted activity are, since they incur the biggest capital risk
(Copeland/Koller/Murrin 1997). The profitability of the capital contributed by them is the measure of the
effectiveness of enterprise operations. Therefore, shareholder value is a bonus for them for earlier
satisfaction of claims of all entities involved in the enterprise activity (suppliers, employees, creditors,
local community, the state) and the incurred risk related to financing this activity. Thus, an increase in
enterprise value reflects the growth of productivity and competitiveness from which all the groups linked
to the enterprise, not only the owners benefit. That is why the necessity to maintain competitiveness
should be recognized if it is to survive and serve the interests of all the entities related to it.
The existence of an enterprise in the long run depends on financial relations with all the stakeholders.
In order to meet the expectations reported by the entities connected with the enterprise, it has to generate
adequately high level of effectiveness, which, in turn, requires value creation. Thence, an enterprise
creating value gives benefits not only to its owners but it also raises the value of the claims of all the
entities connected with it. To sum up, customer and his satisfaction is the source of creating enterprise
value, whereas shareholder value is an additional value which stays after satisfying the claims of
employees, suppliers, local community, the state. Hence, we may assume that the focus on shareholder
value means simultaneous satisfaction of all stakeholders’ claims. Value is a significant indicator of
results, and the owners are the only party for which the maximization of their own demands is
synonymous to the maximization of expectations and claims of all the interested parties (Wroska 2001).
Thus, on the one hand, activities focused on the shareholder value creation enable to meet the
expectations of all stakeholders, whereas on the other hand they make it possible to create enterprise
value. Here also lies the convergence of the enterprise value creation and the idea of corporate
governance. The subjective concept aims at the permanent process of the enterprise value growth and at
the same time reconciles the stakeholders’ expectations to it - at the same time inscribing in the canon of
the progressing ownership supervision.
Conclusions
Market economies of 21st century characterize with a distinct change in the priorities of business,
expressing itself in implementing by enterprises strategies focused on the multiplication of wealth of their
owners, as well as the common domination of so-called investor capitalism. The consequence is the
occurrence of considerable dispersion of ownership, the isolation of the ownership function from the
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19

enterprise management function and dominating enterprise ownership structures by institutional
investors. In these conditions, conflicts between the interests of owners and the interests of executives
managing enterprises arise. All the more that the limitation of exercising control function by the first ones
is increased both by the dispersion of the titles of ownership and the very character of institutional owners
on behalf of which hired managers perform ownership functions. Such a conflict, defined as the “agency
problem”, primarily results from the diversification of the owners’ and the managers’ goals. In this
situation it was necessary to search for instruments which could effectively integrate the goals of both of
these groups and thus foster enterprise development, an increase in the effectiveness of its functioning
and the maximization of its market value. In such conditions, the concept of value based management was
born, the systems of active corporate governance began to be created, and the process of re-including
“hired” managers in the circle of the enterprise owners in order to create conditions motivating them to
take decisions supporting the processes of the multiplication of enterprise market value was initiated.
Thus, the thesis that in the conditions of market economy, in enterprises focused on the growth of
value and at the same time possessing the separated ownership and managerial functions in their
structure may be considered true, two concepts discussed in this article: value based management and
corporate governance may and should be implemented simultaneously, they permeate each other, they
complement each other and, by fulfilling their own goals, co-contribute synergically to enterprise
development.
References
Copeland T., Koller T., Murrin J. (1997), Wycena: mierzenie i ksztatowanie wartoci firmy, WIG-Press,
Warszawa.
Jaki A. (2008), Wycena i ksztatowanie wartoci przedsibiorstwa, Wydawnictwo Wolters Kluwer, Kraków.
Lis K.A., Sterniczuk H. (2005), Nadzór Korporacyjny, Wydawnictwo Oficyna Ekonomiczna, Kraków.
Porter M. (1997), Capital Choices: Changing the Way America Invest in Industry, (in:) Studies in International
Corporate Finance and Governance Systems. A Comparison of The U.S., Japan and Europe, edited by D.H. Chew,
Oxford University Press, Oxford.
Pukaa R. (2011), Potencja rynków ubezpieczeniowych krajów Europy Wschodniej, (in:) Ubezpieczenia
gospodarcze i spoeczne. Wybrane zagadnienia ekonomiczne, Scientific supervision: W. Sukowska, Wydawnictwo
Wolters Kluwer, Kraków.
Rappaport A. (1999), Warto dla akcjonariuszy, WIG-Press, Warszawa.
Szczepankowski P. (2007), Wycena i zarzdzanie wartoci przedsibiorstwa, Wydawnictwo Naukowe PWN,
Warszawa.
Wroska E.M. (2001), Model przedsibiorstwa, system nadzoru korporacyjnego a tworzenie wartoci dla
akcjonariuszy, (in:) Zarzdzanie wartoci przedsibiorstwa a struktura akcjonariatu, Collective work, The Univeristy
of Gdansk– Warsaw School of Economics, Gdynia – Karskrona.
The Business & Management Review, Vol.2 Number 2, July 2012
20

Corporate Governance in Public Sector Banks-Tapping the Bee Hive
Mridula Sahay
Amrita School of Business, India
S. Shiva Kumar
Accountant General (C&RA), A.P., Hyderabad, India
Keywords
Globalization, business community, e-broking, corporate governance.
Abstract
Globalisation of the businesses has created many challenges in front of the corporates and they will not be
able to sustain unless they over come such challenges. In today’s rapidly growing competitive business community,
Corporate Governance provides broad parameters to face the challenges and helps for sustainable development.
Because of the key factor of globalisation of trade, nationalized and co-operative Banks and banking system in India
also got affected. In general, the banks in India are accountable for public savings and deposits. They are heavily
dependent on interest income and merely it can be believed that the income so realized by these banks consists of 80%
from the interest earnings only unlike other private banks. Due to change in policies of Government from time to
time and also reduction in interest rates, there is a large reduction of income earnings of these banks. This has leaded
the management to rethink the functionality of these banks to raise their earnings. The present paper emphasizes the
need to widen their scope so as to increase the earnings to sustain in the market by entering into the arena of online
e-broking. This paper also aims to keep in view the limits of the governing board as well as certain objectives related
to the implementation of corporate governance principles.
Introduction
Banks are the backbone of the country’s economy, providing capital for initiation/modernization
of infrastructure, job creation and overall prosperity. Banks are also play a vital role in society, affecting
not only spending by individual but also growth of industries. Banks are not only helpful in providing
finances to the commercial enterprises but also facilitate the payments mechanism in the systems, even in
difficult market conditions. The country’s growth is depending upon the financial position of the banks.
As per Investment Information and Credit Rating Agency (ICRA), banks in India are largely reliant on
interest income, which accounts for over 80% of their total income. For the last few years, the interest
income of the public sector banks has declined because of various reasons. Further, the involvement of
government is evidently higher in banks because of the larger interests of the public. The remaining noninterest
income comprises mainly from commission, brokerage and exchange transactions. More
significantly, public sector banks have been losing market share in the areas of exchange, commission and
brokerage to private sector banks over the last few years because of the following reasons:
Most of the public sector banks do not have provision of online trading system to earn brokerage
fee;
The rate of growth in fee income is significantly higher for private sector banks;
The proportion of exchange and brokerage as a percentage of the total fee income is higher for the
private banks;
Highly, the better position of the private sector banks is due to their technology platforms with
good corporate governance which provide customized solutions to customers.
For the last 10 years, public mostly from urban cities are showing their high interest to invest in
share market because, they feel it yields good returns compared to other kind of investments like bank
fixed deposits, bonds, public provident fund (PPF), National Saving Certificate (NSC) etc. The Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) are the major stock exchanges in India have
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21

switched over to online trading system to increase efficiency and transparency. Due to this drastic
change, the turn over also dramatically increased. The traded volumes in BSE and NSE for the last ten
years are given as under:
Table: Traded Value in BSE and NSE
Year
The amount of volume traded (in crores)
BSE
NSE
2004 (2004-05) 365613.61 (887293.66)
2005 (2005-06) 547922.44 (475523.48)
2006 (2006-07) 701709.67 (219106.47)
2007 (2007-08) 1160248.63 (282317.02)
2008 (2008-09) 1694310.37 (335951.52)
After the introduction of the online trading systems it is very easy to do online trading and only
requirement is to have a demat account and trading account with a depository participant. Once the
account is active trader can buy shares from BSE or NSE. For every buy or sell transaction one has to pay a
brokerage to the broker normally ranges from 0.4% to 0.8%. Apart from the brokerage, many other
charges like Service tax on the brokerage i.e. 12.25% for buy for sell and Securities Turnover Tax (.125%) is
collected. Most of the private banks like ICICI and HDFC and brokerage houses viz. Sharekhan, Geojith
Securities, India Bulls, Investment Online, Kotak Street, Motilal Oswal, 5 paisa etc. provides trading
account and demat account with a view to generate income by means of brokerage. Where as, most of the
public sector banks have ignored this area. As per the analysis, the brokerage fee income of private sector
banks is very high than that of their counterpart public sector banks. The reason behind non-participation
of the these public sector banks into the brokerage fee market or providing online trading accounts to its
customers is also due to presumption of corporate scandals. Because of the fear of scams, these public
sector banks and nationalized banks are losing their share of brokerage fee income to their counterparts.
Now the time has come to diversify their income profile and to take significant steps to earn brokerage
income giving competitive to the private sector banks. Competition in the market not only brings the
stability in governance with increase in efficiency of the banks but also increase the earnings.
Corporate Governance
Corporate Governance has become a hot topic for debate in all over the world in last ten years.
With the globalization of the business and liberalization policy, the importance of Corporate Governance
has also increased. Corporate Governance imposes certain controls with which the management can act in
a smarter way to achieve a long term strategic goals to satisfy its stake holders, creditors, employees and
customers.
Corporate Governance is basically very important in two ways:
(i) to facilitates the management by which companies are directed and controlled;
(ii) to study many issues arising in controlling the organization and to monitor the outcomes whether
they are in accordance with plans.
Corporate Governance is definitely improves the bank viability and bank’s performance. Further,
the weak governance of banks has negative impacts through the negative ramifications for economic
development. Well governed banks not only contribute to financial stability but also more likely to
allocate capital efficiently. The attention of these (public sector banks) banks are invited to increase the
efficiency through a good corporate governance and also intention behind is to increase the profit ratio of
its share holders. In this paper, the author emphasizes the need of introduction/improvement of
corporate governance in the sector of online trading system to improve the banks functioning and also to
avoid any corporate scandals/scams.
Needless to say, for the public sector banks or for nationalized banks in India, these are challenging
times and need for restoring customers confidence in the these banks. This literature in its wider suggests
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22

a range of issues such as bringing confidence makes to increase the number of its stake holders, at the
same time providing good service to these customers. Good governance can resolve the problems of
mismanagement and financial propriety. Corporate Governance, is therefore, ensures the performance of
the management, strategy and increases the confidence level of its customers. It is indeed needed to
achieve a balance between the essential powers of the Board of Directors and their proper accountability.
A pioneering report would also perhaps be in order to make a brief reference to its recommendations
which are in the nature of guidelines relating to the Board of Directors role, reporting and control.
High Degree of Oversight
The following are the reasons which require to the banks to introduce online trading system in their
banks for their customers.
Firstly, the customers believed that their money is fully protected.
Secondly, the customers expect transparency from the banks.
Thirdly, share market is a volatile market, hence, customers expect that the banks should provide
information about the day to day market transactions, so that they can take care off.
Selecting the right stock in the right sector at the right time is important for success in equities. Price
of the stocks increases according to the growth of the company plus companies will give bonus and
dividend at periodic intervals. Fourthly, customers are assured of the best research being provided
for the investment decisions.
Board Oversight
Boards should adopt a “charter” which includes and describes the role and responsibilities of
Board management and determines high standard of professional conduct. Members should act on a
fully informed basis, in good faith, with due diligence and interests of the Bank. The Board should be
responsible for ensuring the Bank’s protection from illegal, abusive practices and approve the Bank’s
strategic objectives and enforce clear lines of responsibility and accountability. The Board should ensure
that risk control functions are clearly segregated from risk taking. The Board should be aware of the
major aspects of the Bank’s operational risk management framework to be implemented by senior
management in organization. Senior management should also have responsibility for developing policies,
procedures for managing operational risk and should put in place contingency and business continuity
plans to ensure that the losses in the event of severe business disruption should be minimized. The Board
should set and periodically review the strategies and policies related to risk and address any new or
previously uncontrolled risks, setting acceptable levels for banking risks.
Whistle Blow
A whistle blow policy encourages the staff to speak out the legitimate concerns about wrong
doings when an employee or a group of employees are indulged in malpractices or wrongdoing within an
organization. The good practices under the corporate governance should provide the whistle blowing to
describe the wrong doings.
Conclusion
The corporate fraud, malpractices and wrongdoings can be detected or prevented by introducing
technical management/risk management under the corporate governance. Further, the best practice
under the corporate governance also improves the functioning of banks in providing online trading
facility to their customers. With elements of good corporate governance, appropriate internal control
systems, better risk management will definitely improves the business of public sector banks in the areas
like facility of providing online trading to the customers and able to tackle with the challenges given by
the private banks and convert them into expanding the business.
References and Bibliography
http://goliath.ecnext.com/coms2/gi_0198-342154/Corporate-governance-and-performance-of.html
http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran_05.asp
http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran_06.asp
The Business & Management Review, Vol.2 Number 2, July 2012
23

http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran_07.asp
http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran2008.asp
http://www.bseindia.com/about/st_key/volumeofturnoverbusiness_tran.asp
http://www.financialexpress.com/printer/news/107338
http://www.managementparadise.com/forums/archive/index.php/t-24913.html
http://www.uabonline.org/extra_page.phppid=2
Srinivasan, R., Strategic Management, the Indian Context, Third Edition (2008), Prentice-Hall of India Private Limited,
New Delhi.
www.icraratings.com
www.icraindia.com
http://www.nse-india.com/
http://www.bseindia.com/about/st_key/volumeofturnover_apr2004.asp
The Business & Management Review, Vol.2 Number 2, July 2012
24

Financial Reporting Standards as a Tool in order to Ensure Corporate
Transparency: The Case of Turkey
N. Ata ATABEY
Selçuk University, Konya-Turkey
&
Hüseyin ÇETN
Necmettin Erbakan University, Konya-Turkey
Keywords
Corporate governance principles, public accountability, and transparency principle
Abstract
Transparency, which is one of the four major principles of governance, has gradually increased its
importance recently. As it is known, the adoption of transparency on the corporate level is a principle need in order
to preserve the rights of investors and to acquire social trust. Corporations are only able to increase their degree of
corporate transparency by adopting generally accepted principles on the international fields and some principles that
serve as guide. One of the most institutionalized and important principles range of today at the international level is
the set of International Financial Reporting Standards (IFRS). This circumstance proves the parallel interaction of
corporate transparency with accounting applications. As a matter of fact, it is believed that the presentation of
comparable, reliable and comprehensive financial reports could be achieved by the adoption of financial reporting
standards which are accepted internationally. From this point of view, it is thought that the applications within the
framework of IFRS are only providing presentable financial information for general purposes and these applications
are lacking the ability to present additional information required by corporate transparency.
For this reason, we have conducted a survey in those corporations listed on Istanbul Stock Exchange (ISE)
100 index in Turkey. With this survey, we aim to determine how effectively the principle of public disclosure and
transparency has been employed by the companies—the principle that is listed among the principles of corporate
governance determined by the Capital Markets Board (CMB) of Turkey. Additionally, we aim to determine to what
extent the employment of IFRS on transparency is affective and how much adequate the IFRS’s are.
Introduction
In the present day, business life that we witness at an extensive and fast process of change, the
problems appeared in economical and social areas and international financial crises lived cast a shadow
upon the reliability of financial information preparers (Atabey ve Ylmaz, 2005). In this process that the
capital flow is at the most top level, the reliability of capital gradually increases its importance as much as
its yield. Corporate governance is seen as a magic wand that enables to serve for the objective of a better
company management and in this way, that companies are able to supply the resources they need, by
confidence established, as much as it is for the solution of the financial crises lived in global scale
The missingly and misleadingly projection of companies’ activities upon public opinion in the
result of the financial scandals experienced has opened their legitimacy and reliability in the care of public
opinion to question as an establishment; it has caused to lose confidence in capital markets. By the
purpose of regaining the confidence lost, the understanding of corporate governance has been emerged as
a solution against the problem, and countries, in global area, have published the application guides the
corporate governance as it is appropriate for their own values and principles. As the common emphasis in
the guides, it has been referred to financial reporting and transparent, accountable, true, upright,
synchronic, and rapid information supply.
Transparency, one of the basic objectives of corporate governance, is an indispensible element of
“corporate governance”, which is a popular concept of the recent times. Corporate governance, as a
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25

similar of the revolutions done in the area of audit to gain an investor’s confidence and even, as its
complement, increases its importance in financial markets, especially in recent years.
Accounting standards are the mandatory rules in the process of producing and the production of
financial information for the interested. While accounting standards makes a big contribution to the
development of accounting technique and its occupation, it puts key ways and techniques for problems,
possibly will emerge, forward, besides (Atabey and et al., 2011: 38). Financial reporting/accounting
standards makes a contribution to be supplied transparency by the rules that it brings for producing and
reporting of information that indicates the real condition of managements.
In this study; making a survey study on the companies in the ISE 100 index in Turkey, it is going
to be determined, how effective international accounting/financial reporting standards are in the
acquiring of transparency, and its inadequate sides, by putting the application level of the principles of
disclosure and transparency from the corporate governance principles of CMB forward.
The Understanding of Corporate Governance: Its Importance, Merits, and Principles
The concept of “corporate governance”, despite it is a concept discovered firstly in USA, are
recently discussed and applied in the whole world. The perception of the concept of “corporate
governance” has been come to fruition differently in various areas. The concept of “corporate
governance”, however, is called widely as “governance of companies”.
Many different establishments and researchers in the world have developed various definitions
about the mentioned concept. It is possible to explain the main cause of these differences as the concept of
corporate governance, directly or indirectly, interests in scores of stakeholders like shareholders, board
members, directors, and workers at the first, potential investors and ratings bureaus (Öztürk ve
Demirgüner, 2005: 119).
Corporate governance has been defined as ‘‘. . . the system by which companies are directed and
managed’’ (ASX, 2003, p. 3). Many researchers suggest corporate governance mechanisms as the solution to
agency problems (Eng and Mak, 2003; Shan, 2009) and as a means of mitigating management’s lack of
commitment which arises due to agency problems (Bergolf and Pajuste, 2005). Therefore, corporate
governance is primarily designed to include effective mechanisms to control and prevent self-interested
managerial behavior.
In this context, the developments that lead to increase the importance of corporate governance in
modern economies are sorted as the Increasing Role of Private Sector, the Increasing International
Economic Dependence, and the New Competitive Conditions in Which Partnerships Are. The
understanding of corporate governance, with the merits that it gains in both micro and macro scales, has
been one of the main issues of the present day business world. Corporate governance applications are the
key of a dynamic process that begins from the level of management and spills over into capital markets
and in this way, affects the general of economy in positive direction. One of the key elements of increasing
economical efficiency is corporate governance that includes a serial of relation among a management
administration, boards of managements, shareholders and other sides that are directly stakeholder.
Corporate governance puts the structure, which the aims of managements are determined, forwards at the
same time and ascertains the instruments of reaching these aims and of performance audit (OECD,
2010:11).
Successful corporate governance applications in managements are seen as not only a good
protector preventing wastage of resources but also an important element about the financial transparency,
the controlling of partnership activities, the conscious of social responsibility, and the protection of ethic
rules and investors that are wished in many countries. The OECD Principles of Corporate Governance are
a number of corporate governance standards, which were developed by the OECD in co-operation with
governments, international organizations, and businesses. According to the OECD (2004), the Principles
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26

are intended to be used by policy makers for self-assessments and by other stakeholders such as:
researchers, investors, analysts, and consultants. ‘‘The Principles generally represent a common basis that
OECD member countries consider essential for the development of good governance practices.’’ (OECD,
2004, p. 11). The framework contains the following four principles that were released in May 1999 and
revised in 2004:
Principles of Just and Equality
Principle of Accountability
Principle of Responsibility
Principles of Disclosure and Transparency
Principles of Disclosure and Transparency
Transparency is the approach of making persons, managements, markets or governments
responsible for their activities and policies. In this context, transparency, in terms of managements, can be
defined as the disclosure of the whole information, intended for their assessment by (public opinion)
(Florini, 1999).
Shareholders and investors, in our day, want to reach reliable financial information at the stroke
and easily. In the future, financial reporting will be synchronic, real-time and based on measuring. The
five elements of synchronic and real-time reporting are listed below (Anderson, 2002: 5):
Constituting a reliable system
Using all the ways necessary for the disclosure of financial information
Disclosure all financial and nonfinancial information
Corporal accountability, managerial responsibility and a strong risk management
Transparent and permanent disclosure
In this framework, in the disclosing of information about a company, in addition to the things
predicted with legal regulations, it should be used also some disclosure instruments and ways as press
bulletins, electronic data delivery channels, electronic post mails, mobile phone communications (WAP et
cetera technologies) and meetings done with shareholders and potential investors and notifications done
via media organizations or brochures or on internet website (SPK/CMB, 2005: 21).
The Corporately Importance of Transparency
In the process of implementation of corporate transparency, as the complement of the concept of
transparency, we meet with the concept of “disclosure”. Disclosure, appropriate for the principles of
corporate transparency, is the presentation of the financial information, which the regulatory
establishments for capital markets make it obligatory, and of other financial and nonfinancial information
apart from these information, by companies, clearly and openly, for the public (Poray, 2008: 23).
Transparency plays a crucial role for the increasing of an investor’s confidence. With regard to a
high investor’s confidence, it is an indispensible issue for the constituting and the developing of a strong
capital market. Together with transparency and disclosure are of characteristics of a successful
management, they have a close relationship with the directly accounting applications, besides (Akta ve
Doanay, 2007: 3).
The concept of disclosure crudely signifies the presentation of a plenty of information in different
formats like balance sheet, income table or activity report, which are made by companies, to the public.
Out of these information resources that we state and are generally obliged to be disclosed by regulations,
the presentation of some information as press statements that companies willingly make and company
reports or predicts about company that are disclosed via a website to the public is assessed within this
context. In this point, it is beneficial to state that we use the concept of “willingly disclosure” in order to
include all the disclosures done out of the obliged by various regulations. Whether it is obligatory or
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27

willingly, all the developments acquired with disclosure applications will eventually help for the
increasing of the total transparency (Deren, 2006: 66-67).
The importance of disclosure in terms of the development of capital markets can be summarized
in like this manner (Poray, 2008: 25-26):
Disclosure is a strong instrument for the protection of investors. It helps for drawing capital and
increasing confidence for markets.
Weak disclosure leads to unethical behaviors in capital markets and spoil market integrity. This
condition damages not only companies but also economy as a whole, too.
Inadequate and unclear information can increase capital cost, ruining the operating of capital market.
Reliable and well-timed information increases decision makers’ confidence in a company’s body and it
enables that they take successful decisions for company that affect on directly development and
profitableness.
The information disclosed, together with its directly effect that it makes on the stock certificate price of
company, also affects on the price indirectly, affecting on the data collecting initiatives of the
decision makers out of company (stakeholders, investors and creditors) about company.
As long as the quality and the quantity of the information disclosed increase, uncertainties about the
value of company are removed.
With a disclosure in a better quality, a company can draw longer-timed investors, and it enables to a
more widely analysis, and the credibility and the level of accountability of management increase.
`In this process, first of all; it should be made a decision whether the increasing of transparency will
lead to increase economical benefit or not, and if it’s decided the increasing of transparency is necessary,
then, it should be determined the obligations about which information will be disclosed and how these
information will be disclosed by which institutions. As for in the last phase; regulatory policies and
corporate infrastructure should be shaped according to the conditions of the concerned market, and in this
context, it should be taken care that the all disclosure applications, including accounting policies, are
developed as intended for the increasing of “Reliability” of information that is presented as a final aim
(Vishwanath ve Kaufmann, 2010: 7).
International Financial/Accounting Reporting Standards
The worldwide integrity of money and capital markets bring with some difficulties. The primary
of these difficulties is that accounting, which is stated as a management’s language, should be suitable for
these markets. International Financial Reporting Standards (IFRS), indeed, constitutes a common
language for a management, bringing some close valuation and trial criterions among countries, in the
accounting science (Örten and et al., 2007). The right to publication in Turkey of the International
Financial Reporting Standards Set belongs to the Accounting Standards Board of Turkey in the framework
of the agreement made with the Foundation of the International Accounting Standards Board. The Board
publishes the mentioned set by the name of “the Accounting Standards of Turkey” as is compatible with
the International Financial Reporting Standards.
Accounting standards are the mandatory rules in the process of producing and the production of
financial information for the interested. In this context, it has determined some aims that can be
summarized as the strengthening of transparency and accountability, the regulation and the audit of
financial markets according to the conditions of products and participants, and the increasing of
soundness and integrity in financial markets; from among them, by the objective of reaching the aim of
the strengthening of transparency and accountability, some precautions that are needed to be taken
urgently have been listed as below (TMSK, 2009):
The key organizations about global accounting standards should work on developing guidance and
counseling about the evaluation of tangible assets, paying attention to evaluate illiquid and
complicated assets, especially in the periods when financial problems are intense.
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28

Organizations, responsible for determining accounting standards, should improve their works
about the deal with the weaknesses at the accounting and disclosure standards about the assets out
of balance sheet.
Regulatory institutions and organizations responsible for determining accounting standards
should acquaint market participants a lot with complicated financial instruments.
The key organizations concerned with global accounting standards, with the aim of constituting a
single global standard set in a high quality, should work hard.
Regulatory institutions, supervision establishments, and organizations responsible for determining
accounting standards should work together on the base of continuity among themselves and in the
private sector to develop high-quality accounting standards and to provide consistency in practice.
Financial establishments, cohering with the best international practices, should make the developed
risk notifications in their reporting and announce all the losses in a continuous manner. Regulatory
establishments should try to provide that financial organizations reflect their financial statements
(including the activities out of balance sheet) and the condition of company’s activities completely
and rightly and at the right time and that these are coherently and regularly reported.
Corporate Transparency In Terms of Accounting Standards
Financial information that companies will disclose in the financial reporting/accounting standards, which
draw reliable road maps to prepare and present financial information, have been limited as “financial
statements having a general goal”. According to Financial Accounting Standards Board (FASB) and
Accounting Standards Board (ASB), the information acquired with financial reporting, by its very nature, is
financial, and it is not necessary that nonfinancial information are presented in the financial statements or
their appendixes. This information has special purpose, and the preparation and the presentation of the
special information for personal users are not in the accounting standards. In the accounting standards,
there are not any disclosures about the presentation of nonfinancial information (eg; intellectual capital,
customer relations, innovation, corporate reputation etc.) that increases the value of company. Companies,
because of their weaknesses in the accounting standards, have begun to develop models that include
disclosures, which will be willingly done. Companies, thanks to these models, disclose also supporting
information together with the financial reports based on accounting standards. Developments in these
willingly disclosures have been welcomed by international capital markets. Because, it contributes to the
decreasing of information asymmetry between stakeholders and company.
In the Conceptual Framework published by FASB, the objective of the financial statements stated
as “to provide information about the financial condition of a management, the results of its activity and the changes
in its financial condition in the cause of various users benefit while taking decisions” clearly shows that
information having a special goal excludes from the enclosure of standards. The financial statements
prepared for this mentioned goal supply for common needs of a number of users. Financial statements
usually shows the effect of operations in the past, and they do not include nonfinancial information;
because of these reasons, they do not provide for the complete of information that users will need while
they take economical decisions.
In the Conceptual Framework, it is stated that accounting standards are for the preparation and
the presentation of the financial statements having a general goal, and the financial statements having a
general goal are defined as “the financial statements which are prepared and presented annually and
yearly at least and which are in the position of responding the common needs of a wide range of user”.
Besides, it is signed that the information in the financial statements having a general goal has to carry the
characteristics like “comprehensibleness, suitability for need, reliability, and comparability”.
In the Conceptual Framework, stating that some of users can feel the need additional information
apart from the information in the financial statements; the reports containing these additional financial
and nonfinancial information are called as “financial reports having a special goal”, and it is emphasized
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29

that the financial reports having a special goal are out of the frame of the Conceptual Framework (Poroy
Arsoy, 2008: 17).
As a result, the importance of high-quality national accounting standards in terms of disclosure
and transparency cannot be denied. Therefore, in terms of accountancy and financial statement users, the
organization and the activities of Accounting Standards Board of Turkey (ASBT) are an important step. While
the Board manages the activities of developing the accounting standards, it will benefit from the standards
that Accounting and Supervision Standards Board of Turkey (ASSBT) publishes and its standard drafts that
have not transformed into a standard yet. ASSBT, with the works that it keeps on until today, has
constituted a crucial infrastructure for the works that ASBT, which is equipped with some authorities, will
make. ASSBT, with the works it has made until now, has made significant contributions to be arisen and
improved a culture of accounting standards in Turkey. By the standards that it has published, it has taken
an important position in the world of accounting in Turkey.
The Aim, Method, and Extent of the Research
By the increasing of global competition, the performance of corporate governance systems of
countries in the markets of finance and production has begun to be important. The providing for
transparency is an important instrument that company’s accounts are followed in suitable for the
interested regulations, companies stably keep their performances on, and they do not get into an
unsuccessful condition. One of the most important elements in providing for transparency is to apply
National and International Financial/Accounting Reporting standards. The objective of this Research is to
put forward the application scale of the principles of disclosure and transparency of the corporate
governance principles and the role of international accounting standards in providing for transparency, in
the framework of corporate governance understanding, as based on empirical datum, in the public
companies that get into the act in different geographies and in more various sectors in the country and
that are listed by Istanbul Stock Exchange (ISE).
In this Study, as the method of data gathering, it has been used survey technique. The method of
survey contains a general examination done on the overall target mass or on a sample that will be
selected, when wanted to reach a general opinion about the ascertained target mass. While survey
questions were prepared, it has been benefited from many different studies and survey applications and
gotten the concerned people’s opinion.
The extent of the research consists of the companies that are registered in ISE-100 index. The
public companies in ISE-100 index have a number of persons, groups, or organizations in which it is
interested. This has an extremely reasonably cause. One of the two important indicators that are used in
the evaluation of capital markets is market value and the other is the monetary equivalent of transaction
size that companies, which trade at the market, constitutes. The companies trading at ISE-100 index
consist of the companies that have the highest market value. In this way, the total of the market values of
the companies that trade at the ISE-100 index equals to about %90 of approximately 300 companies that
trade at ISE. The monetary action that the mentioned 100 companies constitute in the market, similarly,
reaches about %90 of all the managements. The survey, which was sent to all the companies in ISE-100
index, has been responded by 79 companies. In surveys, generally, it has been 5 point likert scale. All the
analyses have been made by computer, using SPSS 15 statistical packet program
Demographical Information
The nine questions in the survey form consist of the questions to put the basic characteristics of
companies and workers participated in the survey forwards. In the definition of the participants’ profiles
after determining, it has been tried to explain the information belonging to the participants, benefitting
from frequency distribution. The evaluations for the companies and the participants in the framework of
the research have been treated below in company with modal projections by the goal of providing for
easiness in perception together with the frequency distributions and the percentages of the responses
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Table 1. Basic Statistical Information about Companies and Participants
Duty in the Company F (%) Activity Subjects F (%)
Member of Board 1 1,27 Production 47 59,49
Accounting Director 17 21,52 Service 14 17,72
Financial Director 12 15,19 Finance 12 15,19
Other 49 62,03 Holding 6 7,59
Total 79 100,00 Total 79 100,00
Duty Term in the Company
The Numbers of Workers in Companies
1 6 7,59 1-1000 43 54,43
2-5 41 51,90 1.001-5.000 22 27,85
6-9 14 17,72 5.001-10.000 11 13,92
more than 10 18 22,78 more than 10.001 3 3,80
Total 79 100,00 Total 79 100,00
The Level of Education
Activity Duties
High School 6 7,59 1- 5 year(s) 2 2,53
Graduated 66 83,54 6-10 years 3 3,80
Post Graduated 7 8,86 11-20 years 5 6,33
Total 79 100,00 20 years and above 69 87,34
Total 79 100,00
Disclosure and Transparency
In this section related to the principles of disclosure and transparency from the corporate
governance principles of CMB are perceived by the companies listed in ISE-100 index and to the
application of the issues in these principles is searched, for the participants in the survey, it has been
asked 18 questions totally as “yes” and “no”.
Table 2: Disclosure and Transparency
Answers
Disclosure and Transparency
Yes No
1) Has your company two managers who are responsible for notifications that will be done for
disclosure and who have signing authority
86,08 13,92
2) Has a staff working in your department for relationships with shareholders especially charged
with regarding and observing all sorts of matters related to disclosure
92,41 7,59
3) In pursuant of the principle of transparency, do the accounting policies applied and the results of
activities disclose truthfully
93,67 6,33
4) Does board of directors submit shareholders’ information and disclose in the general assembly
after it prepares the alliance of principles that can be called as informing policy
69,62 30,38
5) Are the developments, which have a possibility to affect on the value of the capital market
instruments of the company, disclosed, without passing the time, in the time determined by the 84,81 15,19
regulations
6) In case of an important change in the financial condition and/or in the activities of the company
or in the conditions in which it’s waited that an important change emerges in a near future; save for 78,48 21,52
the rules in the concerned regulations provided that, has it disclosure
7) Do the changes and the developments, which occur about the disclosures of the company
afterwards, continually disclose, updating
83,54 16,46
8) Is the policy of dividend distribution in the activity report And, does it disclose in the
framework of informing policy
78,48 21,52
9) Has the company a web address 98,73 1,27
10) Has the website of the company been prepared in English, besides 86,08 13,92
11) Are the periodical financial statement and its footnotes prepared, grounding on the current
regulations and the international accounting standards
83,54 16,46
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12)Does your company disclose all sorts of important information that can affect on the decisions of
shareholders and other stakeholders, not to be restricted with the disclosures that it has to make by 63,29 36,71
the regulations
13) Do board members, directors, and shareholders who have % 5 of the capital directly or
indirectly disclose the operations that they have made on the capital market instruments of the 69,62 30,38
company
14) Are the periodical financial statement and the financial statement footnotes prepared and
disclosed in a manner that will indicate the real financial condition of the company
79,75 20,25
15) Is your activity report prepared in a detail that will enable that public opinion can reach all sorts
of information about the activities of the company
77,22 21,52
16) Is an independent auditing firm elected for five account periods at most in the permanent
and/or special audits by the board of directors of the company
69,62 30,38
17) Do two account periods at least pass so that the company can sign a permanent and/or special
audit agreement again with the same independent auditing firm
62,03 37,97
18) Do the independent audit firms and the audit employees deployed in these firms give
consultancy service for your company
50,63 49,37
TOTAL 78,25 21,75
In the table 2, when the section of disclosure and transparency is evaluated in general, %78,25 of
the survey participants, “Yes”; and %22,75 has given “No” answer.
About the principles of disclosure and transparency, totally 27 questions have been asked under
the two titles, and by these questions, it has been searched whether the subjects in the websites and the
activity reports of the firms participating in the survey are suitable for the demanded in the Corporate
Governance Principles of CMB, or not. These 27 questions have been prepared as “Present”, “Absent” and
“Partly Present”. The survey questions, the answers given and its percentages are at Table 3 and Table 4
below.
Table 3: The Subjects in the Website of the Company
Partly
Present Absent
The Subjects in the Website of the Company
Present Total
(%)
1) Commercial register information. 79,75 20,25 - 100,00
2) Detailed information about privileged shares. 64,56 30,38 5,06 100,00
3) Together with the date and the number of the commercial register gazettes in
which changes are published, the final state of the company’s prime contract.
68,35 24,05 7,59 100,00
4) Material disclosures. 60,76 20,25 18,99 100,00
5) Yearly activity report. 73,42 18,99 7,59 100,00
6) Periodical financial statements and reports. 74,68 15,19 10,13 100,00
7) Prospectus and public offer circulars. 63,29 22,78 13,92 100,00
8) The agendas of general assembly meetings, participants’ lists, and
proceedings.
67,09 26,58 6,33 100,00
9) Mandatory information forms and similar forms that are prepared for
50,63
collecting takeovers or proxy solicitation.
25,32 24,05 100,00
10) The proceedings of the board’s important decisions that can affect on the
value of the capital market instruments, and information demands that reach 49,37 30,38 20,25 100,00
the company under the name of Frequency Asked Questions.
11) Questions and denunciations, and the answers given for them. 49,37 24,05 26,58 100,00
Total 63,75 23,48 12,77 100,00
The matters, which are in the section of “Disclosure and Transparency” of the Corporate
Governance Principles of CMB and which are demanded for being the website of company, have been
asked the participants of the survey. The percentage indicators of the answers that the total 79 participants
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gave for every question can been seen at the Table 3 above. According to it, when we look at the total line,
for all the questions; % 63,75 of the participants has given the answer of “Present”; %23,48, “Absent”, and
the rest %12,77 has responded it as “Partly Present”. In this point, the participants have answered the
question in the first question about commercial register information as “Present” at most. %30,38 of the
participants has responded the Question 10 as “Absent”
Table 4: The Subjects in the Yearly Activity Report
Partly
Present Absent
The Subjects in the Yearly Activity Report
Present Total
(%)
1) The subject of activity. 100,00 - - 100,00
2) Information about the sector and the place of the company in the sector. 92,41 1,27 6,33 100,00
3) The analysis and the evaluation of the management about financial condition
and results of activity; the accrual degree of the planned activities; the condition 78,48 13,92 7,59 100,00
of the company against the determined strategic aims.
4) The declaration of the board of directors about the internal control system
55,70
and whether this system regularly operates, or not.
30,38 13,92 100,00
5) The opinion of the independent audit firm about the internal control system
48,10
of the company.
37,97 13,92 100,00
6) The evaluation of the ratings bureau. 43,04 49,37 7,59 100,00
7) A detailed explanation related to predictable risks about activities. 63,29 20,25 16,46 100,00
8) The analysis of operations in a significant amount that were done in the last
one year with in-group companies and with other related persons and 69,62 22,78 7,59 100,00
organizations.
9) The changes in organization, capital, partnership structure and management
75,95
structure.
17,72 6,33 100,00
10) The statement of partnership structure that indicate the real person ultimate
controlling shareholder/s of the company thereby cleaning indirect and mutual 56,96 39,24 3,80 100,00
partnership relations.
11) If available, the punishments taken because of the applications contrary to
26,58
the rules of regulations, and the explanation related to their justification.
68,35 5,06 100,00
12) The amendments of regulations that can significantly affect on company’s
50,63
activities.
34,18 15,19 100,00
13) Important suits sued against the company and their possibly results;
warnings, admonitions, and administrative penalty fines that are done by 24,05 69,62 6,33 100,00
public authorities, and et cetera information.
14) Dividend policy; the justification if a dividend will not be done. 60,67 23,60 15,73 100,00
15) Forward looking expectations about sales, efficiency, market share,
endowment capacity, profitableness, debt/equity capital ratio et cetera matters.
62,03 24,05 13,92 100,00
16)The information of reaching the texts in which the function of general
assemblies, the rights that shareholders have got and the foundations related to 62,03 21,52 16,46 100,00
the use of these rights are explained.
Total 60,60 29,59 9,81 100,00
It has been determined the matters that have to be in the yearly activity report according to the
Corporate Governance Principles of CMB. In the Table 4, when the answers related to the matters that
have to be in the yearly activity report that the participants gave are assessed, the vast majority of the
participants have given positive answers to the questions asked. As for %69.62 of the participants has
given negative answer to the Question 13.
Accounting Standards
The complete of the participating to the question “Are the accounting standards used in your
company” has given the answer “Yes”. In this first section, the questions with which they can meet about
the application of accounting standards have been asked the participants in five clauses. As for in the next
section, it has been asked the participants about the benefits of accounting standards.
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Table 5: Opinions on Accounting Standards
OPINIONS
Strongly Disagree
Disagree
Neither Agree
Nor Disagree
Agree
Strongly
Agree
Total
1) To use a common accounting language by IFRS provides that
1,27% 2,53% 16,46% 68,35% 11,39% 100,00%
investors take true decisions.
2) IFRS, in the evaluation of the managements in terms of
financial analysis, increases the level of comparability with 0,00% 1,27% 11,39% 63,29% 24,05% 100,00%
national and international managements.
3) IFRS facilitates the listing of managements into international
0,00% 0,00% 17,72% 64,56% 17,72% 100,00%
capital markets.
4) IFRS facilitates the comparability of time-periods in the
0,00% 2,53% 21,52% 56,96% 18,99% 100,00%
financial statements of managements.
5) IFRS contributes to be taken investment decisions for
0,00% 2,53% 20,25% 58,23% 18,99% 100,00%
managements in a true way.
6) IFRS gives confidence for the financial statement users to
0,00% 1,27% 13,92% 56,96% 27,85% 100,00%
financial reporting in a higher level.
7) IFRS provides saving of time for managements by removing
0,00% 7,59% 26,58% 48,10% 17,72% 100,00%
to arrange a table more than one.
8) IFRS positively affects on the level of reliability in financial
0,00% 2,53% 22,78% 55,70% 18,99% 100,00%
reporting, removing financial controversies in managements.
9) IFRS positively affects on the quality level of accounting
0,00% 2,53% 12,66% 56,96% 27,85% 100,00%
applications (the order of registration and document).
10) IFRS helps the facilitation of managements’ audit activities. 0,00% 1,27% 20,25% 54,43% 24,05% 100,00%
11) IFRS increases the quality level of analysis of financial
0,00% 3,80% 15,19% 55,70% 25,32% 100,00%
statements in managements.
12)IFRS is necessary for an effective Corporate Governance 0,00% 3,80% 5,06% 63,29% 27,85% 100,00%
Total 0,11% 2,64% 16,98% 58,54% 21,73% 100,00%
According to these results, when it is examined the turnouts of the survey participants into the
evaluations done;
By IFRS, using a common accounting language, investors can take true decisions,
By IFRS, in the evaluation of the managements in terms of financial analysis, it is provided the
comparability with national and international managements and its increasing,
By IFRS, the listing of managements into international capital markets is facilitated,
By IFRS, the comparability of time-periods in the financial statements of managements is provided and
facilitated,
By IFRS, it is contributed to take investment decisions for managements in a true way,
By IFRS, it is given confidence for the financial statement users to financial reporting in a higher level,
By IFRS, it is provided saving of time for managements by removing to arrange a table more than one,
By IFRS, removing financial controversies in managements, the level of reliability in financial reporting
is affected positively,
By IFRS, the quality level of accounting applications (the order of registration and document) is
positively affected,
By IFRS, it is helped for the facilitation of managements’ audit activities,
By IFRS, it is increased the quality level of analysis of financial statements in managements,
It is thought that IFRS is necessary for an effective Corporate Governance.
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Conclusion and Evaluation
30. In the globalized world, the countries, which want to benefit from all the possibilities of capital
market and intend for attracting the long-term stabilized capital, should adhere to corporate governance
principles. Today, the element competed in international area is to realize the harmony based on the
volunteering foundation against corporate governance understanding and principles by the goal of
realizing to come near to the business system of the developing world. In the countries in which succeed
in harmony with corporate governance understanding and principles, the risk levels of the companies
decrease, the cost of capital goes down, and in international area, the companies have the competitive
advantage.
In 1999, common principles about corporate governance have been published by OECD, and it
has republished in 2004 again, reviewing. These are; justice and equality, disclosure and transparency,
accountability and responsibility. OECD proposes that these principles, which it has published, are put
into practice by every country as devoted to its own laws and regulations and to its cultural and
economical structure, and it emphasizes on the contributions that corporate governance principles will
provide for economic welfare of a country in case of its application by companies. The most important
step taken for corporate governance in Turkey is the publication of Corporate Governance Principles of
CMB that was entered into force by the Board decision, dated July 4, 2003.
Transparency, which is one of the four basic principles of corporate governance principles and which is
defined as “the set of mechanisms that is based on corporate and market and that encourages the directors
who look out for a company itself for taking decisions that will maximize the value of company for the
shareholders of company” increases its importance, day by day, in national and international platforms.
In this point, we see some issues are important that the providing of an adequate transparency for
possession and management matters as financial and operational matters necessitates a good corporate
governance system, capital markets operating effectually, and a good accounting information system.
Besides, it is significant that which mechanisms can be used for providing transparency or what the
corporate infrastructure, which will support to be reached the level of transparency that is wished, does
include.
Companies and accountants should obey international ethics rules and international standards
about accountancy applications. Therefore, director of accounting in companies should improve a quality
standard program that contains all the ways of accounting activities, observing the activity and the
efficiency of accounting action by both internal evaluations and the evaluations that suitable external
evaluation firms will make. In this way, an accounting activity, which observes its own quality and
periodically makes evaluations in a company, will be able to provide an objective guarantee for settling
the understanding and applications of the corporate governance. In this way, an effective accounting
information system together with an administrative staff whose primary and essential liability about
corporate governance understanding is evident will support the elements of corporate governance
elements.
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36

Boardroom Pay, Performance and Corporate Governance in Malaysia
Puan Yatim
Universiti Kebangsaan Malaysia, Malaysia
Keywords:
Director remuneration, board of directors, firm performance, compensation.
Abstract
This study examines the association among firm performance, corporate governance structures, and director
remuneration of Malaysian listed firms. The study employs a cross-sectional analysis of 428 firms listed on the Bursa
Malaysia for the financial year ending 2008. Bi-variate and multivariate analyses are used to test the relationships
proposed in the hypotheses. The study finds a strong support for the associations between firm performance, CEO
tenure, board size, board independence, and the existence of remuneration committee, and director remuneration.
Specifically, the results show that director remuneration is positively and significantly related to a firm’s accounting
performance (ROA), CEO tenure, board size, and the existence of remuneration committee. The study finds that
director remuneration is negatively and significantly related to board independence. The study also documents no
significant relationship between director remuneration and both CEO duality and insider ownership. With the
exception of the relationship between director remuneration and insider ownership, CEO duality, and the existence
of remuneration committee (H4, H6 and H7 respectively), all other hypotheses (H1, H2, H3, H5) are supported.
Finally, consistent with prior research, the study also finds a positive and significant association between director
remuneration and firm size and firm’s growth opportunity.
Introduction
Recent financial crisis has raised serious criticism particularly regarding corporate governance on
executive compensation (Fahlenbrach and Stulz, 2011; Bebchuck et al., 2010; Kirkpatrick, 2009). It has been
often argued that remuneration and incentive systems have played key role in influencing risk taking
behaviors of managers. The positive link between compensation and risk has remained strong throughout
recent events as evidenced by several recent empirical studies (e.g., Adams, 2012; Chesney et al., 2012;
Bolton et al., 2011; Balachandran et al., 2010).
Defining the structure of remuneration and incentive schemes is a key aspect of corporate
governance and at the same time companies need flexibility to adjust remuneration structure and
incentive schemes to suit their own circumstances. In recent years, the topic of executive remuneration has
attracted considerable interest. Collapses of big corporations and financial institutions in recent years have
heightened awareness of the issues arising from the way in which directors are paid. For more than a
decade, executive remuneration has attracted unfavorable attention from practitioners, academics and
media, who have focused on the large amounts received by executives, both in absolute terms and in
comparison with the pay received by employees lower down the corporate hierarchy. Partly as a result of
this attention, the area has been subject to continued regulation, with government directives and
voluntary codes focusing on the nature of boardroom pay disclosure.
Improvement of corporate governance standards and disclosures has been at the forefront of
international debate in recent times, and remuneration or compensation of directors and executives is one
of the key issues in this debate. In 2003, the Australian Securities Exchange (ASX) reinforced the corporate
governance principles and responded to community concerns with a policy change that has resulted in
greater disclosure about CEO remuneration. Since May 2003, listed companies have been required to
make fuller disclosure about the remuneration packages of newly appointed CEOs. Such disclosure now
includes information about the components of the pay package which might govern the actions of the
CEO and drive levels of performance. While in the United Kingdom, the Directors’ Remuneration Report
Regulations were introduced in 2002 to further strengthen the powers of shareholders in relation to
directors’ pay. The regulations increase the amount of information shareholders are given on director
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37

emuneration, certain disclosures, as well as performance graphs. Shareholders also may vote in an
advisory capacity to approve the directors’ remuneration report. The Combined Code on Corporate
Governance (FRC, June 2006) also recommends that boards establish a remuneration committee to help
the board design remuneration packages aligning to their interests with those of shareholders.
In July 2006, the Securities and Exchange Commission in the United States voted unanimously to
revise the disclosure requirements for executive and director compensation, related-party transactions,
director independence and other corporate governance matters. The rules require, among others, firms to
disclose dollar amounts for salary, bonus, stock awards, option awards, non-stock incentives, pension
plans and total compensation. The Malaysian Code on Corporate Governance recommends that director
remuneration should be appreciable and should reflect the responsibility and commitment of the
directors. In the case of executive director, remuneration should link rewards to corporate and individual
performance while in the case of non-executive directors it should link rewards to experience and level of
responsibilities. The level of remuneration for the executive directors should be decided by the
remuneration committee consisting wholly and mainly of non-executive directors. On the other hand,
remuneration of the non-executive directors should be determined by the board as a whole. As part of
corporate governance best practice, listed firms are encouraged to establish a remuneration committee
and explain director remuneration procedures. As stipulated in the Listing Requirements of Bursa
Malaysia 2001, listed firms are also required to disclose the details of the remuneration of each director in
its annual reports.
These regulatory changes have addressed the widespread contemporary criticisms of previous
remuneration practices by seeking to make the pay determination process more transparent, more
accountable, and less subject to influence of directors. Given the focus on remuneration practices and their
relations to corporate governance, this study makes a timely contribution to the debate. This study is
motivated by the desirability of documenting empirical evidence on the associations of corporate
governance mechanisms and boardroom pay in Malaysian corporate landscape. This is particularly
relevant given the attention by numerous stakeholders, such as regulators, shareholders, and employees
on excessive director remuneration. This study can inform the debate surrounding optimal governance,
board and remuneration practices.
The aim of this study is to provide understanding of boardroom pay in Malaysia in several ways.
Most studies have been concerned with the remuneration in developed economies such as the United
States and the United Kingdom. This study looks at remunerations of corporate directors in Malaysia, a
country with a similar form of corporate governance regime (as the recommendations and provisions of
the Malaysian Code on Corporate Governance derived from Greenbury Committee, Hampel Committee,
Cadbury Committee, and Higgs Committee which led to the United Kingdom’s Combined Code on
Corporate Governance today) as that of the United Kingdom. This study also draws upon a much wider
range of firms including very large firms to smaller sized firms listed on the Bursa Malaysia. Unlike other
studies, this study attempts to capture different dimensions of governance practices and ownership
structure variables, and uses mandatory disclosed remuneration data in annual reports rather than data
collected via surveys and interviews. In addition, this study also attempts to measure the extent to which
the open and publicly disclosed existence of remuneration committees has spread in Malaysian
boardrooms, and to describe the composition and effect of remuneration committees where they can be
seen to exist.
The main contributions of this study are twofold. First, it provides estimates of the statistical links
between boardroom pay, board control, and monitoring. Second, it provides Malaysian evidence on the
effects of corporate governance reforms in influencing boardroom pay. The analysis allows international
comparison and evaluation of the robustness of other existing research. The remainder of this research
proposal is structured as follows: The next section briefly reviews existing remuneration literature. Section
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38

3 describes the research design. The expected empirical results are reported in the fourth section while in
the final section conclusions are drawn and the implications of the study are discussed.
Literature Review and Research Hypotheses
Remuneration and Research Perspectives
In reviewing the literature on compensation/remuneration, three main research perspectives
emerge namely agency theory, organizational theory and CEO power, and structural differences in the
national political economies.
Agency theory takes a positive approach to the compensation issue. In other words, it addresses
the question of how the interests of (more or less) absent and less informed owners can be aligned with
that of powerful and sometimes opportunistic executives (Fama, 1980; Fama and Jensen, 1983). Within this
perspective, a potential weak link between executive pay and firm performance is due to a lack of
correctly designed incentives. In order to reduce the conflict of interest between absent owners and
insightful executives, the linkage of pay and company performance becomes a remedy. Agency theory
suggests a number of indirect ways to alleviate agency costs. These include internal governance structures
such as smaller boards (Yermack, 1996), a higher degree of board independence (Rosenstein and Wyatt,
1990) and CEO-part ownership (McConnell and Servaes, 1990). As a major explanation for executive
compensation (e.g., Baker et al., 1988; Jensen and Murphy, 1990), agency theory has been challenged by the
recent corporate compensation practices (Mintzberg, 2009; Blinder, 2009) and it has also been criticized for
its inability to explain cross-country differences (Haubrich and Popova, 1998; Bruce et al., 2005; Filatotchev
and Allcock, 2010).
Organizational theorists have addressed some of the limitations of agency theory by examining
executive remuneration as a political process, and thus taken a descriptive approach to the issue. These
scholars have focused particularly on CEO power and board in attempting to open the “black-box” of
what affects the executive remuneration decisions (Finkelstein, 1992; Boyd, 1994; Zajac and Westphal,
1996; Elhagrasey et al., 1998 and 1999). One of the arguments presented is that CEOs are in a unique
position to determine their own compensation, based on their ability to influence board behavior.
Previous studies suggest a number of factors that potentially relate to CEO power. These factors include
CEO tenure, CEO ownership, board size, firm size, and board ownership (Elhagrasey et al., 1998 and
1999).
Structural differences in the national political economies suggest that executive remuneration
needs to be understood in the context of specific legal, political, and regulatory systems. Previous research
has identified systematic country differences in regards to corporate law, investor protection, and a firm’s
financial performance (La Porta et al., 1997, 1998 and 1999). Moreover, the effects of different ownership
structures are not consistent across countries (Gugler, 1999). Thus, the effect of agency cost and CEO
power may be mediated by nation-specific factors, such as national culture and business norms, national
tax incentives, and differences national legal structures. Variables such as the location of the headquarters
and foreign board membership might also have an impact on the level of executive remuneration. The
existing corporate governance literature has largely dealt with an analysis of institutional arrangements in
American, British, Australian, German and Japanese firms, with much less attention devoted to firms
from emerging markets such as Malaysia and their executives and boards of directors. Sun et al., (2010)
point out that executive remuneration research in Asia has not received attention from Western
researchers and publications, making Asia a fertile ground for future research in executive remuneration.
Amongst this corporate governance literature, a significant agenda focuses on executive
performance and its link with firm performance. It is scarcely surprising that far less is known about
executive pay in emerging markets such as Malaysia than in other developed countries. In Malaysia,
findings of the paucity of prior studies on board remuneration have shown mixed results. For instance,
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Dogan and Smyth (2002) report that board remuneration are positively related to sales turnovers but
negatively associated with ownership concentration for Malaysian listed firms over a period of 1989 to
2000. Using a sample of 100 public-listed companies in Malaysia, Sim (2004) finds a weak but positive
relationship between director remuneration and firm performance. Abdullah (2006) documents a negative
and significant association between director remuneration and lagged profitability for distressed firms
before the incorporation of the Malaysian Code on Corporate Governance into the Listing Requirements
of the Exchange in 2001. Further, Abdullah (2006) also finds a negative relation between board
independence, the extent of outside directors’ interests and director remuneration.
Research Hypotheses
From an agency theory perspective, the link between firm performance and directors’ pay should
provide an important incentive mechanism for corporate success. However, research on the payperformance
relationship has yielded inconsistent results. Existing empirical evidence using data from the
United States shows a weak but significant positive relationship between profitability and CEO pay (e.g.,
Jensen and Murphy, 1990; Murphy, 1999; Core et al., 1999). The positive pay-performance relationship
confirms the role played by compensation in aligning managerial interests with those of the shareholders,
hence reducing agency costs. Several studies, on the other hand, do not find a positive relationship. Core
et al., (1999) report that excess CEO compensation has a negative association with subsequent stock
returns as well as operating performance. Similarly, Brick et al., (2006) also find that there is a negative
relationship between excess director compensation and firm performance. Several empirical studies from
other countries consistently document that pay-performance relationship is positive. For instance, using
Australian and Japanese data respectively, Merhebi et al., (2006) and Kato and Kubo (2006) both confirm
the positive pay-performance relationship. On the other hand, both Firth et al., (1995) and Fernandes
(2008) do not find any link between pay and performance for Norwegian and Portuguese firms
respectively. Randoy and Nielsen (2002) find a positive and significant correlation between accounting
performance and CEO compensation. However, when examined in a multivariate setting, the positive
significance disappears. Based on the standard agency theory model that there is a positive link between
firm performance and pay, the study therefore proposes the following hypothesis.
Hypothesis 1: There is a positive relationship between financial performance and director remuneration.
Since salary negotiation is really a bargaining process, the directors’ relative bargaining power
may come into play. That is, the more power, the greater the bargaining strength and higher potential
remuneration. The CEO’s dominance of the board of directors in most firms has been widely recognized
(e.g., Vance, 1983; Whisler, 1984; Lorsch, 1989; Crystal, 1991; Hermalin and Weisbach, 1998 and 2000;
Bebchuck et al., 2002). Remuneration is one area in which CEOs exercise their power over the board. To
the extent that boards concern themselves with executive remuneration, they may favor high
remuneration because it enhances the status of directors (Finkelstein and Hambrick, 1988) and of the firm
(Crystal, 1991). Outside directors, who more often than not are also CEOs of other firms (e.g., Booth and
Deli, 1996; Brickley et al., 1999), benefit from board norms of supporting the CEO’s pay recommendation
and from the linkage between CEO pay and director pay (Hallock, 1997; Cordeiro et al., 2000). Inside
directors stand to benefit directly from higher executive remuneration because of the proportional scaling
of remuneration across hierarchical levels (Lambert, et al., 1993; Conyon et al., 2001; Ezzamel and Watson,
2002).
The CEO’s control of director selection and boardroom pay helps explain the CEO’s influence
over the board on executive remuneration, and provides additional insight on the CEO’s dominance of
the board in general. Empirical evidence relating CEO tenure in particular is somewhat mixed. Yermack
(1995) finds that older CEOs and CEOs with longer tenure receive more option awards. Hill and Phan
(1991) suggest that long tenure helps directors influence the board through the director selection process.
Further, Hill and Phan (1991) contend that through increased tenure, directors may gain control over the
pay setting process and in turn design remuneration schemes to his or her preference. In a similar vein,
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Brick et al., (2006) show that CEOs with longer tenure are rewarded with higher pay for possessing more
valuable human capital. Finkelstein and Hambrick (1989) find a curve-linear relationship existing between
CEO tenure and pay, while Hogan and McPheters (1980), O’Reilly et al., (1988) and Attaway (2000) find no
relationship between these two variables. Consistent with the majority of empirical findings indicating a
positive association between tenure and pay, this study hypothesizes the following:
Hypothesis 2: There is a positive relationship between CEO tenure and director remuneration.
Prior studies show that larger boards are associated with ineffective monitoring (Core et al., 1999)
and are negatively related to firm performance (Yermack, 1996; Dalton et al., 1999; Conyon and Peck,
1998). Yermack (1996) finds that the pay-performance relationship for CEOs decreases with board size,
suggesting that small boards give CEOs larger incentives and force them to bear more risks than do large
boards. Holthausen and Larcker (1993a) argue that board size might influence directors’ pay, in particular
that of the CEO. Other studies such as Holthausen and Larcker (1993b) and Core et al., (1999) specifically
link the association between board size and compensation. Both studies find a positive association
between board size and executive remuneration. Similarly, Coakley and Iliopoulou (2006) find that larger
boards award CEOs significantly higher bonuses and salary post M&As for 100 completed bids in the UK
over the 1998-2001 period. More recently, Ozkan (2011) documents a positive and significant association
between CEO compensation and board size. He argues that coordination and communication problems
associated with larger boards hinders board effectiveness, which might be revealed as higher
compensation for CEOs as the number of board members increases. This study takes the view of the
agency theory whereby larger boards perceived as weak governance and monitoring by the board of
directors. Jensen (1993) suggests that larger boards are easily controlled by the CEO and CEO may be able
to “divide and rule”. Further, Pfeffer (1981) argues that inside board members are more loyal to CEOs and
therefore CEOs are more likely to exert greater influence over them that over outside directors. The
agency view is also consistent with organizational behavioral studies which suggest that productivity
decreases when work groups get too large (Latane et al., 1979; Hackman, 1990). If increased board size
leads to less effective monitoring, director remuneration is expected to be positively associated with the
number of directors on the board. Hence, Hypothesis 3 is stated as follows:
Hypothesis 3: There is a positive association between board size and director remuneration.
Recently, ownership structure has been viewed as a determinant of remuneration. One of the
arguments based on the grounds that directors can influence their own level of remuneration if they have
some ownership of the firm. Allen (1981) examines CEO power by analyzing the family stock ownership
of the CEO and other directors of the firm and he finds that executive remuneration is highest in
management-controlled firms. Holderness and Sheehan (1988) provide similar evidence in which
managers who are majority shareholders receive marginally higher salaries than other officers. Lambert et
al., (1993) show that CEO compensation is lower when CEO’s ownership is higher and when there is an
internal member on the board other than CEO who owns at least 5% of the shares. Finkelstein and
Hambrick (1988) also find that executive remuneration is negatively related to CEO family holdings and
CEO pay increases is more likely in management-controlled firms. McConaughy (2000) confirms the
findings of Finkelstein and Hambrick (1988) where he shows that family CEOs’ compensation levels are
lower and that they receive less incentive-based pay, confirming the family incentive alignment
hypothesis. Similarly, Attaway (2000) finds a similar effect of managerial ownership on executive
remuneration. Werner et al., (2005) report that ownership structure not only affects top management’s
pay, but also the pay of all levels of employees. Overall, the impact of ownership structure on executive
pay is unclear given the mixed nature of the empirical results. Following incentive-alignment hypothesis
as suggested by McConaughy (2000) and Attaway (2000), this study predicts that managerial ownership,
proxied by directors’ shareholdings is negatively associated with director remuneration. Hypothesis 4 is
therefore stated as follows:
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Hypothesis 4: There is a negative association between directors’ shareholdings and director remuneration.
Agency literature also suggests that board independence from management provides, among
other things, effective monitoring and controlling of firm activities in reducing opportunistic managerial
behaviors and expropriation of firm resources (Fama and Jensen, 1983a, b; Byrd and Hickman, 1992).
Boards of directors not only perform oversight functions, they also play an important role in designing
effective pay contract so that directors and management have an incentive to serve in the best interest of
shareholders (Jensen, 1993; Finkelstein and Hambrick, 1996; Daily et al., 1996; Conyon and Peck, 1998).
Several studies have shown that board structure explains cross-sectional variation in compensation.
Hallock (1997) finds that when board has directors with interlocking relations (i.e., the CEO of company X
sits on the board of company Y, and the CEO of company Y sits on the board of company X),
compensation to both CEOs is higher. Core et al., (1999) study the relationships among board composition,
ownership structure, and CEO pay. Their results suggest that firms with weaker governance (i.e., less
independent board) tend to pay their CEOs more. This is consistent with the view that insider-dominated
boards are likely to be more loyal to management, and the CEO can exert relatively more influence over
inside directors as opposed to outside directors (Pfeffer, 1981; Zajac and Westphal, 1994). Brick et al.,
(2006) report a relation between firm underperformance and excessive compensation between CEOs and
directors, and interpret their findings as evidence of cronyism between CEOs and directors. Ryan and
Wiggins (2004) find that independent directors have a bargaining advantage over the CEO, resulting in
compensation more closely aligned with shareholders’ interests.
A further independence issue relates to the ability of a board of directors to monitor when the
firm has different individuals holding the positions of the board chair and the CEO. The literature and
governance guidelines show that a board’s ability to perform its governance role is weakened when the
CEO is also a board chair (Crystal, 1991; Rechner and Dalton, 1991; Jensen, 1993; the Cadbury Committee,
1992; the Malaysian Code on Corporate Governance, 2000). Further, a number of empirical studies also
suggest that agency problems are higher when the CEO is also board chair (Fama and Jensen, 1983a;
Yermack, 1996). Core et al., (1999) and Cyert et al., (2002) both show that the level of CEO compensation is
higher when the CEO is also board chair while Grinstein and Hribar (2004) find that the size of bonuses
CEOs receive is higher when the CEO is also board chair. Since greater board independence results in
compensation that is closely aligned with shareholders’ interests, hypotheses 5 and 6 state as follows:
Hypothesis 5: There is a negative association between the proportion of non-executive directors on boards and
director remuneration.
Hypothesis 6: There is a negative association between the separation of the board chair and the CEO positions and
director remuneration.
Deliberation about and the determination of top management pay is often delegated to a
subcommittee of the board of directors. This board sub-committee plays an important role because it must
be concerned with setting and structuring pay packages that provides a viable mechanism for aligning the
interests of managers and shareholders (Conyon et al., 1995; Ezzamel and Watson, 1997; Conyon and Peck,
1998; Main and Johnston, 1993). The theoretical importance of a remuneration committee is clear. In its
absence, there likely exists an opportunity for executives to award themselves pay raises and this may
against the interest of the firm’s shareholders. Williamson (1985) remarks that the absence of an
independent remuneration committee may be akin to an executive’s writing his employment contract
with one hand and then signing it with the other. Main and Johnston (1993, p. 353) states that “there are
strong theoretical reasons for expecting a board sub-committee such as the remuneration committee to
exert an influence on top executive pay”. Main and Johnston (1993) find evidence that management pay is
significantly higher in companies that establish remuneration committees. Given that the aim of
remuneration committee is to design suitable reward packages, its existence and effectiveness is likely to
be related to its structure and membership. The members of a firm’s remuneration committee should be
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independent director and are expected to act as objective decision makers who will ensure that
compensation for executives and directors is set at appropriate levels (Bowen, 1994; Mangel and Singh,
1993; Singh and Harianto, 1989). In addition to agency reasons mentioned above, recent corporate
governance reforms (i.e., the Cadbury Committee, 1992; the Malaysian Code on Corporate Governance,
2000) which require greater compensation disclosures leads this study to expect that the existence of
remuneration committee links to director compensation. This gives rise to the following hypothesis:
Hypothesis 7: There is a negative association between the existence the remuneration committee and director
remuneration.
Data and Research Method
Sample and Data Collection
The sample comprises 428 non-financial public listed companies in Malaysia whose annual
reports are available in 2008. The firms in the sample are either listed on the Main Board or the Second
Board of the Bursa Malaysia. Both financial and corporate governance variables are hand-collected from
the published annual reports. In Malaysia, all listed companies are required to disclose details of director
remuneration and provide remuneration bands in range of RM50000 (less or more). Director
remuneration includes salaries, fees, and other benefits so it represents the total remuneration received by
boards of directors.
Measurement of Variables
The dependent variable, total director remuneration in 2008, includes all major components of
both executive and non-executive director remuneration including salary, bonuses, fees, and benefits-inkind.
It is noted that annual reports of Malaysian listed firms do not provide a consistent reporting of
separate components of director remuneration. In order to reduce heteroscedasticity, the natural log of
total director remuneration is used as the dependent variable.
This study uses the return on assets (ROA) as a proxy for financial performance. CEO tenure is
the number of years the current CEO (year 2008) has held the CEO position, while board size is the total
number of directors on the board of directors. Inside directors’ ownership is the percentage of total equity
held by inside directors at year end 2008. Two measures are used to measure board independence namely
the proportion of non-executive directors on boards and a dummy variable of 1 if a firm separates the
positions of board chair and the CEO, 0 if otherwise. The remuneration committee variable is defined as a
dummy variable equals to 1 if a firm reports the existence of such a committee in its annual report and to 0
otherwise.
Control Variables
The study includes several control variables that are likely to influence director remuneration.
These variables include firm size, leverage, and growth opportunities. The study also controls for industry
differences in the demand for directorial talent or expertise. Prior studies have shown firm size generally
reflects organizational complexity. Larger firms are likely to have larger number of directors on their
boards and may pay higher director remuneration. Additionally, Jensen and Murphy (1990) also show
that CEOs in larger firms receive greater levels of pay. This study measures firm size as the natural
logarithm of the book value of total assets. Jensen (1989) argues that firms with high debt is likely to have
less free cash flow, and thus are less likely to pay a high level of remuneration. Leverage is measured
using the ratio of total liabilities to total assets at the end of 2008. Smith and Wyatt (1992) find that firms
with a higher market to book ratio use more performance-based pay. A more recent study by Walker
(2010) finds that high-growth firms pay their CEOs a greater proportion of performance-based pay. As a
proxy for growth opportunities, the study uses the ratio of market value of equity to book-value of equity.
Finally, industry effects are controlled for by means of sectors classified by both the Main and Second
Boards of Bursa Malaysia. Table 1 describes the variables used in this study.
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Table 1: Description of variables used in the study
Variables
Description
Total director remuneration
The natural log of total director remuneration (salary, bonuses, fees and
benefit-in-kind).
Firm performance
Return on assets (ROA) (Net Income/Total assets).
CEO tenure
The number of years the current CEO has held the CEO position.
Board size
The number of directors on the board of directors.
Insider ownership
The percentage of total equity held by inside directors at year end.
Board independence
The proportion of non-executive directors on the board of directors.
CEO Duality
A dummy variable of 1 if a firm separates the positions of board chair
and the CEO, 0 if otherwise.
Remuneration committee
A dummy variable of 1 if a firm reports the existence of a remuneration
committee in its annual report, 0 if otherwise.
Leverage The ratio of total liabilities to total assets at the end of 2008.
Firm size
The natural logarithm of the book value of total assets.
Growth opportunity
The ratio of market value of equity to book-value of equity.
Industry dummies
A dummy variable of 1 if a firm is in industrial product sector, or in
consumer product sector, or in construction sector, or in technology
sector, or in trade and services sector, or in property sector, or in
plantations sector, or in infrastructure companies sector, or in mining
sector, or 0 if otherwise. Sectors are classified by Bursa Malaysia.
Methodology
A cross-sectional ordinary least square (OLS) regression model is used to test the hypotheses
presented in Section 2. Drawing on previous research on corporate governance and remuneration, the
following model is developed with a variety of independent variables.
Director remuneration i = + 1 Firm Performance + 2 CEO Tenure + 3 Board Size + 4 Insider
Ownership + 5 Board Independence + 6 CEO Duality + 7 Remuneration Committee + 8 Leverage + 9 Firm Size
+ 10 Growth Opportunity + 11 Industry Dummies + e i
Results
Panel A: Continuous variables
Variables Minimum Maximum Mean Standard Deviation Median
Total Remuneration (ringgit) 73,000.00 81,981,000.00 2,892,030.03 5,507,313.96 1,769,000.00
Firm Performance (ROA) (%) -1.3981 0.9832 0.0366 0.1232 0.0412
CEO Tenure (years) 1.00 42.00 8.68 7.59 6.00
Board size (number) 3.00 15.00 7.58 1.81 7.00
Insider ownership (%) 0.00 66.40 11.18 14.94 3.85
Board independence (%) 0.1667 1.0000 0.6276 0.1666 0.6250
Leverage (%) 0.0011 7.7032 0.3656 0.5577 0.2832
Firm Size (Total Assets) (ringgit) 58,017,000.0 38,458,561,000.00 1,591,123,986.00 4,268,777,955.00 485,935,000.00
0
Growth opportunity (%) -0.6019 8.9470 1.0167 0.8639 0.8218
Panel B: Dichotomous variables
Variables Yes % No %
CEO Duality 358 83.6 70 16.4
Remuneration committee 393 91.8 35 8.2
Panel C: Industry Classifications
Number of firms
Constructions 35
Hotels 5
Industrial Products 114
Infrastructure Companies 3
Consumer Products 59
Plantations 24
Properties 71
Technology 14
Trade and Services 103
Total 428
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44

Descriptive statistics and correlations
Table 2 provides descriptive statistics for the variables used in the study and Table 3 reports
correlations. Panel A of Table 2 shows that total director remuneration ranges from RM73,000 to
RM82,000,000 with an average of about RM3,000,000. The average number of years the current CEO
serves on board is approximately 9 years with a minimum of 1 year and a maximum of 42 years. The
number of directors on Malaysian boards is between 3 and 15 with an average board size of 7 directors.
The mean percentage of directors’ shareholding is about 11 percent. Sixty-three percent of overall board
members are non-executive directors. The majority of firms in the sample separate the positions of the
board chair and the CEO (about 84 percent of the firms practice dual leadership). There are 393 firms in
the sample have formally established a remuneration committee (92 percent of total firms in the sample).
Just over 80 percent of the firms in the sample represent four major sectors classified by the Bursa
Malaysia namely industrial products (114 firms), trade and services (103 firms), properties (71 firms) and
consumer products (59 firms). The remaining firms in the sample are in sectors such as constructions,
plantations, technology, hotels, and infrastructure.
Table 2: Descriptive statistics (N=428 firms)
Table 3 reports the correlation between the variables used in the study. As suggested by
Hypothesis 1, the study finds a positive and significant correlation (0.273) between accounting firm
performance (ROA) and director remuneration. Randoy and Nielsen (2002) also find similar correlation
between ROA and CEO compensation for Norwegian and Swedish firms. Consistent with the prediction
of Hypothesis 2, the correlation shown in Table 3 between CEO tenure and director remuneration is
positive and significant (0.179). Randoy and Nielsen (2002), on the other hand, report that the correlation
between CEO tenure and compensation is negative and significant while Finkelstein and Hambrick (1989)
show no significant correlation between CEO tenure and total cash compensation. In line with Hypothesis
3, the study finds a strong positive correlation (0.371) between board size and director remuneration.
There is a weak correlation between insider ownership and director compensation (-0.051). As suggested
by Hypothesis 5, the study finds a negative and significant correlation (-0.219) between board
independence and director remuneration, thus supports the view that greater board independence
reduces CEO power and bargaining advantages of insider-dominated boards. The correlations between
director remuneration, CEO duality and the existence of remuneration committee are weak (-0.026 and -
0.016 respectively). The study also finds positive and significant correlations between director
remuneration, firm size and growth opportunity (0.444 and 0.161 respectively).
Table 3: Correlation matrix for the variables used in the study (N=428 firms)
Variables 1 2 3 4 5 6 7 8 9 10 11
1 Total Remuneration 1.000 0.273 ** 0.179 ** 0.371 ** -0.051 -0.219 ** -0.026 -0.016 0.444 ** 0.000 0.161 **
2 Firm Performance 1.000 0.071 0.107 * -0.063 -0.021 0.036 -0.061 0.127 ** 0.039 0.262 **
3 CEO Tenures 1.000 0.122 * 0.063 -0.133 ** -0.068 -0.041 0.032 0.053 -0.092
4 Board size 1.000 -0.021 -0.061 0.177 * -0.013 0.301 * -0.055 0.073
5 Insider Ownership 1.000 -0.267 ** -0.034 0.118 ** -0.302 ** -0.028 -0.051
6 Board Independence 1.000 0.161 ** 0.013 0.230 ** 0.027 -0.027
7 CEO Duality 1.000 0.029 0.098 * 0.034 0.003
8 Remuneration Committee 1.000 -0.162 ** 0.027 -0.027
9 Firm Size 1.000 -0.011 0.058
10 Leverage 1.000 -0.013
11 Growth Opportunity 1.000
**
Correlation is significant at the 0.01 level (2-tailed).
*
Correlation is significant at the 0.05 level (2-tailed).
Regression analysis
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45

Table 4 presents multivariate regression results for director remuneration. The results in Table 4
show the association between total director remuneration and both hypothesized and control variables
derived from the extant literature as independent variables. The model is significant (p

emuneration. The negative relationship suggests that greater board independence provides effective
oversight function, particularly on matters concerning designing pay contracts and packages. This finding
confirms the view that independent directors have a bargaining advantage over the CEO, resulting in
compensation closely aligned with shareholders’ interests (Core et al., 1999; Ryan and Wiggins, 2004). The
study also finds a weak support for Hypothesis 6, which predicts that director remuneration is negatively
associated with the separation of board chair and CEO positions. The weak relationship between these
two variables is likely due to the presence of higher number of independent directors on boards which
could be used as a substitute monitoring mechanism in controlling level of boardroom pay.
Finally, in contrast to the prediction of Hypothesis 7, the study finds a significant positive
relationship (coefficient = 0.258; p

total remuneration can also be broken up into several components such as bonuses, benefit-in-kind,
salaries, and pension benefits. Several studies from developed markets examine the effectiveness of
remuneration committee which includes its composition and its independence from the CEO is likely to
provide insights on how remuneration packages are designed and decided. Finally, there can be
methodological extensions of the study. A stimulus equation framework to control for endogeneity
problems commonly exist in corporate governance studies, a non-linear pay-performance relationship,
and market-based performance measures may increase robustness of the study.
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51

An Analysis of Performance Appraisal System of Mercantile Bank
Limited
Sheikh Abdur Rahim
Daffodil International University, Bangladesh
Keywords
Performance Appraisal, Employee Appraisal, Bank, Personal Bias, Effectiveness.
Abstract
Performance appraisal is the process of determining and communicating to an employee how he / she is
performing on the job and ideally, establishing a plan of improvement. It is very much critical because it helps the
managers to take the administrative decisions effectively relating to promotions, fringes, payoffs and merit pay
increases of the employees. So, performance appraisal is a must for all organizations. This paper aimed at critically
evaluating the existing performance appraisal systems of Mercantile Bank Limited. For this reason, the researcher
has reviewed existing literatures and collected relevant information from the bank. Finally, the researcher has
provided some recommendations to overcome the problems involved with the existing performance appraisal system
of Mercantile Bank Limited.
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52

On the Effectiveness of Regulatory Policies: Some Empirical Results
Sal Amir Khalkhali
Saint Mary’s University, Canada
Atul A. Dar
Saint Mary’s University, Canada
Keywords
Regulation, Imperfect Competition, Regulatory Quality, Public Interest, Economic Performance.
Abstract
Regulation is a fact of life in almost all advanced economies, and the recent financial crisis in advanced economies has
heightened interest in its economic impacts. Despite significant theoretical advances in the literature on regulation, not
much is known about its macroeconomic implications. This paper seeks to address this issue empirically. To be more
specific, this study attempts to contribute to existing studies by applying an empirical model to data on the seven most
advanced economies over the 1996-2007 period. Our empirical results provide support for the view that the quality
of regulation has a positive impact on growth in these industrialized countries. Nevertheless, the strength of that
evidence varied across these economies.
Introduction
The efficiency of perfectly competitive markets are well established at the theoretical level. In a
competitive market, a single firm has no market power or influence over the price. The firm would earn
maximum normal profit and any excess profit would be transitory. In such a market, price is determined
in the market and the quantity produced/sold would bring about both allocative and productive
efficiency in an economy. In such markets, consumers also maximize satisfaction and there is no need for
any government intervention or public policy. Nevertheless, this model of perfect competition is not
generally applicable to most key industries which are mostly oligopolistic and large firms usually enjoy
some significant degrees of market power. Accordingly, this would open the door for some government
intervention in the form of regulation to limit market power, and/or to promote a more competitive
environment for bringing about more efficient outcomes.
The case for regulation has been well grounded in economic theory in the presence of distortions
resulting from not only imperfect competition but also incomplete markets and externalities. However, it is
also well known from the theory of second-best that the impact of regulation in offsetting welfare reductions
resulting from these distortions is not certain, even when regulators have full information and are guided by
public interest. In other words, much also depends upon the specifics of the distortion and the
appropriateness of the regulation. In addition, despite significant theoretical advances in the literature on
regulation, not much is known about the macroeconomic implications. This paper attempts to address the
impact of regulatory quality on macroeconomic performance, usually measured by the rate of economic
growth. To be more specific, this empirical study seeks to address the following question: are economies in
which the institutional framework is more conducive to the formulation and implementation of effective
regulatory policies also more likely to have better macroeconomic outcomes The rest of the paper is
organized as follows. In the next two sections, we first review the literature and then discuss the data, the
empirical model, and the estimation techniques. The last section contains a discussion of our empirical
findings and some concluding remarks.
A Brief Review of Literature
The relation between institutional factors and macroeconomic performance has been studied from many
angles. The institutional set-up is a key determinant of the type and quality of the regulatory framework,
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53

and of economic growth. However, the difficulty in measuring the quality of regulation has meant that not
many studies have been able to empirically look at this issue, and those that have, have looked at more
general governance indicators, and estimated their impact on various macroeconomic variables. Among
others, one that has been explored at length is the relationship between governance and economic
performance. See for instance Kauffman and Kraay (2002), Hall and Jones (1999), Olson, Sarna and Swamy
(1998), and Barro (1997). According to the World Bank, “governance consists of the traditions and
institutions by which authority in a country is exercised.” In recent years, it has been active in developing
indicators of governance, and currently data on six such indicators are in the public domain. These are:
voice and accountability, political stability and absence of violence, government effectiveness, regulatory
quality, rule of law, and control of corruption. The raw information that are inputs in measuring these
governance indicators are drawn from a variety of national and international sources. See Kauffman, Kraay
and Mastruzzi (2009) for details. According to World Bank publications, “regulatory quality reflects
perceptions of the ability of the government to formulate and implement sound policies and regulations
that permit and promote private sector development. The regulatory quality (RQ) indicator can be taken as
the index that tries to measure the economic burden on business through quantitative regulations, price
controls and other interventions, which can be taken as indicators of the quality of outcomes. This index is
constructed such that higher scores (in the -2.5 to +2.5 range), indicate a better quality of regulation. In our
study, we use the regulatory quality (RQ) index which clearly measures the quality and effectiveness of
regulation.
In regard to economic growth, this study relies on a variant of the basic aggregate growth-accounting
model developed by Solow (1956), with more generalized approaches incorporating theoretical insights
offered by endogenous growth theory. See, for instance, Barro (1991, 2000), Barro and Salai-i-Martin
(1992), Jones (1995), and Mankiw, Romer and Weil (1992), AmirKhalkhali and Dar (2003). An important
element of such studies is that economic growth is seen as depending not just on traditional variables like
factor accumulation, but also upon various institutional factors. Typically, in such models, various
variables reflecting institutional characteristics are included as affecting growth via their impact on total
factor productivity or the “Solow” residual. In reality, there is no unique variable that can capture the
multi-dimensional aspects of a country’s institutional structure; as a result, there are potentially many
ways of studying the impact of institutions. In this study, we narrow the focus by looking at the effect of
the quality of regulation on economic growth in some most industrialized countries. The question of the
impact of regulation on economic performance is relevant on the grounds that there are differences in the
quality of regulation as well as the rate of economic growth among these advanced economies.
The Data, the Empirical Model, and the Estimation Techniques
The sample used in this study consists of data for seven industrialized countries which are members of
Organization for Economic Cooperation and Development (OECD): Canada, France, Germany, Italy,
Japan, the United Kingdom (UK), and the United States (USA). The data span the 1996-2007 interval and
were obtained from various issues of Economic Outlook published by OECD and International Financial
Statistics published by International Monetary Fund (IMF). We also use measures of the quality of
regulation that are drawn from the governance indicators developed by the World Bank.
Table 1 provides some important information about macroeconomic aggregates in these advanced
economies. It presents averages for rates of growth of output (GY), employment (GE), investment (GI),
exports (GX), investment rate (IY), the size of government (GS) measured by government spending as
percentage of GDP, the degree of openness (OPEN) measured bu the sum of exports and imports as
percentage of GDP, public debt-to GDP-ratio (PD), and the regulatory quality index(RQ) during the 1996-
2007 period. This table points to substantial variation in growth rates, averaged over this period for these
economies. It can be seen that GY varies from above 3% for Canada and USA to below 1.6% for Germany,
Italy and Japan. In the cases of employment and investment, Canada enjoyed the highest growth rates
while Japan faced with negative growth rates. This is despite the fact that Japan enjoyed the highest
investment to output ratio. This would raise some questions about effectiveness of relying only on the
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size of this macro-aggregate in fostering growth. The degree of trade openness also varies from a high of
65-70% for Canada and Germany to a low of 23-24% for Japan and the USA. Another interesting point is
that despite its relatively small government size (about 38%) Japan possessed the largest public debt-to
GDP-ratio (about 122.2%). RQ also varies from a high of 1.77 for UK to a low of 0.86 for Japan. Table 2
presents the bi-variate correlation coefficients between these macroeconomic aggregates in the pooled data
of the G7 countries. These reported correlations point to a positive and significant association between GY
with GI, GE, GX and RQ. The growth rate is also negatively and significantly correlated to GS and PD.
TABLE 1
Average Annual Growth of Output (GY), Employment (GE), Investment (GI), Exports (GX); Investment-
Output Ratio (IY), Government Size (GS), Openness (OPEN), Regulatory Quality Index(RQ), and Public
Debt (PD) during the 1996-2007 period
Countries GY GI GE GX IY GS OPEN PD RQ
Canada 3.225 6.125 1.990 -3.192 20.62 41.80 70.61 63.54 1.447
France 2.242 3.775 1.144 0.192 19.55 52.88 49.01 60.85 1.054
Germany 1.575 1.325 0.436 0.775 19.27 47.25 65.57 33.17 1.439
Italy 1.467 2.583 1.889 -4.258 20.52 48.54 49.90 107.67 0.897
Japan 1.317 -0.250 -0.056 -1.458 24.88 37.99 23.96 122.17 0.865
UK 2.942 5.058 1.069 -1.975 17.43 41.35 51.75 38.07 1.711
USA 3.200 4.492 1.231 -1.758 19.76 35.57 24.62 61.70 1.529
G7 2.281 3.301 1.100 -1.668 20.29 43.63 47.92 69.59 1.277
TABLE 2
Correlation Analysis
Variables GY GI GE GX IY GS OPEN PD RQ
GY 1
GI 0.752* 1
GE 0.468* 0.461* 1
GX 0.223* -0.044 0.009 1
IY -0.167 -0.164 -0.116 -0.111 1
GS -0.310* -0.097 0.040 0.115 -0.279* 1
OPEN 0.103 0.224* 0.305* 0.010 -0.418* 0.454* 1
PD -0.217** -0.200** -0.030 -0.193** 0.519* -0.112 -0.427* 1
RQ 0.501* 0.388* 0.100 0.003 -0.135 -0.355* 0.333* -0.613* 1
*and ** indicates statistical significance at the 5% and 10% level, respectively.
With regard to RQ, the table shows that RQ has a positive and significant association not only with
economic growth, but also the growth rate of investment and the openness of the economy. The negative
and significant correlations between RQ with GS and PD indicate that quality regulation would not imply
bigger government in particular through more public borrowing.
The empirical model employed in this study is a generalisation of the commonly-used growth-accounting
model based on the concept of an aggregate production function. It is developed along the lines suggested
in AmirKhalkhali & Dar (2003) and Dar & AmirKhalkhali (2003), and is an extension of both of those
studies. We start a general growth accounting function where GY depends on GI, GE, and the rate of total
factor productivity growth (GA), i.e., GY= f(GK, GL, GA). Generalizations of the model are usually
generated by identifying measurable variables that capture the economic and/or political structure of a
country, and which affect growth via total factor productivity.
In this study, our generalization models total factor productivity as depending upon the rate of export
growth (GX), the quality of regulation (RQ), and the public debt to GDP ratio (PD), as well as upon other
unmeasured differences across countries. We assume that these variables affect total factor productivity
growth and, by implication, economic growth via their impacts on the efficiency of resource use,
innovative activity, the rate of technical progress, and/or the realisation of economies of scale.
Accordingly, we can write:
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GY it = 1 + 2 GK it + 3 GL it + 4 GX it + 5 PD it + 6 RQ it + u it (1)
The subscripts i (i=1,2,...,n) and t (t=1,2,...,T) index the countries and time periods in the sample
respectively. u it is the time and country specific random disturbance. 6 are impact
coefficients. The theoretical literature generally points to a positive impact of GI, GE, and GX on growth,
i.e., we expect . Nevertheless, there is uncertainty about the direction of the impact of
PD and RQ on the rate of growth. This is because there are persuasive arguments for both negative
impacts (through government inefficiency, the excess burden of taxation etc.) as well as positive impacts
(through beneficial externalities, through the development of a legal, administrative, and economic
infrastructure, and interventions to offset market failures etc) on growth.
A significant problem with a structural model such as (1) is the endogeneity of the explanatory variables.
This means that a standard interpretation of the estimated parameters is problematic because of the
correlation between explanatory variables and the error term. Further, in the above model, inter-country
differences are assumed away by virtue of the assumption that all coefficients are the same across
countries. This is a questionable assumption a priori; at least one that should be treated as a testable
proposition. Following AmirKhalkhali and Dar (1993), we overcome both problems by adopting the more
general random coefficients model which permits us to treat the fixed-coefficients assumption as a testable
proposition. In addition, the random coefficients model can be seen as a refinement of the stochastic law
relating economic growth to its main determinants [see Pratt and Schlaifer (1984, 1988)]. Accordingly, we
develop and estimate the following model:
Note that (2) is a varying coefficients model, and that the disturbance is not the joint effect of excluded
variables; instead, it is the joint effect of the remainder of the excluded variables after the effect of
included variables has been factored out. For more details, see AmirKhalkhali and Dar (1993). Note also
that whereas the included variables cannot be uncorrelated with every variable that affects GY, they can
be uncorrelated with the remainder of every such variable, see Pratt and Schlaifer (1988). Thus, each of
our explanatory variables can be uncorrelated with u, and this regression model can be taken to represent
the law relating GY to its determinants. The varying coefficients model represented by (2) also
accommodates inter-country heterogeneity. In this study, these regression models are estimated using
Swamy and Swamy-Mehta random generalized least squares (RGLS) estimators. For more details of the
RGLS estimation methods, see Swamy (1970), Swamy and Mehta (1975), and Swamy and Tavlas (1995,
2002).
The Empirical Results
Table 3 contains the results based on the pooled sample - that is, 7 countries over the 1996-2007 period,
estimated using the Swamy RGLS technique. The validity of the random coefficients model can be tested
using the Swamy’s g-statistic which follows a distribution, see Swamy (1970) for more details. Note
first that the g-statistic is statistically significant at the 5% level, thereby vindicating the random
coefficients model. The investment, employment, and export growth rates coefficients have the expected
positive sign and are each statistically significant at the 5 percent level. The public debt coefficient is
negative but not statistically significant. The regulatory quality coefficient has the positive sign and its
contribution to growth is statistically significant. At the aggregate level, thus, the evidence does point to a
significant role for regulation, as far as economic growth is concerned.
TABLE 3
Random Coefficients GLS: G7 Results
Model :
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Countries
G7 -1.101 0.189* 0.088 0.176* -0.002 2.028*
g-statistic = 80.7*
* indicates statistical significance at the 5% level.
To assess whether and to what extent these aggregate results mask country-specific differences, we look at
the country-wise estimates of the model, obtained using the
TABLE 4
Random Coefficients GLS: Country-specific Results
Model :
Countries
Canada 1.787 0.167* 0.115 0.132* -0.033 1.599*
France -3.049 0.091** 0.359* 0.137* 0.045** 3.124*
Germany 2.984 0.243 0.008 0.176* -0.066** 0.957**
Italy -3.380 0.191* 0.069 0.267* 0.067* 3.507*
Japan 1.475 0.354* 0.197 0.245* -0.003 0.703
UK -0.709 0.235* 0.008 0.237* -0.027 1.886*
USA -1.809 0.040 0.269** 0.039 0.005 2.433*
*and ** indicates statistical significance at the 5% and 10% level, respectively.
Swamy-Mehta (1975) RGLS method. The country-specific estimates are reported in Table 4. The
investment growth rate has a positive impact on the growth performance of all countries. However, it is
not statistically significant for USA and Germany. In the case of employment growth rate, the positive
impact is statistically significant at 5-10% for USA and France. The export growth rate is also a significant
contributor to growth performance for all countries except USA. In the case of public-debt-to-GDP ratio,
the results are mixed. The impact of PD on growth is negative and statistically significant in the case of
Germany but PD contributes to growth in France and Italy. This may somewhat explain why Germany
has been more sensitive to deficit spending than France. The regulatory quality coefficient has the
positive sign and its contribution to growth is statistically significant at 5-10% for all countries except
Japan. Thus, the evidence does again point to a significant impact of quality regulation on growth, in
particular in France, Italy and the USA.
Summary and Concluding Remarks
In this paper, we attempted to investigate the impact of regulation quality on economic growth in a more
general manner than in previous studies. To this end, we studied data from the seven most industrialized
countries over the 1996-2007 interval. We also used the regulatory quality index developed by the World
Bank. We developed the estimating model so that it more accurately represented the law relating the rate
of economic growth to its determinants. The varying coefficients approach is particularly suited here
since, as stressed by the political economy literature, institutional factors are likely to play a major role in
explaining inter-country differences in growth rates, and a random coefficients treatment appears to be a
more reliable way of taking these factors such as these into account than models that try to quantify them.
Our results lend strong support to the random coefficients approach.
Our overall results provide support for the view that the quality of regulation has a positive impact on
growth in these seven advanced economies. In other words, countries in which the institutional
framework is more conducive to the formulation and implementation of effective regulatory policies are
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57

more likely to have better macroeconomic outcomes. Nevertheless, the strength of that evidence varied
across the countries considered in this study. In particular, our empirical results suggest that quality
regulation would be more effective in fostering economic growth in Italy, France, and the USA.
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58

Compliance Versus Volatility of Performance in 2012.
Corporate Influence in Bureaucratic Systems.
Where should the focus for America lay most
David M Chapinski
Rutgers University- Newark Campus, USA
Keywords
Consumers, Ownership, Corporate Income, Volatile, Equity Finance, Highty Tech Firms.
Extended Abstract:
Information accumulates and organizing decisions become fixtures of fixed costs. And if consumers are
naive, and especially if private media outlets serve the governing classes, then state media ownership can expose the
public to less obstinate, more complete, and more accurate information than it could obtain with private ownership.
We must remember that firms do form exchange relationships to gain access to specific resources, but exchange
relationships also are important indicators of social status. The status of a firm means the prestige of a firm. More
specifically, perceived External Prestige (PEP) I believe is important for the discussion of internal versus external
followed by pride in belonging.
The importance of status varies across contexts.
Corporate income is highly volatile. With that being said, labor costs exist in these divisions between “us”
and “them” associated arena. These are associated with sweeping differences in day-to-day experiences, and these
vast differences make it difficult to appreciate what life is like on the other side of such a divide. Faced with effective
differences, it is such an easy and popular contrivance for privileged firms and powerful people to attribute problems,
disappointment and despondency in those of lower status to characteristics such powerful people are certain separate
“their kind” from such lower-statuses individuals.
Equity finance for one, has several advantages over debt for young high-tech firms. For both internal and
external equity finance, shareholders share in upside returns, there are no collateral exigencies, and additional equity
does not deepen problems associated with financial distress. In addition, internal equity finance does not create
adverse selection problems. Internal and external equity finance are not perfect elixirs, however. In sum, if a given
type of prestigious affiliate serves primarily a certifying function, then multiples of this type will have diminishing
positive effects on investors' assessments of firm value. Thus, the picture that emerges when prestigious affiliates are
viewed as providing substantive resources, rather than just certification is very different: Instead of providing largely
redundant signals of an IPO firm's quality, multiple prestigious affiliates provide generally additive benefits, where
“more is better.”
I believe that firms acquire valuable resources from their collaborative-competitive relationships and
strengthen their co-operative capabilities (Gnyawali & Madhavan, 2001).
Firms that have advantageous network positions—that is, those with a large number of connections and are
therefore highly central, and those having nonredundant ties and are therefore profoundly structurally
autonomous—gain several such benefits from their co-operative network and become more competitively aggressive.
Simply put, differential access to network resources leads to resource imbalances between the firms and therefore to
differences in co-operative behavior. Analyzing data on the cooperative network structure, for example, patterns of
collaborative linkages among competing firms in global industries and competitive behavior of firms, we are able to
learn that firms occupying more central positions in the network means foregoing more competitive actions.
Similarly, firms with higher levels of structural autonomy undertake more diverse competitive actions. I will make
the case that firms with high market diversity seem to draw more benefits from their central and structurally
uncontrolled positions in the co-opetitive network. Overall, I will show that the utility of the network perspective in
studying coopetition generates interesting possibilities for future research. Three implications are especially
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59

noteworthy: First, firms vary in systematic ways in their ability to extract competitive benefits from their coopetitive
networks. Second, firms that achieve superior network positions in a co-opetitive network are better able to
develop their competitive capabilities through a network of ties and increase competitive advantage. Third, coopetitive
relationships possess unique structural and competitive characteristics and therefore deserve serious
scholarly attention.
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60

Exposing MBA Students to Corporate Governance
Keywords
Teaching, Pedagogy, Corporate Governance
Patricia Miller Selvy
Bellarmine University, USA
Abstract
Many MBA programs are offering graduate courses in corporate governance. In fact the Association to Advance
Collegiate Schools of Business (AACSB) and other accrediting bodies encourage exposure to this area of study.
There does not seem to be much literature on a “best practices approach” or much similarity to the structure or
design of the various courses in Corporate Governance. This paper looks at the pedagogy used to teach a graduate
level elective course in corporate governance at a small Catholic Liberal Arts University. The focus of the course is
to provide the student with a basic understanding of the history of corporate governance, both its regulatory past and
present, as well as the various theories that surround corporate governance and information on the key stakeholders
and leaders of the firm and current issues facing them today. The course is taught using a case driven, team based
approach. The ultimate outcome of the course is to provide the student with the tools necessary to identify and
discuss the issues faced by corporate leaders and board members, while encouraging these students to become ethical
participants in corporate governance. The ultimate questions posed by this paper are: What are the topics that must
be taught ; What pedagogy is best for presenting the topics surrounding corporate governance; and How do we
help these future leaders to value the ethics and principles necessary to change the actual and perceived corporate
governance culture.
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61

Enterprise Restructuring in the Conditions of the
Crisis and the Globalization Challenges. Based on
the Experiences of the Polish Economy
Ryszard Borowiecki
Cracow University of Economics, Poland
Keywords
Globalization, New Economy, economic crisis, restructuring
Abstract
The 21 st century is the arena of extremely dynamic and turbulent changes we have become not only witnesses but
also participants of. They keep bringing newer and newer challenges for the functioning of the economies of
individual countries and their regions, and the behaviours of enterprises - the basic elements of the subjective triad of
each economy. Thus, the paper attempts to outline the background, causes and consequences of the changes in the
bahaviour of contemporary enterprises, and justifies the necessity of the system reconstruction and the
modernization of their structures in the face of crisis situations, the globalization challenges and the requirements of
the New Economy.
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62

Corporate Governance and Performance of
Commercial Banks in Nigeria
Olagunju Adebayo
Redeemer’s University, Mowe, Ogun State, Nigeria
Oluwa Temitope Mariam
Redeemer’s University, Mowe, Ogun State, Nigeria
Keywords
Corporate Governance, Profitability and Performance.
Abstract
The study was designed to investigate corporate governance and performance of commercial banks in Nigeria. Data
used for this work were collected from both primary and secondary sources. The relevant data collected were analyzed
and tested using simple percentages, tables and bar-charts.The three hypotheses formulated were tested using
correlation co-efficient ). The result of the analysis revealed that there are significant relationships between
corporate governance and profitability ,dividend per share and the return on equity of commercial banks and the
disclosure of the financial report within the organization are adequate and in accordance with acceptable codes and
that Corporate governance is designed to reduce inefficiency, improve performance and to save the operational fraud
in commercial banks. Based on these findings, The study concluded that corporate governance has increased the
overall performance of commercial banks in Nigeria. Finally, the study recommends that in order to safeguard
against possible abuse of the concept of corporate governance; the Central Bank of Nigeria and other regulatory
authorities should check all manner of abuses that may arise which may not be in the interest of shareholders and the
general public; to generate more profit, the bank need a good regulatory environment that will enable them to expand
their scope of businesses but strictly within the financial service industry and that the government should provide
necessary infrastructure in order to reduce the cost of doing business.
The Business & Management Review, Vol.2 Number 2, July 2012
63

Profit creation, intra and inter-generational Equity:
Need for New Company Law
Olawale Ajai
Lagos Business School, Pan African University, Lagos, Nigeria,
Keywords
Corporate profits, CSR/corporate sustainability, sustainability accounting, generational equity, IFRS
environmental standards, intra/inter -generational shareholders equity.
Abstract
The issue of profits in company management is as old as the joint stock company but remains ever topical and
somewhat controversial. Accountants have one measure for profit and economists another measure, whilst some
others want to do away with the whole idea of profit entirely in order to ensure social responsibility by companies.
The theory of sustainability calls into question the existing theory of profits, apparently based on subsidization and
negative externalities, as a result of failure to factor into company accounts their true environmental costs. Not only
does the principle of sustainability seem to give validation to stakeholder rights in corporate profits but it also calls
into question the current theories of profit creation and distributional equity based on shareholder theory, as well as
the existing company law. This paper examines the relevant issues and argues that new legal rules on corporate
accounting and profits reflecting generational equity, rather than voluntary compliance, are imperative for good
corporate governance and sustainable development.
The Business & Management Review, Vol.2 Number 2, July 2012
64

The Publishing Scramble for Africa
A salutary tale of opportunity, bribery and censure
Mark T Jones
Park Royal College, London, UK
Keywords
Education, literacy, publishing, demographics, development, bribery, management, World Bank
Abstract
Education is a life transforming process, one that has a pivotal role to play in human development.
August universities, many of whom were founded by religious figures or institutions have sought to place
themselves on a higher plain, seemingly largely removed from the secular. Such ‘groves of academe’ may
wish to see themselves as very different entities, but there is no escaping the fact that they are engaged in
business and commerce, and as such are subject to human frailty, as well as the vicissitudes of economic
cycles. Eminent publishing houses such as Macmillan and the Oxford University Press (OUP) are required
to maximise returns and it is for this reason that they have endeavoured to break into new and frontier
markets. By trading on a scholarly pedigree and the English Language such publishers have see much of
Africa as virgin territory and have set about penetrating it with enthusiasm. The ardour with which these
publishers have sought to woo Anglophone Africa has resulted in a willingness to forego normal best
practise which has called into question their methods and integrity. The result has been a welter of
criticism and censure, with the World Bank wading in to punish these errant suitors. Now processes and
procedures are in the spotlight, and the work has begun to re-establish credibility, brand name and trust.
Introduction
The Chinese have a proverb that says: “A book is a garden in the pocket”. Education is universally
prized, and furthermore a valuable ‘industry’ in its own right. In 2007 the British Council calculated that
the direct value of international students alone to the UK economy (including fees and off-campus spend)
was nearly £8.5 billion per annum – a figure certain to have risen since. Educational suppliers are eager to
exploit new markets and in recent years have turned to Africa in the hope of seeing their profits grow.
With the population of much of Africa set to rise, and more and more of the Continent’s governments
committed to providing free or subsidized primary education, competition has become fierce for
potentially lucrative contracts to become the chief suppliers of core text for institutions offering primary,
secondary and tertiary education. Kenya is just one example, in 2003 it abolished all fees in state run
primary schools in order to enable the children of poorer families to be better able to access rudimentary
education. In the wake of such announcements various international publishing houses have been eager
to capitalise on such a golden opportunity, but in so doing, some over-zealous, and in some cases
unethical conduct has resulted in a number of leading publishing houses being accused of bribery and
corruption, something which has the potential to tarnish the reputations of world renowned companies.
Recent events concerning wholly-owned subsidiaries of the Oxford University Press (OUP) have caused
shock ways in the publishing world, along with a degree of schadenfreude amongst its rivals. Unethical
business dealings in the world of education highlight the need for robust management processes and
increased vigilance. One of the redeeming features of the OUP bribery scandal has been the willingness of
the world’s largest university press to hold up its hands and declare – Mea Culpa.
The Business & Management Review, Vol.2 Number 2, July 2012
65

A Panel Cointegration Approach to Foreign Direct Investment and
Growth in Africa: Evidences from ECOWAS, ECCAS, EAC and SADC
Blocs
Rasheed O. Alao
Adeyemi College of Education, Ondo, Nigeria.
Keywords
Africa, Foreign Direct Investment, Growth, Panel Cointegration.
Abstract
A plethora of studies have unwrapped the inflows of foreign direct investments (FDI) to Africa from developed
world. Many receiving countries especially the Less Developed Countries (LDCs) woo FDI simply because it serves
as a catalyst of economic growth and as a propellant to economic development. This study explores FDI inflows to
the African Regional Economic Communities (RECs) vis-à-vis economic growth spanning three decades. Applying
panel cointegration technique over the period of 1980-2010, the study found that GDPGRT, FDI, GFCF, OEXR and
EXPORTS were cointegrated. With respect to the availability of data for the observation of thirty (30) years,
fourteen selected sample countries from the African RECs which include Economic Community of West African
States (ECOWAS), Economic Community of Central African States (ECCAS), East African Community (EAC) and
the Southern African Development Community (SADC) blocs. From cointegrating results, the null hypothesis of
no cointegration is rejected by panels Rho, PP and ADF tests within dimensions while panels Rho, PP and ADF also
rejects the null hypothesis of no cointegration between dimensions. However, only panel v test fails to rejects the
hypothesis of no cointegration. The cointegration equation estimation results unwrapped that high level of FDI
generates high level of GDP growth in Africa and statistically significant at 5 percent level.
Introduction
Many countries especially the Less Developed Countries, LDCs woo capital imports of Foreign
Direct Investments (referred to as FDI henceforth) simply because it serves as a catalyst for economic
growth and as a propellant to economic development. Direct inflows of investment through the New
Partnership for Africa’s Development (NEPAD), Organization Economic Community Development
(OECD) and Official Development Assistance (ODA) to Africa has the attraction of huge investment to
Africa since most of the sub-Sahara African countries independence. Herzer and Nunnenkamp (2012)
submits that the empirical literature on the effects of FDI has focused almost exclusively on the benefits
that host economies may reap in terms of higher growth and wages. While this literature “seems to have
run out of steam,” the effects of FDI on important dimensions of the quality of life such as health
conditions are among the wide array of neglected issues (Blonigen and O’Fallon 2011: 4). The importance
of FDI is envisioned in the New Partnership for Africa’s Development (NEPAD) as it is perceived as a key
resource for the translation of the vision of NEPAD for growth and development into reality (Ajayi, 2006,
p. 1). Ajayi (2006, p. 1) further stresses that Africa needs a substantial inflows of external resources in
order to fill the saving and foreign exchange gaps and leapfrog itself to sustainable growth level in order
to eliminate its current level of poverty. FDI is a key driver of international economic integration. With the
right policy framework, FDI can provide financial stability, promote economic development and enhance
the well being of societies (OECD, 2008). According to OECD (2008), FDI is a key element in this rapidly
evolving international economic integration, also referred to as globalisation. FDI provides a means for
creating direct, stable and long-lasting links between economies’’. FDI encourages and brings
technological know-how between economies; serve a vehicle for local enterprise development, raises
efficiency and competiveness of both the recipient (“host”) and the investing (“home”) economy. It also
provides an opportunity for the host economy to promote products and improves international marketing
activities. Since the Asian crisis, the call for an accelerated pace of opening up to FDI has intensified in the
belief that this will bring not only more stable capital inflows but also greater technological know-how,
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66

higher-paying jobs, entrepreneurial and workplace skills, and new export opportunities (Prasad et al.,
2003; Ajayi, 2006). Taking a glance at the Millennium Declaration of 8 September 2000, UN Genaral
Assembly submits that:
We [the United Nations General assembly] resolve to halve by the year 2015, the proportion ofthe World’s
people whose income is less than one dollar a day. We also resolve to take specialmeasures to address the challenges of
poverty eradication and sustainable development inAfrica, including debt cancellation, improved market access,
enhanced official Development assistance and increased flows of Foreign Direct Investment as well as transfer of
technology.
From this submission, Ajayi (2006) opines and as point out by Asiedu (2004 p. 371) that an
“increase in technological transfer and FDI to Africa will help the continent achieve its Millennium
Development Goal (MDG) of reducing poverty rates by half by 2015”. The objective of this study is to
examine panel cointegration of growth and FDI flows to Africa. The remainder of this paper is organized
as follows: Section two reviews the literature. Section 3 present empirical analysis, featuring model, data
mining and preliminary diagnostics while section 4 present concluding remarks and recommendation.
Literature Review
Definition of FDI
OECD (2008) defines FDI as “a category of cross-border investment made by a resident in one
economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct
investment enterprise) that is resident in an economy other than that of the direct investor. The motivation
of the direct investor is a strategic long-term relationship with the direct investment enterprise to ensure a
significant degree of influence by the (former) in the management of the (latter).” UNCTAD (2003, p. 231)
also defines FDI as ‘‘an investment involving a long-term relationship and reflecting a lasting interest and
control by a resident entity in one economy ([the] foreign direct investor or parent enterprise) in an
enterprise resident in an economy other than that of the foreign direct investor….’’. In the same parlance,
Ayanwale’s study (World Bank, 1996) also defines FDI is an investment made to acquire a lasting
management interest (normally 10% of voting stock) in a business enterprise operating in a country other
than that of the investor defined according to residency.
Previous studies
The building blocks of panel cointegration analysis can be traced to the works of the panel
cointegrationist, Peter Pedroni in Pedroni (1993, 1995, 1996a,b, 1997a,b, 1998, 1999, 2001, 2004 and 2007).
Contrary to the conventional Augmented Dickey Fuller (ADF) Dickey and Fuller (1981) and Phillips and
Perron (PP), Phillips and Perron (1988) unit root tests which is widely used to see the stationarity of time
series variables, applications of panel unit root methods, as put by pedroni (1999) have included Bernard
and Jones (1996), Coakley and Fuertes (1997), Evans and Karras (1996), Frankel and Rose (1996), Lee,
Pesaran and Smith (1997), MacDonald (1996), O'Connell (1998), Oh (1996), Papell (1997), Wei and Parsley
(1995), and Wu (1996). Pedroni (1999) however stated that many empirical questions involve multivariate
relationships and a researcher is keen to know whether or not a particular set of variables is cointegrated.
Other applications of the panel cointegration tests developed in Pedroni (1995,1997a) for the case with
heterogeneous cointegrating vectors, as suggested by Pedroni (1999) have included, among others, Butler
and Dueker (1999), Canzoneri, Cumby and Diba (1996), Chinn (1997), Chinn and Johnston (1996), Neusser
and Kugler (1998), Obstfeld and Taylor (1996), Ong and Maxim (1997), Pedroni (1996b), and Taylor (1996).
Stream of empirical studies on FDI flows to Africa are presented below in tabular form.
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67

Table 1: Findings/Results on the FDI flows to Africa and Asia
Researche
r/s
Target Sample
Countries
Observ
ations
Source of Data
1 Ayanwale FDI and Nigeria 1970- CBN Statistical
(2007) Growth
2002 Bulletin (VY), WDI
(2004) & IFS (2005).
2 Ayadi Causality Nigeria 1980- The Economics
(2009) tests of
2007 Intelligence Unit,
growth and
Country data
FDI
3 Onu and Causality Nigeria 1986- CBN Annual Reports
Njiforti tests of
2007 and statement of
(2010) growth and
Accounts, World
Bank Report and
FDI
others
4 Eregha FDI inflows
1970-
(2011)
2008
5 Udo and
Obiora
(2006)
6 Lumbila
(2005)
versus
domestic
investments
Cause-effect
relation
between FDI
and growth
What makes
FDI works
10
ECOWAS
countries
5 WAMZ
Countries
47 SSA
Countries
1980-
2002
1980-
2000
Secondary data: UN
Statistics online and
WDI (2009)
World Bank Database
for Africa (2005) and
WDI (2004)
World Bank’s WDI,
2003
Findings/Results
FDI in Nigeria contributes to
economic growth.
FDI has not contributed
significantly to output growth in
Nigeria.
FDI did not Granger cause
GDP; rather, GDP Granger
cause FDI. Thus GDP stimulates
FDI.
FDI crowd out domestic
investment in the ECOWAS.
No evidence of a two-way
causal relationship between FDI
and eco-growth.
Analysis shows that FDI exerts
a positive impact on growth in
Africa
7 Macias
and
Massa
(2009)
Long-run
relation
between ecogrowth
and
private
capital
inflows
27 SSA
Countries
1980-
2007
World Bank's Global
Development
Finance (2008)
Results show that FDI and
cross-border bank lending exert
a significant and positive
impact on sub-Saharan Africa’s
growth.
8 Seetanah
and
Khadaroo
(2007)
Impact of FDI
on growth
39 SSA
countries
1980-
2000
World Bank’s WDI
(2001) and ADI
(2002)
Results show that FDI has a
positive and significant effect on
the level of economic growth
9 Akinlo
(2004)
10 Olayiwola
and
Okodua
(2009)
11 Herzer
and
Nunnenk
amp
(2012)
Examines
impact of FDI
on economic
growth
Long-run
effect of FDI
on health in
developed
countries
Nigeria 1970-
2001
export has a positive and
statistically significant effect on
growth
Nigeria Empirical evidence from
available data failed to support
the
export-led growth hypothesis in
Nigeria
14
Countries
.
Causality test
on FDI, Non-
Oil export
and Growth
1970-
2009
World Development
Indicators, WDI
(2009)
FDI has, in general, a negative
effect on health in developed
economies
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68

Researche
r/s
12 Khan and
Khan
(2011)
Target
Empirical
relationship
between
industry -
specific FDI
and output
Sample Observ
Countries ations
Pakistan 1981-
2008
Source of Data
State Bank of
Pakistan.
Findings/Results
FDI causes growth in the
primary and
services sectors, while growth
causes FDI in the
manufacturing sector
13 Ousseini,
Hu and
Aboubacar
(2011)
Niger 1961-
2010
14 Stevans
(2011)
The study
examines the
relationship
between
variables and
their effect on
eco-growth
Africa,
Asia, and
Latin
America
1990-
2007
World Development
Indicators, WDI
The result posits that economic
factors internal to a country that
have the most influence on
real GDP over the long term.
15 Pradhan
(2009)
Relationship
between FDI
and economic
growth in the
five ASEAN
countries
5 Asian
countries.
1970-
2007
There is bidirectional causality
between FDI and eco-growth
both at the panel level as well as
individual country level except
Malaysia
Source: Compiled by the author
A stream of works was done on FDI and growth across Africa with unidirectional or bidirectional
causality. From ECOWAS, Akinlo (2004) and Ayanwale (2007) reports that FDI in Nigeria contributes to
economic growth while the determinants of FDI in Nigeria are market size, infrastructure development
and stable macroeconomic policy. On contradictory results, Ayadi (2009) posits that FDI has not
contributed significantly to output growth in Nigeria and the fact that FDI exerts beneficial impact on
growth leading to greater markets…found unrealistic in Nigeria. In the same parlance, Herzer and
Nunnenkamp (2012) posits that FDI has, in general, a negative effect on health in developed economies.
To Onu and Njiforti (2010), FDI did not Granger cause GDP; rather, GDP Granger cause FDI. Thus GDP
stimulates FDI and also notes that there was a unidirectional relationship between FDI and GDP. This
paper follows Akinlo (2004), Ayanwale (2007), Pradhan (2009), Razafimahefa and Hamori (2005) and
Herzer and Nunnenkamp (2012) that FDI induce GDP growth while this paper departs to increase
variables and observations.
Empirical Analyses
Methodology, Variable Selection and Data Mining
The research econometric method comes in three fold. First, this research employs Im, Pesaran,
and Shin (2003) and Levin et al. (2002) for testing the stationarity of the variables and also determines the
order of integration of the individual series. Second, if the variables were integrated of order 1(1), then one
will test for cointegration using approaches and suggestions of Kao (1999), Pedroni (1999) and and
Pedroni (2001). Third, the estimation of long run coefficients wraps it up. Data for foreign direct
investment, FDI (net inflows, percentage of GDP), GDP growth (annual percentage), gross fixed capital
formation, GFCF (percentage of GDP), Official exchange rate, OEXR (LCU per US$, period average) and
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69

exports of goods and services (percentage of GDP) was mined from two databases of the World
Development Indicators and Global Development Finance (2011) and United Nations Statistics Data, 2011,
(Nt=434). The data mined covers 1980-2010 for fourteen African countries of ECOWAS, ECCAS, EAC and
SADC blocs (see Table 5). The research employs Eviews 7.1 statistical software for econometric
physiology.
Table 1: African Economic Blocs and Countries
ECOWAS ECCAS EAC SADC
Cote D'Ivoire Gabon Kenya Botswana
Nigeria Sudan Lesotho
Senegal
Mauritius
S/ Leone Mozambique
South Africa
Swaziland
Zambia
Panel Unit Root Test
The conventional Augmented Dickey Fuller (ADF) Dickey and Fuller (1981) and Phillips and
Perron (PP), Phillips and Perron (1988) unit root test is widely used to see the stationarity of time series
variables. But these techniques are not highly powered to cater for panel unit root test especially in
rejecting the null hypothesis of time series stationarity. Panel unit root tests are usually tested using
common root, individual root or Hadri for level, first and second differences (Eviews 7.1). From Table 2,
both OEXR and EXPORTS variables are stationary at LD under LLC and IPS while others are stationary at
FD on 1(1).
Null Hypothesis: Unit Root
(assumes common unit root
process)
Table 2: Panel Unit Root Test Results
Null Hypothesis: Unit Root (assumes
individual unit root process)
Series Levin, Lin and Chu t (LLC) Im, Pesaran, and Shin t (IPS)
LD FD LD FD Conclusion
FDI -0.76176 -9.02786* -3.78178 -15.3558* 1(1)
GDPGRT -5.49092 -14.1873* -7.68593 -19.3492* 1(1)
GFCF -5.49092 -10.6053* -5.23113 -16.5152* 1(1)
OEXR 0.35074 -7.59957* 3.18895* -8.41346* 1(1)
EXPORTS -0.32617** -6.70087* -1.53024*** -9.80533* 1(1)
*, ** and *** indicates significant at the 1 percent, 5 percent and 10 percent level respectively
LD: Level Data, FD: First Difference
According to Eviews 7.1, common root tests comprise two: 1. Levin, Lin and Chu (LLC) and 2.
Breitung while individual root tests comprise three: 1. Im, Pesanran and Shin (IPS), 2. Fisher – ADF and 3.
Fisher – PP, in summary. The LLC assumes homogeneity in the dynamics of the autoregressive
coefficients for all panel numbers, while IPS assumes for heterogeneity in these dynamics. Therefore, it is
otherwise called as heterogeneous panel unit root tests. According to Pradhan (2009), LLC proposes a
panel-based augmented Dickey-Fuller (ADF) test with a panel setting and restricts to keep it identical
across cross-sectional regions. The model only allows for heterogeneity in the intercept as presented in
equation (1)
pi
Yi,t = i + Yi,t-I + j Yi,t-j + it …………………………………….(1)
j=1
where Yi,t is a series for panel member countries i (t =1,2,3,…N) over period
t( t = 1,2,3,..T), while pi stands for number of lags in the ADF regression and it is the error term.
The Business & Management Review, Vol.2 Number 2, July 2012
70

Panel Cointegration Test
After stationarity test with first difference, the series may become stationary and might have
linear combination that are stationary without being differenced and such series usually termed
cointegrated (Granger, 1988; Pradhan, 2009). After obtaining integration of order one, 1(1) what next is to
use panel cointegration technique based on Pedroni (1999) residual cointegration tests. This techniques
allows for fixed and time effects as followed Basu, et al (2003) and Khan and Khan (2011). The results of
the cointegration tests are reported in Table 3. It is glaringly clear from the cointegrating results (Table 3)
that the null hypothesis of no cointegration is rejected by panels Rho, PP and ADF tests within dimensions
while panels Rho, PP and ADF also rejects the null hypothesis of no cointegration between dimensions.
However, only panel v test fails to rejects the hypothesis of no cointegration.
Table 3: Results of Pedroni's Panel Cointegration Tests between
GDPGRT, FDI, GFCF, OEXR and EXPORTS
Pedroni Residual Cointegration Test
Alternative hypothesis: common AR coefs. (within-dimension)
Alternative hypothesis: individual AR coefs. (between-dimension)
Test Statistics Statistic Probability Weighted Probility
Statistic
Panel v-Statistic -1.586507 0.9437 -1.427749 0.9233
Panel rho-Statistic -2.209328 0.0136** -1.983268 0.0237**
Panel PP-Statistic -6.890367 0.0000* -7.811462 0.0000*
Panel ADF-
Statistic -2.212904 0.0135** -3.363762 0.0004*
Statistic Probability
Group rho-
Statistic -1.868609 0.0308**
Group PP-Statistic -12.94975 0.0000*
Group ADF-
Statistic -2.923189 0.0017*
Notes: Null hypothesis: no cointegration; * and ** indicates significant at the 1 percent, 5 percent level
respectively.
Source: Author's Computation
The estimated cointegration equation takes this form in equation (2):
Yit = i0 + i1X i1t + i2Xi2t + i3X i3t + ………..+ ikXikt + it ……………………..(2)
The equation can be transformed to
it = Yit – (i0 + i1X i1t + i2X i2t + i3X i3t + ………..+ ikXikt) ……………………(3)
While the cointegration vector is
[1- i0 - i1 - i2 - i3 ………..- ik] ………………………………………………(4)
The new developed panel cointegration tests by Pedroni (2004; 1999) provide a technique that
allows for using panel data and thereby overcoming the problem of small samples. Peter Pedroni suggests
two types of test to know the existence of heterogeneity of cointegration vector. The first is within-
The Business & Management Review, Vol.2 Number 2, July 2012
71

dimension approach (panel test) while the second is between-dimension approach (group test). The first,
panel test comprises four statistics: panels v, , PP and ADF. These four statistics pool the autoregressive
coefficients across different members for the unit root tests on the estimated residuals (Pradhan, 2009).
The second, group test includes three statistics: , PP and ADF. As cited by Pradhan (2009), Pedroni (1999)
presents the following seven (7) panel cointegration statistics as follows.
Seven Panel Cointegration Statistics
1. Panel v-statistic:
2. Pan -statistic:
l =
3. Panel t-statistic:
(Non-parametric)
4. Panel t– statistic:
(parametric)
2 2
3 2
3 2 ˆ
2 2
ˆ
ˆ
.
N T
T N Z T N L11
it it 1
……………………..(5)
VN T
i1
t 1
1
ˆ2
2
ˆ
ˆ
, 1
N T
N T
2
N Z T N L
PN
T
11i
it1
L ˆ
i
ˆ
it
ˆ
11 1
it
i
i1
t1
t1 t1
T
Z
tN , T
1
….(6)
0.5
2 ˆ2
2
ˆ
N T
N T
2
L ˆ
11i
it1
L
i
it
ˆ
ˆ ˆ
11 1
it
i
i1
t1
t1 t1
* ˆ* 2 ˆ
2
,
N T
ZtN
T
S L11
i
i1
t 1
~
5. Group p-statistic: 1 2
1
Z PN ˆ , T
* 2
it1
0.5
N
T
i1 t1
Lˆ
2
* *
ˆ ˆ
11i
it 1
it
………(7)
N T
1
T
TN
1
2
2
TN ˆ ˆ ˆ ˆ
i1 t1
it1
t1
it1
……………..(8)
.………..(9)
it
i
6. Group t-Statistic:
(Non-parametric)
N
N T
0.5
T
2
ZtN N
ˆ
2 ˆ ˆ
it 1
ˆ
it 1
ˆ
it
i
i1
t1
t1
1 / 2 ~ 1/
2
, T
………(10)
7. Group t-Statistic:
(parametric)
N
1/
2
Zˆ
*
tN , T
N T
1/
2
T
1/
2 ˆ *2 *2
* *
N S ˆ ˆ ˆ
i
ei,
t1
ei,
t
1
ei,
t
…………..(11)
i1 t1
t1
where:
ˆ 1
ki
2
2 2 2
2
i 1
ˆ i,
t ˆ, t s,
sˆ
ˆ
i
ˆ
i,
t'
i
sˆ
i
2 ˆ i,
N , T
T s1
ki1
ts1
*2
*2 *2
sˆ i
ˆ
i,
t,
sN
T
eˆ
S
T
1
T
T
t1
1
N
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72
~
N
i1
Lˆ
ˆ ………(12)
T
1 ~ N
T
ki
1 *2
sˆ
, i
,
T
s
Lˆ
2 1 2 2
ˆ
11 i
i,
t
1
ˆ i,
t ˆ i,
t s ………….(13)
t t1
N i1
T t1 T s1
ki1ts1
*
and where the residuals ˆ i,
t,
ˆ ,
and ˆ i
t are obtained from the following regressions:
i t
,
Ki
M
*
i t
yiei ˆ ˆ
,
, t 1
ˆ i,
t,
ei ˆ , t yiei ˆ ˆ , t 1yi
ˆ , kei
ˆ , t k ˆ i,
t
, yi,
t bmi
ˆ x,
i,
t ˆ i,
k1 m1
2
11i
2
i
t …..(14)
Equations (5-11) were estimated, results of which were reported in Table 3. From Table 3 results, one can
deduce that panels Rho, PP and ADF are reliable tests of cointegration which corroborates the notion of
Maeso-Fernandez, et al (2006) who submits that panels Rho, PP are more reliable tests of cointegration.

Against this background, this paper is statistically backed up to conclude that cointegration existed
between GDPGRT, FDI, GFCF, OEXR and EXPORTS.
Model Specification
The study employs the panel cointegration test as suggested by Pedroni (1999;2001; 2004) and
also followed by Hamori and Razafimahefa (2005), Pradhan (2009), Khan and Khan (2011), Stevans (2011)
, Nunnenkamp and Hezer (2012) and supported by Kao (1999). The panel test starts by with the following
time series panel regression of equation (12).
pi
Yit = i + jixjit + it ………………………………………………….(12)
j=1
i = 1,2,3,….14
t = 1,2,3,….30
where both Yit and all the variables in xit are nonstationary and integrated of order one 1(1). Yit is
the dependable variable GDPGRT and xit contains the explanatory variables FDI, GFCF, OEXR and
EXPORTS. The intercepts are assumed to be heterogeneous, the coefficient vector, , is homogeneous
across cross-sectional units (or countries) without trend terms and it is the error term. The parameters of
equation (12) cannot be estimated by the OLS method since all variables are in order one.
Following equation (12), the technique starts by estimating the following equation as specified in equation
(13).
GDPGRTit = 0 + 1FDIit + 2GFCFit + 3OEXRit + 4EXPORTSit + it ………..(13)
where 0 are country specific-fixed effects, 1, 2, 3, 4 are cointegrating vectors, it are country
specific time trends. GDPGRTit is a measure of the growth of the country i in year t, and FDIit stands for
foreign direct investment in country i at time t while GFCFit, OEXRit, and EXPORTSit are gross fixed
capital formation, official exchange rate and exports in country i at time t respectively. Following the
previous literature, the study proxy growth with GDP growth (annual percentage), while FDI variable
proxy by Foreign Direct Investments, net inflows (percentage of GDP). This study, contrary to Herzer and
Nunnenkamp (2012)’s work on health and FDI use Growth and FDI. The study use equation (13) which
assumes a long-run multivariate relationship between GDP growth rate movements and movements in
FDI, GFCF, OEXR and EXPORTS (relative to GDPGRT). Necessary conditions for this assumption to hold
are that the individual time series for both growth and the FDI variable are nonstationary or integrated
and that GDPGRTit, FDIit, GFCFit, OEXRit, and EXPORTSit form a cointegrating vectors as corroborates
by Herzer and Nunnenkamp (2012). The results cointegration equation estimation is presented in Table 4.
From the table one can deduce that gross domestic product's growth has positive effect on FDI and
statistically significant at .05 level. The GDP growth also has positive impact other variables.
Table 4: Cointegrating Equation Estimation Results
Dependent Variable: GDPGRT
Method: Panel Least Squares
Sample: 1980 2010
Periods included: 31
Cross-sections included: 14
Total panel (balanced) observations: 420
Variable Coefficient Std. Error t-Statistic Prob.
FDI
GFCF
OEXR
EXPORTS
0.114700
0.069270
0.000393
0.050900
0.055079
0.015319
0.000277
6.403890
2.082449**
4.521733*
1.415665***
0.007948*
0.0379
0.0000
0.1576
0.0000
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73

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.071528
0.065050
4.747879
9693.212
-1289.851
1.380000
*, ** and *** indicates significance at .01, .05 and .1 level
Source: Authors' Computation
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
3.564135
4.910270
5.962447
5.999986
5.977265
A regression containing all the variables of a cointegrating vector has a stationary error term, it,
implying that no relevant integrated variables are omitted; any omitted nonstationary variable that is part
of the cointegrating vector would enter the error term, thereby producing nonstationary residuals and
thus leading to a failure to detect cointegration (Herzer and Nunnenkamp (2012)). Thus, an important
implication of finding cointegration is that no relevant integrated variables are omitted in the
cointegrating regression. Cointegration estimators are therefore robust to the omission of nonstationary
variables that do not form part of the cointegrating relationship (Pedroni (2007); Herzer and
Nunnenkamp (2012)).
Empirical Results and Discussion
The results of panel cointegration test are reported in Table 2. Each of these variables is nonstationary
but they are cointegrated at order one, 1(1). The null hypothesis of no cointegration is mostly
rejected at the .01 significant levels. The estimation of cointegration results are presented in Table 4. The
explanatory variables of foreign direct investments, gross fixed capital formation, official exchange rates
and exports are statistically significant at .01 S.L.
Conclusion and recommendation
Conclusion
The research explores relationship between Gross Domestic Product growth rate (GDPGRT) and
Foreign Direct Investment (FDI) along with Gross Fixed Capital Formation (GFCF), Official Exchange Rate
(OEXR) and Exports of Goods and Services (EXPORTS) in ECOWAS, ECCAS, EAC and SADC blocs over
the periods of 1980-2010. From cointegrating results, Table 3 reported that the null hypothesis of no
cointegration is rejected by panels Rho, PP and ADF tests within dimensions while panels Rho, PP and
ADF also rejects the null hypothesis of no cointegration between dimensions. However, only panel v test
fails to rejects the hypothesis of no cointegration. Using panel cointegration, it suggests the following
findings.
1. From results the study concludes that FDI inflows have, in general, a positive effect on the Africa’s
blocs. There is a general consensus on the past works that FDI inflows play vital roles in the
economic growth of host countries. Those inferences, conclusions and perceptions are in full
support by this paper.
2. All the variables used are integrated of order one for the fourteen countries, namely…
3. Pedroni's panel cointegration test confirms the existence of long run equilibrium relation between
the variables.
4. Applying Pedroni's panel cointegration test, the results confirms the presence of cointegration
between the variables.
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74

Recommendation
The following recommendations were made.
1. As high level of GDP growth generate high level of FDI and vice versa due to straightforwardness
of policy implication, various government and authorities concerned need to maintain policy
consistence.
2. To attract more FDI, the economic blocs need a sustainable economic growth in their respective
economies.
3. Insecurity discourages influx of FDI to Less Developed Countries as foreign investors would not
like to invest in an unsecured environment. African blocs especially ECOWAS, EAC and ECCAS
regions need to guarantee security in their regions so as to attract FDI inflows. Attacking oil
installations and kidnapping by the Niger Delta militants in the South-Eastern Nigeria, bombings
and killings across the Northern Nigeria and Al-Qaeda attacks in Ethiopia and Kenya in Eastern
Africa has seriously prevented influx of foreign investors to the west, central and eastern Africa.
According to the results, FDI has positive impact on GDP growth in the sampled countries,
therefore African Union (AU) in collaboration with American and European countries need to assist
Africa solve her security challenges so as to allow the continuity of FDI inflows to the continent.
4. Governments also need to provide a conducive environment for investors. Power availability or
factor is next to insecurity. Interruptible power supply drives off investors as cost of generating
alternate power for productivity is always exorbitant.
Acknowledgements
This research paper was supported by a grant from the Federal Government of Nigeria's Tertiary
Education Trust Fund (TETFund) 2010/2011 Conference Attendance Intervention. Following the usual
disclaimer, the findings, opinions and recommendation of the paper are those of the author, however, and
do not necessarily reflect the views of the TETFund or its management.
The author is highly indebted to Professor Adeyemi Idowu, Provost, Adeyemi College of
Education, Ondo, Nigeria for his critical cum perspicacious commentaries, thoughtful suggestions and
valuable research assistance.
The author also appreciates his model and mentor, the Igboho-born Nigerian Educationist
extraordinaire, Professor ‘Dibu Ojerinde, OON, Registrar/CEO, Joint Admissions and Matriculation
Board (JAMB), Abuja for his non-stop support. 'Dibu Ojerinde, a Professor who has scored many firsts;
first Nigerian Professor of Tests and Measurement, 1986; first Director, Monitoring and Evaluation,
National Primary Education Commission (NPEC), 1990-1991; first Director/Consultant, Centre for
Educational Measurement (CEM), Federal Ministry of Education, 1991-1992; first Registrar/CEO,
National Board for Educational Measurement (NBEM), 1992-1999 and the first Registrar/CEO, National
Examinations Council (NECO), 1999-2007. The firsts scorer has nurtured the author's life to enviable
heights and helped him to mature through greater TRUST.
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77

Technology Systems for Sustainable Development in Poland
Marek Dziura
Cracow University of Economics
Keywords
Technology, science and technology policy, foresight, sustainable development
Abstract
In Poland technology foresight activities play an important role in targeting science and technology towards present
and future societal needs. This paper describes a recent technology foresight study, explicitly meant to re-align
technological development with the long-term goal of achieving sustainable development. The foresight was meant –
and is actually used – to develop a policy strategy for stimulating those technological systems that might radically
increase the efficiency of products, processes and services.
Technology foresight is regarded as the most upstream element of the technology development process. It
provides inputs for the formulation of technology policies and strategies that guide the development of the
technological infrastructure. In addition, technology foresight provides support to innovation, and incentives and
assistance to enterprises in the domain of technology management and technology transfer, leading to enhanced
competitiveness and growth.
The technology foresight initiative also provides suitable methodologies to promote sustainable and
innovative development, fostering economic, environmental and social benefits at national and regional levels. Its
outcomes are policies and programmes that deal with innovation, industrial growth and competitiveness.
Introduction
Science and technology policy should be of the most dynamic policy domains in Poland. The
strong political interest in science and technology reflects a wide recognition of the relevance of scientific
research and technological development in relation to industrial competitiveness and societal problems. In
preparing for the challenges our country faces in the 21st Century, research and development are
regarded as vital, whether they concern ageing, transportation and mobility issues or sustainable
development.
Technology Foresight
Although the importance of science and technology is recognised, it is far from evident that
scientific research and technological development are attuned to societal needs. Traditionally, science and
technology policy in most industrialised countries focused mainly on the supply side of the innovation
process, hardly taking the societal needs into account. However, during the last five years, stimulated
forcefully by the government reports on technology foresight (2006, introduced by the Polish Ministry of
Science and Higher Education for 2007-2008), the focus of Polish science and technology policy is to
strengthen the interaction between the supply of and demand for knowledge. The Polish government has
attempted to gain an understanding of the possibilities technology presents to reduce current
technological problems. The effects of that program were presented in 2009.
Evidently there are a large number of technological options that could contribute to economic growth and
ecological sustainability. However, encouraging technological development is no guarantee of
environmental improvement. For example, new technology can lead to new forms of pollution. In other
words: technology implies threats as well as opportunities. A policy on technology from the viewpoint of
sustainable development should serve to strengthen the opportunities where possible and mitigate any
threats.
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The representatives of the Polish ministries commissioned all organizations to perform a
technology foresight study that was explicitly meant to re-align technological development with the longterm
goal of achieving sustainable development. The objective of this foresight was to find handles for
policy aiming to selectively stimulate technological systems, with the intention of increasing the
environmental efficiency of products, processes and activities.
The concept of “environmental efficiency” is a key concept in Polish environmental policy. It
refers to a societal development in which economic growth, an increase in competitive strengths and
employment goes hand in hand with a decrease in the pressure on the environment and the use of nonrenewable
raw materials. Technological development is regarded as one of the key elements in realising
radical improvements in environmental efficiency.
This environment-oriented foresight studies focuses on a period of 10 years for the purpose of
including more radical innovations within the scope of study. One important notion is that it is
meaningful to obtain an understanding of the environmental effects of new technological systems in
advance of the implementation. The opportunity to intervene early on in the development trajectory may
have greater effect on the eventual technology. Also it seems better to identify potential undesired side
effects of new technologies, in order to prevent them from occurring.
Methodology
A Systems Approach
An important new element in this technology foresight study is that we did not focus on separate
technologies, but took a systems approach to technological development. Also, we combined a
broadlybased inventory of the technological supply with an analysis of dynamism in society's demand.
This technological foresight study takes a very wide field into consideration. It is impossible to
describe the technological developments in detail. And more importantly, a detailed analysis of
technological components would overlook the relation between these components: it is only in
combination that they perform their specific function (transportation, communication). Therefore, the
study focuses on the identification and analysis of developments at system level. The notion of
“technological system” was introduced for the combination of technical means and the human skills and
knowledge to make these means perform a specific, societal function.
The study focuses on technological systems which might possibly be used in Poland over the next 10
years. When assessing the environmental relevance of these systems we made a distinction in terms of the
sphere of application for which they are developed. We chose a breakdown into societal functions. This,
far more than a classification into branches of industry, provided us with the opportunity to do justice to
the social dynamism over the next few decades. These functions will not change quickly; the way in which
these functions are fulfilled will.
The term “societal function” is seen in the broad sense. It covers the function fulfilment for the
end consumer, as well as for the industrial suppliers. The different functions are based on Michael Porter's
often-used categories of economic goods and services. In analogy with Porter's classification, a distinction
is made between:
- generic functions that feed all the other functions, such as the supply of energy and (raw) materials.
- intermediate functions that create the essential conditions for all other functions, such as movement
(transport and infrastructure), communication and business services.
- end-use functions that fulfil the needs of the consumer, namely: nourishment; housing, care and
recreation.
If we focus on innovation processes at the system level, we should distinguish between
innovation taken one step at a time and radical innovation. Step-by-step innovation is based on existing
systems; radical innovation often focuses on new systems to replace existing ones. We make a distinction
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here between three ideal kinds of innovation: optimisation, redesign and function innovation of
technological systems.
Optimisation focuses on improving existing products, processes or infrastructure. The main
concern here is to modify systems which already have a commercial use. In this type of improvement, the
system concept is not essentially modified but the efficiency of the system is increased by making slight
modifications only.
In the second kind of innovation, redesign, the actual design of existing products, processes or
infrastructure is partly changed. Specific features of the system are changed, for instance by choosing to
use materials that can be made suitable for reuse in the disposal stage. In redesign, the system concept
remains largely unchanged.
More far-reaching improvements can be achieved by departing from the system concept and by
developing new systems which perform the same function better. This can result in a radical change as to
how the function is fulfilled. This kind of innovation is called function-oriented innovation or in short:
function innovation.
Optimisation, redesign and function innovation are indicative of ideal types within a continuum.
The degree of freedom in this continuum becomes progressively higher. Whereas for optimisation the
system concept is in essence still a given factor, for function innovation only the system’s function is
important. In many cases, function innovation is linked with shifts in the associated socio-economic
system. This is because new parties enter the market and established market positions come under
pressure. In addition to the required R&D effort, it is because of this socio-economic dimension that
function innovations need considerably more time to be realised than optimisation of existing systems.
This distinction also shows that the difference between these different kinds of innovation is
important from the viewpoint of the environment. Improving existing systems can lead to substantial
improvements in efficiency, but at some point, the existing concept becomes fully developed and the
ceiling will have been reached in terms of environmental efficiency. Only by changing the design, or by
introducing a completely new system concept would it become possible to break through this ceiling. In
the long run a greater leap in efficiency may be expected from the development of new systems than from
optimising existing ones. How great that leap will be obviously depends on the system and the function.
It only gives a general indication in this respect.
Ways of implementation
In terms of methodology, two ways were followed in the environmental technology foresight
systems:
- mapping out the technological developments that could lead to a significant change in environmental
impact in the next 10 years (positive, or negative).
- investigating the main societal driving forces which are decisive for the resulting developments.
First an overview was compiled of all the currently known technological developments which
over the next 10 years could lead to a substantial reduction in today's environmental problems or,
conversely, to the advent of new environmental problems. This overview was based on the findings of
numerous technology foresight studies describing future trends and expectations in a wide variety of
technological fields.
Subsequently, a systematic assessment was made of the potential consequences of adopting new
or upgraded technological systems in terms of changes in environmental efficiency (both positive and
negative) in relation to the dominant systems in the year 2005. Extent of changes in the consumption of
energy, scarce raw materials and in the release of emissions and waste were analysed when making this
assessment. Also the use of space was taken into account. All changes were assessed on the basis of unit of
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output (product or service), implying that any potential developments in production volume or amount of
consumption were not taken into account. Nor were behavioural changes, which could either increase or
neutralise the environmental pay-off of improvements in environmental efficiency taken into
consideration when carrying out this assessment.
The second route consisted of a scenario analysis of the main societal driving forces and obstacles
that are decisive for the rate and direction of technological development, and thus determine how fast
new technological systems penetrate the market. On the one hand, the specific features of the systems
themselves, such as the technological barriers that need to be overcome before a system becomes ripe for
the market, were taken into consideration. On the other hand, the driving forces and obstacles of a
cultural, social and economic nature were also analysed. Among other things this relates to the pace of
economic growth, the interaction between the societal demand and the technological supply, society's
acceptance of technological innovation and the price we are prepared to pay for resolving collective
problems. These analyses were based on future scenarios drawn up by the Polish Ministry of Economy
and the Ministry of the Environment (see Table 1). The resulting information on driving forces and
obstacles was used to identify handles for policy.
Table 1. Relevant differences between the potential scenarios for Poland
Balanced growth European Renaissance Global shift
dominant market perspective is coordination
perspective
forming of trade blocs
trade liberalisation
- dominant market perspective is
balanced perspective
- open market correction
- strong economic growth
- strong growth in labour and capital
resources productivity (A,K) and
material productivity (M)
- ample willingness to change
- substantial R&D
- strong technological
ynamism
- global awareness of the
environment
- high level of energy saving
Source: based on Weterings et al, (1997).
strong economic growth
strong growth in material
productivity (M) and extra stimuli
for economic infrastructure (G)
less call for innovation
substantial R&D
less strong technological
dynamism
- European awareness of the
environment
- energy saving
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81
dominant market perspective is open
market perspective
economic growth lags behind
growth in labour and capital resources
productivity (A,K)
conservative, more of the same
little R&D
innovation coming to a halt, duplication
local awareness of the
environment
very little saving of energy
Results
Clusters of technological systems
The inventory of the technological systems that could lead to a substantial change of the
environmental impact over the next 10 years resulted in a technological systems. These systems can be
categorised in five major clusters:
- energy systems, including systems based on coal gasification, solar energy, wind energy, biomass,
hydrogen, nuclear fusion, nuclear fission and innovations in energy distribution (for both local and
mobile supplies).
- new (raw) materials, particularly biological raw materials, composites and new colour systems.
- production systems, geared towards optimising industrial production (including the metal industry,
synthetic materials production industry, food processing industry) and agricultural production.
- information and communication systems, relating mainly to the application of information and
communication technology in the industrial and service sectors, as well as in the domestic environment.
- transport systems, a cluster of innovative systems for the transportation of people and goods (e.g. superaircraft,
new trains, hybrid transport and underground pipeline transport). In these innovations, the
introduction of new or improved modalities is inevitably coupled with changes in the transport
infrastructure.

Technological innovation and environmental efficiency
Technological innovation leads predominantly to an improvement in the environmental efficiency
of products, processes and activities. Some technological systems can be expected to result in an
improvement in environmental efficiency. Of these we can expect a positive contribution in the form of:
- substitution: substitution of oil, gas and coal by renewable energy sources, including the utilisation of
energy systems based on biomass, solar and wind energy.
- energy saving: a reduction in energy consumption per unit of output that can be expected in the majority
of industrial production systems.
- a reduction in combustion emissions (CO2, SOx and NOx) and (waste) clinkers inherent in the utilisation
of oil, gas and coal.
- dematerialization: a reduction in the input of scarce materials (metals, groundwater and tap water) per
unit of output that can be expected from industrial production systems on the basis of closing the cycle.
- waste reduction: a reduction of hazardous and non-hazardous waste per unit of output, particularly
through using the majority of the production systems investigated.
Considerable saving on energy consumption and the use of materials, as well as a substantial
reduction in emissions and waste can be achieved by optimising the technological systems of today.
About 50% of all systems are in this category. Even larger efficiency improvements can be realised either
by radically changing the design of contemporary technological systems or by developing new systems to
take over the functions of existing systems in a completely new way. Only few identified systems are in
this category.
Innovations vs. adverse impacts
The findings of the technology foresight also stress that technological innovation is no guarantee
of environmental improvement. This is evident in these technological systems. These, in addition to the
positive effects, also can be expected to result in adverse effects on the environmental efficiency of
products, processes and activities. They relate mainly to:
- a potential increase in the consumption of oil, gas and/or coal and the resulting combustion emissions
and (waste) clinkers, for instance through the introduction of supersonic aircraft.
- a potential increase in waste and the utilisation of scarce raw materials (especially metals) which could
result from implementing the information and communication systems investigated.
- a potential increase of emissions linked with intensive farming (mainly manure and crop protection
agents) resulting from the cultivation of agricultural crops to be used as biological raw material for the
energy supply and agricultural chemistry, etc.
- the possible generation of new, complex waste streams which are at present difficult to process, for
instance from using metallic-matrix-composites and nuclear fission.
It is important that the detection of these potential effects in this technology foresight study is
followed up by more specific initiatives focusing on identifying preventive solutions in the design stage.
In addition to these adverse consequences, a number of technological systems could shift existing
environmental problems onto the use of space. It concerns particularly those systems for the functions of
supplying energy and (raw) materials and the function of movement. One concrete example in this
respect is the substitution of oil by biomass in energy supply and in the chemical industry. Clearly, the
production of agricultural crops demands that physical space is available. Another example is in the field
of transportation. Some of the new systems for the environmentally-efficient transport of persons and
goods require the construction of infrastructural facilities and, hence, additional physical space.
Throughout Europe, but particularly in Poland, physical space of good quality is rapidly becoming a
scarce resource. It is urgent that these shifts onto physical space be investigated further.
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82

Driving forces and obstacles
The observation that the majority of environmentally-relevant systems examined here contribute
in a positive sense towards environmental efficiency may not lead to the expectation that technological
innovation will lead, in due course, to the automatic solving of all environmental problems. Such a
conclusion would overlook any possible adverse effects of several technological systems. Moreover, it
does not go without saying that the environmentally efficient systems will automatically break though
into society.
How quickly a new system reaches the market expansion stage, and how extensive that expansion
is before the market reaches saturation point, depends on a number of driving forces and obstacles which
accelerate or hinder market development. Such driving forces and obstacles are found in the
characteristics of:
- the technological system itself (technical features, unwelcome characteristics).
- the market parties that develop and market the system (the supply side).
- the market parties that can use the system (the demand side).
- current governmental policy (infrastructure, regulations).
It is the actual characteristics of a technological system that conceal the scientific and technological
obstacles or thresholds that will need to be overcome before the system can be realised. The size of these
obstacles determines how much money will be required for research and development in order to get a
new system ready for commercial production. It is obvious that research and development will still
continue, leading to updated variations of the system (which also will be marketed eventually).
How quickly a new system reaches the expansion stage, and how extensive that expansion is
before the market reaches saturation point, depends on driving forces and obstacles of a cultural, social
and economic nature. Among other things this relates to the economic dynamism: the rate of economic
growth, the level of prosperity and the interaction between demand pull and technology push. The social
and cultural dynamism of society is expressed in society’s acceptance of technological innovation and the
price people are prepared to pay to resolve societal problems.
For each of the five clusters of technological systems mentioned above, an analysis was made of
the main societal trends and driving forces stimulating or hampering the process of innovation and
diffusion. When assessing the technological environmentally-relevant systems in three contrasting future
scenarios we can observe that the development and use of environmentally-relevant technological
systems was just as dependent on societal trends (the demand side) as on the continued augmentation of
knowledge (the supply side).
Especially the price of energy and the willingness of society to change its habits are apparently of
crucial significance. The price of oil, gas and coal is evidently the main obstacle standing in the way of
environmentally-efficient technological systems. This applies not only with regard to innovations in the
field of energy supplies, but also to innovations in industrial production systems and transport systems.
From foresight towards policy
The government is brought into contact with new technological systems at an early stage via
standardisation, product regulations and other instruments which set a framework for the workings of
market mechanisms. In addition to this regulatory role, the government also fulfils a role in developing
both the supply (R&D investments, subsidies) and the demand (price measures, subsidies, the
government as a demand party).
As we found in Polish foresight (and the other studies), the price of fossil energy carriers is evidently by
far the most significant obstacle to the development and breakthrough of environmentally-efficient
technological systems. This applies not only with regard to innovations in the energy supply, but also to
innovations in industrial production systems and transport systems. In theory, a price increase on fossil
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energy carriers (e.g. by introducing an energy tax) would make a positive contribution to environmentoriented
technological innovation. In connection with energy systems, industrial production systems and
transport systems, we recommend investigating which forms are conceivable and what potential
consequences can be expected from government measures which focus on lowering this price barrier.
However, it is not only the energy price that offers a handle for the selective stimulation of
environmentally-efficient systems. The most important driving forces for the breakthrough of
environmentally-efficient systems are: a high level of economical dynamism (supply) and an articulated
societal demand for (environmentally) efficient systems (demand). This environment-oriented technology
foresight study shows that the government could additionally promote the breakthrough of more
environmentally-efficient systems by:
1. Encouraging the supply dynamism of technology development, for instance by initiating
dialogues with the parties involved, stimulation of combined public and private R&D
investments and by facilitating knowledge transfer between companies.
2. Encouraging a selective articulation of the demand, for instance by the government taking action
as the pro-active party on the market, and by introducing price measures which selectively lower
the threshold for introducing new systems.
1. Direct government control, geared towards intervening in the development of technological
systems which could lead to adverse environmental effects, for instance by means of
environmental regulations which impose more stringent requirements on existing systems, plus a
selective policy on the introduction of new systems.
2. Although it might be tempting to focus on selective incentives policy, it is important not to limit
those incentives to too great an extent to a few technological options. A substantial contribution
towards the aim of achieving sustainable development can especially be expected from a policy
that stimulates the supply dynamism and the demand articulation, in combination with
monitoring both the direction and pace of environmentally-relevant technological innovation.
An important policy issue is also how to cope with the substantial lack of knowledge regarding the
economical, societal and environmental impact of new technologies. It is impossible to identify and assess
all relevant developments over a period of 10 years from now, the time horizon of this foresight study.
Indeed, the result of this technology foresight draws attention to the considerable lack of knowledge
on the impact of new technologies. Especially in the field of information and communication technology,
the speed of technological development is so fast that all the potential uses are yet unknown. This is more
important, since the continuing penetration of information and communication technology is a significant
trend in all future scenarios. These ICT systems may contribute to substantial changes in all social
functions. The further growth of products and services based on information and communication
technology is expected to expand enormously. Considerable impact is expected on industrial production
and business services. The added value of the provision of services vis-à-vis physical production gradually
becomes more important. The office environment shrinks to the dimension of the individual: all white
collar workers are provided with portable data and communication equipment. In addition a large growth
in the market for virtual amusement can be expected. Citizens are entertained by new services such as
virtual travel in both time and space, experiencing these new opportunities as a substitute for the need for
physical movement. An extra stimulus to develop information and communication systems may arise
from investments in a European traffic and transport infrastructure.
So far, research into information and communication technology applications has been mainly supply
driven. Little can be said as to how the information and communication technology revolution will
influence other functions over the next few decades, or the associated substitution effects. Nor are the
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direct environmental impacts of the revolutionary growth in information and communication technology
undisputed. On the one hand we may expect that the penetration of information and communication
technology will lead to an increase in the use of energy and scarce raw materials in connection with the
production and use of information and communication technology hardware. On the other hand,
miniaturisation will raise the energy and material efficiency of the equipment. While some people expect
that information and communication systems will reverse the current growth in the use of paper and
transport movements, others point out that the opposite is quite conceivable.
The lack of insight into the potential environmental effects of information and communication
systems has become acute since it is widely expected that these systems will penetrate strongly into
society over the next few decades. A deeper foresight study into the potential environmental effects of
information and communication systems in the different areas of application is needed. Such a study
should provide a greater understanding of the conditions that underlie these effects, as well as insight into
any preventive measures that can be taken.
The findings of the environmental technology foresight have given new impulses to policy
development in Poland. For instance, in the governmental studies on environment and economy, several
technological systems were described as “inspiring imaginary projects”. In the recent strategies (National
Development Strategy 2007-2015 and the National Strategy of Regional Development 2007-2013) the
systems approach has found a profound place in the policy on environmental technology. The findings
also gave rise to enhance the budget for an existing research programme on economy, ecology and
technology. New policy instruments, such as task forces and a first mover facility were announced. Also a
decision has been taken for a study to explore the possibilities of ICT for a sustainable economy. The basic
notion of these policy instruments is that changes in technological systems go hand in hand with changes
in socio-economic systems. The instruments are used to create incentives in the socio-economic system
that support the actual implementation of new technological systems.
A direct follow-up of the studies (foresight and strategies) were more detailed studies, with the
objective to define more specific policy action plans for technological systems. Dialogue is a key
characteristic in the follow-up. The results form a basis on which a dialogue between key actors from both
research and industry can be started. The objective is to establish a shared vision of how to direct the
technological development towards a sustainable economy. Dialogue is to be started with policy makers
from all relevant Polish ministries and with key actors from relevant Polish research organisations and
stakeholders from industry.
This last element, the active participation of relevant stakeholders, is directly related to the
experiences with technology foresight and technology policy in Poland. Polish policy makers pay more
and more attention to the innovation system itself: the institutions, the level and dynamic nature of their
cooperation, their positioning in (inter)national networks. New networks are identified, combining
relevant research organisations, industries and stakeholders, in order to identify and develop new options
in collaboration. The most recent example is the start and continuation of the National Development
Strategy 2007-2015 (NSR). This initiative has the objective to bring together different stakeholders around
sustainable technological development. Here also technological systems are the focus. The NSR, together
with the relevant actors, identifies new sustainable technological systems. The NSR also stimulates and
facilitates research around the driving forces and barriers relevant to technological and institutional
breakthroughs.
Conclusions
The main conclusion of the technology foresight study (especially in their ecological aspects) is
that technology offers opportunities for sustainable development. But alignment of technological
developments with sustainability is necessary. Secondary effects like shifting the burden from
environment to space should be countered. Also more attention is needed for system innovations. The
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government is an important player on different levels (regulation, stakeholder) and should start the
dialogue with relevant parties. The system approach and societal needs offer a useful conceptual
framework to bring parties together. The technology foresight study could form a basis for this dialogue.
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Risk in the Enterprise Value Creation
Andrzei Tomasz Jaki
Cracow University of Economics, Poland
Keywords
Value based management, enterprise risk management, global economic crisis.
Abstract
The global economic crisis which started in 2008 drew attention of executives to a significant role of risk as
a factor determining the effectiveness of enterprise value creation. Risk is immanently inscribed into every decisionmaking
process being an inherent attribute of the functioning of a contemporary enterprise. At the same time, it has
revealed numerous weaknesses of the value management concept which, starting from 1980s, has been treated as an
effective and efficient tool of enterprise value creation. Thus, the main aim of this article is the presentation of the
scope and the areas of the influence of risk on the effectiveness of value management concept alongside the depiction
of risk determined problems connected with its implementation and the use in the enterprise’s operations. The
contents of the paper includes considerations referring to problems linked to each other, such as: risk as a factor of the
pro-value management triad, risk in the process of the VBM system implementation and risk as a base of the critique
of the VBM concept in the face of experiences of the global economic crisis.
Introduction
Value management concept, created and developed since 1980s, showed new possibilities in the
search for solutions stimulating the effectiveness of enterprise value creation. It has also become a base for
formulating a new strategy focused on enterprise value creation as an effective investment of its owners,
and a generator of benefits for other stakeholders. At the same time, the global economic crisis has become
a fundamental strategic challenge to contemporary enterprises. It has drawn attention to a significant role
of risk as a factor determining the effectiveness of the enterprise value creation since risk is immanently
inscribed into every decision-making process being an inherent attribute of the functioning of a
contemporary enterprise. Thus, the basic aim of this article is to present the scope and the areas of the
influence of risk on the effectiveness of the value management concept and to show risk determined
problems connected with its implementation and the use in the enterprise operations.
Pro-value management triad
The efficiency and the effectiveness of pro-value enterprise management is directly dependent on
the ability to use key determinants shaping enterprise value. Depending on the degree of minuteness and
the scope of influence on the effectiveness of value creation, these determinants may be divided into three
groups (Black, Wright & Bachman 1998):
strategic factors, including such macro-factors as: profitability, risk and growth;
financial factors, including such value drivers, indicated by A. Rappaport, as: sales and their
dynamics, investment in fixed assets and current assets, operational profit margin, capital cost
and the income tax rate (Rappaport 1986);
operational factors, which are specific for every enterprise and result from both internal and
external conditions of conducting activity by them.
Strategic macroeconomic factors and the dependencies undergoing between them form at the
same time so-called pro-value management triad, as shown in Fig. 1.
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Fig. 1. Pro-value management triad
Profitability
Growth
Risk
Source: Schierenbeck & Lister (2002).
While analyzing dependencies between individually mentioned macro-factors in the context of their
impact on the enterprise management growth, the role of profitability should be stressed in the first place
as a medium of enterprise value. When striving at the growth of effectiveness, it is necessary to correlate it
closely with the shaping of risk level accompanying enterprise functioning. The multiplication of the
enterprise value occurs when the rate of profitability growth precedes the rate of risk growth. Otherwise,
the destruction of enterprise value will occur (Schierenbeck & Lister 2002). Thus, maintaining balance
between the risk taken and an increase in the enterprise value is becoming vital, which requires
connecting closely the value management concept with the concept of enterprise risk management (ERM)
(Krysiak 2011).
The third of the mentioned macro-factors – enterprise’s growth – is the factor securing its value
creation. Thus, it cannot be treated as an independent goal of an enterprise, since by itself it does not
automatically bring about enterprise value, but only creates conditions for its occurrence. Within the
framework of pro-value focused management, the growth of an enterprise is the consequence of the
strategic planning process directed at the maximization of enterprise value. Thus, for example,
undertaking investment by an enterprise, constituting the internal growth of the enterprise will contribute
to the increase in the enterprise’s value only when its profitability will be higher than the cost of the
capital financing it (Rappaport 1986).
The effectiveness of the management system based on the triad of three macro-factors supported by
financial and operational micro-factors requires at the same time creating a new comprehensive concept of
management focused on the growth of enterprise value. At the same time, the idea of creating enterprise
value as a foundation for formulating a separate management concept is relatively new. It appeared only
in 1980s in the United States when a term which is common today, „Value Based Management (VBM)” was
created by N. Kurland, known mainly as an initiator of employee stockholder structure of ESOP type
(Employee Stock Ownership Plan), and a propagator of the concept of economic justice by expanding the
ownership of capital (Brohawn, Hardiman, Kurland & Simon 2010). In the initial intention, the term was
to refer to the management system directed at delivering value for a wide circle of enterprise
shareholders, particularly owners, employees and customers, by being guided by fundamental rules of
economic and social justice. Broad propagation of the mentioned term in the sphere of American business
was the reason for which since the end of 1980s it is exclusively associated with and used in the context of
the multiplication of enterprise market value and its owners’ wealth, and its original meaning refers now
to the “Justice - Based Management” concept as a concept of management based on the idea of economic
and social justice (Brohawn, Hardiman, Kurland & Simon 2010). The development and the propagation of
VBM in economic practice as a new management concept falls on 1990s, when the concept reached
Western Europe (Olsen 2003).
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VBM system and the risk of its implementation
The concept of value management implies the need for focusing all of the enterprise’s resources
around the implementation of the management strategy determined by the criterion of its value
maximization since value creation takes place on all levels and in all organizational units of an enterprise.
Thus, the implementation of all functions of management should be subordinate to this goal, from
planning and organizing, through motivating, up to the control of the achieved effects of the management
(Woniak-Sobczak 2005). Therefore, it requires a comprehensive approach through the creation of
structured system structure of management directed at the multiplication of enterprise value. Due to it,
the value based management system (the VBM system) has the key significance for the effective
implementation of value focused strategy. In this situation, negative consequences of the occurrence of
principal-agent problem for the enterprise and its owners, resulting from the separation of the ownership
from management, are the reason for which VBM system is expected first of all to give to the process of
enterprise management qualities similar to ownership management, with which the enterprise owners, by
means of available instruments, exert influence on its functioning and the implementation of the assumed
goals. Therefore, the implementation of such a system is assumed to create conditions in which managers
think and act like owners (Olsen 2002).
The result of considering the assumptions mentioned is a framework structure of value based
management, which is shown in Fig. 2.
Fig. 2. The framework structure of value based management system
Strategic goal
Creating enterprise value
Strategy
Value focused strategy
Management processes
operational decisions
internal structure
relations with shareholders
organizational culture
Management functions
Source: own study.
planning
organizing
motivating
control
The implementation of the VBM system leads to a significant redefinition of enterprise goals,
transformation of its internal structure, renewal of strategic and operational processes, as well as the
introduction of changes in the scope of the practices of human resources management. In consequence, we
deal here with the versatile and multi-directional change in the organization of enterprise activity
(Starovic, Cooper & Davis 2004). At the same time, effective implementation of such an advanced change
in the whole management system is connected with specific risk. Experiences gained from the practice of
creating and implementing VBM systems by well-established world consulting companies enable to
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indicate fundamental obstacles, from which the risk of implementing the new philosophy of management
and decreasing the effectiveness of management systems based on it arises. The obstacles, together with
the explanation of the scope of their potential negative impact are presented in Table 1.
Table 1. Common obstacles to successful VBM implementation
Lp. Obstacles Comments
1. Failing to define the objectives
clearly
Efficient implementation of the concept requires understanding what is the
multiplication of shareholder value is in its essence and what benefits can it bring both
on the level of operational units’ employees and their management staff, and on the
level of the enterprise board of directors.
2. Making value management an
enterprise planning or finance
initiative
3. Treating value management as a
project rather than a process
4. Omitting the analysis at the
operational level
The success of the concept requires both the support from the owners and the board of
directors, as well as understanding its essence
and benefits coming from it by operational managers.
Reorientation of an enterprise to a new management concept does not take place
overnight, in addition to understanding its essence it is necessary to make real changes
systematically.
Value management is too often treated as a tool referring only to the top management
levels while in fact value is created on the operational level. Effective value creation
requires proper correlation of operational skills with experiences of the managers of top
management levels.
5. Fixation with the metrics None of the indicators reflecting short-term effects of value creation can be treated only
as an objective reflection of the enterprise value multiplication process since the value
results first of all from investors’ expectations concerning shaping of the return rate.
Thus, it is necessary to properly link short-term indicators with the summary effect of
value creation reflected in the form of changes in the enterprise market value.
6. Leading the process with an
information systems „white
elephant”
Source: Smith (2009).
Managers of various levels receive plenty information and reports. With no proper
ordering of them in accordance with set priorities it makes problems appear, both with
the proper use of the possessed information and with defining information needs.
Implementation of the value management system in the enterprise aims at involving all its resources
and concentrating all efforts on effective value creation. It is the reason for which with the implementation
of such a system, the enterprise gains a number of various, direct and indirect benefits. At the same time,
some negative effects may also appear, resulting both from the existing shortcomings of the VBM concept
itself and the enterprise management system based on it, and from the potential threats related to
objective difficulties in the scope of efficient and effective reorienting the enterprise management system,
which is presented in Table 2.
Table 2. Advantages and disadvantages associated with the VBM implementation in an enterprise
Advantages
Disadvantages
provides a common language in the internal and external different forms of VBM and methods of management complicate task
communication
relatively disappointing at the subordinate business level because of the
powerful comparative tool
difficulty of forecasting value
useful for resource allocation – better discrimination managerial costs of VBM implementation
between value creating and value destroying investment the degree of complexity in the calculation was a limitation
positive effect on financial performance – achieved difficult to translate the financial measures into operating customer
through reductions in capital base
measures
powerful strategic tool
technical measurement difficulties – for example at the cost of capital,
very useful tool to help management focus upon value especially cost of equity
drivers
effective value creation by getting more accountability
for discrete business units
Source: Starovic, Cooper & Davis (2004).
Risk as a base of VBM concept critique - experiences of the global economic crisis
Risk connected with the implementation of the value management concept and potential risks
which may be related to it and which are stressed at that occasion have also become a base for its critique
referring both to the idea itself and to the conditionings of implementing pro-value focused management,
as well as the measurement tools used in it and the assessment of the effectiveness of creating enterprise
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value. When depicting various weaknesses of the value management concept, the problem is linked to the
following conditionings which accompanied its development (Kasiewicz 2009):
an influence of the processes of the progressing globalization, implying multi-directional changes
within the functioning and development of markets and entities operating in them,
aggressiveness of motivation systems being a key component of the value management system,
no integration between the value management concept and the risk management concept in the
enterprise.
Thus, the value management concept is mentioned today as one of causes of the global economic
crisis. At the same time, however, it should be stressed that it is not about the idea of value management
itself but rather about the way of using this concept in the economic practice (Kasiewicz 2009).
An important premise for the formation and conceptualization of value management was the need to
search for tools integrating the goals of owners and the goals of executives managing enterprises, which
in the conditions of the division of ownership and management brings a number of negative
consequences for the effectiveness of creating enterprise value defined as the “agency problem”. Provalue
motivation systems created within this scope have been based on the need for a long-term
correlation of the interests of the mentioned two groups of the enterprise stakeholders. In order to do that,
a number of various programmes of direct motivation, connected with the managers’ participation in the
enterprise ownership, and indirect motivation, assuming the use of partial indicators of the effectiveness
of value creation as a base for the assessment of management effects, have been developed and used. An
analysis of practical experiences within this scope, including experiences resulting from direct and
indirect causes of the present economic crisis, indicates the existence of a phenomenon of asymmetry of
owners’ and managers’ risk. The mentioned asymmetry is particularly noticeable in case of indirect
motivation systems, thus, in the situation of the lack of managers’ participation in the enterprise
ownership. An enterprise owners, from naturally always incur a risk of losing invested capital. Managers’
risk comes down here only to the loss of bonus in case of negative effects of value creation, in an extreme
case also the loss of a job. Moreover, basing the motivation system only on the use of partial accounting,
financial and/or market indicators of effectiveness has brought a danger of creating a false picture of the
financial condition of the enterprise - fictitious effectiveness - not translating into real, permanent effects
of value creation. Falsifying the effectiveness of enterprise value creation assessed on the basis of partial
indicators is particularly important in case of the lack of possibility to verify its value directly by the
capital market mechanism.
The owners’ and managers’ risk asymmetry scale, although undoubtedly to a smaller extent, is also
noticeable in direct motivation programmes, especially in the ones in which there is no necessity to invest
equity by managers. Depending on the applied motivation programme, managers’ risk may be related to:
no bonus gratification in the situation of unprofitability of the stock purchase option
implementation
the loss of value of the invested capital as a result of the drop in share prices,
incurring financial risk related to financing stock purchase with borrowed capital in case of the
Leverage Buy-Out programme,
the loss of a job.
The enterprise owners’ risk in direct motivation is sometimes also connected with applying
creative accounting by managers to use most often a short-lasting but non-durable increase in the
enterprise value which aims at proving high effectiveness of management. In order to limit this kind of
risk, various institutional solutions are used, integrated into direct motivation programmes, for example
in the form of periodical inability to dispose of shares gained as remuneration for the effects of
management, which at the same time prevents deriving benefits on account of short-term growth of their
value as a result of manipulating the results of the enterprise performance.
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Experiences of recent years, related to the occurrence of asymmetry between the risk of the
enterprise owners and the risk of executives managing it, have also resulted in proposals of introducing
further changes in pro-value motivation systems in the form of rewarding managers for the growth of the
enterprise value with the simultaneous punishing them for its reducing (Szablewski 2009).
In the context of the discussed negative effects related to the development of the value
management concept, it should be noticed that problems or potential risks connected with this were often
stressed before on the basis of the analysis of practical experiences resulting from the implementation of
the mentioned concept. At the same time, however, drawbacks of the value management concept could
not intrinsically generate or stimulate the current crisis since its sources lie in the system mechanism of
generating imbalance on the market and the formation of a gap between the real and the financial sphere
which was fostered by processes of the progressing globalization and the accompanying liberalization and
deregulation of markets (Kasiewicz 2009). In this way, globalization is becoming a process conducing the
spread of crisis situations in the international dimension.
Conclusions
Negative consequences of the influence of risk on the effectiveness of enterprise value creation
have revealed flaws of the value management concept and potential risks it brings . It has become a
premise to search for solutions eliminating weaknesses of the concept and negative consequences of the
influence of risk on the process of enterprise value creation. Value Focused Restructuring and Value
Controlling (Jaki 2012), among others, are becoming useful instruments within this scope. They create
opportunities both in monitoring the process of enterprise value creation and in the search for managerial
solutions limiting negative impact of risk on the effectiveness of pro-value management.
References
Black A., Wright P. & Bachman J.E. (1998), In Search of Shareholder Value: Managing the Drives of
Performance, Pitman Publishing, London.
Brohawn D.K., Hardiman S.F., Kurland N. & Simon T.J. (2010), Justice-Based Management: A Framework for
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93

Analysis of Causes and Consequences of the Global
Economic Crisis – Poland’s Perspective
RyszardBorowiecki
Cracow University of Economics, Poland
Barbara Siuta-Tokarska
Cracow University of Economics, Poland
Keywords
Global economic crisis, globalization, causes, consequences, perspectives
Abstract
The publication presents selected views and opinions of economists on the direct causes of the global crisis
outbreak. It also shows opinions and views comprising the wholeness of the systematic and structural conditions
which led to it in the progressing globalization process, including the accelerated financialization, the development of
finance and the separation of finance from the real economy sphere. At the same time, perspectives and opportunities
to limit the consequences of the global crisis are indicated, considering the economy of Poland.
With reference to Poland, the paper also presents changes related to the global crisis in the real economy.
Moreover, it emphasizes that the delayed consequences of the crisis in Poland were an effect of, among others, not
fully developed financial market in comparison with the western countries, and also traditional attitude of banks
which have not developed derivatives, securitization and other tools of financial engineering to a greater extent.
Introduction
The global economic crisis which began in 2007 in US directly or indirectly affected almost all
countries of the world and has been still continuing, bringing the global uncertainty of tomorrow as far as
the living conditions of about seven billion world population are concerned. Thus, restraining the crisis
and limiting its most negative and critical results for the whole economy requires a global look to
recognize the causes and effects of this crisis and to discuss possibilities to find the proper way out of it in
such difficult and complex conditions of the functioning of national economies, including the economy of
Poland, as well as the whole world economy. Such a look is attempted in this publication.
The intensification of the globalization processes as a factor favouring the occurrence
of crises
Globalization is a multi-level, multi-dimensional phenomenon and at the same time a
phenomenon happening in all spheres of life, whereas the processes related to it lead to the
standardization of the image of the world as a homogenous wholeness within the framework of which
there is linkage between economic elements and the common consumption culture (Borowiecki, Siuta-
Tokarska 2012). In the historical and literary representation, specific stages of the globalization process are
indicated with the arbitrary choice of their duration. Thus, according to W. Wosiska, the four-stage
progression of globalization started as early as the antiquity, from the formation of the first political
powers, whereas the period following the Second World War, marking a new political order of the world,
is the last stage. On the other hand, in the three-stage globalization process by C. Prestowitz, stage one
included the years 1425 - 1947, marked by the colonization times and a gradual decrease in the role of
China and India in the world economy from 75% to about 8%, stage two are the years 1947 - 2000 when a
new political system was created after World War II, and stage three, counted from 2000, which still lasts,
and characterizes with intense development of state-of-art information and communication technologies,
progressing deregulation and liberalization and the economic development of China and India.
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By the end of 20 th century and at the beginning of 21 st century we can observe the following changes,
phenomena and tendencies in the world, among others:
an overall increase in the world’s population (especially in less developed countries) from 2.52
billion people in 1950 (1.71billion in less developed countries) to 6.45 billion in 2005 (5.2 billion)
and 6.97 billion in 2011 (5.7 billion) (Population Challenges... 2005; World Population 2010, http),
enormous pollution of the environment related to its excessive exploitation, including water, soil,
air pollution, and its consequences for people and the environment („Pollution is likely toaffect over
a billion people around the world, with millions poisoned and killed each year. The World Health
Organization estimates that 25 percent of all deaths in the developing world are directly
attributable to environmental factor” (Environment and Health in Developing Countries 2009).
Some researchers estimate that exposure to pollution causes 40 percent of deaths annually
(Pimentel et al. 2007; Top ten toxic Pollution Problems 2011, http)),
in 1992 the CO 2 emissions in the world were 22399312kt, and then they were increasing, reaching in
2008 the amount of 32082583kt (Climate Change. World Bank Statistics), that is an increase by over
43% (according to the data for 1996 concerning the global emissions of greenhouse gases - 1.2 billion
people living in developed countries emitted 64% of them, which gives 3 t/person, whereas the
remaining part of the emissions fell on 4.4 billion people living in developing countries, which gives
an index of 0.5 t/person) (Przyszo. Scenariuszezmian, http),
“Every day, 2 million tons of sewage and industrial and agricultural waste are discharged into the
world’s water. The UN estimates that the amount of wastewater produced annually is about 1,500
km 3 , six times more water than exists in all the rivers of the world”(Ross 2010).
a rapid increase in trade turnovers. The world trade has grown 5 times in real terms since 1980 to
2005 and its share of the world GDP has risen from 36% to 55% (Schiffers, http). Merchandise trade
in the low- and middle-income countries rose from 31% of GDP in 1993 to 57% in 2008 and about
40% in 2009(WDP 2012),
an increased share of FDI in the world economy - flows increasing from 0.5% of GDP in 1980 to 4%
in 2007, followed by a decline during the global economic crisis (WDR 2012). Global FDI inflow rose
from 1,472 billion dollars on average in 2005-2007 to 1,744 billion dollars in 2008, and then fell to the
level of 1,244 billion dollars in 2010 (Akram et al. 2011),
in 1970 less than a third of FDI related to the export of services – today that risen to half and it is
expected to rise even further, making intellectual capital the most important commodity on world
markets(Intriligator2003),
diversification in current account balances between emerging and developed economies (from the
value of about -100 billion dollars in 1996 to about + 600 billion dollars in 2006 for emerging
economies, and from the value of about +20 billion dollars in 1996 to about-700 billion dollars in
2006 for developed economies (Schiffers, http)),
“volume of goods, services and investments is transferring the national borders very rapidly.
Nowadays, approximately USD 1.5 billion of foreign exchange transactions are taking place daily.
Statistics show that approximately USD 8.9 trillion of goods are transacted across borders and USD
2.10 trillion of services are provided across the borders”(Akram et al. 2011),
an increase in the number of operations and the value of international financial turnovers (total
cross-border financial assets have more than doubled - from 58% of global GDP in 1990 to 131% in
2004),
increased global insecurity: job insecurity, lack of social protection, food insecurity and fear of
terrorism(Torres 2001; Scheve, Slaughter 2002; Debrah, Smith 2002; Globalization, growth and
poverty... 2002),
the growth of global migration in the world from 154 million people in 1990 to 175 in
2000(International migration and development Report 2006) and to 214 million in 2010 (namely by
22.3% in relation to 2000 and about 40% in comparison with 1990) (The Age and Sex of Migrants
2011),
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ise in the number of unemployed people worldwide from 157.3 million in 1995 to 191.8 million in
2005, namely by 22% over ten years (including men, from 92.7mln to 112,9 million, and among
women from 64.7million to 78.9 million) (Akram et al. 2011),
a change in the structure within the scope of the kinds of employment of both men and women. An
increase in the share of people employed in services in the years 1987-2007 in the population of
women from 63% to 70%, and among men from 45% to 51%, but in developing countries a
simultaneous increase in the share of employment in industry is observed, from 6% to 7% in total
female employment and from 10% to 13% in total male employment to the benefit of a decrease in
the number of people employed in agriculture (WDR 2012),
child employment: it is estimated that in 2004 as many as 1,566.3 million children were employed in
various kinds of jobs worldwide, including 128.4 million in hazardous work, and in 2008 their
number went up to 1586.3 million, including 115.3 million in hazardous work (Dialo et al. 2010),
distinct increase in inequality (international inequalities increased significantly between 1820 and
1910, remained stable from 1910 to 1960 and grew again from 1960 to 1992(Bourguignon,
Morrisson 2002). Also in the years 2006-2007, in comparison with 1990s, the growth of inequality
was marked(Global Wage Report 2008; Inequality in Asia, Key Indicators 2007). At present,
practically no convergence is observed, or even the occurrence of divergence or polarization of
incomes worldwide “with the rapid-growth economies joining the rich nations, but with the poor
nations slipping even further behind”(Intriligator 2003)),
At the same time, the attention should be paid to changes concerning:
a distinct increase in the number of people having access to modern technologies of communications
systems. In 1998 only 20% of people in developed countries had a cell phone and by 2009 these
shares had climbed to 100%, in developing countries in the same period from about 1% to about
57%; internet access and use in high-income countries increased from 12% of the population in 1998
to 64% in 2009 and in developing countries from near 0% in 1998 to 17.5% in 2009 (WDR 2012),
the growth of the share of IT service sector in GDP from about 2% in the years 1999 -2000 to about 5%
in the years 2005-2006(Schiffers, http),
It is worth observing that the greatest benefits from globalization basically invariably fall on highlydeveloped
countries whose share in the global GDP is in the range of 70% - 80% of the world level, the
inflow of FDI around 75-80%, or the inflows of total portfolio investment in the range of 85 - 90%(The
social dimension of globalization 2004).
On presenting the above changes in the world economy, which result from the globalization
processes, we can claim that globalization may be discussed on the one hand as a positive phenomenon,
assuming that it leads to the civilization progress and an increase in the welfare of societies. To some
extent, the development of modern technologies, characteristic for the end of 20 th century and the
beginning of 21 st century, fosters the fulfillment of this assumption. Moreover, alongside globalization and
its manifestations the following are observed: greater opportunities to access capital, a bigger market of
operations, bigger opportunities for the effectiveness and the scale of activity, extension of product offer,
broader and easier access to information, an increase in performance, a possibility of internationalization,
or a possibility of better allocation of assets (Siuta-Tokarska 2010).
On the other hand, however, we could indicate a lot of very negative aspects of the globalization
process. Globalization of the turn of 20th and 21st century is great acceleration of the development of
changes in the world economy and the threat of a global ecological crisis related to the aggressive use of
the resources of the earth and nature. It may lead to the destruction of our civilization and planet due to
the overexploitation of forests, air pollution, soil and water pollution with waste and numerous
destructive activities of the man.
Regardless of the ecological crisis in the economic aspect, one of the basic problems concerning
globalization is a possibility of the spread of local economic fluctuations, recession, or crises to other
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countries, regions or the world. As M.D. Intriligator of MilkenInstitute pointed out as early as in 2003, it is
not just a theoretical possibility but a fact, and as an example, he mentions a crisis in Thailand in 1997
which spread to other Southern Asian Economies, and even to South Korea with delayed effects in Russia.
The global economic crisis started in 2007 in the USA is another example of influencing changes from the
level of one country to the rest of the world, as well as the impact of global conditions on.
Global economic crisis - identifying its nature
The literature on the subject observes the division into three basic kinds of views on the nature of the
present crisis (Geografiapolskiegokryzysu 2009):
1) a dominating view, based on so-called market fundamentalism, which emphasizes the natural
character of crises in economy, as well as their cyclicity, assuming that the market should regulate
itself, and the crisis will have a refreshing effect, enabling a change in the economic structures;
2) a view pointing out that although long-term cycles of market economy repeat with great regularity,
each of them has different causes and effects and each leads serious social and political changes;
3) a view stressing the qualitative difference between the present crisis and the previous ones and
pointing out that the present crisis concerns first of all relations between the state and financial
institutions, not the financial sphere itself, and it is connected with long-lasting decomposition of
the social structure related to the organization of the society, globalization, global imbalance, etc.
Taking the above views into consideration, however, it seems that the roots of the crisis reach a bit
deeper than only the financial sphere which may be regarded the direct cause of the crisis. As W.
Szymaski points out, the systematic roots of the crisis include (Szymaski 2009):
1) difficulties on the way of transition from the national to the global economy,
2) limiting coordination activities,
3) the lack of political globalization with an increase in the conflict of interests,
4) limiting democracy and social control over economy,
5) system provisional state, spontaneity, and the growth of particularisms,
6) overusing other “accelerators” by capitalism.
With reference to the indicated systematic items, it seems advisable to draw attention to certain
analytical observations within this scope (Szymaski 2009):
re 1) A distinct differentiation should be made between economy in crisis and economy in other periods
(recovery, boom). There is a theory related to it, a theory of stimulating economy in the crisis by
influencing demand with unconventional methods. In comparison with the crisis of 1930s when there
were difficulties with learning how to function efficiently within the national economy, the crisis is an
expression of failure to cope within the global economy.
re 2) Alongside the liberalization of capital and commodity flows and the development of
investment funds, transnational corporations, a supranational economic zone is developing more and
more, which does not underlie control and coordination activities of the states, which in consequence
contributes to the loss of sovereignty of the states, particularly in the spheres where the state politics
comes into conflict with the interest of capital. On the other hand, capital flows in mainly where there are
possibilities to reduce costs, including low taxes. As a result, the competition of states, regions and cities is
forced to encourage foreign capital. This kind of competition has shaped the globalization rule of
equalizing downwards within the scope of state regulations, taxes and social benefits (Szymaski 2009).
re 3) An increase in imbalance between the growing forces of the micro-economic interest (the
interests of enterprises) and the weakening forces of the macro-economic and macro-social interest leads
to parting from the rules which serve sustainable development to improve social welfare. In consequence,
it often leads to “passing costs on to employees, natural environment, the society or to weaker partners”,
and in “the situation of subordinating the state to the requirements of capital, it is in practice possible to
fulfill the interest of capital with the hands of the state”(Szymaski 2009).
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e 4) In general, we can claim that with the impairment of the power of the state, when its
economic sovereignty is limited, also democracy is limited, since not only functions of the state are
reduced, but also the functions of democracy are.
re 5) The globalization process has brought about a collapse of the hitherto prevailing order in the
world in which nation states were a pillar. A hybrid system has been formed, connecting nation states
with activities in the supranational sphere, where there is no control and coordination system. Thus, such
a system, where conflicting interests occur, leads to “chaos, conflict, instability, and crisis
situations”(Szymaski 2009).
re 6) Some economists express a view that the crisis is a consequence of “the enforced process of
searching for new sources of development and new bases of dynamics by capitalism”(Szymaski 2009). In
the previous historical periods, conditions for the expansion of demand were seen in colonialism and
territorial expansion connected with it, which gave colonial economies a chance for a long economic
advantage. Alongside the spreading globalization and more and more common access to external markets
(with no bigger restrictions), this advantage was gradually withering on the vine. However, it is worth
emphasizing that with regard to restricted goods, also in today’s world intensified activities (political,
economic, or even military ones) are observed of some countries in the areas possessing desired natural
resources. Moreover, an attitude to a consumer’s needs has changed, superseding autonomic initiatives to
the benefit of introducing advertising to a great scale, thus making changes in the system of social values.
Today, this is not a consumer who shows what his needs are, but the needs are created by producers. In
the literature, challenging the market sovereignty of the consumer via passing to so-called “active
manipulation” is defined as “the main accelerator of capitalism” over the last 50 years. Particularly
dangerous here is an infantile consumerization of children related to serious moral consequences for the
totality of people. As examples of other “accelerators of capitalism”, the following may be mentioned:
using financial innovations for the dynamic development of credits, easy crediting - taking high credits
has become a normal way of building one’s own capital (Szymaski 2009).
Regardless of the systematic causes of the present economic crisis as shown above, also structural
causes are observed, and they refer to (Szymaski 2009):
instability and separation of the financial sphere from the real one,
increasing global trade and payment imbalance with the simultaneous weakening of the ability
of the market to return to the state of balance in many spheres,
polarization of incomes and perturbations in the consumption and investment demand,
changes in ownership structure and the emancipation of
managers.
Out of the remaining causes of the global crisis, being a
kind of complementation of the already presented ones, we could indicate the following ones
(Orowski 2009):
demographic changes, including in particular the fast process of ageing of the societies in
highly developed countries,
very rapid development of financial markets over the last 25 years,
inability to make correct evaluation of risk, especially within the scope of derivatives,
a wave of irrational optimism, enabling to assess the chances for the development of the
market too optimistically,
no common sense approach in valuating assets, particularly real estate by financial institutions,
including the lack of ownership supervision and improper, basically only motivation and
salary system to remunerate management boards,
mistakes of the economic policy especially in US.
Selected consequences of the global economic crisis in the world and in Poland seen
so far
Numerous scientific publications devoted to the issue of the global economic crisis, as well as
statistical publications by, for example, the World Bank or the International Monetary Fund, have
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analyzed and assessed quite in detail the consequences related to the economic crisis, both in the real
sphere and in the financial sector. Due to the above, this paper shows only the ones which seem crucial.
Among serious effects of the global economic crisis, we should consider in particular the worsening
trust to the issuer of the world currency, which is American dollar (high exchange rate of dollar against
other currencies during the crisis deepens the global imbalance - trade deficit and US debt - and it also
establishes the crisis), and the collapse of the banking and financial system. Moreover, we should also take
into consideration the fact that although the crisis started in the US as early as in 2007, still in 2008
American financial institutions granted so-called toxic loans to the amount of USD 700 billion, assuming
falsely that the prices of houses would be rising and the funds created by banks with the use of so-called
CDO instruments transformed substandard debts into instruments with investment rating (Maecki 2008).
By creating special funds and adopting derivative instruments with credits of sufficient quality, banks
could not reveal that in balances and omit legal regulations concerning capital requirements and
borrowers’ credibility. Due to that, the range of infection in the whole banking system was increasing
(Szymaski 2009). This kind of infection was spreading and as a result of the chronic crisis of liquidity on
international markets, the situation of the lack of customers’ trust to banks passed from banks to other
banks (Szymaski 2009).
Another serious threat to individual economies were speculation activities during the crisis with
reference to national currencies and stock exchanges. “Financialization of economy over the last twenty
something years is a derivative…of the freedom of capital flows, the development of investment funds
and new financial instruments” (Szymaski 2009). In the times of the collapse of finance, relations
between the real sphere of economy and the financial sphere are definitely intensifying, and the observed
“evaporation of tens billion dollars from stock exchanges and stock markets impinges not only upon the
sense of impoverishment of numerous entities and people but also on their ability to meet previously
undertaken obligations”(Szymaski 2009). It is estimated that about 40 trillion dollars „evaporated”
during the crisis, which gives nearly 60% of the world product, and in consequence had to “shake the
foundations” of the whole global economy (Szymaski 2009). On the other hand, with regard to so-called
toxic assets, it is estimated that “cleaning” banks may last several or even several dozen years. Thus, it is a
very serious problem and finding a solution to it is extremely important from the point of view of the
future of the whole financial system and in this situation it seems necessary to make verification and
changes in the mandatory law in order to limit such activities in the future.
Moreover, among the consequences of the crisis to the global scale, the following should be indicated:
changes in the level of reserves in the emerging and developing economies with a growing
tendency,
an increase in the public debt. According to the 2010 data, the global value of public debts in the
world was about USD 40 trillion, and during the crisis there was acceleration of this rate,
according to the forecasts, this value may be over USD 46 trillion in 2012 (The Global Debt Clock,
http). In the ratio representation, the world’s public and private debt exceeds 300 percent of GDP
(Smick 2011),
a necessity to finance financial institutions from public means,
reduction of government spending, among others to education and health care,
decreasing the dynamics of GDP, related to a drop in demand and consumption and investment
expenditure,
an increase in unemployment also related to the bankruptcy of a number of business entities,
return migrations and lowering the value of flows from migrants,
impoverishment of societies (according to the World Bank data, it was estimated that because of
the crisis, in 2010 additional 64 million people worldwide could live in abject poverty, namely for
less than USD 1.25per day.
With reference to the economy of Poland, it should be stressed that due to the system transformations
begun in 1989, the economy has becomemuch more linked to the economy of the Western European
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countries, and Poland’s accession to the European Union in 2004 united this process even more. The
development of the financial market and the stock exchange in Poland is particularly connected with the
changes in the Central and Eastern Europe (e.g. partial consolidation of the stock exchange in Ljubljana
and Budapest via the stock exchange in Vienna) but also global conditionings. Therefore, it seems that
careful watching changes in this area, in fact, influencing the whole economy, is particularly important.
In case of Poland, in connection with the economic crisis, the following have been observed, among
others:
a decrease in the level of the official monetary reserves by about USD 4.6 billion in the period
between July 2008 - January 2009,
lowering the value of the balance of financial account in the years 2008 - 2009 by around EUR 4.4
billion in comparison with 2007,
undertaking forced intervention on the currency market as a result of dangerous speculation
operations related to Polish zloty in the second half of 2008,
a drop in the dynamics of GDP and the individual consumption in the years 2008-2009,
worsening dynamics of investment expenditure in the second half of 2008 and in 2009,
the dynamics of exports in 2009 in comparison with 2008 was only 80%,
an increase in unemployment from 9.5% in 2008 to 12.5% in 2011,
growth of the value of non-financial enterprises’ liabilities in the years 2006-2009: long-term
liabilities by 44.6%, short-term liabilities by 30.8%,
an increase in bankruptcies of enterprises by 60% in 2009 in comparison with 2008 (Siuta-
Tokarska 2011),
an increase in the public debt by 48% in the years 2006 - 2010, foreign debt by 85% in the same
period.
Possibilities and ways out of the crisis according to economists
It is assessed that the scale of disturbances in the world economy which has occurred over the past
quarter of the century include not only disturbances in the financial sphere but also in other spheres,
namely: moral, mental, institutional, and first of all market sphere. The disturbances have exceeded all
acceptable limits and evoked the global economic crisis.
According to W.M.Orowski, taking into consideration changes that have undergone in the
contemporary world, it is possible, however, to:
“restore the ethics of the financial sector”, since banks should be institutions of public trust,
strengthen the corporate governance in financial institutions,
in order to recover the situation of banks, lead to so-called deleveraging on the level of individual
financial institutions (avoiding the phenomenon of excessive leveraging),
cause the strengthening of risk management instruments and developing more perfect methods of
asset valuation and risk assessment,
cause an increase in the transparency of the financial market within the scope of regulation policy,
including warning about the risk of taking advantage of risky derivatives, or even to introduce
the prohibition of using them,
introduce effective and appropriate regulatory standards concerning the improvement of safety of
the banking sector with the cooperation of governments and central banks in the world,
make necessary changes in the economic policy as the rules of the policy conducted so far by
central banks and governments which shaped in the second half of 20th century do not conform
present conditions and challenges. The task of the fiscal policy is first of all not to allow an
increase in the global imbalance.
According to W. Szymaski, in comparison with many crises from the past, the current crisis
characterizes with much deeper collapse, comprising almost the whole world, and first of all it has
basically different conditionings. This crisis is fully mobile over borders, not only with capital but also
with demand, and the restoration of this demand may not be easy. First, some savings must be gathered
in order to pay back at least part of the consumption on credit. Moreover, it will be necessary to suffer tax
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consequences resulting from the activeness of governments in their struggleagainst the crisis, regardless
of inflation consequences concerning the activeness shown in the anti-deflation activity (particularly in the
developed countries).
In the context of considerations on the possibilities to overcome the crisis it seems extremely
important to discuss the systematic and structural causes of the crisis, both in the economic and ecological
sphere. However, to make the possibilities real, “the character of economics as a science of management
would have to undergo a change, and in consequence management itself should be changed”
understanding economics as a science which deals with how “the man, an enterprise, the state deal with
the rarity of factors in the situation when they have multi-dimensional applications to satisfy needs best”
(Smick 2011).
It seems that a partnership agreement between US and China is necessary within the scope of
sustainability of the world economy, regardless of other actions undertaken to combat the economic -
ecological crisis(Smick 2011). In the four scenarios of overcoming the crisis adopted by W.Szymaski,
namely the deflation collapse scenario, stagflation, so-called lost decade, or fast passing to growth - all of
them show a long and difficult road to overcome the crisis, and overcoming the crisis itself is undoubtedly
complex and first of all requires reorientation of two partners of the world economy towards the growth
of consumption expenditure into infrastructure on the part of China and the growth of savings on the part
of US.
Independently of a long-term and difficult way out of the economic crisis - the ecological crisis is a
serious problem because it is related to irreversible changes in the natural goods, constituting the struggle
for the perspectives for future generations, and even for the whole human civilization. It should be
stressed that at present “the level of absorbing natural resources and the threat related to warming and
irreversible changes in the ecosystem are dramatic”(Szymaski 2009).
As far as Poland is concerned, it is assessed that the quality of the functioning of the state during the
crisis shows a regression towards the needs resulting from the changeable and more and more complex
global environment. Deficiencies concern, among others, the personnel of „high-class civil servants” and
an effective system of taking advantage of experts (Szymaski 2009). It is worth stressing that in Poland
the effects of the crisis revealed late which mainly resulted from the fact that Poland is a country with not
too big exports and relatively big share of internal demand, and there is no so-called narrow
specialization. Moreover, the banks in Poland have not developed derivatives, securitization and other
tools of financial engineering to a greater scale, which influenced the state of “infecting” their assets (it
was lower than in cases where such instruments were used more frequently).
Therefore, it seems advisable to pay attention to opportunities for the development of the economy of
Poland not only based on the inflow of foreign capital (as it has been the case so far) which concentrates
mainly on the section of low and average-low technique anyway, but on internal capital, with the skilful
use of the European Union funds for the modernization of the economy and the development of exports.
Only the implementation of long-term planning may contribute to changes in the structure of the
economy leading to the growth of its competitiveness and innovativeness with the maintenance of the
rules of sustainable development.
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102

The Disharmonies, Dilemmas and Effects of the Transformation
of the Polish Economy
Jarosaw Kaczmarek
Cracow University of Economics, Poland
Keywords
Systemic transformation, transition economy, liberalization, privatization
Abstract
A systemic transformation is designed to remove direct links between the state as a regulator and business
entities which function in the real economy. The implementation of the transformation process is conditioned by the
democratic principles of law–making and pluralistic institutional structures. The transformation process is composed
of a set of mutually linked reforms the success of which is dependent on the condition of stability.
It seems impossible to create a target vision for a new economic system and the ultimate institutional order.
However, there is a general concept which sets directions for changes.
In the context of a systemic transformation an economic model describes the relations between the
undertaken measures and expected outcomes, while the manner in which a model is disseminated takes the form of a
strategy. The dilemmas, disharmonies and doubts related to the decision–making process in the course of economic
transformations result from the incoherence of driving factors and inadequate structural dynamics.
Poland’s systemic transformation started more than 20 years ago, and one of the major questions that may
arise is whether this process has been completed. The question related to the alleged end of the transformation process
leads to some general commentaries with regard to the actual course of this process in the general context of economic
transformations. The paper aims to present some views and conclusions concerning this issue.
Introduction
The Polish systemic transformation started at the turn of the 1980s and the 1990s. It is a subject of
a number of research studies, constituting a wide platform for exploration based on the multi–aspect, i.e.
holistic, understanding of an economy and its processes. Special attention given to economic issues does
not imply that it is the only dimension of this process. A major role is also played by social, political and
defense–related changes which affect the course of the transformation process.
There are qualitative differences between an economic transformation and changes referred to as
economic reforms. What results from a transformation process is the foundation of an economic system –
not only the scope or manner of self–regulation and management. An economic transformation comprises
overall changes in economic regulation resulting from the implementation of a new economic system. In
the case of Poland, it is a transformation from a monocentric to a polycentric system.
The essence and components of a systemic transformation
A transformation process is aimed to eliminate direct links between the state as a regulator and
business entities functioning in the real economy, leading to deregulation. This process is accompanied by
the creation and development of markets, and the comprehensive character of transformation changes
necessitates dealing with such issues as deflation, demonopolization, denationalization, restructuring as
well as the establishment of new economic institutions (Fischer, Gelb 1991).
A systemic transformation comprises economic and systemic changes. The implementation of the
transformation process is conditioned by introducing democratic law–making procedures and pluralistic
institutional structures (Nasiowski 1995). They provide proper conditions for breakthrough changes in
ownership and legal and institutional structures as well as for introducing regulatory free market
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103

mechanisms. The significance of such conditions should be stressed – it is hardly possible to build a free
market system within the legal and institutional framework of a monocentric system.
The most frequently cited components of an economic transformation include the following
(Dewatripoont, Roland 1996):
macroeconomic stabilization,
microeconomic liberalization,
institutional restructuring along with privatization.
These elements are interlinked and they constitute, according to L. Balcerowicz, a set of reforms
(Åslund, Dbrowski 2008), with stability being a prerequisite for further reforms (Csaba 1995). However, a
threat appears – stabilization efforts, price liberalization, devaluation and rising costs of money have a
destabilising effect on the economy (Koodko 1991).
A systemic transformation, apart from the democratization of life and citizens’ freedoms, leads to
changes in attitudes and human behaviour. Following the initial phase of the state’s active engagement, it
comprises a set of unmanageable processes which are independent of state policies (Batowski, Miszewski
2006). This factor differentiates it from en economic transformation which is characterised by a strong
involvement on the part of the state. It is also stressed that a shift towards a free market economy (en
economic transformation) is a prerequisite for maintaining a democracy (Islam, Mandelbaum 1993) and
that a free market economy cannot function effectively in longer periods of time in non–democratic
systems (Jakóbik 2000).
The target form of an economic system, and transformation models
Creating a target vision for a new economic system is significant in the context of setting the
objectives of an economic transformation and identifying the manner of introducing changes. It seems,
however, that the development of a final institutional order is not possible. It is only possible to create a
concept which sets general directions (Sadowski 2005). It is not possible to anticipate, or programme on an
a priori basis, all the factors that impact the transformation process in the course of time. Knowledge about
a free market economy, its types, nature, characteristics and evolution should, without a doubt, facilitate
the process of making the right choices in the period of transformation. Such choices, however, are
strongly affected by non–economic factors, which is confirmed, for example, by state intervention in the
economy.
Three groups of conditions can be identified in the analysis of an economic transformation
(Balcerowicz 1997):
initial economic, social and political conditions
external conditions and events
economic policies
Initial conditions and external factors, unlike economic policies, cannot be consciously affected by
human activities. The scope and impact of such activities is dependent on economic, social and political
factors. Consequently, a “complex network of mutual impacts” occurs, which is characterised by a certain
degree of randomness.
The structure of the economic transformation process and an analysis of its stages, sequence and pace
of changes can be outlined at 3 levels (Wilkin 1995):
relations between an economy, politics and social awareness
breakthrough changes in the structure of an economic system
changes in the internal elements of the structure.
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A broad area of problems related to transformations and different views held by many authors can be
presented in a synthetic way from the perspective of changes in the Polish economy. As a result, a model
of changes can be developed.
Figure 1. Differentiation criteria and transformation models
Source: own study based on ukrowska (ed., 2010).
Generally, the term economic model describes different forms of relations in an economic system.
The principles of developing economic models are frequently regarded by many authors to be the
equivalent of economic theories, and R. Gilpin even states that a model, when it explains certain events, is
based on economic theory (Gilpin 2001). M. Gärtner, on the other hand, refers to a model as a simplified
picture of reality for the needs of analyses and recipients which does not describe all its aspects (Gärtner
1997).
From the point of view of a systemic transformation, a model is a description of relations between
the undertaken measures and expected results. The way in which the adopted model is disseminated
takes the form of a strategy. Transformation models are classified in literatures on the basis of a number of
criteria: duration, dynamics of changes, types of applied solutions and the degree of institutionalization
(see Fig. 1).
Transformation dilemmas and strategies
Two reasons can be identified for the dilemmas, disharmonies and decision–making doubts
which occur in the course of an economic transformation: the inconsistency of driving forces and
inadequate structural dynamics (M. Batowski and M. Miszewski 2006). The first one indicates the state
and its economic policy as a major stimulant of the transformation process. The other reason refers to
different paces of economic and systemic transformations as well as the contradiction between their
objectives. The conducted analysis also gives attention to a view which totally rejects state economic
policy programmes as the ones which are implemented against the principle of the organic development
of structures and institutions as part of the spontaneous order which is characteristic of self–forming
capitalism (von Hayek 1987).
The basic dilemma is posed by the degree of state intervention in the economy. The debate is
marked by two conflicting views: one indicates the necessity of state intervention in a modern free market
economy, while the other one states that the institutional systems of world advanced economies evolve
towards reducing state intervention. The subsequent events in the global economy can be viewed as
supporting both views.
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The state’s activities in the period of transformation should be regulatory in character, focused on
setting standards and establishing institutions. In the initial phase of the process the state should also
eliminate the adverse effects of the lack of activities carried out by fully developed and institutionalised
market structures. The necessity of state intervention is also related to adaptive economic programmes as
well as increased innovativeness and competitiveness. Such views, however, are rejected in the context of
a negative assessment of the state’s undertakings in the form of direct and vertical interference with the
activities of business entities and the structures of the particular markets (Lipowski 2002).
Another issue is the selection of a strategy for achieving the main objectives of the transformation
process: should a radical approach be adopted (the so called “shock therapy”) or a strategy of evolution
(“gradual” changes) The adoption of the radical method, which originates from the school of monetarism
and new classical economics (Roland, 2000), leads to quick effects in terms of stabilization, but it should
not be applied in restructuring programmes when market and privatization infrastructure is not available.
Moreover, the radical approach leads to a number of threats, especially rising unemployment rates and
salary pressure (Blanchard 1997). The gradual approach, in turn, which originates from the institutional
approach, may reduce the pace of changes and lead to the situation in which a programme of reforms
reaches a stalemate (Belka, Trzeciakowski 1997). In addition to that, this approach may lead to a more
significant role played by the state in an economy (Åslund 2002). Therefore, J. Kornai proposes dividing
transformation strategies into limited development strategies and strategies of accelerated privatization
(Kornai 1991).
A number of economists believe that the quality of transformation changes can be measured by
the degree of privatising the public sector and the autonomous development of the private sector.
Privatization, then, is recognised as a key factor of transformation (Fisher, Gelb 1991). A privatization
process causes much controversy over such issues as the objectives it should achieve, applied and
preferred privatization methods, the actually adopted methods or the scope of the entire process. In this
context it is worth referring to M. Friedman’s statement according to which it is a mistake to regard
privatization as the main objective of transformation –greater significance should be attributed to a rule of
law, i.e. the creation of institutions (Fukuyama 2005).
Another dilemma of the transformation process refers to the degree of the opening up of an
economy. The question is not whether an economy should be opened up, but how this process should be
implemented. Some other dilemmas include the problem of external debt, setting priorities with regard to
export–oriented or counter–inflation policies as well as the relations between stabilising policies, economic
growth and unemployment rates. Another significant issue to be considered is the social cost of
transformation: unemployment, social impoverishment, the crisis of social services, and social pathologies
(Sadowski 2005). The final issue refers to integration with the European Union – structural convergence
and overcoming the existing barriers. In conclusion, there are a number of economic policy options which
consider the above dilemmas and disharmonies.
The end of the systemic transformation – or just one of its phases
The Polish transformation started more than 20 years ago, and one of the fundamental questions
is whether the process has been completed. The term transformation itself, indicating continuous changes,
causes much controversy among many authors. Some of them refer to the term transition, commonly used
in foreign literatures (Gros, Steinherr 2004), suggesting that the transformation process may be completed.
A number of significant events in the period of the last few years can be treated as the cornerstones
marking the particular stages of the process. The year 2004, a turning point marking Poland’s accession to
the EU, can justify the view held by many economists that the transformation process came to an end. It
implies the development of an economic system in which economic policies are transformed into an
exogenous factor which only regulates the dynamics of the system (Filar 1993).
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Another possibility is the abandoning of transformation policies, which leads to the situation in
which the transformation process is not completed (Winiecki 1991). In the context of differentiating
between the economic and systemic transformation some authors claim that the systemic transformation
is far from being completed due to slower changes in social attitudes, beliefs and behaviours.
Z. Sadowski’s position is quite clear – the transformation has not come to an end, it is just the first
stage of the process that has been completed (Sadowski 2005). This view is justified by the fact that the
main objectives of the process have not been achieved: the modernization of economic structures and
privatization. The first phase of the transformation process implemented the solutions which do not meet
the requirements of the contemporary economy – the industrial civilization is being replaced by a
civilization based on information and a knowledge–based economy. Hence the need for further structural
changes, supported by the state’s active engagement, leading to the development of a post–capitalist
economy in which knowledge is the most important means of production (Drucker 1994).
Assessment of the systemic transformation
The controversy over the completion of the Polish transformation raises the question concerning a
general assessment of this process with special attention given to the major area of the analysis – an
economic transformation. As regards ownership changes, the effects of the Polish transformation are
generally viewed as positive. However, a number of large companies and industries have not been
privatised due to the decisions to introduce a different pace of this process for the particular sectors. It has
a major impact on the economy as a result of cooperation links between industries (e.g. mining, energy
generation and railways). A positive assessment should be given to selecting privatization methods, while
some doubts can be raised with regard to the grass–roots character of the process and the
individualization of a number of projects as well as legal restrictions imposed on privatization methods.
Most controversial opinions relate to ESOP programmes (Employee Stock Ownership Plan), while the
mass privatization programmes (National Investment Funds) are regarded to have been a complete
failure.
The on–going debate concerning the scope of the transformation ”shock” at the initial stage of the
process does not overshadow a positive assessment of stabilising policies. The overcoming of a
destructive impact of high inflation rates and the full convertibility of the national currency (avoiding a
monetary crisis) can be regarded to be successful undertakings. As regards regulation policies, a positive
assessment is given to the fact that the National Bank of Poland managed to avoid direct state
intervention. However, an assessment of the entirety of antimonopolistic policies suggests that progress in
this area is not satisfactory, and some cases are recorded of resuming the practice of politicising the
economy. EU policies result in the state’s increasing assistance offered to small and medium enterprises,
which are regarded to be more responsive to the changing market. However, some critics claim that it has
an adverse impact on the economic freedom due to the preferential treatment given to the sector. The
infrastructure of the capital market is well developed in terms of the operating institutions as well as the
available instruments. On the other hand, the state fails to formulate clear directives with regard to its
ownership policies, which play a significant role in the context of the privatization process.
The above classification of the components of economic transformation (macroeconomic
stabilization, microeconomic liberalization and institutional restructuring along with privatization) can be
a basis for carrying out a quantitative assessment of the transformation process. A useful tool for
analysing macroeconomic stabilization is the concept of ”the stabilization pentagon” model which
describes the following indicators: GDP growth rate, CPI (Consumer Price Index), unemployment rates,
the budget balance to GDP ratio, and the current account balance (Pitek [in:] Jarmoowicz, Szarzec, eds.,
2011). The measurements of the surface of the pentagon for the particular years represent the effects of the
transformation process (time axis). Overall, the period of unfavourable conditions at the beginning of the
process in 1994–1998 is followed by considerable improvements; deteriorating indicators prevail until as
late as 2004, followed again by improved economic ratios.
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107

Figure 2. The surface of the ”stabilization pentagon”, GDP growth and unemployment rates in Poland in
1990–2011
0.5
0.45
0.4
0.35
0.3
0.25
0.2
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Area of the ”stabilization pentagon”
Unemployment rate
Pace of GDP changes
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Inflation
rate
2011
1991
Unemploy
ment rate
Central
budget
account
Pace of
GDP
changes
Current
account
balance
Source: own study based on figures from:
The Yearbook of the Central Statistical Office, Warszawa (for the years 1990–2010, respectively),
GDP estimated figures for 2011: www.stat.gov.pl [11.03.2012]; Pitek [in:] Jarmoowicz, Szarzec, (eds.)
(2011).
The effects of liberalization and privatization
Liberalization–related changes can be assessed on the basis of the ratios developed and published
by the European Bank for Reconstruction and Development (EBRD 2010). They include indicators related
to governance and corporate reforms, price liberalization, Forex and trade liberalization and competition
policies. It can be concluded that the fundamental and positive changes occurred before 1994, while their
dynamics declined considerably in later periods. The best assessments were given to Forex and trade
liberalizaton (1998), while competitiveness and governance and corporate reform indexes are at lower
levels, recording higher values in the period of the last decade.
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108

Figure 3. Transformation indicators – liberalization and privatization in Poland in 1989–2010
Source: own study based on: Transition Report. Recovery and Reform, (EBRD 1990–2010), www.ebrd.com
[11.03.2011].
Note: indicators for economically advanced countries are at the level of 4.3.
According to EBRD’s assessment of small–scale privatization (the sales or transfer of state–owned
small companies and their assets) and large–scale privatization, a steady and considerable increase in the
value of indicators is recorded in 1990–1996; in later periods the indicators remain unchanged with the
exception of higher assessments of large–scale privatization in 2010. From the point of view of national
accounts, the effect of privatization is the share of the private sector in creating value added – it rises from
nearly 30% in 1990 to more than 70% in 2010. Privatization comprises two trends: transformation–related
privatization and an independent development of the private sector; it is estimated that the former trend
accounts for merely 30% of value added created by the private sector. The private and public sector came
to the same level in terms of the number of employees as early as in 1991; in terms of value added creation
– in 1993, while in terms of the value of fixed assets – as late as in 2000.
Transformation vs economic growth – conclusions
The impact of the transformation process on economic growth is the final element of the
presented assessment of Poland’s economic transformation. The course of the process included the
previously defined factors: macroeconomic stabilization, progressing market reforms and institutional
changes, privatization and initial conditions. Most authors regard the impact of macroeconomic
stabilization to be a clearly positive factor (Fisher, Sahay, Vegh 1996). However, the initial stage of the
process is marked by a decrease in economic growth (Fidmuc 2001), which results from the economics of
disorganization (Blanchard 1996). A positive assessment is given to market reforms as well as small–scale
privatization (Radulescu, Barlow 2005). Moreover, breakthrough reforms lead to increased economic
growth (Åslund, Boone, Johnson 1996). The impact of large–scale privatization, on the other hand, causes
much controversy. K. Staehr claims that it has a negative impact both on short– and long–term economic
growth (Staehr 2003). Other authors believe that large–scale privatization may have a positive impact
depending on the way in which the process is implemented (Megginson, Netter 2001). Institutional
changes are generally regarded to have a positive impact on economic growth (Grogan, Moers 2001) if
accompanied by effective management, efficient operations and adherence to ownership rights (Brunetti,
Kisunko, Weder 1997). As indicated by B. Heybey and P. Murrell, the impact of the initial conditions on
the transformation process is commonly assessed as having a negative impact on economic growth, which
decreases, however, in the course of time (Heybey, Murrell 1999).
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The verification of the hypothesis on a significant impact of the discussed factors on economic growth,
based on the LSDV regression (Least Squares Dummy Variable), leads to the following conclusions
(Pitek, Kukuka [in:] Jarmoowicz, Szarzec eds. 2011):
macroeconomic stabilization – positive impact,
small–scale privatization – positive and significant impact,
large–scale privatization – negative and significant impact,
institutional changes – generally positive impact,
initial conditions – negative and significant impact.
Overall, the above conclusions are consistent with the previously presented views held by other
authors, and they present a picture of changes and positive effects for the Polish transition economy.
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Winiecki W. (1991), Nauka dla Polski z reform. Zbyt wolna zmiana systemu, „Gospodarka Narodowa”, vol.
3.
ukrowska K. (ed.) (2010), Transformacja systemowa w Polsce, SGH, Warszawa.
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Low Economic Awareness:
A Philosophical Study of Economic Behaviors in Turkey
Murat ARICI
Konya Necmettin Erbakan University, Turkey
Keywords
Economic awareness, low economic awareness, economic behaviors.
Abstract
The chief purpose of this paper is to attract attention to a target fact that the public’s economic awareness in
Turkey is too low (both in terms of consumptive and non-consumptive practices) and to examine its reasons and
adverse consequences. To achieve such a goal, I initially explain what is meant by the term “economic awareness” in
the introduction. After that, I determine and analyze the indicators for the public’s low economic awareness in the
first section. These are the lack of conscious selective behavior, the lack of reactive attitude, and the lack of judicial
action. In the second section, I present three serious consequences of the low economic awareness in question: (1)
Because of it, the individuals living in Turkey suffer dramatically from unfair economic applications of both
governmental institutions and private sector enterprises. (2) This socio-economic fact in question provides excuses
for public and private corporations not to abide by the principles of corporate governance, thus blocking their own
improvement. (3) And as a result of these two, the overall development of Turkey—both in terms of its economy and
social justice—is negatively affected. Finally, in the third section, I attempt to reveal the major reasons for the
public’s low awareness. These are negative effects of some cultural factors such as religious beliefs and traditions, the
state centric educational system, structural defects of the political system, state practices insensitive to rights,
capital-dependant mass media, and inadequate workings of non-governmental organizations.
Introduction
Economists have spent a lot of time and energy pondering as to how an overall economic system
can and should develop locally and globally. A great many aspects of economic systems have been
studied well in the course of such a purpose, but little have been done in order to understand how
individuals’ economic awareness affect and is affected by the whole economic system of a country. It is
obvious that a constant interaction takes place between the two. If most of the individuals are
economically well aware and thus are conscious consumers of goods and services provided in a country,
those individuals, one way or another, shape the whole economic system of the country. But in turn, if
most of them are economically unaware individuals, there will be no positive force on the economic
system to develop in favor of individuals, though the system may surely develop in favor of capital
owners and decision makers in politics.
One can think about the interaction the other way around. The very economic system of a country
could be a chief cause determining the level of economic awareness individuals enjoy. An individual is
economically aware or unaware, it may be claimed, because the structural mechanism governing the
economy in that country encourages or discourages the individual to be so.
Let us first state what we mean by the term “economic awareness.” In general, an individual has
economic awareness only if she consciously attempts to know what kind of economic events happening
around her; ask questions about causes for those economic events; deliberately try to foresee positive and
negative effects of those economic events upon herself and other individuals; and is well aware of her
extant rights against unfair economic applications conducted either by governmental or private sector
institutions.
Based on the above understanding, we can express the target fact that this paper is focused on:
The economic awareness of individuals living in Turkey is too low, and the negative consequences of this
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fact is so severe that ignoring it would be rather irresponsible for any intellectual mind spending energy
in studying multi-faced economic development of Turkey. To repeat it again:
The Target Fact: The economic awareness of the public in Turkey is too low meaning that most of the
people are unaware of the economic events occurring in the country, the causes and reasons for those
events, the possible consequences of those events, and their own economic rights against the negative
effects of economic applications.
Evidence for the Low Economic Awareness
`One may initially question whether there is any solid indicator for the public’s low economic
awareness in question. Indeed there are a lot, and the examples are clearly enough to conclude in favor of
the target fact above. I will organize the examples into three groups. When they act economically, most of
people living in Turkey fail to appreciate three basic features that an ideal citizen should possess. In the
economic sense, they lack (i) conscious selective behavior, (ii) reactive attitude, and (iii) judicial action.
(i) The Lack of Conscious Selective Behavior
Before 2005, the public of Turkey had suffered from the high rate of inflation for a long time. As a
result of this, people in general could not and still cannot get rid of some related habits. They still see it
quite normal, for example, to pay for some goods or services more money than those deserve thinking
that perhaps the prices of all those goods and services in the same category increased all together without
their knowledge. To give another example, most consumers in Turkey tend to buy the expensive one even
if the qualities of two different goods are exactly the same, and most of the time the consumers know
about this. One may think that there must be some underlying socio-cultural reasons for such a seemingly
implausible consumer behavior. Indeed there are, such as those related to gaining a socio-economic
identity, achieving social prestige, not-having faith in the honesty of the buyer who sells the cheap one etc.
But here the more important reason for the consumer’s behavior of such kind should not be disregarded.
The consumer behaves in such a way because she does not think about the consequences of her
behavior— consequences for both herself and the public in general. In another sense, she do not select
consciously when she consumes.
Another bad habit of most consumers in Turkey is to ignore bad treatment of buyers and service
providers both in private companies and governmental institutions. Unfortunately it is sometimes
observed in Turkey to be ignored, be treated rudely, or even be reprimanded when a consumer attempts
to receive a goods or service in places such as restaurants, cafes, hotels, banks, post offices, municipality
buildings and other governmental institutions. Perhaps this happens not only in Turkey but also happens
in a lot of developing and even sometimes developed countries. But what I draw attention to is not the
occurrence of such bad treatments, but rather the consumers’ reactions to such treatments. While
consumers in developed countries consciously notice such treatments and punish the buyers and service
providers by not preferring them again, most consumers in Turkey forget about previous bad treatments
and attempts to buy goods and services from the same places. It is because the public in general do not
consider important the professionalism neither in private companies nor in governmental institutions.
We can generalize this non-conscious selective behavior into the followings. In terms of the
qualities and prices of goods and services, most consumers in Turkey:
• do not select goods and services consciously,
• do not select sellers and service providers consciously,
• do not attach importance to the professionalism,
• do not check up warranty rules and return conditions.
(ii) The Lack of Reactive Attitude
The Current government in Turkey put her signature under a lot of great achievements in
economy. The gross domestic product of Turkey has increased more than three times it was since the
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uling Justice and Development Party came in to power in 2002. Latest export figures show that Turkey
has quadrupled its exportation since 2002. The gross national income per capita has been reached to more
than $ 10,000 while it was around $ 3000 ten years ago. The inflation rate decreased from 29.7% to 6.4%
during the last decade. Yet the country has moved forward little when it comes to some severe socioeconomic
problems such as the injustice of taxation, the unfair distribution of income, and the nondeveloped
rights of individuals and consumers against state agencies and private sector enterprises.
To give examples of such socio-economic problems, consider the case of unjust taxation. The rate
of indirect taxes to total tax incomes has increased to 68% in 2010 while it was 55% in 1999, which makes
Turkey the champion of the highest rate of indirect taxation. Likewise, the rate of direct taxes to total tax
incomes has decreased to 32% while it was 45% in 1999. Moreover, in 2010 the rate of tax incomes cut
from salaries of employees (including bottom-wage earners) to total tax incomes was 66% while the tax
incomes received from self-employed people such as bankers, dealers of gold, building contractors,
doctors, pharmacists etc. was merely 1.77% of total income tax, which clearly shows the severity of the
situation. This obviously means that low-incomers and middle-income individuals have ended up paying
proportionately more and more income taxes than the rich ones do during the last decade. And this is
quite opposed to what is expected from a rapidly developing country like Turkey whose experience of
civilization in the history goes beyond even that of many developed countries.
Take the case of unfair distribution of income. Although there can be given no solid indicator of
such an economic and perhaps universally valid fact, the above considerations of unjust taxations have
already given significant clues of unfair income distribution. Besides, some comparisons of current
salaries of different occupational clusters will be enough to enjoy the fact in question. A primary school
graduate working as a department chief in a municipality is paid with a %50 higher monthly salary than
an assistant professor with Ph.D. degree working at a university. Likewise, a university graduate teacher
working at a high school is salaried only with a %14 higher salary than a primary school graduate janitor
working at the same school.
In addition to these governmental applications, there can be found a lot of other cases in which
economic rights of individuals and consumers are blatantly overridden by private sector enterprises. That
the producers and service providers do not present the needed information on the products and the
necessary details about services due to the lack of required laws or auditing; that the written warranty
rules and return conditions on the products are violated by the sellers against the benefit of consumers;
that the deception in trade is not fully audited by the state and so on can be counted among those.
Oddly enough, the public in Turkey do not show any significant reaction to such applications.
There are some consumer associations who sometimes react to these applications, but their press
announcements explaining these unjust implementations can only find tiny places on the mass media,
thus receives little attention from the public. Besides, no one can see any manifest social movement or
protest demonstration against such state practices. This is why we can drive the conclusion that most of
the individuals living in Turkey do not have any reactive economic attitude against such governmental
practices that corrupt the social justice in a deeper way.
(iii) The Lack of Judicial Action
As a social habit, Turkish individuals have always been unwilling to take legal action against the
injustice especially the ones conducted by state institutions or the powerful. In section 4, we will examine
some socio-cultural reasons behind this habit, but for now let me state the surface reasons for such a lack
of judicial action. One reason is about (a) bureaucratic difficulties. Most people are discouraged to seek
their rights at the court because of heavy bureaucratic processes. This unwillingness is especially more
common among less-educated people from rural regions. Surely, as both a cause and effect of these
difficulties, the ignorance of procedural processes is also very common among people. Another
discouragement is related to (b) slow working structure of judicial system. Albeit there have been
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significant progresses recently on this issue, still there are legal cases which have not been concluded in
decades. One another reason for why most individuals refrain from applying to court concerns (c)
expensive costs of litigation. This may be divided into court fees and attorney fees. Both types of fees are
much higher than low-incomers can really pay. Even middle income individuals sometimes cannot afford
the fees in question. The final and the most important reason why most people are unwilling to take
judicial proceedings is that (d) they unfortunately do not have a strong faith in regaining their rights by
way of going to court. This disbelief in judicial system in fact explains one of the severest causes for the
asymmetric development of Turkey. In other words, the macro-economic development does not match
any equivalent progresses in social justice chiefly because of the lack of a fully and truly functioning
judicial system.
Consequences of the Low Economic Awareness
Examining all consequences, in detail, of the public’s low economic awareness in Turkey is surely
beyond the scope of this paper. But at least we can organize the major consequences succinctly under
three main headings as follows.
Consequence 1:
The foremost consequence constitutes the chief concern of this paper. Individuals with low and
middle income in Turkey severely suffer from unfair economic applications conducted by both decision makers in
politics and administrations of private corporations. Here the economic suffering is twofold: from the
governmental institutions and private sector enterprises. On the first horn, Individuals, in many cases,
have to pay a great many kinds of unfair taxes, charges, fees and fines implemented by the key decision
makers of governmental institutions. Since individuals are not used to show any significant reactions to
and judicial action against these undeserved economic applications because of their low economic
awareness, politicians never feel any force to take measurements to prevent this economic suffering. On
the second horn, consumers in Turkey suffer from high prices for undeserved goods, low quality services,
bad treatment from sellers and service providers, unknown warranty rules and return conditions and so
on. Since consumers do not present any selective economic behavior or take judicial action, private sector
enterprises, likewise, never face any pressure to increase the standards of their business quality for the
benefits of consumers.
Consequence 2
Due to the public’s low economic awareness in Turkey, economic institutions particularly private
sector enterprises cannot develop themselves in terms of corporate governance. The cause-effect relationship is
obvious here. When people are economically harmed and do not exhibit any selective economic behavior,
reactive attitude, and judicial action, neither the state-owned institutions nor public sector corporations
will have significant reasons to advance the quality of their corporate governance, thus they will not be
able to increase their overall economic value. It is because these institutions and corporations hardly abide
by the principles of corporate governance, which have been determined by international standards such
as justice and equality, public disclosure and transparency, accountability, and administrative
responsibility. If economic institutions and corporations do not develop themselves in the sense of these
principles, it is obvious that the whole economic system of the country will be affected from this.
Consequence 3
Based on the above two, the general consequence, over the long run, of the public’s low economic
awareness is apparent: the overall development of Turkey—both in terms of its economy and social justice—is
negatively affected. To elucidate this, we can specify the followings. (a) Decision makers in politics do not
pay any mind to improve the rights of consumers and individuals. (b) Producers and service providers do
not feel any need to increase the quality of goods and services; they rather care to increase their profit
only. (c) Positive values promoted by the standards accepted internationally in the field of economy do
not find a chance to become the rising values in the society. (d) As the citizens of a rapidly developing
country, individuals in Turkey cannot unfortunately enjoy the most urgent need: social justice.
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Reasons for the Low Economic Awareness
So far, we have been investigating into the details of the public’s low economic awareness in
Turkey and its adverse economic consequences. While doing this, I have already hinted on several
underlying causes for such low awareness. One may here rightly wonder about why people living in
Turkey behave like that or lack conscious selective behavior, reactive attitude, and judicial action. This is
quite worth asking, since any measurements to overcome the adverse economic consequences we have
examined above will have to require a detailed analysis of the reasons reached albeit those reasons are
very difficult to analyze due to their complexity and inter-relatedness. Even so, we can at least attempt to
point out several of those reasons by categorizing them into some chief headings of social aspects such as
cultural, educational, political and so on.
Cultural Reasons
Cultural reasons vary in kind. In my opinion, the most significant one results from the
interpretation of religious values. In the context of religious beliefs, particularly of those of Islamic faith,
the majority of the public do not seem to believe in the value of having economic awareness. That is to
say, they do not attach the required importance to practices such as conscious selection on material things,
reaction to unjust applications, seeking their rights at the court etc. Here, the chief ground for this
economic behavior must be this: Most of devoted people believe that any unjust applications will
ultimately be punished fully and hence the deserved but belated justice will be restored properly in the
afterworld. But this means devaluing the worldly life while still living in the world. Any solution to this
ill-formed point of view, it seems, lies within a truer interpretation of religious beliefs.
The case is not very different in another context: the context of settled traditions. People in Turkey
traditionally do not consider the judicial struggle as a social duty particularly when the resulting economic
value is too low. What is worse is that when it is about only a small sum, those who attempt to seek their
rights legally are usually sniffed at by the rest of the public. It is very common in Turkey to hear the
words “Let it go/Drop it/It does not worth it” when it comes to a man’s going after his small amount of
money that he had to pay because of some unjust economic application. I believe the cure for this
unhealthy traditional pressure can be found only by re-shaping the relevant elements of the educational
system, which is in fact not very difficult to implement in a country of rapid changes in every area of
social structure.
Educational Reasons
It is true that intermediate and high school students in Turkey still takes a class of Turkish civics
which had been taught by a military officer until recently. Ironically, in such a class, students even learn
the details of military ranks but are never taught how to seek their rights by legitimate ways. The Turkish
education system is still state centric. It would be too naïve to expect from an education system like that of
Turkey to promote individuals’ rights and to implement a curriculum in order to increase public’s
awareness of several kinds including the economic one. Given that most of the problems against public’s
awareness of their rights originate in the education system, and there have been only little studies of the
issue around the world (Otter 1991; and Jopper and Bendelow 1993), serious measurements in this field
are obviously an urgent due. Among what has to be done may be counted designing courses and
seminars at all level of education such as of individual’s rights, human rights, economic awareness,
conscious consumption, individual-state relationship and so on.
Political Reasons
The current political system in Turkey has been established in 1982 just two years after the
Turkish army made a military coup in 1980. The constitution of the republic of Turkey has never gone
through a major change since then, except perhaps the constitutional amendment accepted in the
referendum in 2010. Likewise, the political parties act has remained the same for decades, and it has still
its structural defects. As a result of these defects, parliamentary candidates are not elected by the relevant
local public. No properly functioning political channels that should exist in any ideal political system
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takes place between the public and the statesmen in Turkey. Hence, the candidates are determined by the
sole leaders of political parties. Consequently, members of the parliament do not truly consider
themselves as the real representatives of the public. Those elected in such a way, it seems obvious, do not
put themselves in a position of protecting the citizens’ rights, let alone giving account to their electors. The
lack of properly functioning political channels between the political representatives and the public
prevents individuals from increasing their awareness of several types including the economic one. A true
resolution to this defective political system is nothing but to replace the political parties act with one that
centralizes individuals’ rights more than it does the interest of the powerful.
Insensitive State Practices
Although there has been a considerable amount of progress in removing the militaristic influence
on the political system in Turkey during the last decade, still some past habits continue to affect political
leaders’ way of thinking. As a result, some state practices override or ignore individuals’ rights and even
sometimes basic human rights on the grounds that the citizens are still implicitly expected to show a
traditional obedience to the state and public/private corporations. Since political leaders themselves grow
up in a culture of obedience, they do not take political decisions to promote bringing up individuals who
seek their rights in every legal way.
These reasons mentioned so far are not the only causes for the public’s low awareness in question.
There are others that are interrelated to the ones above, such as inadequate workings of nongovernmental
organizations and the capital-dependant mass media. As we have mentioned before, nongovernmental
organizations in Turkey do not function effectively due to their political and economic tie to
capital owners and political powers. Similarly, the mass media institutions are not influential enough to
improve the public’s economic awareness due to their dependence on the capital and governmental
powers.
Summary
To summarize what we have been examining so far, Turkey’s economy has made a lot of
progresses during the last decade. But in spite of all those progresses, some chronic and obstinate
problems of socio-economic issues such as unjust taxation, unfair distribution of income, underdeveloped
rights of consumers and individuals against governmental institutions and private sector enterprises have
neither been solved nor attempted to be solved. There may be several ways of accounting for this
situation, but the chief reason, as I see it and have focused on along the paper, is the public’s low
economic awareness. As we examined it, one’s having low economic awareness means one’s lacking three
kinds of socio-economic duties: conscious selective behavior, reactive attitude, and judicial action. Most of
the individuals in Turkey lack these social duties. They do not select goods and services consciously; do
not show enough reaction to unjust economic applications by the governmental institutions and private
sector enterprises; and avoids taking legal actions when their economic rights are overridden. The chief
consequences of this low awareness are threefold: Individuals living in Turkey are economically harmed
by both public and private institutions. Both state and private sector corporations cannot develop in terms
of corporate governance due to their unwillingness to comply with internationally determined principles.
And the overall economic development of Turkey in the long run is negatively affected. As to the reasons
for the public’s low economic awareness, they vary in type. Negative elements of cultural factors, the state
centric educational system, and structural defects of the political organization are the chief ones. Other
reasons such as state practices insensitive to individual rights, inadequate workings of non-governmental
organizations, and capital-dependant mass media are also influential and interrelated to those.
Any effective measurements that must be taken to increase the economic awareness of the public
lie in a careful analysis of these reasons. The strategy to follow seems simple: Carefully pin down all the
reasons that constitute the ground for the individuals not to be economically conscious citizens. Analyze
them meticulously. Take steps to eliminate either the reasons themselves or the negative effects of those
on the individuals’ economic awareness. With the help of the human nature to seek his or her benefit
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constantly, the steps taken in this way will surely reshape the whole point of view individuals possess in
terms of economic awareness. Over the long term, the new increased awareness will most likely yield
more conscious individuals and consumers. Thus, the public will ultimately enjoy the social justice at least
to a notable extent.
References
Açkgöz, enay (2009). “Türkiye’de Vergi Gelirleri, Vergi Yaps ve ktisadi Büyüme likisi: 1968-2006” [The
Tax Incomes, Structure of Taxation and Their Relation to Economic Growth]. Ekonomik Yaklam 68:91-113.
Jopper, D. and R. Bendelow (1993). “Consumerism: The Public’s Awareness of their Rights.” European Journal of
Marketing 13 (3):113-25.
Kanl, Murat (2007). Dolayl Vergiler ve Kayt D Ekonomi [Indirect Taxes and Unrecorded Economy]. Master’s
thesis submitted to Marmara University, Graduate School of Social Sciences, Department of Finance, stanbul.
Koç, A. Fuat and M. Fatih Dal (2007). “Vergi Yükü Daglm ve Vergi Adaleti” [The Distribution of Tax
Burden and Tax Justice]. Vergi Raporu Dergisi 88 (Jan):38.
Otter, Dorron (1991). “Economic Awareness and Higher Education: An Outline of the Background to and
Proposed Work of the Economic Awareness Programme at the University of Durham.” Education + Training 33 (6):9-
13.
Sin, Sevil (1996). “Türkiye’de Vergi Adaleti Açsndan Dolayl Vergiler.” Master’s Thesis submitted to Uludag
University, Graduate School of Social Sciences.
Susam, N. and N. Oktayer (2007), Türkiye Ekonomisinde Genel Bütçe Vergi Gelirleri içinde Dolaysz ve
Dolayl Vergiler (1995-2005), [Direct and Indirect Taxes in General Budget Tax Incomes in Turkey’s Economy]. ktisadi
ve dari Bilimler Dergisi 21 (2).
Ylmaz, G. Akgül (2006). “Türkiye’de Gelir Vergisi Tarifesinde Meydana Gelen Deiikliklerin
Vergilendirmede Adalet lkesi Bakmndan Deerlendirilmesi” [An Evaluation of the Changes in Income Tax Scale in
Turkey in terms of Justice Principle in Taxation] Marmara Üniversitesi ..B.F. Dergisi 21 (1).
T.C. Gelir daresi Bakanl [Revenue Administration Department of Turkey]. www.gib.gov.tr
Türkiye statistik Kurumu [Turkish Statistical Institute]. www.tuik.gov.tr
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118

Ranking Indian States on Social Welfare & Developmental Status in
Globalization Era using a MCDM Approach
Ayan Chattopadhyay
IISWBM (Affiliated to Calcutta University) and Research Scholar, India
Arpita Banerjee Chattopadhyay
Budge-Budge College (Affiliated to Calcutta University), India
Keywords
MCDM (Multi Criteria Decision Making), TOPSIS (Technique for Order Preference by Similarity to Ideal
Solution), Shannon’s Weight, Social Welfare and Development.
Abstract
Social Welfare & Development have since ages been a matter of serious concern worldwide. While the
concept of development has been interpreted and explained by many in different ways; however development of a
state is now being evaluated more in terms of the welfare status of the population apart from just the financial or
economic prosperity. Of the various determinants of societal welfare, the researchers have considered the most crucial
ones that include Education, Basic Living Infrastructure, Economic Status, Awareness and Exposure, Child Crime,
Crime Status, Women Status, Public Protection and Health & Medical Status. The ensuing research study aims to
study the relative position of the Indian States on the basis of social welfare & development status and also rank the
Indian States. Rank evaluation has been done using a quantitative approach that includes 80 variables that the
researchers consider to be most important parameters influencing social welfare & development. The quantitative
approach involves analysis and then arriving at a conclusion in a MCDM (Multi Criteria Decision Making)
environment. Of the different MCDM approaches, TOPSIS (Technique for Order Preference by Similarity to Ideal
Solution) has been deployed and Secondary data forms the basis of this study.
Introduction
It would not be an exaggeration to depict the contemporary global scenario as predominantly
capitalist. This is because even if some command economies are surviving they are more or less thriving
on their linkages to the global capitalist market. India is no exception. In the year 1991 Indian National
Congress came to power with a nominal majority and crumbling economy with serious balance of
payment crisis and acute dearth of foreign exchange. Urgent measures had to be taken to pull out the
country from this dwindling economy. This crisis management effort ultimately culminated into the
policy of liberalization – connecting with global economy. Series of reforms and readjustment measures
were undertaken to comply with the requirements imposed by the Bretton Woods Institutions like IMF,
WTO which included structural adjustments, deregulation, and initiation of privatization, tax reforms,
and inflation controlling measures. The open market policy was undertaken as the panacea for all kind of
chronic economic crisis. This was the time when Indian Economy came closure to the Global market
without much protective measures and leaving its import substituting industrialization model behind and
adopting instead a more market friendly “trade led growth” strategy. Lots of attention is being paid on
mechanism that could catch FDI as the age of impediments characterized by high tariff, and overvalued
exchange rate, import control, industrial licensing is over. The prophets of the globalized economy
assured that everything would be fine as long as competition is set free and there are few regularity fixes.
They emphatically opined that globalized market will automatically reward those who are efficient and
eliminate the unworthy ones. But not all are so ecstatic about this glorified image of globalization. They
are constantly reminding us about the mixed record of globalization that meticulously camouflages the
dark spots like layoffs, drainage of indigenous social, economic and intellectual resources; shrinking of
public welfare initiatives, increasing asymmetric income distribution, inflating socio economic
inequalities, perennial debt crisis, dependence on developed economies, lack of basic social services etc.
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The concept of globalization measures development mostly from the economic perspective. It
takes into account only the output variables like GDP, the extent of foreign reserves, debt ratio, exports
and productivity. In most of the literatures economic growth and progress is considered as coterminous
with social development. So economic considerations are thought to be the most crucial and single prerequisite
for development. Other indicators of social development are left relatively unnoticed. Though
we must acknowledge that effect of globalization can be traced most prominently in economic sphere;
however it must not be considered that other denominators of social development are mere consequences
of this broader process. Rather, independent emphasis should be given to these denominators. It is
precisely because from 1980 onwards scholars like Amartya Sen, Mahbub Ul Haq, Paul Streeten and
others argued that income measurement cannot be a sole denominator of welfare or development of a
society. In fact in UN Development program adopted this basic criticism of income measurement and
presented a more comprehensive concept of human development. The report defined human
development as a process of enlarging people’s choices. Now the attention has concentrated around three
essential areas: the opportunity to lead a long and health life, the opportunity to acquire knowledge and
the opportunity to have access to resources needed for a decent standard of living. Later some more
denominators of development have been added that includes considerations like political freedom and
human rights, human development for women as well as for men, environmental and other aspects of
sustainability and themes regarding citizen’s participation and opportunities to effect the political
decision in society. The radical shift in the attitude towards development brings the notion of human
welfare at the focal point.
20 years have gone by since the process of globalization was initiated in India. Since 1991, India
has witnessed a considerable FDI flow and a host of MNCs have started their operations in India. During
the same time a host of developmental activities have also been initiated. It is worthwhile to mention that
while some Indian states are enjoying the fruits of globalization, others are relatively slow in catching up
with globalization. While the economic development in the Indian states have seen a growth in most
cases, the overall social welfare and development status of the Indian states is still a matter of concern and
debate; especially in states where impact of globalization is very high. The researchers felt that state wise
progress needs monitoring not just against the economic or other individual parameters but amongst a
host of parameters that influence of social welfare and development in Indian states i.e. the researchers
aimed at studying the social welfare and development status of Indian states in a multi-criteria decision
making environment and rank them.
Review of Literature
Pattanaik, Anjali and Badu Kanak, Manjari. (2003) made an independent study on Population
explosion and media to elicit the information level and attitude of adolescents concerning population
growth and role of media pertaining to population growth and policy. For the purpose of the study,
samples from both urban and rural areas were selected from Ganjam district, Orissa. It was revealed that
youngsters of the community were quite aware about the problem of population explosion and had
positive attitude toward population policy. The role of media in this respect was found very strong as all
had been in touch with various types of media. Results proved that all the independent variables (family
size, education of parents, and income of parents, mass media, and flow of information) had strongly
influenced the awareness and attitude of the samples pertaining to population explosion. It was
recommended that population education should be incorporated in the school and college curriculum.
Palanithurai, G. (2004) made an independent study on the role of the community in achieving
social development through the Panchayats. This study Panchayats and communities in family welfare
was carried out in 10 Gram Panchayats of Dindigul district of Tamil Nadu with support of the Population
Foundation of India. The objectives of the study were to improve the quality of life of people by ensuring
adoption of appropriate community process; to enable the community to set achievable development
goals in the areas of school enrolment, literacy, immunization, pre- and post natal care, family welfare,
nutrition, sanitation, child care; to assist communities to develop their agenda of development; and to give
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120

the required professional assistance to the community in its efforts to achieve these objectives. Study
found that eligible children who did not go to school in the 10 Panchayats were in two digits in the year
1999-2000, but it reduced to single digit in the third year. It was found that family planning methods were
mostly used by women, and people were sensitized about the age of marriage for men and women; school
going children were sensitized about good health practices such as trimming nails, washing hands before
meals, and using toilets in schools; SHG women were sensitized about environmental sanitation that
helped to keep the villages clean. The study also found that all Gram Panchayats had conducted health
camps with the assistance of the Health Department. It was suggested that this kind of experience and
exposure can be replicated in other Gram Panchayats in order to bring about social change and impact on
social development issues.
Debotosh Sinha (2005) in his work on Problem of elderly abuse: some reflections and implications
for social work practice have perceived old age as a problem in India. In urban areas, older persons feel
isolated and insecure. Modernization and industrialization have created a rupture in the traditional
Indian society. The objectives of the study were to investigate the problem of elderly abuse; formulate an
appropriate response; and see how social work interventions could be effective in dealing with such
problems. The study highlights that about 80% of the elderly population in India lives in rural areas, and
30% elderly are below the poverty line. When the elderly are isolated from society or from social
networks, they are not permitted to come into the mainstream society. It was found that abuse was cyclic
in nature. The present generation felt that older people were unproductive and treated them as a burden.
The paper suggests that people and caregivers should be sensitized about the security of elderly persons;
elderly individuals should not be left alone for long periods of time; family members should have close
ties with their ageing relatives or friends; and communities should consider providing direct assistance to
care giving families.
Gujarat Institute of Development Research, GIDR (2005) made a study on Infrastructure &
Growth in Regional Context: Indian States since the 1980s. The study tries to analyse the crucial role of
infrastructure in promoting regional development. The study exclusively considers certain important
physical infrastructure, namely transportation, power, telecommunications, irrigation, drinking water and
sanitation. The study highlights that states like Maharashtra, Gujarat, Haryana and Kerala have been in
the forefront of Development promoting this crucial component - infrastructure. The states with least
progress were Madhya Pradesh, Assam, Bihar and Orissa; and the level of development reflects the
inability of these states to mobilize resources for financing state highways. The study also highlights that
from 1980-2001, all the four selected infrastructure variables, namely density of national highways (NH),
density of rail routes (Rail), irrigation intensity (Irr), per capita consumption of electricity (Ele), and
teledensity (Tel) had grown in importance in impacting state per capita income.
A study on Indian Social Development was done by Council for Social Development (2008). In
India development projects in the last 60 years are estimated to have displaced roughly 60 million people,
most of whom have never been properly resettled. The present study examined the social impact of a
number of current industrial projects in India in the context of massive unresolved displacement problems
suffered by the people. It was found that in Andhra Pradesh the proportion of landless rose from 10.9% to
36.5% in 2001 and in Assam from 15.56% to 24.38% in 2006. The report also showed Social Development
for rural and urban areas in 2005. 35 parameters were mapped in the study and additive rule for rank
determination was used to arrive at the final result. Among the rural areas Kerala (72.57) had top rank
during 2005 followed by Himachal Pradesh (62.90). The next high ranking states were Jammu and
Kashmir (61.13), Tamil Nadu (58.27) and Punjab (57.41). Orissa (32.98), Rajasthan (31.87), Chhattisgarh
(29.21), M.P. (27.84), U.P. (26.21), Jharkhand (18.83) and Bihar (18.29) had aggregate index value below the
national average (33.97). In the case of urban areas, during 2005, Himachal Pradesh (72.90) was at the top
followed by Kerala (67.49), Jammu and Kashmir (62.77), Punjab (56.36) and Tamil Nadu (53.26).
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121

Research conducted so far covers theoretical as well as empirical works covering both microscopic
and macroscopic aspects of the subject. State ranking on social development have been found out at 2005
base with limited parameters being considered. Also, the study assumes that in a multi criteria decision
making environment, all selected parameters have equal weightage which in real life scenario is not
feasible. In other words, the relative social welfare and developmental status in the Indian States has been
found to be missing especially in a multi – criteria environment where parameters have varying weights
or relative importance in influencing social welfare & development and the same has been identified as
the gap by the researchers.
Objective
To rank and compare the relative position of Indian States basis their social welfare and
development status using TOPSIS, a Multi Criteria Decision Making approach.
Methodology
The normal approach to compare the relative positions (here Indian States) is to find out the
relative ranks. Ranking can be done using additive rule which includes evaluating each state against
individual parameters considered and then selecting the best values in order. State ranks against
individual parameters are then added to arrive at the total rank score. The lower the total rank score, the
higher is the overall ranking for that state. This method, being a popular has a major limitation in
considering equal weightage of all parameters. In reality all parameters cannot have equal importance and
result obtained from this method cannot be considered as the best solution. Thus, this method needs
modification by incorporation of the relative weight of the parameters in the overall rank determination
when studied amidst a lot of parameters i.e. in a multi criteria decision making environment. The MCDM
(Multi Criteria Decision Making) Approach is considered as a better alternative in assessing the ranking of
Indian States in terms of assessing the social welfare and developmental status. Within the MCDM
approach, data of input parameters are first classified as positive or negative. A parameter is considered
as positive if increase in its value enhances or improves the welfare and development. Hence, negative
parameters are those which suppress such scope. For example, Literacy Rate is considered as positive
while Drop outs from School as negative. The absolute values of the parameters are then subjected to
statistical normalization to annul the effect of disparate units followed by weight determination using
Shannon’s method before finally applying the MCDM approach for rank determination. Within this
study, 9 input parameters (Key Consideration Set) have been considered and each input parameter is
indicated by a set of variables called indicator variables. A total of 80 indicator variables have been chosen
which according to the researchers represent as the strongest indicators of social welfare and development.
The input parameters include Education, Basic Living Infrastructure, Economic Status, Awareness and
Exposure, Child Crime, Crime Status, Women Status, Public Protection and Health & Medical Status.
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122

The 80 indicator variables chosen are shown in Exhibit 1.
Key Consideration
Set for Social
Development
Indicator Variables
Key Consideration
Set for Social
Development
Indicator Variables
Education
Basic Living Infra
Economic Status
Awareness &
Exposure
Child
Crime
1 Literacy Rate (%) 41 % of Total Cognizable Crimes to All India Cognizable Crimes
2 Universities (incl. deemed & Inst. Of National Importance) 42 Rate of Total Cognizable Crimes (per '000)
3 Research Institutions 43 Rate of Murder (per '000)
4 Arts, Science & Commerce Colleges 44 Rate of Rape (per '000)
5 Engg., Tech. & Arch. Colleges 45 Rate of Kidnapping & Abduction (per '000)
6 Medical Colleges (Allo, Ayur, Homeo, Nursing, Pharma) 46 Rate of Kidnapping & Abduction of Women & Girls (per '000)
7 Teacher Training Colleges 47 Rate of Dacoity (per '000)
8 Teacher Training Schools 48 Rate of Robbery (per '000)
9 Other Colleges (Law, MBA, MCA/ IT, Agri.) 49 Incidence of Highway Robbery
10 Polytech. Inst. 50 Rate of Burglary (per '000)
11 Primary Schools 51 Rate of Theft (per '000)
12 High Schools 52 Rate of Riot (per '000)
13 Pupil Teacher Ratio (Primary School) 53 Incidence of Cyber Crime
14 Pupil Teacher Ratio (High School) 54 Total Crimes in Railways
15 Dropout Rates in Primary School (I - V) 55 Rate of Dowry Deaths (per '000)
16 Dropout Rates in High School (VIII - X) 56 Rate of Molestation (per '000)
17 % of Trained Teachers in High Schools 57 Rate of Harassment (per '000)
18 Per Capita Expenditure on Education & Training 58 Rate of Cruelty by Husband & Relatives (per '000)
19 % of Expenditure on Education & Training 59 Female to 1000 Males
20 Households having Safe Drinking Water facility 60 Contribution of Crime Rate against Women to All India Total
21 % of Households having Electricity 61 Mean Age at Effective Marriage of Females (yrs)
22 % of Households having bathroom facility at home 62 Media Exposure - Female %
23 House holds with Permanent Structure 63 % of Cases Pending for Investigation (under IPC) to All India Total cases
24 Households with Semi Permanent Structure 64 Strength of Civil Police per 1000 population
25 Consumption of Energy by Ultimate Consumers (GWH) 65 Strength of Armed Police per 1000 population
26 Employment Status in Organized Sector ('000) 66 Institutional Births (%)
27 Total No. of Workers 67 Anemia Amongst Pregnant Women (%)
28 Total Number of Non - Workers 68 Anemia Amongst Adolescent Girls (%)
29 Per Capita Income 69 % of Children as Under Nourished
30 Per Capita Net SDP 70 % of Children having Iron Deficiency
31 Population below Poverty Line (%) 71 Doctors (per 1 lac population)
32 % of Population participated in last lok sabha 72 Hospitals (per 1 lac population)
33 Media Exposure 73 Vaccination Coverage
34 TV Ownership 74 Low BMI Males (%)
35 HIV awareness (males%) 75 Low BMI Females (%)
36 HIV awareness (females%) 76 Infant Mortality Rates (per 1000 live births)
37 Contribution of Crime Rate against Children to All India Total 77 Primary Health Centers (per 1 lac population)
38 Rate of Narcotic drug & Psychotropic substance cases 78 Nurses (per 1 lac population)
39 Juvenile Delinquency (Incedence of different cases in all) 79 Life Expectancy at Birth
40 % of Juvenile Delinquency Cases Pending to All India Total cases 80 Health Exp. as a % of Total Expenditure
Crime Status
Women Ststus
Public
Protection
Health & Medical Status
Exhibit - 1
The MCDM Approach
In a usual MCDM environment, there are a number of alternatives to be assessed on the basis of
their preference order. There are many MCDM techniques available (Hwant and YOON, 1981, Zeleny
1983 and Yoon and Hwang 1995) among which the technique for order preference by similarity to ideal
solution (TOPSIS) proposed by Yoon (1980) and Hwang and Yoon (1981) is a very effective and realistic
one. The basic principle employed by TOPSIS is that the best alternative should have the shortest distance
from the ideal alternative, which is both intuitive and important. The TOPSIS method is presented below
The MCDM environment: Suppose there are all together K alternatives to be assessed and the
best alternative is to be selected. Let the alternatives be denoted by S 1, ………S K. there are also N criteria
identified to assess the alternatives, which are denoted by C 1, ….C N. The k-th alternative’s value on the n-
th criteria is obtained as x kn, and the same is written as:
S k = (x k1, ……., x kN), 1,……,K, and C n = (x 1n, ……, x kn), n = 1, ……,N.
The ideal solution: It is both intuitive and feasible to compare each alternative with an “ideal
alternative” to solve the assessment or decision making problem. TOPSIS adopts an intuitive approach to
the construction of the best and worst alternative and calls them the ideal and the negative-ideal
alternatives or solutions. The ideal alternative S +, is formed by taking all the best values attained on each
criterion by some alternatives, and can be explicitly denoted by:
S + = (x +1, ….., x +N) = [min {x k1}, …., min {x kM}, max {x km + 1},……., max {x kN}].
and the negative-ideal alternative S -, comprises of all the worst criterion values attained by some
alternatives, and is denoted by
S - = (x -1, ….., x -N) = [max {x k1}, …., max {x kM}, min {x km + 1},……., min {x kN}].
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123

The TOPSIS Procedure: With the above notation and explanation, the
TOPSIS procedure for assessing the ranking can be described as follows:
Firstly we normalize the n-th criterion vector C n into TC n:
TC C || C || ( x / || C ||,....., x / || C ||) ( t ,......, t ), n 1,....,
,
where ||C n|| =
n
n
/
n 1n
n
kn n 1n
kn
N
K
2
( x kn
) is the Euclidean length or norm of C n, so the new criterion vectors have the
k 1
same unit length and are thus unit free and directly comparable. Under the new criterion values, the k-th
alternative, S k, and the ideal and negative ideal solutions S + and S - , are transformed to TS k, TS + and TS -,
respectively:
TS k = (t k1,…..,t kN) = (x k1/||C 1,…., x kN/||C 1||), k=1,….,K,
TS += (t +1,….., t +N) = (x +1/||C 1||,…..,x +N /||C N||,
TS - = (t -1,….., t - N) = (x -1/||C 1||,…..,x – N /||C N||,
from TS + are defined:
d(
S , S
k
Next the distances of S k and x + as the weighted Euclidean distance of TS k
) ||
w ( TS
k
TS
) ||
N
n1
[ W ( t
n
kn
t
1]
2
=
N
=
n1
[ W ( x
n
kn
x
n
/ || C
N
[
2
2
n
( xkn
min{ x
jn})
|| Cn
||] [ Wn
( xkn
max{ x
jn})/
|| Cn
||]
j
j
nM
1
k = 1,…..,K,
W
where “ ” is vector product operator and w is an N-dimensional weight vector whose elements represent
the relative importance of the N criteria. Similarly, the distance of S k from S - is defined as the weighted
Euclidean distance of TS k from TS - and the same is represented as:
d(
S , S ) ||
w
( TS
k
k
TS
) ||
N
n1
[ W ( t
n
kn
t
]
n
2
n
2
||
N
n1
[ W ( x
n
kn
x
n
/ || C
n
||)
2
M
=
2
[ Wn
( xkn
max{ x
jn})
|| Cn
||]
n1
k = 1,……,K,
j
N
nM
1
[ W ( x
n
kn
min{ x
j
jn
}/ || C
n
||]
2
Finally the K alternatives are ranked according to the preference order by
their relative closeness to the ideal alternative S + which for the k-th alternative is defined as:
r(S k, S +) = d(S k, S +)/[d(S k, S +) + d(S k, S -)], k = 1,…..,K
The assessment criterion of TOPSIS is that the smaller the value of r(S k, S +) which ranges between 0
and 1, the more preferred is the alternative S k.
Choice of weights: A reasonably good approach to obtain internal importance weights is to use the
entropy concept. It is a criterion for the amount of information (or uncertainty) represented by a discrete
probability distribution, p 1, …..p k and this measure of information was given by Shannon and Weaver
k
(1947) as E( p1 ,...., pk
) k
pk1n(
pk)
where k=1/1n(K) is a positive constant which guarantees
k1
that 0 E(p 1,……,p k) 1. it is noted that the larger the E(p 1,……,p k) value, the smaller the variations
among the p k’s and that 0 entropy means maximum information and 1 minimum information. For the n-
The Business & Management Review, Vol.2 Number 2, July 2012
124

th criterion vector C n in an MCDM environment, let X n = x 1n + …+ x Kn be the total value of the criterion. If
we view the normalized values p kn = x kn / X n for k = 1, ….,K as the “probability distribution” of C n on the
K alternatives, the entropy of C n may be defined as:
K
K
E(C n) = - ø k pk1n(
pk
) k(
xkn
/ X
n
)1b
( xkn
/ X
n
), n 1,...... N,
and define the weights as
k1 k1
w
n
N
( 1
E(
C )) / (1 E(
C )), n 1,...., N .
n
j1
Findings & Analysis
The values of 80 indicator variables have been initially plotted for each state as shown in Exhibits
2, 3, 4 & 5. Since these variables have varying units it is essential to annul the effect of varying units. To
annul the effect of these varying units, the next step involved is the Statistical Normalization. Normalized
values of all variables for the states are shown in Appendix. Since in reality all parameters cannot have
equal weights, relative weight of indicator variables is calculated using Shannon’s Method as shown in
Exhibit 6. The distance from Normalized Ideal and Normalized Negative Ideal is next calculated (as
shown in Appendix) before finally calculating the rank of the Indian States.
j
Literacy
Rate (%)
Universities
(incl. deemed
& Inst. Of
National
Importance)
Research
Institutio
ns
Arts, Science &
Commerce
Colleges
Engg.,
Tech. &
Arch.
Colleges
Medical
Colleges
(Allo,
Ayur,
Homeo,
Teacher
Training
Colleges
Teacher
Training
Schools
Other
Colleges
Polytech. Primary
(Law,
Inst. Schools
MBA,
MCA/ IT,
High
Schools
Pupil
Teacher
Ratio
(Primary
School)
Pupil
Teacher
Ratio
(High
School)
Dropout
Rates in
Primary
School (I -
V)
Dropout
Rates in
High
School
(VIII - X)
% of
Trained
Teachers
in High
Schools
Per Capita
Expenditu
re on
Education
&
% of
Expenditur
e on
Education
& Training
C 1 C 2 C 3 C 4 C 5 C 6 C 7 C 8 C 9 C 10 C 11 C 12 C 13 C 14 C 15 C 16 C 17 C 18 C 19 C 20
Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Negative Negative Negative Negative Positive Positive Positive Negative
ANDHRA PRADESH 68 25 5 1,340 261 53 92 25 93 140 61,680 14,342 25 33 32 64 95 606 14 15.77
ARUNACHAL PRADESH 67 1 3 10 1 1 2 0 1 1 1,371 136 23 31 47 71 66 1,540 11 17.6
ASSAM 73 16 0 317 3 7 40 1 21 8 30,068 4,629 15 24 50 75 29 1,109 20 19.7
BIHAR 64 19 11 743 7 23 15 70 63 13 39,347 2,944 19 28 52 83 96 488 25 41.4
CHATTISH GARH 71 5 0 213 2 2 1 13 32 10 33,595 1,231 32 25 10 64 62 796 22 40.9
DELHI 74 17 1 63 16 15 10 21 56 25 2,463 504 61 30 0 47 100 1,132 28 14.7
GOA 87 1 0 23 4 7 2 1 7 5 1,003 364 13 21 2 41 88 2,619 18 13.8
GUJRAT 79 20 17 507 44 57 115 214 177 52 16,385 5,260 40 35 35 59 99 856 19 16.8
HARYANA 77 9 0 166 69 8 36 37 35 33 11,800 3,382 26 27 5 33 97 894 17 14
HIMACHAL PRADESH 84 7 2 89 3 7 23 12 24 6 11,178 1,373 29 20 8 0 98 1,739 20 10
JAMMU & K 69 9 0 50 4 6 127 14 34 12 12,049 965 19 17 37 52 66 1,000 13 5.4
JHARKHAND 68 8 1 117 5 8 9 27 8 10 16,572 1,068 24 20 52 78 100 620 21 40.3
KARNATAKA 76 27 1 930 120 172 68 133 214 179 26,645 9,462 14 47 16 59 100 880 19 25
KERALA 94 9 1 186 66 40 21 184 82 56 6,827 3,093 15 15 0 7 99 1,210 21 15
MADHYA PRADESH 71 21 0 760 60 28 21 25 209 44 96,737 4,246 45 16 10 65 79 577 19 38.3
MAHARASTRA 83 42 54 1,208 177 116 157 303 128 163 41,669 14,391 26 42 7 54 99 1,161 23 30.7
MANIPUR 80 2 0 58 1 1 3 1 1 1 2,552 588 9 23 31 43 40 1,149 19 17.3
MEGHALAYA 76 1 0 54 0 0 2 7 0 1 5,851 631 9 16 50 79 36 1,243 19 18.5
MIZORAM 92 1 0 26 0 0 2 2 1 2 1,481 445 24 12 50 67 29 2,569 16 12.6
NAGALAND 80 1 0 37 0 0 1 1 18 3 1,520 336 13 35 43 67 27 1,282 15 19
ORISSA 74 15 0 700 37 30 13 65 102 17 45,700 7,141 17 31 39 64 100 562 16 46.4
PUNJAB 77 10 0 212 27 49 24 26 51 19 13,352 2,283 24 29 24 44 99 952 13 8.4
RAJASTAN 67 25 5 611 39 24 54 46 113 17 55,942 6,756 29 24 57 74 94 707 21 22.1
SIKKIM 82 2 1 2 1 1 2 1 1 2 684 111 43 18 49 82 51 2,928 9 20.1
TAMIL NADU 80 41 1 445 222 97 43 82 184 202 33,470 5,004 16 33 1 55 100 859 19 22.5
TRIPURA 88 1 0 14 1 1 1 2 5 1 1,776 409 24 25 43 73 39 1,699 26 18.9
UTTAR PRADESH 70 40 10 1,009 69 34 121 70 702 81 129,976 5,205 48 45 12 44 97 503 19 32.8
UTTARANCHAL 80 10 11 86 2 1 1 9 28 18 14,663 773 38 29 11 43 100 1,418 21 39.6
WEST BENGAL 77 26 11 374 54 19 66 58 33 40 50,397 4,399 30 50 44 78 85 663 19 24.7
Populatio
n below
Poverty
Line (%)
Exhibit - 2
Househol
ds having
Safe
Drinking
Water
facility
% of
Househol
ds having
Electricity
% of
Househol
ds having
bathroom
facility at
home
House
holds
with
Permane
nt
Structure
Househol
ds with
Semi
Permane
nt
Structure
Consumpt
ion of
Energy by
Ultimate
Consumer
s (GWH)
Employm
ent Status
in
Organized
Sector
('000)
Total No. of
Workers
Total Number
of Non -
Workers
% of
Population
participated
in last lok
sabha
Media
Exposure
TV
Ownership
HIV
awarenes
s
(males%)
HIV
awarenes
s
(females
%)
% of Total
Cognizabl
e Crimes
to All
India
Cognizabl
e Crimes
Rate of
Total
Cognizabl
e Crimes
(per '000)
Rate of
Murder
(per '000)
Rate of
Rape (per
'000)
Rate of
Kidnappin
g &
Abductio
n (per
'000)
Rate of
Kidnappin
g &
Abductio
n of
Women &
Girls (per
'000)
C 21 C 22 C 23 C 24 C 25 C 26 C 27 C 28 C 29 C 30 C 31 C 32 C 33 C 34 C 35 C 36 C 37 C 38 C 39 C 40
Positive Positive Positive Positive Negative Positive Positive Positive Negative Positive Positive Positive Positive Positive Negative Negative Negative Negative Negative Negative
ANDHRA PRADESH 80.1 67.17 19.91 9220878 3589493 39,829 2027.9 34,893,859 41,316,148 49.45 86.0 52.6 93 74 8.5 216.6 2.9 1.4 2.4 1.8
ARUNACHAL PRADESH 77.5 54.69 11.24 43363 38025 161 40.6 482,902 615,066 36.12 68.0 41.3 75 66 0.1 193.6 4.8 4.8 5.1 2.3
ASSAM 58.5 24.9 7.21 971530 1543491 2,203 1382 9,538,591 17,116,937 38.95 69.0 34.3 75 53 2.6 181.2 4.3 5.3 8.9 6.9
BIHAR 86.6 10.25 4.81 5695671 3570471 4,022 495.1 27,974,606 55,023,903 57.77 56.0 18.2 70 35 5.8 128.4 3.3 1 3.4 2.1
CHATTISH GARH 70.5 53.1 6.19 1053912 2988548 8,788 339 9,679,871 11,153,932 25.78 60.0 33.4 67 41 2.4 212.6 4.5 4 1.2 0.9
DELHI 97.2 92.86 35.51 2341874 123154 13,423 831.2 4,545,234 9,305,273 34.32 84.9 68.3 80 57 2.4 282.6 3.1 2.6 14.3 9.3
GOA 70.1 93.57 33.26 195040 78620 2,141 126.9 522,855 824,813 38.7 92.5 77.5 92 83 0.1 177.7 3.1 2.8 2.0 1.3
GUJRAT 84.1 80.4 25.28 6300314 2848727 37,092 1677.4 21,255,521 29,415,496 28.94 77.5 53 80 49 5.4 200.5 1.8 0.8 2.3 2
HARYANA 86.1 82.89 25.79 2322039 997122 15,426 639.9 8,377,466 12,767,098 11.24 72.5 50.3 87 60 2.7 231.9 3.9 2.5 3.8 2.7
HIMACHAL PRADESH 88.6 94.81 17.70 800664 404334 3,569 313.3 2,992,461 3,085,439 65 83.0 63.4 92 79 0.6 200.9 1.9 2.8 2.3 1.8
JAMMU & K 65.2 80.66 22.83 853408 498983 4,189 226.8 3,753,815 6,389,885 38.03 84.5 62.9 88 61 1 170.2 1.8 1.8 6.8 6.4
JHARKHAND 42.6 34.3 7.55 1526946 2804608 9,348 788.4 10,109,030 16,836,799 35.72 48.0 28.1 53 29 1.8 122.6 5.4 2.4 2.7 1.7
KARNATAKA 84.6 78.55 29.44 5613007 3645185 25,702 1911.6 23,534,791 29,315,771 40.15 83.5 53.6 85 66 6.3 230.3 2.9 0.9 1.5 0.7
KERALA 23.4 70.24 31.06 4493814 1424375 10,190 1128.9 10,283,887 21,557,487 47.9 93.5 67.7 99 95 5.6 341.5 1 1.6 0.7 0.5
MADHYA PRADESH 68.4 69.98 12.14 4536975 6088468 19,371 1054.8 25,793,519 34,554,504 76.36 60.5 35 68 45 9.8 293 3.4 4.2 1.5 1.2
MAHARASTRA 79.8 77.49 30.56 11021426 6552768 58,732 2704.5 41,173,351 55,705,276 32.89 82.0 58.8 87 82 9.4 183.6 2.4 1.4 1.2 0.9
MANIPUR 37 60.04 5.22 33491 219548 188 79.1 945,213 1,221,575 67.57 92.5 47.8 99 99 0.1 106.8 4.9 1.2 6 3.6
MEGHALAYA 39 42.74 16.83 93389 157122 725 68.9 970,146 1,348,676 27.74 64.0 41.4 63 57 0.1 95 5 4.3 2.2 1
MIZORAM 36 69.63 25.63 85288 41171 135 43.6 467,159 421,414 29.24 89.0 48.3 96 94 0.1 205.5 3.1 8.3 0.9 0
NAGALAND 46.5 63.6 18.71 54089 167413 145 64.7 847,796 1,142,240 43.68 68.5 37.9 91 81 0 47.6 2.1 1 2.3 0.4
ORISSA 64.2 26.91 5.26 2170796 1968196 8,104 765.5 14,276,488 22,528,172 17.1 67.5 28.9 73 62 2.6 137.9 3.1 2.5 2.3 2
PUNJAB 97.6 91.91 34.77 3672451 378145 24,261 832.7 9,127,474 15,231,525 42.71 87.0 78.2 92 70 1.7 131.7 3.2 1.9 2.6 1.9
RAJASTAN 68.2 54.69 16.19 6066447 1955190 18,014 1200.2 23,766,655 32,740,533 26.09 60.0 35.6 52 37 7.9 252.2 2.1 2.3 4.3 3.5
SIKKIM 70.7 77.76 18.18 39493 48418 209 44.7 263,043 277,808 45.5 75.0 55.8 89 75 0 110.8 3.1 3 1 1
TAMIL NADU 85.6 78.18 19.94 8295106 2572029 44,516 2271.4 27,878,282 34,527,397 41.83 91.0 53.1 98 94 8.2 260.3 2.1 0.9 2 1.7
TRIPURA 52.5 41.84 5.61 65726 303523 371 143.3 1,159,561 2,039,642 47.66 78.0 46.7 89 73 0.3 153.8 3.7 5.3 3.4 2.6
UTTAR PRADESH 87.8 31.9 14.36 13752000 6600491 30,374 2086 53,983,824 112,214,097 27.13 64.0 34 74 40 8.1 88.4 2.3 0.9 3.1 2.6
UTTARANCHAL 86.7 60.32 19.38 1369656 104615 3,497 241.5 3,134,036 5,355,313 31.23 78.0 61 90 79 0.4 90.9 2 1.1 2.8 2.5
WEST BENGAL 88.5 37.45 11.81 6353785 5855648 20,957 1889.2 29,481,690 50,694,507 46.29 69.0 37 74 50 5.3 126.7 2.3 2.6 3.1 2.5
Exhibit - 3
The Business & Management Review, Vol.2 Number 2, July 2012
125

Rate of
Dacoity
(per '000)
Rate of
Robbery
(per '000)
Incidence
of
Highway
Robbery
Rate of
Burglary
(per '000)
Rate of
Theft (per
'000)
Rate of
Riot (per
'000)
Incidence
of Cyber
Crime
Total
Crimes in
Railways
Rate of
Dowry
Deaths
(per '000)
Rate of
Molestati
on (per
'000)
Rate of
Harassme
nt (per
'000)
Rate of
Cruelty by
Husband
&
Relatives
(per '000)
C 41 C 42 C 43 C 44 C 45 C 46 C 47 C 48 C 49 C 50 C 51 C 52 C 53 C 54 C 55 C 56 C 57 C 58 C 59 C 60
Negative Negative Negative Negative Negative Negative Negative Negative Negative Negative Negative Negative Positive Negative Negative Negative Negative Negative Negative Negative
ANDHRA PRADESH 0.1 0.7 115 9.3 29.6 2.7 30 993 0.7 6.2 4.2 13.6 978 12.5 18.7 7.1 0.4 1208 5.09 7.3
ARUNACHAL PRADESH 1.6 4.5 5 16.5 31.2 4.3 1 0 0 4.8 0.5 1.1 901 0.1 20.7 0.1 2.3 112 0.47 0.1
ASSAM 0.8 2.2 60 10.3 21 5.9 2 272 0.6 4.4 0 14.4 932 4.8 21.7 0.2 0.6 546 2.3 8.9
BIHAR 0.7 1.7 827 3.7 15.9 8.9 0 2076 1.4 0.8 0 2.6 921 4.3 19 4.2 0.3 935 3.94 12.4
CHATTISH GARH 0.6 2.3 115 16.5 24 4 4 291 0.5 6.6 0.6 3.7 990 2 19.9 5.5 1.5 2860 12.06 0.6
DELHI 0.2 2.9 10.0 9.7 122.2 0.3 5 926 0.8 3.1 0.7 7.2 821 2.1 22 11.7 1.7 452 1.91 5.9
GOA 0.2 1.8 3.0 17.4 50.7 0.3 8 0 0.2 2.2 0.6 1.2 960 0.1 19.8 0.4 2.1 60 0.25 0.4
GUJRAT 0.4 2.5 60 7.8 34.2 2.7 20 1259 0 1.3 0.2 9.6 921 3.9 20.3 4 0.1 1428 6.02 2.4
HARYANA 0.6 2.8 113 16.8 53.3 4.8 0 1139 1.2 1.9 2.5 10.8 861 2.6 20.1 1.5 3.6 959 4.04 1.8
HIMACHAL PRADESH 0.1 0.3 1 11.8 12.4 8.9 6 4 0 4.8 0.6 4.3 970 0.5 22 0.9 7.1 127 0.54 0.3
JAMMU & K 0 0.5 1 12.1 20.4 11.4 0 27 0.1 7.5 2.9 1.5 900 1.3 23.2 0.1 2.3 8 0.03 1.1
JHARKHAND 1.3 2.6 360 4.6 25.3 7.6 0 546 1 0.9 0.3 2.3 941 1.5 19.2 0.2 0.4 686 2.89 4.3
KARNATAKA 0.5 3.1 92 11.4 35.4 10.8 97 488 0.5 3.8 0.1 5.5 964 3.9 19.8 1.3 0.4 227 0.96 7.9
KERALA 0.3 2.4 30 10.3 16.1 23.3 64 214 0.1 7.3 1.1 11.6 1,058 3.9 22.9 2.4 1.9 441 1.86 3.1
MADHYA PRADESH 0.2 3.2 300 15 32.8 3.4 16 2006 1.2 8.9 1 5.6 920 7.8 20.5 19.2 1.1 4535 19.12 1.5
MAHARASTRA 0.7 3 314 14.6 46.9 7.4 53 3389 0.3 2.9 1 7.1 922 7.4 20.1 12 1.3 4623 19.49 12.5
MANIPUR 0 0.1 0 2.5 14.8 1.8 1 0 39 2 0 0.9 978 0.1 20.4 0.3 0.6 0 0 1.4
MEGHALAYA 2.5 2.6 29 5.7 21.1 0.7 0 0 0 2.8 0 0.9 975 0.1 19.9 0.3 0.7 82 0.35 0.8
MIZORAM 0.2 0.4 3 38.3 76.4 0.1 0 0 0 6.1 0.1 0.4 938 0.1 21 0.1 9.7 19 0.08 0
NAGALAND 0.4 4.1 34 3.7 15.6 0.2 0 0 0 0.5 0 0 909 0 19.9 0 4.3 11 0.05 0.1
ORISSA 0.9 3.7 420 7.3 17.6 4.2 2 624 0.9 6.7 0.5 5.1 972 4 20.5 0.8 0.2 381 1.61 4.5
PUNJAB 0.1 0.6 25 9.3 20.8 0 28 306 0.5 1.2 0.1 3.9 874 1.3 21.5 3 16.4 135 0.57 2.5
RAJASTAN 0.1 1.3 77 8 33.5 1.7 27 972 0.7 3.8 0 15.7 922 8.5 19.9 5.8 1.6 1819 7.67 0.9
SIKKIM 0 0.7 0 15.4 10.3 6.5 0 0 0 1.7 0 1 875 0 21 0.2 0.7 56 0.24 0.1
TAMIL NADU 0.1 1.7 84 6.3 23.4 3.6 18 450 0.3 1.9 0.7 2.2 986 3 21.8 2.6 2.6 1362 5.74 7.2
TRIPURA 0.2 2.2 1 6.5 11.6 5 0 0 0.8 10.8 0.1 22.8 950 0.7 20.4 0.7 1.5 42 0.18 0.1
UTTAR PRADESH 0.2 1.2 891 2.7 14.9 2.2 14 2153 1.1 1.4 1.3 4.4 898 11.4 19.8 12.7 7.3 313 1.32 2.3
UTTARANCHAL 0.4 1.8 75 3.7 16.5 4.8 7 0 1 1.2 2.6 3.7 964 0.6 20.2 0.1 4 152 0.64 0.2
WEST BENGAL 0.2 0.8 81 0.4 19.2 7.5 13 1028 0.6 2.2 0.1 18.1 934 11.4 19.7 2 0.6 135 0.57 9
Exhibit - 4
Female
per 1000
Males
Contributi
on of
Crime
Rate
against
Women
to All
India
Total
Mean Age
at
Effective
Marriage
of
Females
(yrs)
Contributi
on of
Crime
Rate
against
Children
to All
India
Total
Rate of
Narcotic
drug &
Psychotro
pic
substance
cases
Juvenile
Delinque
ncy
(Incedenc
e of
different
cases in
all)
% of
Juvenile
Delinque
ncy Cases
Pending
to All
India
Total
cases
% of
Cases
Pending
for
Investigat
ion
(under
IPC) to All
India
Strength
of Civil
Police per
1000
populatio
n
Strength
of Armed
Police per
1000
populatio
n
Institutio
nal Births
(%)
Anemia
Amongst
Pregnant
Women
(%)
Anemia
Amongst
Adolesce
nt Girls
(%)
% of
Children
as Under
Nourishe
d
% of
Children
having
Iron
Deficienc
y
Doctors
(per 1 lac
populatio
n)
Hospitals
(per 1 lac
populatio
n)
Vaccinati
Low BMI
on
Males (%)
Coverage
Low BMI
Females
(%)
Infant
Mortality
Rates (per
1000 live
births)
Primary
Health
Centers
(per 1 lac
populatio
n)
Nurses
(per 1 lac
populatio
n)
Life
Expectanc
y at Birth
Health
Exp. as a
% of Total
Expenditu
re
Per Capita
Income
Per Capita
Net SDP
Media
Exposure -
Female %
C 61 C 62 C 63 C 64 C 65 C 66 C 67 C 68 C 69 C 70 C 71 C 72 C 73 C 74 C 75 C 76 C 77 C 78 C 79 C 80
Positive Positive Positive Negative Negative Negative Negative Positive Positive Positive Negative Negative Negative Positive Positive Positive Positive Positive Positive Positive
ANDHRA PRADESH 1.10 0.16 43 2.1 23.6 42.3 38.7 73.29 5.45 74 24.8 30.8 66 2.52 133.42 64.4 3.53 51,025 26,211 79
ARUNACHAL PRADESH 2.48 2.77 26 7.8 40.3 32.2 42.9 45.6 23.86 28 13.6 15.5 44 7.51 62.4 67 4.45 51,644 23,788 64
ASSAM 0.90 0.76 21 0.4 0.2 12.6 23.6 53.72 1.01 32 33.4 36.5 76 2.64 33.29 58.9 3.06 27,197 18,598 61
BIHAR 1.12 0.29 15.8 2.2 27.6 54.6 46.6 38.65 0.4 33 28.7 43 67 2.97 10.65 61.6 3.24 16,119 7,875 41
CHATTISH GARH 0.75 0.46 16 5.1 48.3 47.4 55.5 31.2 0.16 47 31.8 41 32 3.57 61.4 58 3.74 38,059 20,151 52
DELHI 3.48 0.37 49 1.3 28.7 35.3 48 152.31 4.04 69 28.1 33 32 0.85 166.72 63.5 2.78 95,943 61,676 65
GOA 2.79 0.45 93 0 10.8 30 24.9 127.85 8.1 79 116.8 20.5 44 3.49 166.08 64 3.27 132,719 70,112 92
GUJRAT 0.80 0.20 36.3 5.1 39 46 51.7 63.67 4.99 56 28.2 32.3 64 3.17 137.59 64.1 3.05 63,961 34,157 71
HARYANA 0.49 0.08 24.8 3.3 40.2 35.6 54.1 5.03 0.37 65 26.8 27.8 67 2.68 63.41 66.2 2.59 78,781 38,832 67
HIMACHAL PRADESH 0.78 0.33 24.3 4 31 36.4 47.7 62.22 1.33 67 19.8 24.3 60 5.54 96.81 67 5.08 50,365 33,805 79
JAMMU & K 9.21 3.64 54 2.6 10.1 20.3 27.9 29.6 0.42 67 19.9 21.3 50 4.4 49.3 64 4.78 30,582 19,730 82
JHARKHAND 1.18 0.48 19 1.3 24.2 52.2 40.9 36.9 0.42 35 33.4 42.6 66 2.89 61.6 64 3.65 30,719 19,066 39
KARNATAKA 1.07 0.16 49 0.9 14.8 44.8 34 109.29 0.55 55 25.5 31.4 57 4.83 146.36 65.3 3.49 50,676 27,291 77
KERALA 1.11 0.09 97.1 0 2.2 35.8 10.2 91.87 13.92 75 11.9 12.5 14 4.03 185.65 74 4.71 59,179 30,668 90
MADHYA PRADESH 2.19 0.84 16.4 3.4 33.2 55.4 50.2 29.75 0.16 54 36.3 40.1 88 3.73 142.95 58 3.39 27,250 15,647 53
MAHARASTRA 1.48 0.12 48.6 1.8 29.4 47.7 50.2 79.97 3.56 59 24.9 32.6 48 3.19 106.3 67.2 3.51 74,027 37,081 76
MANIPUR 4.31 5.40 43 1.2 9.4 34.9 34.9 59.4 0.78 59 12.2 13.9 23 3.67 88.9 66 3.72 28,531 20,326 90
MEGHALAYA 1.99 1.41 30 1.5 0.7 15.2 24.1 61.2 0.3 33 8 13.7 58 4.55 87.7 63 5.23 46,601 23,420 60
MIZORAM 3.27 6.76 65 1.1 21 21.4 30.5 55.55 1.24 72 6 15.3 23 13.01 164.91 71 3.96 45,982 22,417 87
NAGALAND 2.07 1.60 12 4 21.4 9.7 39.4 58.4 0.85 21 10.8 15.9 16 2.62 89.5 63.5 4.68 21,434 20,998 62
ORISSA 0.28 0.14 14.1 3.8 27.2 42.8 40.9 38.27 0.74 52 32.1 40.5 96 4.35 105.26 59.6 3.9 33,226 17,299 61
PUNJAB 1.77 0.65 12.8 2.9 33.9 40 50.2 129.66 0.9 60 12 13.5 52 3.02 152.45 69.4 3.1 62,153 34,929 84
RAJASTAN 0.87 0.18 8.1 3.3 21.9 58.1 39.7 34.87 0.2 27 33.8 33.6 79 3.86 44.79 62 3.94 34,189 17,863 46
SIKKIM 3.26 2.66 49 0.8 19.3 30.2 42.7 56.3 0.37 70 7.2 9.6 49 4.97 67.8 59 2.56 48,937 26,412 73
TAMIL NADU 1.04 0.19 64.7 1.9 17.7 38.3 30.6 102.26 0.65 81 18.5 23.5 51 4.09 166.95 66.2 4.2 62,499 29,958 88
TRIPURA 2.63 3.57 49 1 8.5 29.7 17.8 11.52 0.84 50 38.3 35.1 41 2.2 15.5 65 3.79 35,799 24,706 74
UTTAR PRADESH 0.57 0.17 8 3.4 28.8 55.3 47.1 0.11 0.05 23 32.7 34.1 83 0.01 0.04 61 4.49 23,132 13,262 52
UTTARANCHAL 1.13 0.41 36 3.2 28.6 52.6 36.6 59.89 0.04 60 21.8 25.7 83 0.01 78.4 60 4.34 55,877 24,585 73
WEST BENGAL 0.68 0.24 35.8 3.7 18 44.9 30.7 61.75 0.51 64 31.6 37.7 51 2.2 53.94 64.9 0.93 41,469 25,223 63
Exhibit - 5
The weight of all indicator variables mapped has been calculated using Shannon’s Weight and the
same is shown in Exhibit 6. Rate of Dowry Deaths; Research Institutions; Hospitals; Incidence of Cyber
Crime; Engineering, Tech. & Arch. Colleges; Incidence of Highway Robbery; Juvenile Delinquency;
Colleges; Teacher Training Schools & Colleges; Crime Rate against Children; Medical Colleges;
Polytechnic. Inst.; Rate of Harassment; Strength of Armed Police; Total Crimes in Railways and Rate of
Narcotic drug & Psychotropic substance cases have been found to be the 15 most important variables
affecting social welfare and development in India.
The Business & Management Review, Vol.2 Number 2, July 2012
126

INDICATOR VARIABLES
Shannon's
Weight.
INDICATOR VARIABLES
Shannon's
Weight.
Literacy Rate (%) 0.016 Rate of Rape (per '000) 0.655
Universities (incl. deemed & Inst. Of National Importance) 1.325 Rate of Kidnapping & Abduction (per '000) 0.871
Research Institutions 4.478 Rate of Kidnapping & Abduction of Women & Girls (per '000) 1.016
Arts, Science & Commerce Colleges 1.892 Rate of Dacoity (per '000) 1.761
Engg., Tech. & Arch. Colleges 3.035 Rate of Robbery (per '000) 0.652
Medical Colleges (Allo, Ayur, Homeo, Nursing, Pharma) 2.605 Incidence of Highway Robbery 3.015
Teacher Training Colleges 2.212 Rate of Burglary (per '000) 0.724
Teacher Training Schools 2.621 Total Crimes in Railways 2.494
Other Colleges (Law, MBA, MCA/ IT, Agri.) 2.664 Rate of Dowry Deaths (per '000) 6.761
Polytech. Inst. 2.593 Rate of Molestation (per '000) 0.813
Primary Schools 1.867 Rate of Harassment (per '000) 2.575
High Schools 1.768 Rate of Cruelty by Husband & Relatives (per '000) 1.388
Pupil Teacher Ratio (Primary School) 0.360 Female per 1000 Males 0.004
Pupil Teacher Ratio (High School) 0.201 Contribution of Crime Rate against Women to All India Total 1.886
Dropout Rates in Primary School (I - V) 1.001 Mean Age at Effective Marriage of Females (yrs) 0.005
Dropout Rates in High School (VIII - X) 0.288 Contribution of Crime Rate against Children to All India Total 2.616
% of Trained Teachers in High Schools 0.223 Rate of Narcotic drug & Psychotropic substance cases 2.010
Per Capita Expenditure on Education & Training 0.423 Juvenile Delinquency (Incedence of different cases in all) 2.752
% of Expenditure on Education & Training 0.085 % of Juvenile Delinquency Cases Pending to All India Total cases 2.751
Population below Poverty Line (%) 0.381 % of Cases Pending for Investigation (under IPC) to All India Total cases 1.941
Households having Safe Drinking Water facility 0.152 Strength of Civil Police per 1000 population 1.017
% of Households having Electricity 0.255 Strength of Armed Police per 1000 population 2.502
% of Households having bathroom facility at home 0.484 Institutional Births (%) 0.629
House holds with Permanent Structure 1.914 Anemia Amongst Pregnant Women (%) 0.837
Households with Semi Permanent Structure 1.904 Anemia Amongst Adolescent Girls (%) 0.591
Consumption of Energy by Ultimate Consumers (GWH) 1.965 % of Children as Under Nourished 0.223
Employment Status in Organized Sector ('000) 1.435 % of Children having Iron Deficiency 0.161
Total No. of Workers 1.739 Doctors (per 1 lac population) 0.634
Total Number of Non - Workers 1.872 Hospitals (per 1 lac population) 3.486
% of Population participated in last lok sabha 0.215 Vaccination Coverage 0.195
Media Exposure 0.045 Low BMI Males (%) 0.663
TV Ownership 0.162 Low BMI Females (%) 0.253
HIV awareness (males%) 0.044 Infant Mortality Rates (per 1000 live births) 0.276
HIV awareness (females%) 0.152 Primary Health Centers (per 1 lac population) 0.639
% of Total Cognizable Crimes to All India Cognizable Crimes 1.734 Nurses (per 1 lac population) 0.593
Rate of Total Cognizable Crimes (per '000) 0.254 Life Expectancy at Birth 0.006
Rate of Murder (per '000) 0.214 Health Exp. as a % of Total Expenditure 0.108
Rate of Theft (per '000) 0.717 Per Capita Income 0.366
Rate of Riot (per '000) 1.342 Per Capita Net SDP 0.323
Incidence of Cyber Crime 3.093 Media Exposure - Female % 0.079
Exhibit - 6
STATES
Rank Table
Relative Closeness
Value
TOPSIS
RANK
MAHARASTRA 0.35978160 1
GUJRAT 0.38111846 2
TAMIL NADU 0.40595578 3
ARUNACHAL PRADESH 0.41315305 4
ANDHRA PRADESH 0.41644543 5
KARNATAKA 0.41872947 6
KERALA 0.42109128 7
UTTAR PRADESH 0.42530225 8
WEST BENGAL 0.42609100 9
GOA 0.43744068 10
MIZORAM 0.44093943 11
SIKKIM 0.44176901 12
JAMMU & K 0.44193706 13
UTTARANCHAL 0.44248823 14
RAJASTAN 0.44350226 15
HIMACHAL PRADESH 0.44485216 16
NAGALAND 0.44585348 17
ORISSA 0.44639955 18
PUNJAB 0.44806323 19
TRIPURA 0.44854088 20
MEGHALAYA 0.45082405 21
DELHI 0.45099977 22
ASSAM 0.45245613 23
BIHAR 0.45603213 24
HARYANA 0.45857572 25
JHARKHAND 0.45967534 26
CHATTISH GARH 0.46808061 27
MADHYA PRADESH 0.48048565 28
MANIPUR 0.63287276 29
Exhibit - 7
The Business & Management Review, Vol.2 Number 2, July 2012
127

Conclusion
The ensuing research study reveals that Maharashtra is the state with highest social welfare &
development followed by Gujarat and Tamil Nadu respectively. This indicates that in these states, the
overall well being of people have increased and improved along with economic development in the
globalization era. Looking at the top 10 developed states in India on social welfare and development
aspect, it is to be noted that 4 states are from South India, 3 from West India, 2 from East India and 1 from
North India. Again looking at the bottom 10 states, it is noted that 2 are from North India, 2 from Central
India, 2 from East India and 4 from North East. It must be noted that there are states where economic
development and industrialization has rapidly progressed in the era of globalization but the welfare
status of people in such states is still a matter of concern as found out from the ensuing research. Such
states include Madhya Pradesh, Haryana, Delhi, Punjab, Rajasthan & Uttaranchal. It may thus be
interpreted that the positive impact of globalization might have led to overall economic prosperity in
certain states, but social welfare development has not happened as desired. The researchers opine that the
economic outcome of globalization should not be considered by the nation as a measure or yardstick of
development as development of society actually depends on factors beyond economic or industrial output.
Limitation & Directions of Future Research
The present work like most other researches is not self content in every respect. The observable limitations
may highlight inclusion of more parameters. Also the research is based on secondary data and there is a
scope to do primary research to capture the real time facts. The research can be extended to split research
works on specific areas like education, crime, women status, economic development etc.
References
11 th Plan Targets – Health & Nutrition, Ministry of Health, GOI.
Census of India 2011, GOI.
Crime in India, 2009, National Crime Records Bureau, Ministry of Home Affairs, GOI.
Emerging Trends in Healthcare, 2011, ASSOCHAM – KPMG Report.
Estimates of Maternal Mortality Ratios in India and its States, Indian Council of Medical Research, 2003, Ministry of
Health & Family Welfare, GOI.
Gujarat Institute of Development Research Report, Ahmedabad. (2005). Infrastructure and growth in a Regional context:
Indian states since the 1980s. pp 21.
Hwang, C.L., & Yoon, K. (1997). Multiple Attribute Decision Making - Methods & Application. New York: Springer –
Verlag.
India Social Development Report. (2008). Council for Social Development, New Delhi. pp 311.
National Crime Records Bureau Report, 2009, Ministry of Home Affairs, GOI.
National Health Profile Report, 2009, Ministry of Health, GOI.
Nutritional Status of Children and Prevalence of Anemia among children, adolescent girls and pregnant women,
2006, International Institute for Population Sciences (Deemed University) and Ministry of Health and Family Welfare,
GOI.
Palanithurai, G. (2004). Panchayats and Communities in Family welfare. Social Welfare, 51(7), pp 22-30.
Pattanaik, A. & Badu Kanak, M. (2003). Population Explosion and Media. Indian Journal of Population Education, (20),
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Selected Educational Statistics, 2005, Ministry of Human Resource Development, GOI.
Sinha, D. (2005). Problem of Elderly Abuse: Some reflections and implications for social work practice. Perspectives in
Social Work. 20(3), pp 31-37.
SRS Bulletin, June 2011, Registrar General of India.
SRS Bulletin, October 2008, Registrar General of India.
The Business & Management Review, Vol.2 Number 2, July 2012
128

Appendix
Normalized Value of parameters
Literacy
Rate (%)
Universitie
s (incl.
deemed &
Inst. Of
National
Importanc
e)
Research
Institution
s
Arts,
Science &
Commerce
Colleges
Engg.,
Tech. &
Arch.
Colleges
Medical
Colleges
(Allo,
Ayur,
Homeo,
Nursing,
Pharma)
Teacher
Training
Colleges
Teacher
Training
Schools
Other
Colleges
(Law,
MBA,
MCA/ IT,
Agri.)
Polytech.
Inst.
Primary
Schools
High
Schools
Pupil
Teacher
Ratio
(Primary
School)
Pupil
Teacher
Ratio
(High
School)
Dropout
Rates in
Primary
School (I -
V)
Dropout
Rates in
High
School
(VIII - X)
% of
Trained
Teachers
in High
Schools
Per Capita
Expenditur
e on
Education
& Training
% of
Expenditur
e on
Education
& Training
Norm.C1 Norm.C2 Norm.C3 Norm.C4 Norm.C5 Norm.C6 Norm.C7 Norm.C8 Norm.C9 Norm.C10 Norm.C11 Norm.C12 Norm.C13 Norm.C14 Norm.C15 Norm.C16 Norm.C17 Norm.C18 Norm.C19 Norm.C20
ANDHRA PRADESH 0.163 0.247 0.082 0.473 0.600 0.204 0.296 0.053 0.110 0.376 0.286 0.513 0.162 0.210 0.174 0.195 0.214 0.085 0.139 0.116
ARUNACHAL PRADESH 0.161 0.010 0.049 0.004 0.002 0.004 0.006 0.000 0.001 0.003 0.006 0.005 0.149 0.197 0.255 0.217 0.148 0.217 0.111 0.129
ASSAM 0.176 0.158 0.000 0.112 0.007 0.027 0.129 0.002 0.025 0.021 0.140 0.166 0.097 0.152 0.271 0.229 0.065 0.156 0.192 0.144
BIHAR 0.154 0.188 0.180 0.262 0.016 0.089 0.048 0.149 0.074 0.035 0.183 0.105 0.123 0.178 0.282 0.254 0.216 0.069 0.242 0.303
CHATTISH GARH 0.171 0.049 0.000 0.075 0.005 0.008 0.003 0.028 0.038 0.027 0.156 0.044 0.208 0.159 0.054 0.195 0.139 0.112 0.215 0.300
DELHI 0.178 0.168 0.016 0.022 0.037 0.058 0.032 0.045 0.066 0.067 0.011 0.018 0.396 0.190 0.000 0.144 0.225 0.159 0.272 0.108
GOA 0.211 0.010 0.000 0.008 0.009 0.027 0.006 0.002 0.008 0.013 0.005 0.013 0.084 0.133 0.013 0.125 0.198 0.368 0.178 0.101
GUJRAT 0.191 0.197 0.278 0.179 0.101 0.220 0.370 0.456 0.209 0.140 0.076 0.188 0.259 0.222 0.190 0.180 0.223 0.120 0.184 0.123
HARYANA 0.185 0.089 0.000 0.059 0.159 0.031 0.116 0.079 0.041 0.089 0.055 0.121 0.169 0.171 0.027 0.101 0.218 0.126 0.167 0.103
HIMACHAL PRADESH 0.202 0.069 0.033 0.031 0.007 0.027 0.074 0.026 0.028 0.016 0.052 0.049 0.188 0.127 0.043 0.000 0.220 0.245 0.189 0.073
JAMMU & K 0.166 0.089 0.000 0.018 0.009 0.023 0.409 0.030 0.040 0.032 0.056 0.035 0.123 0.108 0.201 0.159 0.148 0.141 0.126 0.040
JHARKHAND 0.163 0.079 0.016 0.041 0.011 0.031 0.029 0.057 0.009 0.027 0.077 0.038 0.156 0.127 0.282 0.238 0.225 0.087 0.202 0.295
KARNATAKA 0.182 0.266 0.016 0.328 0.276 0.663 0.219 0.283 0.252 0.481 0.124 0.339 0.091 0.298 0.087 0.180 0.225 0.124 0.189 0.183
KERALA 0.226 0.089 0.016 0.066 0.152 0.154 0.068 0.392 0.097 0.150 0.032 0.111 0.097 0.095 0.000 0.021 0.223 0.170 0.203 0.110
MADHYA PRADESH 0.170 0.207 0.000 0.268 0.138 0.108 0.068 0.053 0.247 0.118 0.449 0.152 0.292 0.102 0.054 0.199 0.178 0.081 0.188 0.281
MAHARASTRA 0.200 0.415 0.883 0.426 0.407 0.447 0.506 0.645 0.151 0.438 0.193 0.515 0.169 0.267 0.038 0.165 0.223 0.163 0.219 0.225
MANIPUR 0.192 0.020 0.000 0.020 0.002 0.004 0.010 0.002 0.001 0.003 0.012 0.021 0.058 0.146 0.168 0.131 0.090 0.162 0.189 0.127
MEGHALAYA 0.182 0.010 0.000 0.019 0.000 0.000 0.006 0.015 0.000 0.003 0.027 0.023 0.058 0.102 0.271 0.241 0.081 0.175 0.179 0.136
MIZORAM 0.221 0.010 0.000 0.009 0.000 0.000 0.006 0.004 0.001 0.005 0.007 0.016 0.156 0.076 0.271 0.205 0.065 0.361 0.155 0.092
NAGALAND 0.193 0.010 0.000 0.013 0.000 0.000 0.003 0.002 0.021 0.008 0.007 0.012 0.084 0.222 0.233 0.205 0.061 0.180 0.141 0.139
ORISSA 0.177 0.148 0.000 0.247 0.085 0.116 0.042 0.138 0.120 0.046 0.212 0.256 0.110 0.197 0.212 0.195 0.225 0.079 0.151 0.340
PUNJAB 0.185 0.099 0.000 0.075 0.062 0.189 0.077 0.055 0.060 0.051 0.062 0.082 0.156 0.184 0.130 0.134 0.223 0.134 0.128 0.062
RAJASTAN 0.162 0.247 0.082 0.216 0.090 0.092 0.174 0.098 0.133 0.046 0.260 0.242 0.188 0.152 0.309 0.226 0.211 0.099 0.204 0.162
SIKKIM 0.198 0.020 0.016 0.001 0.002 0.004 0.006 0.002 0.001 0.005 0.003 0.004 0.279 0.114 0.266 0.250 0.115 0.412 0.089 0.147
TAMIL NADU 0.193 0.405 0.016 0.157 0.510 0.374 0.139 0.175 0.217 0.543 0.155 0.179 0.104 0.210 0.005 0.168 0.225 0.121 0.186 0.165
TRIPURA 0.212 0.010 0.000 0.005 0.002 0.004 0.003 0.004 0.006 0.003 0.008 0.015 0.156 0.159 0.233 0.223 0.088 0.239 0.248 0.138
UTTAR PRADESH 0.168 0.395 0.164 0.356 0.159 0.131 0.390 0.149 0.828 0.218 0.603 0.186 0.311 0.286 0.065 0.134 0.218 0.071 0.188 0.240
UTTARANCHAL 0.192 0.099 0.180 0.030 0.005 0.004 0.003 0.019 0.033 0.048 0.068 0.028 0.246 0.184 0.060 0.131 0.225 0.199 0.203 0.290
WEST BENGAL 0.186 0.257 0.180 0.132 0.124 0.073 0.213 0.124 0.039 0.107 0.234 0.157 0.195 0.317 0.239 0.238 0.191 0.093 0.182 0.181
Population
below
Poverty
Line (%)
Household
s having
Safe
Drinking
Water
facility
% of
Household
s having
Electricity
% of
Household
s having
bathroom
facility at
home
House
holds with
Permanent
Structure
Household
s with
Semi
Permanent
Structure
Consumpti
on of
Energy by
Ultimate
Consumers
(GWH)
Employme
nt Status
in
Organized
Sector
('000)
Total
Total No. Number of
of Workers Non -
Workers
% of
Population
participate
d in last
lok sabha
Media
Exposure
TV
Ownership
HIV
awareness
(males%)
Norm.C21 Norm.C22 Norm.C23 Norm.C24 Norm.C25 Norm.C26 Norm.C27 Norm.C28 Norm.C29 Norm.C30 Norm.C31 Norm.C32 Norm.C33 Norm.C34 Norm.C35 Norm.C36 Norm.C37 Norm.C38 Norm.C39 Norm.C40
ANDHRA PRADESH 0.205 0.189 0.179 0.343 0.231 0.356 0.319 0.328 0.237 0.218 0.209 0.193 0.209 0.203 0.332 0.211 0.164 0.083 0.103 0.109
ARUNACHAL PRADESH 0.198 0.154 0.101 0.002 0.002 0.001 0.006 0.005 0.004 0.159 0.165 0.151 0.168 0.181 0.004 0.188 0.272 0.285 0.220 0.139
ASSAM 0.150 0.070 0.065 0.036 0.099 0.020 0.218 0.090 0.098 0.172 0.168 0.126 0.168 0.145 0.102 0.176 0.244 0.315 0.384 0.416
BIHAR 0.222 0.029 0.043 0.212 0.229 0.036 0.078 0.263 0.315 0.255 0.136 0.067 0.157 0.096 0.227 0.125 0.187 0.059 0.147 0.127
CHATTISH GARH 0.180 0.149 0.056 0.039 0.192 0.079 0.053 0.091 0.064 0.114 0.146 0.122 0.150 0.112 0.094 0.207 0.255 0.238 0.052 0.054
DELHI 0.249 0.261 0.319 0.087 0.008 0.120 0.131 0.043 0.053 0.151 0.207 0.250 0.180 0.156 0.094 0.275 0.176 0.155 0.616 0.561
GOA 0.179 0.263 0.299 0.007 0.005 0.019 0.020 0.005 0.005 0.171 0.225 0.284 0.206 0.227 0.004 0.173 0.176 0.166 0.086 0.078
GUJRAT 0.215 0.226 0.227 0.234 0.183 0.331 0.264 0.200 0.169 0.128 0.189 0.194 0.180 0.134 0.211 0.195 0.102 0.048 0.099 0.121
HARYANA 0.220 0.233 0.232 0.086 0.064 0.138 0.101 0.079 0.073 0.050 0.176 0.184 0.195 0.164 0.106 0.225 0.221 0.149 0.164 0.163
HIMACHAL PRADESH 0.227 0.266 0.159 0.030 0.026 0.032 0.049 0.028 0.018 0.286 0.202 0.233 0.206 0.216 0.023 0.195 0.108 0.166 0.099 0.109
JAMMU & K 0.167 0.226 0.205 0.032 0.032 0.037 0.036 0.035 0.037 0.168 0.206 0.231 0.197 0.167 0.039 0.165 0.102 0.107 0.293 0.386
JHARKHAND 0.109 0.096 0.068 0.057 0.180 0.084 0.124 0.095 0.097 0.157 0.117 0.103 0.119 0.079 0.070 0.119 0.306 0.143 0.116 0.103
KARNATAKA 0.217 0.221 0.264 0.209 0.234 0.230 0.301 0.221 0.168 0.177 0.203 0.197 0.191 0.181 0.246 0.224 0.164 0.053 0.065 0.042
KERALA 0.060 0.197 0.279 0.167 0.092 0.091 0.178 0.097 0.124 0.211 0.228 0.248 0.222 0.260 0.219 0.332 0.057 0.095 0.030 0.030
MADHYA PRADESH 0.175 0.196 0.109 0.169 0.391 0.173 0.166 0.243 0.198 0.336 0.147 0.128 0.153 0.123 0.383 0.285 0.193 0.250 0.065 0.072
MAHARASTRA 0.204 0.218 0.274 0.410 0.421 0.525 0.426 0.387 0.319 0.145 0.200 0.216 0.195 0.225 0.368 0.178 0.136 0.083 0.052 0.054
MANIPUR 0.095 0.169 0.047 0.001 0.014 0.002 0.012 0.009 0.007 0.298 0.225 0.175 0.222 0.271 0.004 0.104 0.278 0.071 0.259 0.217
MEGHALAYA 0.100 0.120 0.151 0.003 0.010 0.006 0.011 0.009 0.008 0.122 0.156 0.152 0.141 0.156 0.004 0.092 0.283 0.256 0.095 0.060
MIZORAM 0.092 0.195 0.230 0.003 0.003 0.001 0.007 0.004 0.002 0.129 0.217 0.177 0.215 0.257 0.004 0.200 0.176 0.493 0.039 0.000
NAGALAND 0.119 0.179 0.168 0.002 0.011 0.001 0.010 0.008 0.007 0.192 0.167 0.139 0.204 0.222 0.000 0.046 0.119 0.059 0.099 0.024
ORISSA 0.164 0.076 0.047 0.081 0.126 0.072 0.121 0.134 0.129 0.075 0.164 0.106 0.164 0.170 0.102 0.134 0.176 0.149 0.099 0.121
PUNJAB 0.250 0.258 0.312 0.137 0.024 0.217 0.131 0.086 0.087 0.188 0.212 0.287 0.206 0.192 0.066 0.128 0.181 0.113 0.112 0.115
RAJASTAN 0.175 0.154 0.145 0.226 0.126 0.161 0.189 0.224 0.188 0.115 0.146 0.131 0.117 0.101 0.309 0.245 0.119 0.137 0.185 0.211
SIKKIM 0.181 0.218 0.163 0.001 0.003 0.002 0.007 0.002 0.002 0.200 0.182 0.205 0.200 0.205 0.000 0.108 0.176 0.178 0.043 0.060
TAMIL NADU 0.219 0.219 0.179 0.309 0.165 0.398 0.358 0.262 0.198 0.184 0.221 0.195 0.220 0.257 0.321 0.253 0.119 0.053 0.086 0.103
TRIPURA 0.134 0.117 0.050 0.002 0.020 0.003 0.023 0.011 0.012 0.210 0.190 0.171 0.200 0.200 0.012 0.149 0.210 0.315 0.147 0.157
UTTAR PRADESH 0.225 0.090 0.129 0.512 0.424 0.271 0.328 0.508 0.643 0.120 0.156 0.125 0.166 0.110 0.317 0.086 0.130 0.053 0.134 0.157
UTTARANCHAL 0.222 0.169 0.174 0.051 0.007 0.031 0.038 0.029 0.031 0.138 0.190 0.224 0.202 0.216 0.016 0.088 0.113 0.065 0.121 0.151
WEST BENGAL 0.227 0.105 0.106 0.236 0.376 0.187 0.297 0.277 0.291 0.204 0.168 0.136 0.166 0.137 0.207 0.123 0.130 0.155 0.134 0.151
HIV
awareness
(females%)
% of Total
Cognizable
Crimes to
All India
Cognizable
Crimes
Rate of
Total
Cognizable
Crimes
(per '000)
Rate of
Murder
(per '000)
Rate of
Rape (per
'000)
Rate of
Kidnappin
g &
Abduction
(per '000)
Rate of
Kidnappin
g &
Abduction
of Women
& Girls
(per '000)
Rate of
Dacoity
(per '000)
Rate of
Robbery
(per '000)
Incidence
of
Highway
Robbery
Rate of
Burglary
(per '000)
Rate of
Theft (per
'000)
Rate of
Riot (per
'000)
Incidence
of Cyber
Crime
Total
Crimes in
Railways
Rate of
Dowry
Deaths
(per '000)
Rate of
Molestatio
n (per
'000)
Rate of
Harassme
nt (per
'000)
Rate of
Cruelty by
Husband
&
Relatives
(per '000)
Female per
1000
Males
Contributi
on of
Crime Rate
against
Women to
All India
Total
Mean Age
at
Effective
Marriage
of Females
(yrs)
Contributi
on of
Crime Rate
against
Children to
All India
Total
Rate of
Narcotic
drug &
Psychotro
pic
substance
cases
Juvenile
Delinquen
cy
(Incedence
of
different
cases in
all)
% of
Juvenile
Delinquen
cy Cases
Pending to
All India
Norm.C41 Norm.C42 Norm.C43 Norm.C44 Norm.C45 Norm.C46 Norm.C47 Norm.C48 Norm.C49 Norm.C50 Norm.C51 Norm.C52 Norm.C53 Norm.C54 Norm.C55 Norm.C56 Norm.C57 Norm.C58 Norm.C59 Norm.C60
ANDHRA PRADESH 0.026 0.056 0.080 0.138 0.146 0.073 0.211 0.174 0.018 0.249 0.615 0.295 0.194 0.460 0.169 0.226 0.017 0.153 0.153 0.267
ARUNACHAL PRADESH 0.416 0.362 0.003 0.245 0.154 0.116 0.007 0.000 0.000 0.193 0.073 0.024 0.179 0.004 0.187 0.003 0.098 0.014 0.014 0.004
ASSAM 0.208 0.177 0.042 0.153 0.104 0.160 0.014 0.048 0.015 0.176 0.000 0.312 0.185 0.177 0.196 0.006 0.025 0.069 0.069 0.325
BIHAR 0.182 0.137 0.577 0.055 0.079 0.241 0.000 0.364 0.036 0.032 0.000 0.056 0.183 0.158 0.171 0.133 0.013 0.119 0.119 0.453
CHATTISH GARH 0.156 0.185 0.080 0.245 0.119 0.108 0.028 0.051 0.013 0.265 0.088 0.080 0.196 0.074 0.180 0.175 0.064 0.363 0.363 0.022
DELHI 0.052 0.234 0.007 0.144 0.604 0.008 0.035 0.162 0.020 0.124 0.102 0.156 0.163 0.077 0.199 0.372 0.072 0.057 0.057 0.216
GOA 0.052 0.145 0.002 0.258 0.251 0.008 0.056 0.000 0.005 0.088 0.088 0.026 0.190 0.004 0.179 0.013 0.089 0.008 0.008 0.015
GUJRAT 0.104 0.201 0.042 0.116 0.169 0.073 0.140 0.220 0.000 0.052 0.029 0.208 0.183 0.144 0.183 0.127 0.004 0.181 0.181 0.088
HARYANA 0.156 0.225 0.079 0.249 0.264 0.130 0.000 0.199 0.031 0.076 0.366 0.234 0.171 0.096 0.181 0.048 0.153 0.122 0.122 0.066
HIMACHAL PRADESH 0.026 0.024 0.001 0.175 0.061 0.241 0.042 0.001 0.000 0.193 0.088 0.093 0.192 0.018 0.199 0.029 0.301 0.016 0.016 0.011
JAMMU & K 0.000 0.040 0.001 0.180 0.101 0.308 0.000 0.005 0.003 0.301 0.424 0.033 0.178 0.048 0.209 0.003 0.098 0.001 0.001 0.040
JHARKHAND 0.338 0.209 0.251 0.068 0.125 0.205 0.000 0.096 0.026 0.036 0.044 0.050 0.187 0.055 0.173 0.006 0.017 0.087 0.087 0.157
KARNATAKA 0.130 0.250 0.064 0.169 0.175 0.292 0.681 0.085 0.013 0.152 0.015 0.119 0.191 0.144 0.179 0.041 0.017 0.029 0.029 0.289
KERALA 0.078 0.193 0.021 0.153 0.080 0.630 0.450 0.037 0.003 0.293 0.161 0.252 0.210 0.144 0.207 0.076 0.081 0.056 0.056 0.113
MADHYA PRADESH 0.052 0.258 0.209 0.223 0.162 0.092 0.112 0.351 0.031 0.357 0.146 0.121 0.182 0.287 0.185 0.610 0.047 0.575 0.575 0.055
MAHARASTRA 0.182 0.242 0.219 0.217 0.232 0.200 0.372 0.593 0.008 0.116 0.146 0.154 0.183 0.272 0.181 0.381 0.055 0.586 0.586 0.457
MANIPUR 0.000 0.008 0.000 0.037 0.073 0.049 0.007 0.000 0.996 0.080 0.000 0.020 0.194 0.004 0.184 0.010 0.025 0.000 0.000 0.051
MEGHALAYA 0.650 0.209 0.020 0.085 0.104 0.019 0.000 0.000 0.000 0.112 0.000 0.020 0.193 0.004 0.180 0.010 0.030 0.010 0.011 0.029
MIZORAM 0.052 0.032 0.002 0.569 0.378 0.003 0.000 0.000 0.000 0.245 0.015 0.009 0.186 0.004 0.190 0.003 0.412 0.002 0.002 0.000
NAGALAND 0.104 0.330 0.024 0.055 0.077 0.005 0.000 0.000 0.000 0.020 0.000 0.000 0.180 0.000 0.180 0.000 0.183 0.001 0.002 0.004
ORISSA 0.234 0.298 0.293 0.108 0.087 0.114 0.014 0.109 0.023 0.269 0.073 0.111 0.193 0.147 0.185 0.025 0.008 0.048 0.048 0.164
PUNJAB 0.026 0.048 0.017 0.138 0.103 0.000 0.197 0.054 0.013 0.048 0.015 0.085 0.173 0.048 0.194 0.095 0.696 0.017 0.017 0.091
RAJASTAN 0.026 0.105 0.054 0.119 0.166 0.046 0.190 0.170 0.018 0.152 0.000 0.341 0.183 0.313 0.180 0.184 0.068 0.231 0.231 0.033
SIKKIM 0.000 0.056 0.000 0.229 0.051 0.176 0.000 0.000 0.000 0.068 0.000 0.022 0.173 0.000 0.190 0.006 0.030 0.007 0.007 0.004
TAMIL NADU 0.026 0.137 0.059 0.094 0.116 0.097 0.126 0.079 0.008 0.076 0.102 0.048 0.195 0.110 0.197 0.083 0.110 0.173 0.173 0.263
TRIPURA 0.052 0.177 0.001 0.097 0.057 0.135 0.000 0.000 0.020 0.433 0.015 0.495 0.188 0.026 0.184 0.022 0.064 0.005 0.005 0.004
UTTAR PRADESH 0.052 0.097 0.621 0.040 0.074 0.059 0.098 0.377 0.028 0.056 0.190 0.095 0.178 0.420 0.179 0.403 0.310 0.040 0.040 0.084
UTTARANCHAL 0.104 0.145 0.052 0.055 0.082 0.130 0.049 0.000 0.026 0.048 0.380 0.080 0.191 0.022 0.182 0.003 0.170 0.019 0.019 0.007
WEST BENGAL 0.052 0.064 0.056 0.006 0.095 0.203 0.091 0.180 0.015 0.088 0.015 0.393 0.185 0.420 0.178 0.064 0.025 0.017 0.017 0.329
Total cases
% of Cases
Pending
for
Investigati
on (under
IPC) to All
India Total
cases
The Business & Management Review, Vol.2 Number 2, July 2012
129

Strength Strength
Anemia
% of
Anemia % of
Doctors Hospitals
of Civil of Armed Institution Amongst
Children
Vaccinatio
Amongst Children as
(per 1 lac (per 1 lac
Low BMI
Police per Police per al Births Pregnant
having
n
Adolescen Under
population population
Males (%)
1000 1000 (%) Women
Iron
Coverage
t Girls (%) Nourished
)
)
population population
(%)
Deficiency
Low BMI
Females
(%)
Primary
Infant
Health
Health Nurses
Mortality
Life Exp. as a %
Media
Centers (per 1 lac
Per Capita Per Capita
Rates (per
Expectanc of Total
Exposure -
(per 1 lac population
Income Net SDP
1000 live
y at Birth Expenditur
Female %
population )
births)
e
)
Norm.C61 Norm.C62 Norm.C63 Norm.C64 Norm.C65 Norm.C66 Norm.C67 Norm.C68 Norm.C69 Norm.C70 Norm.C71 Norm.C72 Norm.C73 Norm.C74 Norm.C75 Norm.C76 Norm.C77 Norm.C78 Norm.C79 Norm.C80
ANDHRA PRADESH 0.080 0.015 0.185 0.128 0.170 0.196 0.180 0.193 0.179 0.242 0.140 0.195 0.210 0.108 0.230 0.186 0.173 0.174 0.162 0.208
ARUNACHAL PRADESH 0.180 0.250 0.112 0.474 0.290 0.149 0.199 0.120 0.786 0.092 0.077 0.098 0.140 0.321 0.107 0.194 0.218 0.176 0.147 0.168
ASSAM 0.065 0.069 0.090 0.024 0.001 0.058 0.110 0.141 0.033 0.105 0.188 0.231 0.242 0.113 0.057 0.170 0.150 0.093 0.115 0.161
BIHAR 0.081 0.026 0.068 0.134 0.199 0.253 0.217 0.102 0.013 0.108 0.162 0.272 0.213 0.127 0.018 0.178 0.158 0.055 0.049 0.108
CHATTISH GARH 0.054 0.041 0.069 0.310 0.348 0.219 0.258 0.082 0.005 0.154 0.179 0.259 0.102 0.153 0.106 0.168 0.183 0.130 0.125 0.137
DELHI 0.253 0.033 0.211 0.079 0.207 0.163 0.223 0.401 0.133 0.226 0.159 0.209 0.102 0.036 0.287 0.184 0.136 0.327 0.382 0.171
GOA 0.203 0.041 0.400 0.000 0.078 0.139 0.116 0.336 0.267 0.258 0.659 0.130 0.140 0.149 0.286 0.185 0.160 0.452 0.435 0.242
GUJRAT 0.058 0.018 0.156 0.310 0.281 0.213 0.240 0.167 0.164 0.183 0.159 0.204 0.203 0.135 0.237 0.185 0.149 0.218 0.212 0.187
HARYANA 0.036 0.007 0.107 0.201 0.290 0.165 0.251 0.013 0.012 0.212 0.151 0.176 0.213 0.115 0.109 0.192 0.127 0.268 0.241 0.176
HIMACHAL PRADESH 0.057 0.030 0.105 0.243 0.223 0.168 0.222 0.164 0.044 0.219 0.112 0.154 0.191 0.237 0.167 0.194 0.248 0.172 0.210 0.208
JAMMU & K 0.670 0.328 0.232 0.158 0.073 0.094 0.130 0.078 0.014 0.219 0.112 0.135 0.159 0.188 0.085 0.185 0.234 0.104 0.122 0.216
JHARKHAND 0.086 0.043 0.082 0.079 0.174 0.241 0.190 0.097 0.014 0.114 0.188 0.269 0.210 0.123 0.106 0.185 0.178 0.105 0.118 0.103
KARNATAKA 0.078 0.014 0.211 0.055 0.107 0.207 0.158 0.287 0.018 0.180 0.144 0.199 0.181 0.206 0.252 0.189 0.171 0.173 0.169 0.203
KERALA 0.080 0.008 0.418 0.000 0.016 0.166 0.047 0.242 0.458 0.245 0.067 0.079 0.045 0.172 0.320 0.214 0.230 0.202 0.190 0.237
MADHYA PRADESH 0.159 0.076 0.071 0.207 0.239 0.256 0.233 0.078 0.005 0.176 0.205 0.254 0.280 0.159 0.246 0.168 0.166 0.093 0.097 0.140
MAHARASTRA 0.108 0.011 0.209 0.109 0.212 0.221 0.233 0.210 0.117 0.193 0.140 0.206 0.153 0.136 0.183 0.194 0.172 0.252 0.230 0.200
MANIPUR 0.314 0.486 0.185 0.073 0.068 0.161 0.162 0.156 0.026 0.193 0.069 0.088 0.073 0.157 0.153 0.191 0.182 0.097 0.126 0.237
MEGHALAYA 0.144 0.127 0.129 0.091 0.005 0.070 0.112 0.161 0.010 0.108 0.045 0.087 0.184 0.194 0.151 0.182 0.256 0.159 0.145 0.158
MIZORAM 0.238 0.609 0.280 0.067 0.151 0.099 0.142 0.146 0.041 0.235 0.034 0.097 0.073 0.556 0.284 0.205 0.194 0.157 0.139 0.229
NAGALAND 0.151 0.144 0.052 0.243 0.154 0.045 0.183 0.154 0.028 0.069 0.061 0.101 0.051 0.112 0.154 0.184 0.229 0.073 0.130 0.163
ORISSA 0.020 0.012 0.061 0.231 0.196 0.198 0.190 0.101 0.024 0.170 0.181 0.256 0.305 0.186 0.181 0.172 0.191 0.113 0.107 0.161
PUNJAB 0.129 0.059 0.055 0.176 0.244 0.185 0.233 0.341 0.030 0.196 0.068 0.085 0.165 0.129 0.263 0.201 0.152 0.212 0.217 0.221
RAJASTAN 0.063 0.016 0.035 0.201 0.158 0.269 0.184 0.092 0.007 0.088 0.191 0.213 0.251 0.165 0.077 0.179 0.193 0.116 0.111 0.121
SIKKIM 0.237 0.240 0.211 0.049 0.139 0.140 0.198 0.148 0.012 0.229 0.041 0.061 0.156 0.212 0.117 0.171 0.125 0.167 0.164 0.192
TAMIL NADU 0.076 0.017 0.279 0.116 0.127 0.177 0.142 0.269 0.021 0.265 0.104 0.149 0.162 0.175 0.288 0.192 0.205 0.213 0.186 0.232
TRIPURA 0.191 0.321 0.211 0.061 0.061 0.137 0.083 0.030 0.028 0.163 0.216 0.222 0.130 0.094 0.027 0.188 0.185 0.122 0.153 0.195
UTTAR PRADESH 0.042 0.015 0.034 0.207 0.207 0.256 0.219 0.000 0.002 0.075 0.184 0.216 0.264 0.000 0.000 0.177 0.220 0.079 0.082 0.137
UTTARANCHAL 0.082 0.037 0.155 0.195 0.206 0.243 0.170 0.157 0.001 0.196 0.123 0.163 0.264 0.000 0.135 0.174 0.212 0.190 0.152 0.192
WEST BENGAL 0.049 0.021 0.154 0.225 0.130 0.208 0.143 0.162 0.017 0.209 0.178 0.238 0.162 0.094 0.093 0.188 0.045 0.141 0.156 0.166
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130

Creating Consumer Based Brand Equity in
Indian Sport Shoe Market
M.Ravindar Reddy
National Institute of Technology – Warangal, India.
Chandrajeet Kumar
National Institute of Technology – Warangal, India.
Keywords
Brand equity, dimensions of brand equity, promotional activities, sports shoes.
Abstract
Along with Indian sportswear sector fast growth, the competition of sports market is fierily and fragmented due to
numerous brands vying for consumer attention. This project is using sports shoes as example to understand and
comprehend the effects promotional activities and dimensions brand equity on consumer based brand equity creating
in Indian sportswear market. This study mainly focuses on exploring the relationship between brand equity and
promotional activities by using of the dimensions of brand equity using Correlation, Multiple regression, ANOVAs
and Post-hoc test. The results show that, four dimensions of brand equity (brand awareness, brand association,
perceived quality and brand loyalty) have significant effects on brand equity; store image have positive influence on
brand equity dimensions, whereas celebrity endorsement have not influence on brand equity dimensions.
Introduction
Along with a rapidly growing economy, rising incomes and an enormous population, India has
been appreciated as one of the most attractive consumer markets in the world. Meanwhile, with a
growing interest in sports among its consumers, India is viewed its sportswear marketing rapidly
promising. Brand equity is one of the most important concepts in marketing science, and it has wellrecognized
as one of the most valuable intangible assets by most firms. Recently, the competition of
sportswear market is shifting from price to brand building, particularly, the branding and product image
are becoming increasingly significant to Indian customer (The economist, 2009). Brand equity is
incremental utility and value endowed to a product or service by its brand name.
If the sportswear marketers or firms could better understand the importance of brand equity, and
then they would better gain competitive advantage, loyal their customers.
Literature review
Rong Huang and Emine Sarigöllü (2011) examine the relation between brand awareness and
market outcome and explore the relation between brand awareness and brand equity. The study also
investigates the effects of marketing mix elements on brand awareness. Results reveal consumers' brand
usage experiences contribute to brand awareness, implying experience precedes awareness in some
contexts. Carmen Camarero, Mar´a Jose´ Garrido and Eva Vicente (2010) aim to explore determinants of
brand equity for cultural activities from the perspective of internal as well as external visitors. Their
analysis advocates four elements for brand equity in artistic and cultural activities (loyalty, brand image,
perceived quality and brand values) and assesses them for the case of an itinerant art exhibition staged
over the past twenty years in a region of Spain. Findings suggest that external visitors attach greater
importance to brand image as a determinant of value than do internal visitors, whereas for the latter
brand values are the main source of value.
Pierre Valette-Florence and et al. (2009) assess the relative impact of a long-term brand
management instrument (brand personality) and a short-term marketing mix instrument (sales
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131

promotions) on brand equity formation. In line with research that identifies varying consumer responses
to promotional deals, this study posits that the relative impact of the two elements varies across consumer
groups. Three homogeneous consumer groups differ according to the relative impact of brand personality
and consumer promotions on brand equity, following an application of a finite mixture partial least
squares procedure. Kyung Hoon Kim et al. (2008) study brand equity in hospital marketing. They identify
five factors that influence the creation of brand equity through successful customer relationships: trust,
customer satisfaction, relationship commitment, brand loyalty, and brand awareness. An empirical test of
the relationships among these factors suggests that hospitals can be successful in creating image and
positive brand equity if they can manage their customer relationships well.
Eva Martínez, Teresa Montaner and José M. Pina (2009) propose and estimate a theoretical model,
using the structural equation methodology. The results of the estimation indicate that the attitude towards
the extension influences brand image and that this attitude is a consequence of the initial brand beliefs
and the coherence of the new product. A multi sample analysis also reveals that favouring the
introduction of extensions through adequate advertising constitutes an efficient way of protecting brand
image.Jana M. Hawley in 2009 used Aaker’s well-known conceptual framework of brand equity, this
study employed structural equation modelling to investigate the causal relationships among the four
dimensions of brand equity and overall brand equity in the sportswear industry. This research is confined
to particular region of Chinese market. This model is not supported to measure the performance of the
brand.
Borgran jin sun in 1996 research on brand plays a important role in service company. They used
Aaker’s 4 dimension of brand equity (brand loyalty, perceived quality, brand association and brand
awareness). The limitation of this research is that the score which the calculated by using ANOVA is less.
So we can say that it is difficult to make a customer loyal in the hotel business. Xiao tong in December
2006 research on creating brand equity on clothing market in china using the tool by Aaker’s model. The
primary goal of this project is to examine Chinese customer’s attitudes toward imported clothing brands
and their marketing strategies. The drawback of this research examines only the effect of individual
marketing decision variables and does not investigate the interactions among them. Since marketing
strategies are interactive by nature, celebrity endorsement could interact with advertising, promotion
could interact with distribution, target marketing could interact with commercial event sponsorship, price
could interact with price promotion, and so on. This study uses perceptual, not actual, measures of
marketing efforts. It would be meaningful from a managerial perspective to use hard marketing data from
secondary sources, such as scanner data and published survey reports from the firms that are marketing
the focal brands.
Ruchan Kayaman and Huseyin Arasli aim to explore interrelations of the four brand equity
components; brand awareness, brand loyalty, perceived quality and brand image in hotel industry and
improve the conceptualization of customer-based hotel brand equity. The study has some limitations.
First of all, the study is limited to only five-star hotels. based on the empirical results of the path analysis
was that of the components of perceived quality as suggested by Parasuramanet al. (1988), assurance was
found to have no direct relationship with any component of customer-based brand equity. As explained
in the discussion section, this might show that this 5 component models of perceived quality is not
applicable to the five-star hotels.
This research has examined the relationship between brand equity and promotional activities by
using of the dimensions of brand equity.
H1. All Brand equity dimension (Brand awareness, Brand association, Perceived quality, Brand Loyalty)
has a significant positive effect on consumer-based brand equity (brand equity).
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H2. All promotional activity (Advertisement, Word of mouth, Celebrity Endorsement, Sales promotion,
Store image and Event sponsorship) has a significant positive effect on brand awareness.
Research methodology
This chapter describes the research design utilised. Specifically, the chapter describes the sample
of the study by reflecting on the biographical data of the respondents, the measuring instrument used and
issues pertaining to its validity and reliability, the procedure followed to gather the data, the hypotheses
and the statistical techniques used to analyse the data.
A brand is defined as a name, term, sign, symbol or design, or a combination of them which is
intended to identify the goods and services of one seller or group of sellers and to differentiate them from
those of competitors (Kotler, 1997).
Table 1
Chronbach alpha values computed for each variables.
Variables
Chronbach alpha values
Brand equity .756
Brand awareness .843
Brand association .831
Perceived quality .789
Brand loyalty .722
Advertisement .878
Word of mouth .851
Celebrity endorsement .897
Sales promotion .893
Store image .893
Event sponsorship .904
The reliability test are carried out to measure the internal consistency of the variables.
Chronbach’s (1951) coefficient alpha measures the extent to which the scale items cohere with each other.
The Chronbach alphas for different variable are shown in the Table 2. A high value of alpha is often used
as evidence that the items measure underlying constructs. The variables which offer alpha value less than
.5 are discarded as these variables are less reliable.
Sample
The main objective of this research is to examine the relationship between brand equity and
promotional activities by using of the dimensions of brand equity. A structured questionnaire includes
three parts. First part contains the general questions related to the overall brand equity. Second part on
brand equity dimensions. Third part involves all promotional activity. The questionnaire is administered
to Warangal dist. Of A.P. Total sample comprised of 160 completed questionnaires and 30 were
incomplete which are excluded from research sample. Ages are categorized into different group as shown
in the below table 3.
Respondents Age Profile
Table No 2
Age groups No. of respondents Percentage
Less than or equal to 20 26 16
Between 21-25 67 54
Between 26-35 44 35
Between 36-40 15 10
Above 40 8 5
Total 160 100
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Gender
Respondents Gender Profile
Table no 3
No. of
respondents
Percentage
Male 110 69
Female 50 31
Total 1600 100
The percentage of male and female respondents is 69 and 31 respectively. Different age categories are
chosen from different generations. Maximum respondents belong to the Generation Y (21–25 years).
Analysis and discussion
The first Correlation test is conducted to understand whether there exists any relation between Brand
equity dimension and promotional activity. Results are shown in Table 5.
** Correlation is significant at the 0.01 level (2-tailed).
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This means that there is a strong relationship between your two variables. This means that
changes in one variable are strongly correlated with changes in the second variable. If we see Pearson’s r
is 913,.927,.882,.982 respectively. This number is very close to 1. For this reason we can conclude that there
is a strong relationship between advertisement and (Brand awareness, BA, PQ & BL respectively).If we
see other promotional activity with brand equity dimension the value of Pearson’s r is between .898 and
.989, which is close to 1.So we can conclude that there is a strong relationship or effect on each other.
Multiple regression analysis (structural model and hypothesis testing)
Regression analysis in this study is used to determine whether the independent variables explain
a will be significant variations in the dependent variable and whether a relationship exists. If p0.05, that
means the hypothesis is supported and can be used to make predictions, however, if P >0.05, it means the
hypothesis is rejected.
Table 5: Conclusion of structural model
Hypothesis Sig. Conclusion
H1a. Brand awareness- brand equity .742 NOT SUPPORTED
H1b. Brand association- brand equity .083 NOT SUPPORTED
H1c. Perceived quality-brand equity .796 NOT SUPPORTED
H1d. Brand loyalty-brand equity .000 SUPPORTED
H2a. Advertising- brand awareness .000 SUPPORTED
H2b. Advertising- brand association .404 NOT SUPPORTED
H2c. Advertising- perceived quality .024 SUPPORTED
H2d. Advertising -brand loyalty .001 SUPPORTED
H3a. Word of Mouth- brand awareness .837 NOT SUPPORTED
H3b. Word of Mouth- brand association .826 NOT SUPPORTED
H3c. Word of Mouth- perceived quality .706 NOT SUPPORTED
H4a. Celebrity endorsement -brand awareness .837 NOT SUPPORTED
H4b. Celebrity endorsement -brand association .037 SUPPORTED
H4c. Celebrity endorsement -perceived quality .044 SUPPORTED
H4d. Celebrity endorsement -brand loyalty .146 NOT SUPPORTED
H5a. Sales promotion -brand awareness .001 SUPPORTED
H5b. Sales promotion -brand association .482 NOT SUPPORTED
H5c. Sales promotion -perceived quality .966 NOT SUPPORTED
H5d. Sales promotion -brand loyalty .173 NOT SUPPORTED
H6a. Store image -brand awareness .000 SUPPORTED
H6b. Store image- brand association .002 SUPPORTED
H6c. Store image- perceived quality .000 SUPPORTED
H6d. Store image -brand loyalty .010 SUPPORTED
H7a. Event sponsorship- brand awareness .001 SUPPORTED
H7b. Event sponsorship -brand association .010 SUPPORTED
H7c. Event sponsorship -perceived quality .315 NOT SUPPORTED
H7d. Event sponsorship -brand loyalty .000 SUPPORTED
Within this finding, we suggest that marketers or brand managers should put their efforts on
perceived quality, brand association and brand loyalty since these 3 dimensions have high significance in
brand equity building. The effective promotional activities such as advertising, word of mouth, sales
promotion, store image and event sponsorship that would be helped in building high perceived quality,
brand association and brand loyalty for a brand. Especially, building a positive store image can also
reduce Indian consumer’s uncertainty, increasing trustworthy and raising customer’s satisfaction.
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ANOVAs Analysis:
If we see the table we can say that Perceived quality between age group has a significant
difference (>.05). But this table is unable to recognize that which factor have significant difference in the
age so we go for further analysis. Post Hoc test tells us which age is making difference.
Brand Between Groups
awareness
Sum of Squares df Mean Square F Sig.
1.965 3 .655 1.353 .260
Within Groups 71.163 147 .484
Total 73.127 150
Brand Between Groups 1.302 3 .434 .992 .398
association
Within Groups 64.286 147 .437
Total 65.588 150
Perceived Between Groups 3.578 3 1.193 3.120 .028
quality
Within Groups 56.196 147 .382
Total 59.775 150
Brand Between Groups 2.320 3 .773 1.934 .127
loyalty
Within Groups 58.796 147 .400
Total 61.116 150
Post Hoc Tests:
Researchers have solved this problem by conducting post hoc tests. These tests are used when he have
found statistical significance between conditions but when we don’t know where the significant
differences are. These tests are not used when the results of a 1-Way between Subjects ANOVA are not
significant because there is no need. But when we do find a statistically significant result, when the Sig.
value is less than .05, we need to use these tests.
Gowels
Howells
G
Multiple Comparisons
Dependent
Variable (I) age (J) age Mean Difference (I-J) Std. Error Sig.
95% Confidence Interval
Lower Bound Upper Bound
awarness 16-20 year 21-25 years .33861 .17988 .262 -.1580 .8353
26-35 years .18156 .19222 .781 -.3413 .7044
36-40 years .12868 .26835 .961 -.7581 1.0154
21-25 years 16-20 year -.33861 .17988 .262 -.8353 .1580
26-35 years -.15705 .12818 .612 -.4918 .1777
36-40 years -.20994 .22692 .795 -1.1548 .7349
26-35 years 16-20 year -.18156 .19222 .781 -.7044 .3413
21-25 years .15705 .12818 .612 -.1777 .4918
36-40 years -.05288 .23682 .996 -.9628 .8571
36-40 years 16-20 year -.12868 .26835 .961 -1.0154 .7581
21-25 years .20994 .22692 .795 -.7349 1.1548
26-35 years .05288 .23682 .996 -.8571 .9628
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136

Brand
association
Perceived
Quality
Brand
loyalty
16-20 year 21-25 years .28167 .14887 .254 -.1248 .6882
26-35 years .19514 .16124 .625 -.2393 .6295
36-40 years .02206 .33990 1.000 -1.3502 1.3943
21-25 years 16-20 year -.28167 .14887 .254 -.6882 .1248
26-35 years -.08654 .12256 .894 -.4065 .2334
36-40 years -.25962 .32334 .850 -1.7120 1.1928
26-35 years 16-20 year -.19514 .16124 .625 -.6295 .2393
21-25 years .08654 .12256 .894 -.2334 .4065
36-40 years -.17308 .32922 .948 -1.5909 1.2448
36-40 years 16-20 year -.02206 .33990 1.000 -1.3943 1.3502
21-25 years .25962 .32334 .850 -1.1928 1.7120
26-35 years .17308 .32922 .948 -1.2448 1.5909
16-20 year 21-25 years .36180 * .12533 .031 .0255 .6981
26-35 years .16148 .12654 .583 -.1782 .5012
36-40 years -.29044 .23505 .638 -1.2078 .6269
21-25 years 16-20 year -.36180 * .12533 .031 -.6981 -.0255
26-35 years -.20032 .11120 .278 -.4900 .0894
36-40 years -.65224 .22716 .145 -1.5960 .2915
26-35 years 16-20 year -.16148 .12654 .583 -.5012 .1782
21-25 years .20032 .11120 .278 -.0894 .4900
36-40 years -.45192 .22783 .330 -1.3929 .4890
36-40 years 16-20 year .29044 .23505 .638 -.6269 1.2078
21-25 years .65224 .22716 .145 -.2915 1.5960
26-35 years .45192 .22783 .330 -.4890 1.3929
16-20 year 21-25 years -.10841 .12485 .821 -.4458 .2290
26-35 years .16403 .13979 .647 -.2089 .5370
36-40 years -.03309 .37339 1.000 -1.6651 1.5990
21-25 years 16-20 year .10841 .12485 .821 -.2290 .4458
26-35 years .27244 .11872 .106 -.0376 .5825
36-40 years .07532 .36603 .996 -1.6027 1.7533
26-35 years 16-20 year -.16403 .13979 .647 -.5370 .2089
21-25 years -.27244 .11872 .106 -.5825 .0376
36-40 years -.19712 .37139 .946 -1.8401 1.4459
36-40 years 16-20 year .03309 .37339 1.000 -1.5990 1.6651
21-25 years -.07532 .36603 .996 -1.7533 1.6027
26-35 years .19712 .37139 .946 -1.4459 1.8401
*. The mean difference is significant at the 0.05 level.
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The Gowells howells post-hoc tests are also conducted for all the four dimensions of brand equity
in table 8.The post-hoc results for ‘Uncertainty’’ show that there is a difference between 21-25 years of age
(p=.031; significant at .05 level).
Managerial implications:
The hypotheses stated in the beginning have been validated through different statistical test. The
research objective was to examine the relationship between brand equity and promotional activities by
using of the dimensions of brand equity. In brand equity we have seen that customer is loyal towards
product and service. There is some difference in the perceived quality of product between age group (20-
25) . Building a positive store image can also reduce Indian consumer’s uncertainty, increasing
trustworthy and raising customer’s satisfaction. As a result of study companies should target on sales
promotion and event sponsorships.
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The Business & Management Review, Vol.2 Number 2, July 2012
138

A Conceptual Framework of Customer Retention Strategy (CRS)
Palto Ranjan Datta
University of Hertfordshire, UK
Keywords
Retail Industry, consumer-oriented demand, trust, bond, commitment, customer loyalty, customer
retention.
Abstract
The retail industry is huge and dynamic, an industry in which change is a constant phenomenon.
Over the last few decades in both Europe and North America one has seen the emergence of supermarkets
as the dominant retail form. This is due to the fact that consumers’ behaviour has changed and shifted
towards convenience, high quality produce and provision of customer care. Customers also demand
greater choice and would appear to place even greater emphasis on value for money. Flexible payment
methods and sophisticated channels of distribution have also played their part. These factors combined
with the growth of the car owning middle class enjoying economic stability have also fuelled its growth.
To cope with consumer demands retailers are constantly reshaping their business strategies and striving
to offer the right products and services both to meet existing needs and to anticipate and stimulate future
demand.
Several consumer-oriented factors have contributed to challenges in the field of grocery food retailing.
These include fluctuations in the economy, changes in consumers’ demographic characteristics and life
style eating habits, the search for a convenient way to shop providing wide varieties of assorted and
branded products, quality of products together with a steady increase in the number of car owners in
urban areas. Relationship Marketing is the biggest paradigmatic shift in marketing theory and practice in
recent decades. Customer retention has received considerable attention and has become a prime issue for
organisations desiring to stay in business, maximise profits or to build and sustain competitive advantage.
This current study critically examine the relevant literature to set the theoretical foundation on
relationship marketing. By reviewing current literature various constructs of relationship marketing in
relation to customer retention were identified, examined and discussed. A conceptual framework of
Customer Retention Strategy (CRS) was developed and established the hypotheses which are to be
empirically tested. The conceptual framework will establish the association of various relationships
marketing (RM) constructs with customer retention. The model integrates the concept of bonds, service
quality and components of relational quality (Trust, commitment & satisfaction) into one relationship
model to show the relationship between these five constructs and customer loyalty and finally the
independent variable of customer retention.
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139

Reward-or-Penalty Inter-temporal Pricing of a Decentralized Channel
Supply Chain under Asymmetric Information Condition
Weiping Liu
Eastern Connecticut State University, USA
Lindu Zhao
Southeast University, Nanjing, China
Keywords
Decentralized channel supply chain, asymmetric information, inter-temporal pricing, coordination
mechanism, reward-or-penalty, sales efforts.
Abstract
In a decentralized channel supply chain, manufacturer often wants retailer to exert more sales efforts to increase the
sale quantity. However, sales efforts are usually private information. Therefore, asymmetric information regularly
exists between manufacturers and retailers. To improve the financial efficiency of the whole channel supply chain,
reward-or-penalty inter-temporal pricing is proposed as a coordination mechanism. This mechanism allows
manufacturer to take actions such as sharing costs of the retailers’ sale efforts, subsidize retailers’ markdown and
passing the savings of production cost to the retailer to reward retailers who exert more sales efforts while penalizing
those who do not. In return, manufacturer also benefit from the inter-temporal pricing.
The Business & Management Review, Vol.2 Number 2, July 2012
140

Succession Planning in Management Institutes: A Critical Study
Priyanka Kulkarni
MIT Coe, Centre for Management Studies and Research, Pune, India
&
Arun Mokashi,
MIT Coe, Centre for Management Studies and Research, Pune, India
Keywords
Succession planning, Management institutes, Business organizations, Management practice, Efficiency of
management institute.
Abstract
Succession planning is an important issue which many organizations deal with. Management institutes, where the
future managers are made; teach the students succession planning and its importance. But their teachings are based
on theoretical concepts and they have to depend upon the industry for the experts who would share their experiences
with the students on how they implemented succession planning effectively and how it helped in improving the
efficiency of the organization. Succession planning is the search for the future leader. When the management
institutes are also business organizations operating in a business environment and facing challenges like competition
and attrition, all the practices that are applicable for making other organizations successful, should also be applicable
to a management institute. So don’t the management institutes need leaders for being successful Is this
management practice not applicable to management institutes also The researchers through this paper will try to
find out whether the technique of succession planning can be adapted by the management institutes. And if it can be,
how and what will be the impact on the efficiency of management institute
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141

Cultural Intelligence as Core Competency to Employability
Ruey-Fa LIN
FengChia University, Taiwan.
Nattawadee Korsakul
FengChia University, Taiwan.
Nattharuja Korsakul
FengChia University, Taiwan.
Keywords
University, Corporate Social Responsibility, Cultural Intelligence, Hierarchical Regression, Service
Learning
Abstract
Cultural Intelligence (CQ) has been regarded as an important role in cultivating intellectual, human, psychological,
and social capital development investing for the future employability in multinational and globalized corporate.
Pursuing the necessary and desired human resources using human, intellectual, and social capitals, the fully English
taught courses become popular in the recent years amongst universities in higher education as the highly achieved
goals. For local and foreign and different studying abroad students, cross-cultural understanding plays a critical and
crucial competency to adjustment and management. The empirical study was conducted and employed students in
bachelor programs of international business administration and international trading as well as other students in
business schools and other competency-based departments. This study aimed to clarify the various understanding
and competency differences between fully and partially English taught programs/divisions with general competencybased
training department courses.
For those students taught by English as a foreign language amongst professionals may be supposed to have
a higher importance understanding and accessible capability. Compared with their soft skills training simultaneously
stressed by the university awarded teaching excellence for successive four years, extracurricular activities, leadership
training, general liberal art and civility education, intern/practicum, part-time workers, and voluntary services are
used to enhance the supportive/supplementary service learning types. Hierarchical multiple regression and
multivariate analysis of variance using statistical data analyzed with SPSS were conducted from randomly selected
at stratified department/division/program level.
The results are desired to give a clear map for developing cross-cultural leadership and management
guideline as further learning basis.
The Business & Management Review, Vol.2 Number 2, July 2012
142

Opinion-Leading Role of Politically Aware Consumers
Mirza Ashfaq Ahmed
University of Gujrat, Pakistan
&
Suleman Aziz Lodhi
Lahore Leads University, Pakistan
Keywords
Political Socialization Process, Opinion Leader, Voting Behavior, Community Agents, Pakistan.
Abstract
In the political system, voters belong to diverse nature of communities and their voting intentions are the outcome of
their participation in the social networks and learning from community’s socialization process. Where, social agents
play very significant and influential contribution in shaping the community’s overall voting behavior through an
ongoing process. These social agents influence and being influenced by the community members during this process.
This research begins to address the influential contribution of community, opinion leader and individual voter in
community’s overall voting decisions by conceptualizing a model. This model is empirically evaluated by surveying
and collecting 550 valid responses from registered voters of selected constituency. A carefully designed questionnaire
was used as the measurement instrument to collect the empirical data from the sample. The structural equation
modeling technique was employed to analyze the possible relationship between the different constructs of the
conceptualized model. The study concludes that social agents have major contribution in shaping the attitude of the
voters towards a particular political party. This is due to the reason that electorates’ behaviors in the community are
highly vulnerable to the knowledge and information coming from different fronts. Where, opinion leaders play very
important role in convincing and wining the voters for a particular political party through provision of relevant
information, brand advocacy and powerful word-of-mouth within their electoral communities.
The Business & Management Review, Vol.2 Number 2, July 2012
143

International Conference on Business & Economic Development (ICBED)
23-24 th July 2012
Planet Hollywood Resort & Casino
3667 Las Vegas Boulevard
South Las Vegas, NV 89109, USA.
Conference Programme & Proceedings
Method - Integrity - Camaraderi
144

International Conference on Business & Economic Development (ICBED)
23-24 th July 2012
Planet Hollywood Resort & Casino
3667 Las Vegas Boulevard
South Las Vegas, NV 89109, USA.
Dear Conference Participants,
It gives me great pleasure to welcome you all here in Las Vegas. Given the glamour all around, the
conference theme of ‘International Conference on Business and Economic Development’ immediately becomes
revealing - the dichotomy that exists between developing and the developed world. For development to take place at
a more rapid pace, it is the quality of response to challenges that matter. In line with the theory developed by Porter ,
moving forward, to start with, from a factor driven stage to investment driven stage , and then to the stage of
innovation , is , mostly a function of the quality of resources employed , management included. The developing
countries are experiencing it. Where the quality of response is high via resource quality, both at individual
(entrepreneurship) and govt. level, the gradient of production becomes visibly steeper. All this requires reforms at all
levels - economic, social and political. Successful implementation of reforms is thus of strategic importance for the
developing world.
If we look at the DCs, the same scenario again. America is in a less advantaged shape today - we all know. It
might have been more awful had not the Republican policy making body earlier gone for the supply side
rationalisation. All said and done, Britain would have been in a much poorer shape to day had it not been for the
conservative govt. to restructure the economy during Thatcher’s time.
Development efforts will thus take different colour depending on at what stage a country is in. The present
conference is the right platform to reflect on all these and other related issues and possibly areas of consensus will
emerge on apparently conflicting development issues thereby making the event invigorating.
I extend my very best wishes to you all
Professor P. R. Banerjee
Head of Research and Development
Academy of Business & Retail Management (ABRM)
145

International Conference on Business & Economic Development (ICBED)
23-24 th July 2012
Planet Hollywood Resort & Casino
3667 Las Vegas Boulevard
South Las Vegas, NV 89109, USA.
SCHEDULE FOR THE CONFERENCE 2012
Saturday 21 st July , 2012, thru Sunday 22 nd July, 2012
Arrival and Independent traveling days in Las Vegas, USA
MONDAY 23 rd July, 2012
8.00 AM -9.00AM Registration
Monday 23 rd July, 2012
9.00AM-9.15AM
OPENING ADDRESS & WELCOME
9.15AM-13.00 PM (Tea and coffee Break: 11.00-11.15)
Track: HRM, Marketing and Information Technology
Session Chair: Dr P R Datta
I
II
How Does Employee satisfaction Impact Information Flow during order fulfillment process
Yen-Ting Tim Lin and Wen-Hui Mico Yang, Hsiuping University of Science and
Technology, Taiwan; Cho-Pu Vincent Lin, St. John`s University, Taiwan
An Exploration of Consumer Misbehaviours and their influences on Retail stores: An Application
of the theory of Justice
Jungki Lee, Korea University, Sejong, South Korea
III
IV
How Do Online Consumer Review Sentiments affect E-commerce Sales A Text Mining
Analysis
Wenyu Do, Xiaojun Quan, and Wenyin Liu, College of Business, City University of
Hong Kong, Hong Kong, China.
Geographic Distribution of Population and Labor Force in Saudi Arabia
Majed Sultan Abu Ashwan, College of Arts, King Saud University, Riyadh, Saudi
Arabia
146

V
VI
VII
VIII
IX
X
The Relationship Between Leadership and Learning Organisation: A Review of the Literature and
Research Proposal
Bojana Milic, Ljubica Dudjak and Leposava Grubic-Nesic, University of Novi Sad,
Serbia
Relationship Marketing: Towards a Definition
Palto Ranjan Datta, University of Hertfordshire, UK and Ashru Bairagee, Academy of
Business and Retail Management, UK
ERP System Implementation CSFs for Korean Organisations: A Delphi study
Yeong Real Kim, Chungbuk National University, Korea
The Effects of Extrinsic Cues on the Relationship Between Brand Image and Purchasing
Intention-Evidences from Chinese Exchabge Students` Perspective
Luke Hsiao, Ming Chi Hsiao and jen-Ting Sun, College of Management, I-Shou
University, Taiwan
Employee Stock ownership and Employee Psychological ownership: The Moderating
Role of Individual Characteristics
Ann Lin, Chang Gung Institute of technology, Taiwan
Adoption of Job Rotation as a Component of Staff Development in Polytechnics In Ghana
Patience Kwakyewa Asirifi, Koforidua Polytechnic, Koforidua, Ghana
13.00-14.00
BREAK FOR LUNCH
Monday 23 rd July 2012, 2012
14.00 PM-14.25PM
Key Note Speaker
Mark T Jones
Mark is a fervent internationalist, who is widely travelled. He has had a distinguished career in
education and currently serves as the Director of External Affairs for Park Royal College. In the
year 2000 he initiated and oversaw a major humanitarian venture into war-torn Sierra Leone,
and then spent two years in the Middle East where he worked in Jordan (2002 – 2004). He
writes and speaks on a variety of subjects ranging from corporate governance to women’s health
in the developing world.
As well as being an orator of distinction, Mark believes that it is essential that we articulate our
convictions with passion; in this regard he is eager to help the voice of others to be heard. He is a
Legislative Leadership Training specialist, as well as being an advisor on Diaspora community
engagement. He is the Co-Founder & Executive Director of the Horn of Africa Business
Association (HABA) as well as sitting on the Board of the Kitenge Africa Foundation (Uganda),
the Advisory Committee of the Expertise Forum (A Think Tank Society focusing on the
Sustainable Development of South Asian Countries) and being Chair of Trustees of Daughters of
147

Eve. In 1994 he was elected a Freeman of the City of London, and is also a Fellow of the
Chartered Management Institute.
14.30 PM – 17.30 (Tea and Coffee Break: 16.00-16.15)
Track: Finance, Accounting and Organisational Structure
Session Chair: Professor Teymur Rahmani
I
II
III
IV
V
Markets in Financial Instruments Europe Directive (MIFID): A Method of Controlling Ethical
Banking
Amaia Jone Betzuen Alvarez, University of Basque, Spain
Efficiency of EC Greenhouse Gas Abatement Measures and Firms in the European
Union: Evidence from Plant Level Allocations and Surrendered Permits.
A. Gregoriou and Jerome. V. Healy, University of Hull Business School, UK
Corruption, Democracy and Tax Compliance: Cross-country Evidence
Teymur Rahmani and Saman Falahi, University Tehran, Iran
Are High Interest Loans a Debt Trap or Access to Credit Evidence from a Field Experiement of
Payday Borrowers.
Marc Anthony Fusaro, Arkansas Tech University, USA and Patricia J. Cirillo, Cypress
Research Group, USA
The Expectations of Potential Acquirers of Real estate rights and decisions to Purchase property
in times of Recesion
Darja Kobal Grum, Department of Psychology, University of Ljublijana, Slovenia and
Bojan Grum, European Law faculty in Nova Gorcia, Slovenia
17.35PM
CLOSING SPEECH FOR THE 1 st DAY CONFERENCE
Tuesday 24 th July, 2012
9.30AM-9.45AM
OPENING ADDRESS FOR DAY 2
9.45AM -13.00PM (Tea and coffee Break: 11.00-11.15)
Track: The Growth and Economic Development
Session Chair: Marek Dziura
I
The Role of Micro and Small Enterprise in Employment Opportunity and Poverty reduction in
addis Ababa, Ethiopia: The Case of Addis ketema Sub City
Moges Teshome, Wageningen University, Addis Ababa, Ethiopia
148

II
III
IV
V
VI
VII
VIII
Innovation Policy in Poland – Challenge for Intensive Growth
Marek Dziura, Cracow University of Economics, Poland
Structural Changes and Development of the SME Sector in Poland after EU Membership
Ryszard Borowiecki and Barbara Siuta-Tokarska, Cracow University of
Economics, Poland
The Identification and Measurement of Financial Threats Vs the Causes of Insolvency in the
period of Poland`s Economic Transformation
Jaroslaw Kaczmarek, Cracow University of Economics, Poland
Challenges of Sustainability and Urban Development in Nigeria: Reviewing the Millenium
Development Goals
Owobu Gladys Ann, Department of Urban and Regional Planning, Esan South east
LGA, Edo State, Nigeria
Incentives to Encourage Social Environmental Responsible Corporate Actions: Willingness to pay
for non-use value of Land-Case of Backpackers in Fiji
Filipo Tokalau, School of Economics, University of South Pacific Suva, Fiji island
Testing the Export-led Growth Hypothesis for Sub Saharan Africa Countries(SSA). A Panel Data
Analysis
Francis Atsu and Samuel Adams, Ghana Institute of Management and Public
Administration (GIMPA), ACCRA, Ghana
Cross Country Analysis of GCC Economic Risk
Hassan Mounir El-Sady, Gulf University for Science and Technology, Kuwait, and
Vasilya Sultanova, Australian College of Kuwait, Kuwait
13.00-14.00
BREAK FOR LUNCH
Tuesday, 24 th July 2012
14.00 PM-14.25PM
14.30 PM – 17.30 (Tea and Coffee Break: 16.00-16.15)
Track: Miscellaneous
Session Chair: Mark Thomas Jones
I
II
How to Transfer Knowledge to your work
Wen-Hui Mico Yang and Yen-Ting Tim Lin, Hsiuping University of Science and
Technology, Taiwan and Cho-Pu Vincent Lin, St. John`s University, Taiwan
Enterprise Development under Globalisation and the New Economy Conditions
149

Andrzej Jaki, Cracow University of Economics, Poland
III
IV
V
VI
VII
Innovation in Enterprise Development Strategy
Tomasz Rojeck, Cracow University of Economics, Poland
Research of Influencing Factors for Usage of Facebook Willingness-A case Study on College
Students in the Tamsui Area
Cho-Pu Vincent Lin, St. John`s Iniversity, Taiwan, Yen-Ting Lin and Wen-Hui Mico
yang, Hsiuping University of Science and Technology, Taiwan
Scientific Advance and Perceptions about the Effectiveness of Democracy in MENA
Hoda Abd El Hamid Ali, Helwan University, Cairo, Egypt
What Explains Innovative Outcomes at the Start Up Stage
Masatoshi Kato, School of Economics, Kwansei Gakuin University, Japan, Hiroyuki
Okamuro, Hitotshubashi University, Japan and Yuji Honjo, Chuo University, Japan
Does Vice Pay A Traditional Investigation of “Irresponsible” Investing
Greg M. Richey, California State University, San Bernardino, USA
17.05 PM CLOSING SPEECH FOR THE CONFERENCE
25 th July 2012
There will be no session or function scheduled for today. Please take this opportunity to
explore Las Vegas
150

How does Employee Satisfaction Impact Information
Flow during Order Fulfillment Process
Yen-Ting Tim Lin
Hsiuping University of Science and Technology, Taiwan
Wen-Hui Mico Yang
Hsiuping University of Science and Technology, Taiwan
Cho-Pu Vincent Lin
St. John's University, Taiwan
Keywords
Employee satisfaction, information flow, order procurement process
Abstract
Employees are the internal customers of the business, because, if they are satisfied with the current
working environment, they will be willing to cooperate with the management to accomplish organizational goals.
Employee satisfaction with training stems from the fact that employees gain confidence in producing high-quality
services, perceive potentials for career advancement and appreciate their companies’ investment in them. Therefore,
the present study explores how employee satisfaction may influence information flow during order fulfillment
process in Taiwanese electronics companies.
The present study is assumed that employee satisfaction has a positive relationship with information flow
in order fulfillment. It features a significant relationship between information flow and employee satisfaction.
Furthermore, the result shows that salary, promotion opportunities and nature of job all positively affect quality of
information flow.
Overall, the finding of a positive correlation between employee satisfaction and the quality of information
flow has important implications on efforts to improve the quality of order fulfillment in Taiwan’s electronics
industry.
Introduction
Order fulfillment actually serves as a spanning capability that, when utilized in a strategic
manner, creates significant potentials for a competitive advantage (Davis-Sramek, Mentzer, & Stank,
2008). However, logistic service quality is not the only factor that may influence the order-fulfillment
process. Based on Vaidyanathan and Devaraj’s (2008) findings, the timeliness of order fulfillment has
more impact than accuracy of order fulfillment. They suggested information quality be used as a resource
to bring forth quality fulfillment capability.
The importance of employee factors, such as job satisfaction, loyalty, organizational
commitment, and their impact on operational performance, has been largely neglected by the
management (Yee, Yeung, & Cheng, 2008). Therefore, Yee et al. (2008) proposed a research model to study
the impact of employee satisfaction on quality and profitability. Although employee satisfaction belongs
to organizational behavior and psychology, Ukko, Tenhunena, and Rantanen (2007) were convinced that
employee attributes are an essential factor of operational efficiency.
Literature Review
Employee Satisfaction
Employees are the internal customers of the business, because, if they are satisfied with the
The Business & Management Review, Vol.2 Number 2, July 2012
151

current working environment, they will be willing to cooperate with the management to accomplish
organizational goals (Chen, Yang, Shiau, & Wang, 2006). Employees with high levels of extraversion
reported a greater intention of remaining when perceiving their work environment as having a high level
of social rewards but a low level of procedural fairness (Burnett, Williamson, & Bartol, 2009). Jun, Cai, and
Shin (2006) mentioned that employee satisfaction with training stems from the fact that employees gain
confidence in producing high-quality services, perceive potentials for career advancement and appreciate
their companies’ investment in them. To Silvestro (2002), employee satisfaction is critical to service
organizations’ ability to respond effectively to customer needs while driving down costs through reduced
recruitment and training expenditure and enhanced cost efficiency accruing from skilled workers’
superior performance.
Information Flow
The ability to manage and track the flow of relevant information across supply-chain members
has been greatly enhanced (Kulp, Lee, & Ofek, 2004). The effectiveness of information exchanges in a
partnership hinges on the quality of information sharing and “the level of information quality and
participation” (Heikkila, 2002). Wade and Hulland’s (2004) reported that resources of information systems
may take on many of the attributes of dynamic capabilities and, thus, may be particularly useful to
companies operating in rapidly changing environments or facing long-term competiveness issues by
helping them develop, add, integrate and release other key resources over time. Kulp et al. (2004)
mentioned that information sharing may help the companies generate products and services that better
match the needs of end customers. According to Shang and Marlow (2005), an information-based
capability comprises information sharing and information technologies, which improve distribution
performance, facilitate logistic integration and contribute to supply chain success.
Research Methodology
In order to find solutions to the managerial dilemmas identified in the introduction and
literature review, a research question were developed:
Research Question: What employee satisfaction factors will influence information flow in order
fulfillment process
To answer this question, the present study adopts a quantitative approach to verifying the
current situations in the electronics industry. On the basis of the research question, a hypothesis was
formulated:
Employee satisfaction will be positively related to quality of information flow.
Figure 1 illustrates a model that shows hypothesis along with the variables imbedded in it.
The population of present study consists of the companies in Taiwan’s electronics industry.
According to Taiwan Stock Exchange, there are 344 such companies. Given the definition of order
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152

fulfillment, the respondents for the present study should have had direct contact with customers and a
personal involvement with the company’s business operation. For this reason, the present survey targeted
the employees in sales departments.
According to a list from Taiwan Stock Exchange, companies were contacted and inquired about
their willingness to participate in the survey. Questionnaires were then distributed, either by mail or
online. The questionnaire eventually adopted consisted employee satisfaction and information flow.
Employee satisfaction: For the measurement of employee satisfaction, Yee et al. (2008)
formulated a number of questions, such as “We are satisfied with the salary of this company,” “We are
satisfied with the promotion opportunities at this company,” and “We are satisfied with the job nature of
this company.” These same questions were adopted in the present study.
Information flow: Vaidyanathan and Devaraj (2008) used statements such as “I believe our
company’s online catalog information is adequate,” “I believe our company’s online requisitioning
processes are effective” to measure quality of information flow. In present study, these same items were
used to measure quality of information flow.
Data Analysis
The following section presents the empirical verification of the causal relationship between
employee satisfaction and information flow. The structural equation model was used as a statistical
method for this testing. The observed and latent variables are described in the following.
Observed Variables: ES 1 (Salary), ES 2 (Promotion opportunities), ES 3 (Nature of job); IF 1 (Online
information), IF 2 (Online order procedures), IF 3 (Accuracy of order fulfillment), IF 4 (Timeliness of order
fulfillment).
Latent variables: Employee satisfaction, quality of information flow.
The standardized regression weights in Table 1 range from 0.610 to 0.945. All of these weights are below
1.0. Therefore, it is clear that no offending estimates had occurred in Model
Table 1. Standardized Regression Weights.
Estimate
Information flow Employee satisfaction .746
ES 1 ES .915
ES 2 ES .945
ES 3 ES .708
IF 4 IF .730
IF 3 IF .610
IF 2 IF .637
IF 1 IF .712
Note: Estimate = Standardized coefficients
Figure 2 is a graphical representation of the model. The indices of this model are chi-square divided by
degree of freedom = 2.770, GFI = 0.970, CFI = 0.983, and RMSEA = 0.077. All of these indices have met the
index value recommended by researchers (Kline, 1998; Byrane, 2001; Wu, 2009; Tabei, 2006).
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153

Table 2 shows a positive and significant relationship between employee satisfaction and quality of
information flow. The three observed variables (salary, promotion opportunities, nature of job) are
positively influenced by employee satisfaction.
Furthermore, the four observed variables (online information, online order procedures, accuracy of order
fulfillment, timeliness of order fulfillment) are positively influenced by information flow.
Table 3 indicates that two relationship errors, e5 and e6, should be created. The relationship is significant.
Table 3. Covariance.
Estimate S.E. C.R. P
e5 e6 1.308 .178 7.348 ***
Note: Estimate = Unstandardized coefficients; S.E. = Standard error;
C.R. = Critical ratio; P = Significance: * p < 0.05, ** p < 0.01, *** p < 0.001
As shown in Figure 2, ES 1 (Salary), ES 2 (Promotion opportunities) and ES 3 (Nature of job) positively
affect information flow. Hypothesis, that employee satisfaction will be positively related to quality of
information flow, was support by the data. This model assumes a positive relationship between employee
satisfaction and quality of information flow.
Discussions
In Figure 2, the standardized regression weight is 0.75 between employee satisfaction and information
flow. The standardized regression weight is significantly high between these two groups. Hence, this
result suggests that the information flow is a function of satisfied employees (Yee et al., 2008). The
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154

following paragraph displays the detail standardized regression weights for employee satisfaction and
information flow.
The standardized regression weight of IF 1 (Online information) is 0.71; for IF 2 (online order procedures)
it is 0.64. The weights for IF 3 (Accuracy of order fulfillment) and IF 4 (Timeliness of order fulfillment) are
0.61 and 0.73, respectively. The standardized regression weight of ES 1 (Salary) is 0.91 while those of ES 2
(Promotion opportunities) and ES 3 (Nature of job) are 0.94 and 0.71, respectively. Because the standard
regression weights of salary and promotion opportunities are high, these two variables had to be fulfilled
first in order for them to exert a strong effect on information flow.
The coefficient weight between IF2 (Online order procedures) and IF3 (Accuracy of Order fulfillment) is
significantly high (0.65). Bienstock, Mentzer and Bird (1997) defined order procedure as the efficiency and
effectiveness of the procedures followed by a supplier. This result supports the posited relationship
between order procedures and order-fulfillment accuracy.
References
Bienstock, C. C., Mentzer, J. T., & Bird, M. M. (1997). Measuring physical distribution service quality.
Journal of the Academy of Marketing Science, 25(1), 31-44.
Burnett, M. F., Williamson, I. O., & Bartol, K. M. (2009). The moderating effect of personality on employees’
reactions to procedural fairness and outcome favorability. Journal of Business and Psychology, 24(4), 469-484
Byrne, B. M. (2001). Structural equation modeling with AMOS: Basic concepts, applications and
programming. Mahwah, NJ: Lawrence Erlbaum Associates.
Chen, S. H., Yang, C. C., Shiau, J. Y., & Wang, H. H. (2006). The development of an employee satisfaction
model for higher education. The TQM Magazine, 18(5), 484-500.
Davis-Sramek, B., Mentzer, J. T., & Stank, T. P. (2008). Creating consumer durable retailer customer loyalty
through order fulfillment service operations. Journal of Operations Management, 26, 781-797.
Heikkila, J. (2002). From supply to demand chain management: efficiency and customer satisfaction.
Journal of Operations Management, 20, 747-767.
Jun, M., Cai, S., & Shin, H. (2006). TQM practice in Maquiladora: Antecedents of employee satisfaction and
loyalty. Journal of Operations Management, 24, 791-812.
Kline, R. B. (1998). Principles and practice of structural equation modeling. New York: Guilford.
Kulp, S. C., Lee, H. L., & Ofek, E. (2004). Manufacturer benefits from information integration with retail
customers. Management Science, 50, 431-444.
Shang, K. C., & Marlow, P. B. (2005). Logistics capability and performance in Taiwan’s major
manufacturing firms. Transportation Research, Part E: Logistics and Transportation Review, 41, 217-234.
Silvestro, R. (2002). Dispelling the modern myth: Employee satisfaction and loyalty drive service
profitability. International Journal of Operations and Production Management, 22, 30-49.
Tabei, A. (2006). The handbook of AMOS for using variance-covariance analysis. Taipei: Ting-Mao
Publishing.
Ukko, J., Tenhunena, J., & Rantanen, H. (2007). Performance measurement impacts on management and
leadership: Perspectives of management and employees. International Journal of Production Economics, 110, 39-51.
Vaidyanathan, G., & Devaraj, S. (2008). The role of quality in e-procurement performance: An empirical
analysis. Journal of Operations Management, 26, 407-425.
Wade, M., & Hulland, J. (2004). The resource-based view and information system research: Review,
extension and suggestions for future research. MIS Quarterly, 28, 107-138.
Wu, M. L. (2009). SPSS operation and application: The practice of quantitative analysis of questionnaire
data. Taipei: Wu-Nan Book Co., Ltd.
Yee, R. W. Y., Yeung, A. C. L., & Cheng, T. C. E. (2008). The impact of employee satisfaction on quality and
profitability in high-contact service industries. Journal of Operations Management, 26, 651-668.
The Business & Management Review, Vol.2 Number 2, July 2012
155

An Exploration of Consumer Misbehaviors and their Influences on
Retail Stores: An Application of the Theory of Justice
Jungki Lee
Korea University at Sejong, South Korea
Keywords
Consumer misbehavior, theory of justice, distributive misbehaviors, procedural misbehaviors,
interactional misbehaviors
Abstract
This study applies a new perspective to the study of consumer misbehaviors and investigates the
consequences of them at retail stores. By adopting the theory of justice, the study conceptualizes consumer
misbehaviors as a dysfunctional type of consumer behavior aimed at obtaining unfair or unjust benefits during
shopping, and classifies consumer misbehaviors into three types; distributive misbehaviors, procedural misbehaviors,
and interactional misbehaviors. Distributive misbehaviors include shoplifting, financial fraud, and other outcomeoriented
dysfunctional consumer behaviors where the allocation of benefits is not distributed fairly but unduly
unfavorable to the seller. Procedural misbehaviors, exemplified by jumping queues, cheating for personal
convenience, willful disobedience of rules and so on, are founded upon the buyers’ motives for selfish procedural
convenience. Finally, interactional misbehaviors include verbal abuse, physical abuse, using threats, and other
consumer’s unfair interpersonal treatment of the seller. The study, by using 9 hypotheses, examined the extent of
each type of consumer misbehaviors and its influences on store employees, other customers in the store, and overall
store atmosphere. For the data collection, a survey research was conducted from 235 retail employees who worked for
department store, general store, convenience store, or discount store. Seven of the nine hypotheses were either fully
or partially supported, indicating the significant negative influences made by consumer misbehaviors on store
employees, other customers, and overall store atmosphere. Managerial implications and future research directions are
provided.
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156

How do online consumer review sentiments affect e-commerce sales A
Text-Mining Analysis
Wenyu Dou, Wenyin Liu and Xiaojun Quan
City University of Hong Kong, China
Keywords
Word-of-mouth communication, e-commerce, consumer sentiment, service attributes.
Abstract
Word-of-mouth (WOM) communications are considered to be key drivers for e-commerce sales. Yet majority of
existing studies in this area rely on numerical ratings provided by customers, ignoring the rich details of consumer
sentiment (e.g., happy vs. exhilarated) contained in the review texts. This study aims to fill this void. Specifically, we
developed a new text-mining methodology that can extract and represent consumer sentiments in reviews in an
iterative manner. We start by identifying key dimensions in consumer reviews. Next, we rate the sentiment level of
each specific review according to a pre-developed coding sheet. On the basis of a text mining process, we develop
consumer sentiment scores on key service attributes.
Finally, we ran an econometric analysis on the impact of review sentiment scores on sales. The model was tested
using data from a travel service provider in China and obtained preliminary support. Implications for the e-
commerce industry and WOM research are discussed.
The Business & Management Review, Vol.2 Number 2, July 2012
157

Geographic Distribution of Population and
Labor Force in Saudi Arabia
Majed Sultan Abu Ashwan
College of Arts, King Saud University, Riyadh, Saudi Arabia
Keywords
Geographic distribution, labor force, growth of population, expatriates, population redistribution
Abstract
Saudi Arabia, the largest country in the Middle East is going through changes on its demographic front;
not only on growth but also on geographic distribution. Increasing urbanization, geographic mobility and
immigration are national concerns requiring concerted efforts.
This paper examines (a) regional distribution of population (b) region wise growth of population during
1974-2010 (c) proportional growth and distribution of expatriates at various regions of the Kingdom and (d) labor
force pattern.
This paper is based on the National Censuses carried out in the Kingdom on four different periods namely,
1974, 1992, 2004 and 2010.
Population of the Kingdom is largely concentrated in regions namely, Riyadh, Makkah and Eastern
Region, where three metropolises – Riyadh, Jeddah and Dammam – are located. Labor force pattern is based on the
development dimension of the area. This urban pressure creates hurdles on development planning in terms of basic
infrastructure. And so, with industrial and commercial development, population redistribution will be of priority.
Introduction
Population distribution in Saudi Arabia is uneven both on regional and urban scales (Arab News,
2012; Makki, 2008). This distribution created phenomenal growth of urban centres through concentration
of Government and private investments (Collemore, 2003). Thus, the primate cities grew alarmingly,
which increased demand for public services such as piped water, electricity, sewage and telephone.
Growth of secondary cities needs encouragement at this juncture (Khraif, 2007), in order to redistribute
the population.
Geographic regions namely Riyadh – the capital; Makkah – the holy city and Eastern region –
industrial corridor had expanded in terms of population size during the last four decades (Ashwan et al.,
2012; Arab News, 2012). As a result, the infrastructure of utility services upgraded; there by promoting
quality of life style. This modernization increased expatriate labor force paving way for tremendous
changes in living arrangement, regional balance and distribution of population and thus the national
economy (Khraif, 2007).
The discovery of oil revenues opened up the employment sector creating openings for foreign
labor to fulfill demands from various economic sectors – primary, secondary and tertiary. The expansion
of economic and labor sector facilitated rural to urban migration of natives. Urbanization and
modernization created inequity and regional differences that affected economy and labor force (Ashwan,
1990).
Inmigrations – mobility of native population from one region to another especially rural to urban
gained momentum (Makki, 2008) for purposes of employment, better living arrangements, commercial
The Business & Management Review, Vol.2 Number 2, July 2012
158

and industrial activities and quality of life (Khraif, 2000; Khraif, 1994).
This uneven distribution of population in the Kingdom favoring metropolises and small towns due to
urbanization create hurdles (Collemore, 2003) on public utility services (Salam and Mouselhy, 2012).
Objectives
This paper is prepared in this context of increasing disparity among various regions, which affect
economic integration of the Kingdom. A close look at population – both native and expatriate - at various
geographic regions and its relation with labor force participation are made here.
Methodology
Data pertaining to various censuses in the Kingdom is utilized in this paper. Censuses in Saudi Arabia
were held during 1962/63 (incomplete); 1974 (complete but not reliable): 1992, 2004 and 2010.
Results and Discussion
As the 1962/63 census was incomplete, it was not analyzed. Census of 1974 was not utilized much as it is
not reliable. The other census data were utilized to the maximum extent in this analysis. Labor force
details were made available only in 2004 census. Results are discussed under three heads (a) geographic
distribution (b) labor force participation and (c) correlation between expatriate population and labor force
pattern.
Distribution of Population
Census of 1974 gave Makkah as the largest region in terms of population size (26.2%) – both
native (23.5%) and expatriate (46.2%) – followed by Riaydh (18.7%; 18.8%; 18.2%), Eastern Region (11.3%;
11.3%; 11.2%) and Aseer (10.1%; 10.9%; 4.0%) in that order. Riyadh region experienced a large growth in
population. By 1992, it population reached near to that of Makkah, proportionately. These three regions
(Riyadh, Makah and Eastern Region) took a share of 64.2 percent of population (59.35% of natives and
77.2% of expatriates), as per 1992 census. The corresponding proportions during 2004 and 2010 were 64.5
(59.7% in case of natives and 77.3% in case of expatriates) and 65.6 (60.5% of natives and 77.0 % of
expatriates); showing the pace of urbanization. Not only the proportional distribution of native
population but also the expatriate population grew in these regions. Regional variations are indicative of
urbanization, employment and demographic processes (Arab News, 2012).
The Business & Management Review, Vol.2 Number 2, July 2012
159

Table 1 Proportional distribution of population by regions – Census years
Regions
Total
1974 1992 2004 2010
Total
Al Riyadh
Makka Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
18.7
26.2
7.7
4.8
11.3
10.1
2.9
3.9
1.9
6.1
2.1
2.8
1.5
100.
0
22.6
26.4
6.4
4.4
15.2
7.9
2.9
2.4
1.4
5.1
1.8
2.0
1.6
100.
0
24.1
25.6
6.7
4.5
14.8
7.4
3.1
2.3
1.2
5.2
1.9
1.7
1.6
100.
0
25.0
25.5
6.6
4.5
15.1
7.1
2.9
2.2
1.2
5.0
1.9
1.5
1.6
100.
0
Natives
Al Riyadh
Makka Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
Expatriate
Al Riyadh
Makka Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
18.8
23.5
8.0
5.2
11.3
10.9
3.1
4.4
2.1
5.8
2.2
3.0
1.6
100.
0
18.2
46.2
5.2
1.7
11.2
4.0
1.2
0.6
0.7
7.9
1.8
0.6
0.7
100.
0
21.2
22.6
6.8
5.0
15.5
9.3
3.3
2.8
1.5
6.0
2.0
2.4
1.8
100.
0
26.3
36.4
5.3
3.0
14.5
4.1
1.8
1.4
1.1
2.8
1.3
0.9
1.0
100.
0
22.5
21.7
6.9
4.9
15.5
8.7
3.6
2.7
1.5
6.0
2.1
2.0
1.9
100.
0
28.2
36.0
6.0
3.2
13.1
4.1
1.6
1.2
0.7
3.1
1.2
0.8
0.9
100.
0
The Business & Management Review, Vol.2 Number 2, July 2012
160
23.0
22.0
6.7
5.0
15.5
8.5
3.5
2.6
1.4
5.9
2.2
1.9
1.9
100.
0
29.4
33.2
6.1
3.4
14.4
3.8
1.5
1.3
0.6
3.1
1.2
0.8
1.1
100.
0

Over the census years population grew from 6 million (1974) to 27 million (2010); a growth of 303
percentage. Growth during the period of 1974-1992 was 15.2 percentage; 1992-2004 was 33.8 percentage
while the same for 2004-2010 was 19.7 percentage. Annual growth rate showed a hike during 2004-2010
as compared to the previous census period.
Table 2 Population by regions – Census Years
Regions 1974 1992 2004 2010
Total
Al Riyadh
Makka Al Mokarramah
Al Madinah Al Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
Native
Al Riyadh
Makka Al Mokarramah
Al Madinah Al Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
Expatriate
Al Riyadh
Makka Al Mokarramah
Al Madinah Al Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
1259145
1760216
516636
324543
762037
678679
194539
265216
127582
408334
144097
185851
99591
6726466
1115252
1394934
475457
311230
673113
647068
182112
260127
121997
345706
130105
180824
94436
5935361
143893
365282
41179
13313
88924
31611
9427
5089
5585
62628
13992
5027
5155
791105
3834986
4467670
1084947
750979
2575820
1340168
486134
411284
229060
865961
300994
332157
268228
16948388
2613915
2781075
837695
610566
1902108
1150089
401917
346177
178610
733968
240581
289946
223406
12310053
1221071
1686595
247252
140413
673712
190079
84217
65107
50450
131993
60413
42211
44822
4638335
5458273
5797184
1512724
1015972
3360031
1687939
691716
526882
279971
1187587
420345
377900
361738
22678262
3725557
3584628
1144271
817271
2555502
1434842
594271
451747
239834
994025
349041
328317
308034
16527340
1732716
2212556
368453
198701
804529
253097
97445
75135
40137
193562
71304
49583
53704
6150922
6777146
6915006
1777933
1215858
4105780
1913392
791535
597144
320524
1365110
505652
411888
440009
27136977
4296745
4116065
1262512
928491
2891115
1590847
661153
487204
268177
1105095
402424
348636
349112
18707576
2480401
2798941
515421
287367
1214665
322545
130382
109940
52347
260015
103228
63252
90897
8429401
The Business & Management Review, Vol.2 Number 2, July 2012
161

Regions of Riyadh, Makah, Al Qaseem, Eastern Region, Northern Border, Najran and Jouf reported a hike
in annual growth rate. Tabouk reported a reduction in annual growth rate. During 1992-2004, native
Saudi grew in numbers; higher in Riyadh, Tabouk, Najran and Jouf. But during 2004-2010, expatriate
population grew in all regions. These high growth rate and increased population density has implications
on business and financial sectors as large populations are captive consumer market that pressurizes
housing, health care, education, transport and environmental sectors (Arab News, 2009; Vizian, 2009).
Table 3 Annual growth rate of population by regions – Census years
Regions
Annual
growth
rate
74-92
Annual
growth
rate
(92-04)
Annual
growth
rate
(04-10)
Percentage
growth
(74-92)
Total
Al Riyadh
Makka Al
Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
Native
Al Riyadh
Makka Al
Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
6.0
5.0
4.0
4.5
6.6
3.7
4.9
2.4
3.2
4.0
4.0
3.1
5.3
5.0
4.9
3.7
3.1
3.6
5.6
3.1
4.2
1.5
2.1
4.1
3.3
2.5
4.6
3.9
3.0
2.2
2.8
2.5
2.2
1.9
3.0
2.1
1.7
2.6
2.8
1.1
2.5
2.4
3.0
2.1
2.6
2.4
2.5
1.9
3.3
2.2
2.5
2.5
3.1
1.0
2.7
2.5
3.9
3.1
2.9
3.2
3.6
2.2
2.4
2.2
2.4
2.5
3.3
1.5
3.5
3.2
2.5
2.5
1.8
2.3
2.2
1.8
1.9
1.3
2.0
1.9
2.5
1.1
2.2
2.2
204.6
153.8
110.0
131.4
238.0
97.5
149.9
55.1
79.5
112.1
108.9
78.7
169.3
152.0
134.4
99.4
76.2
96.2
182.6
77.7
117.1
33.1
46.4
112.3
84.9
60.3
136.6
107.4
Percentage
growth
(92-04)
42.3
29.8
39.4
35.3
30.4
25.9
42.3
28.1
22.2
37.1
39.7
13.8
34.9
33.8
42.5
28.9
36.6
33.9
34.4
24.8
47.9
30.5
34.3
35.4
45.1
13.2
37.9
34.3
Percentage
growth
(04-10)
24.2
19.3
17.5
19.7
22.2
13.4
14.4
13.3
14.5
14.9
20.3
90.0
21.6
19.7
15.3
14.8
10.3
13.6
13.1
10.9
11.3
7.8
11.8
11.2
15.3
6.2
13.3
13.2
The Business & Management Review, Vol.2 Number 2, July 2012
162

Expatriate
Al Riyadh
Makka Al
Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
11.5
8.2
9.6
12.7
10.9
9.7
11.8
13.7
11.8
4.0
7.9
11.4
11.6
9.5
2.9
2.3
3.3
2.9
1.5
2.4
1.2
1.2
-1.9
3.2
1.4
1.4
1.5
2.4
6.4
4.2
6.0
6.6
7.3
4.3
5.2
6.8
4.7
5.3
6.6
4.3
9.4
5.6
748.6
361.7
500.4
954.7
657.6
501.3
793.4
1179.4
803.3
110.8
331.8
739.7
769.5
486.3
41.9
31.2
49.0
41.5
19.4
33.2
15.7
15.4
-20.4
46.6
18.0
17.5
19.8
32.6
43.2
26.5
39.9
44.6
51.0
27.4
33.8
46.3
30.4
34.3
44.8
27.6
69.3
37.0
This uneven distribution of population across geographic areas was reflected in the ratio of expatriate to
native population – a national concern. The ratio registered an increase with census years (Saudi Gazette,
2010). The national population spatial distribution policies meet their objectives and create prudent
balancing of financing (AlKhalifeh, 1993).
Table 4 Expatriates per every 1000 nationals by regions
Regions
Census
1974 1992 2004 2010 Percent
Increase
(74-92)
Al Riyadh
Makka Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
129
262
87
43
132
49
51
20
46
181
108
28
55
133
467
606
295
230
354
165
210
188
282
180
251
146
201
377
465
617
322
243
315
176
164
166
167
195
204
151
174
372
577
680
408
309
420
203
197
226
195
235
257
181
260
451
262.1
131.6
240.8
437.6
168.1
238.3
311.5
861.4
517.0
-0.7
133.5
423.7
267.5
182.7
Percent
Increase
(92-04)
-0.4
1.8
9.1
5.7
-11.1
6.7
-21.7
-11.6
-40.8
8.3
-18.6
3.7
-13.1
-1.2
Percent
increas
e
(04-10)
24.1
10.2
26.8
27.3
33.5
14.9
20.3
35.7
16.6
20.8
25.6
20.1
49.3
21.1
Labor Force
More than one-third of the native population (38.9%), as a whole, was into the labor force; of which male
participation rate was nearly 5 times that of females. A highest level of participation was observed in
Tabouk (42.9%) followed by Eastern Region (41.8%) and Riaydh (41.4%) in that order. Aljouf (15.4%), Al
Qaseem (14.9%) and Riyadh (14.7%) regions had higher percent of females in labor force. The current
high proportion of population in urban area indicates the population labor force interrelationship (Sly
and Serow, 1993).
The Business & Management Review, Vol.2 Number 2, July 2012
163

Table 5 Labor force participation rate of native population (15 year and above) – 2004 (Percentage)
Region Male Female Total
Al Riyadh
Makka Al Mokarramah
Al Madinah Al Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
66.2
64.1
62.2
58.9
68.1
58.8
71.2
57.8
63.5
59.2
66.9
57.5
59.0
64.1
14.7
13.2
11.6
14.9
13.1
12.0
11.8
13.3
12.7
11.5
10.5
12.7
15.4
13.2
41.4
38.8
36.6
36.9
41.8
34.5
42.9
34.8
38.2
34.5
38.4
33.0
37.6
38.9
Out of the 3,860,783 natives aged 15 years and above in labor force, only 3,298,179 were main workers; the
rest were marginal workers. Of the main workers, 2.8 percent were employers, 3.5 percent were self
employed while the rest 93.6 percent were paid/unpaid workers. There were a higher percent of
employers in Al Qaseem followed by Makkah and Madina regions in that order. It was males, who were
employers in all regions. The paid/unpaid workers were the largest category with more than 90 percent
in all the regions.
Table 6 Main workers by their employment level (15 years and above) - 2004
Self
Employer employed
Region
Male
Al Riyadh
Makkah Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
Female
Al Riyadh
Makka Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
3.2
4.3
3.4
5.1
3.1
1.9
1.4
2.7
1.9
1.5
2.7
3.0
2.1
3.2
0.4
0.8
0.3
0.3
0.4
0.3
0.2
0.2
2.3
5.0
5.7
5.3
3.9
4.4
2.0
5.1
3.2
6.8
5.4
3.3
3.1
4.0
0.3
0.5
0.3
0.4
0.4
0.3
0.1
1.7
Paid/unpai
d worker
94.5
90.8
90.9
89.6
93.0
93.7
96.6
92.1
95.0
91.7
91.9
93.8
94.8
92.7
99.2
98.7
99.4
99.3
99.2
99.4
99.7
98.1
Total
704128
644389
174038
125320
493723
210097
108169
65468
36790
135207
55089
47335
43146
2842899
120214
103852
27320
26375
65813
34758
12343
12314
The Business & Management Review, Vol.2 Number 2, July 2012
164

Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
0.3
0.3
0.2
0.2
0.1
0.4
0.2
0.5
0.3
0.3
0.3
0.4
99.5
99.2
99.5
99.5
99.6
99.1
5551
20602
7212
9512
9414
455280
Total
Al Riyadh
Makka Al Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
2.8
3.8
3.0
4.2
2.8
1.7
1.3
2.3
1.7
1.3
2.4
2.5
1.8
2.8
2.0
4.3
5.0
4.5
3.5
3.8
1.8
4.6
2.8
6.0
4.8
2.8
2.6
3.5
95.2
91.9
92.0
91.3
93.8
94.5
96.9
93.1
95.6
92.7
92.8
94.7
95.6
93.6
824342
748241
201358
151695
559536
244855
120512
77782
42341
155809
62301
56847
52560
3298179
The main occupation of native population were divided into management (Directors and managers);
specialists, technicians, clerical, sales, service, traditional (agriculture, husbandry, fishing and hunting);
industrial and supporting. Higher proportion of people was technicians, clerical, specialists and service
workers.
Table 7 Main workers by their main occupation (15 years and above) - 2004
Region
Al Riyadh
Makka Al
Mokarramah
Al Madinah Al
Monawarah
Al Qaseem
Eastern Region
Aseer
Tabouk
Hail
Northern Borders
Jazan
Najran
Al Baha
Al Jouf
Total
Man
agem
ent
11.5
11.0
8.8
9.8
9.8
8.8
9.6
8.2
8.4
6.9
8.9
8.2
8.4
10.1
Spe
ciali
sts
14.7
13.5
12.0
12.3
12.6
11.9
10.1
10.7
10.2
10.1
10.0
13.0
11.8
12.9
Tec
hni
cian
s
20.8
22.4
24.9
28.5
19.5
25.9
19.6
29.0
24.7
28.7
22.6
31.3
29.2
22.9
Cl
eri
ca
l
20
.8
17
.9
16
.3
16
.5
17
.4
16
.1
18
.4
16
.4
Sale
s
6.3
7.0
6.5
6.2
7.2
6.0
7.6
5.1
6.2
7.2
9.3
4.7
5.3
6.7
Se
rv
ice
10
.7
11
.6
12
.4
11
.0
11
.6
11
.6
11
.4
12
.8
Tra
diti
ona
l
4.1
4.9
5.5
5.4
4.6
7.7
7.8
8.0
8.1
9.2
6.4
5.0
5.7
0.6
Ind
ustr
ial
3.8
3.5
4.2
2.7
6.4
4.4
6.4
3.1
5.1
4.0
4.9
2.6
3.5
4.3
Sup
port
ing
7.1
8.0
9.4
7.7
10.9
7.6
9.0
6.7
8.3
7.4
9.3
7.1
7.0
8.3
Total
82434
2
74824
1
20135
8
15169
5
55953
6
24485
5
12051
2
77782
42341
The Business & Management Review, Vol.2 Number 2, July 2012
165

16
.9
13
.8
16
.6
15
.1
17
.6
18
.0
12
.0
12
.8
11
.9
13
.0
11
.6
11
.5
15580
9
62301
56847
52560
32981
79
Relation between labor force and expatriate population
Expatriate population increased not only in metropolitan regions but also in other regions. The
employment oriented immigrations have a bearing on labor force participation of native population that
they have a perfect positive correlation (r=1.0; p

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167

The Relationship between Leadership and Learning Organization: A
Review of the Literature and Research Proposal
Bojana Milic, Ljubica Dudjak & Leposava Grubic-Nesic
University of Novi Sad, Faculty of Technical Sciences, Serbia
Keywords
Learning organization, organizational learning, authentic leadership
Abstract
The concept of the learning organization has received substantial attention in the academic literature since
the learning processes have been emphasized as a source of competitive advantage.
Among the many factors that influence the development of learning organization leadership is emphasized
as a key factor. Despite the importance that leadership has in this process, relationship between learning organization
and leadership has been relatively understudied
This paper aims to contribute to the learning organizations and leadership fields by proposing a research on
how authentic leadership influence characteristics of the learning organization at the individual, group and
organizational levels. In order to examine this relationship, authors propose employing of the Dimension of Learning
Organization Questionnaire (DLOQ) instrument along with Authentic Leadership Questionnaire (ALQ). This
approach provides research propositions that have not been considered previously.
Introduction
The present business world is characterized by constant and rapid changes in the global economy
which have lead to the emergence of a new organizational form known as Learning Organization.
Learning organizations are designed to enable people and organizations to be adaptive to the
environment and responsive to change. The transformation of organizational systems to reflect “processes
of learning, behavior change, and performance improvement” (Slater and Narver, 1995, pp. 63 – 64) has
become an organizational imperative as the survival of the organization is at stake. According to the
theorists, the capacity to learn faster than competitors may be the only sustainable competitive advantage
in unstable environments (De Gus, 1988; Stata, 1989). Today, it is almost impossible to find an industry
that is not in a state of dynamic change requiring organizations to focus on continuous learning activities.
Among the many factors that influence the development of learning organization leadership is
emphasized as the key factor (Senge 1990, Bass 2000, Prewitt 2003, Sadler 2003). Leadership and
organizational learning are both fundamental to effective organizational functioning (Berson et al., 2006).
Despite the importance that leadership has in this process, relationship between learning organization and
leadership has been relatively understudied.
In this paper, authors address gap in the literature by interrelating authentic leadership theory and
theory of the learning organization. Explicitly, paper addresses the question: What is the impact of
management leadership style (authentic) on characteristics of the learning organization Building on
current theories of authentic leadership (Walumbwa, Avolio, Gardner, Wernsing, & Peterson 2008) and on
learning organization concept as articulated by Watkins and Marsick (1993, 1999), authors develop a
theoretical model to address this research question.
Authors have aim to contribute to the learning organization and leadership fields by linking two
developed streams of research that have not been connected previously.
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Defining learning organization
In order to obtain and sustain competitive advantage organizations must enhance their learning
capability and must be able to learn better and faster from their successes and failures, from within and
from outside (Marquardt, 2002). Learning has now been recognized as an important element of
organizational change and the ability of individuals and organizations to learn becomes the only source of
success.
This had led to the emergence of learning organization whose foundation lies in the belief that
learning and change are closely interrelated. Developing into learning organization means transforming
from a traditional organization to one which values people and emphasizes on learning to improve
performance.
Organizational learning can be defined as ‘’a dynamic process of creation, acquisition and
integration of knowledge aimed at the development of resources and capabilities that contribute to better
organizational performance” (Lopez, Peon & Ordas, 2005, p.228). Organizational learning is a process that
aims to create a learning organization.
The most remarkable definition of the learning organization term was given in publication ‘’The
Fifth Discipline’’ by Peter Senge (1990). According to Senge (1990) learning organization is an organization
where people continually expand their capacity to create the results they truly desire, where new and
expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are
continually learning how to learn together. Watkins and Marsick (1993) define the learning organization
as one that is characterized by continuous learning for continuous organizational improvement, and by
the capacity to transform itself. Although there are different approaches and perspectives for defining and
conceptualizing learning organization, all views directed to the one that in the long–run organizational
performance is measured by long-term survival and growth of the firm.
For the purpose of this paper Watkins and Marsick’s (1996) conceptualization of the learning
organization was used. They proposed an integrated model for a learning organization, as presented in
the Figure 1.
Figure 1: Conceptual Framework of the Dimension of Learning Organization (Yang, Watkins & Marsick,
2004)
Watkins and Marsick developed the Dimension of Learning Organization Questionnaire (DLOQ) to
identify the learning activities in organizations. The instrument has been widely employed to determine
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the characteristics of a learning organization (Marsick & Watkins 2003). It is organized into seven sections
addressing individual level, team level, and organization level learning:
1. Create continuous learning opportunities – learning process is inscribed in the work, so that people
can learn in the course of their work (on the job learning). Opportunities for continuous education
and growth are provided.
2. Promote inquiry and dialogue – people gain productive reasoning skills to express their opinions;
they have the ability to listen and research into the views of others; the culture of the organization
supports questioning, experimentation and provides a feedback.
3. Encourage collaboration and team learning – work is done through the use of employees’ groups;
members of the groups can become familiar with different ways of thinking, it is expected from
the groups to learn and work together; organizational culture supports collaboration and rewards
it.
4. Create systems to capture and share learning – systems for sharing learning are created and used in
the work, and employees have free access to accumulated knowledge.
5. Empower people toward a collective vision – people are involved in creating and implementing a
shared vision; the responsibility for its implementation rests with those who are involved in
decision-making process; people are motivated to learn to truly fulfill their obligations.
6. Connect the organization to its environment – allows people to see the effects of their work from the
perspective of the organization; people can use information from environmental organizations
and adapt his work; the organization is linked to external communities.
7. Provide strategic leadership for learning – Leaders shape, improve and support learning; leaders use
learning strategically to achieve better business results.
Generally, the first three dimensions relate to individual and collaborative learning, the next two
concern leadership and the last two are structural in nature.
In some research DLOQ has been linked with some other aspects of management literature including
leadership, organizational commitment, organizational creativity, job satisfaction, learning transfer, and
so on (e.g. Hernandez 2000, Lim 2003, Joo 2007). However, DLOQ has not been related to the concept of
authentic leadership previously.
Authentic leadership
The past decade has seen a dramatic increase in scholarly interest in the topic of a new type of
genuine and values-based leadership named authentic leadership.
According to Walumbwa, Avolio, Gardner, Wernsing, and Peterson (2008), authentic leadership
can be represented as a construct composed of four related dimensions:
internalized moral perspective,
self-awareness,
relational transparency, and
balanced processing.
Self-awareness refers to how often the leader demonstrates that he or she is aware of his or her
impact on other people. Relational transparency involves promoting trust through disclosures that
include openly sharing information and expressions of leaders' true thoughts and feelings. Internalized
moral perspective refers to leader behaviors that are guided by internal moral standards and values as
opposed to those behaviors being based on external forces such as peers, organizational and societal
pressures. Finally, balanced processing involves objectively analyzing all relevant information before
coming up with a ‘fair’ decision. Leaders who exhibit balanced processing solicit views from others
indicating the willingness to challenge their deeply held positions before coming to a decision.
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Walumbwa, Avolio, Gardner, Wernsing and Peterson (2008) proposed a Authentic Leadership
Questionnaire (ALQ) as a instrument for the assessment of this four-factor construct.
The literature on the learning organization and organizational learning consistently cannot be
complete without its leadership, which identifies appropriate organizational conditions in order to create
the possibility of ongoing learning (Watkins and Marsick, 1993). Authors’ main idea in this paper is to
outline the concept of authentic leadership as a leadership style that could have a key role in the
development and maintenance of the learning organization.
Leadership and learning organization
Leadership plays an essential role in organizational learning process and the development of
learning organization (Johnson 1998, Senge 1990, Fiol & Lyles 1985). First, by providing the contextual
support in the organization, leaders obtain the needed resources for learning to occur through exploration
and exploitation. Second, leaders are critical to the integration of learning across group and organizational
levels. Leaders enable and enhance this integration by providing a foundation of shared understandings
of needs and purpose at different levels of the organization. Throughout the learning process, leaders
provide the guidance necessary to cross organizational boundaries and integrate what is learned. And
third, leaders are important in institutionalizing learning by integrating new and existing knowledge in
the organization's policies and practices. Because of their central role in an organization and their ability
to span boundaries across levels, not much learning in an organization could take place without leaders
providing guidance, support, and institutionalization.
The empirical evidence generally supports assertions that transformational leadership carries the
values necessary to create a successful learning organization. Aragon-Correa, Garcia-Morales and
Cordon-Pozo (2005) used data from 408 large Spanish firms and found that transformational leadership
facilitates the organizational members’ ability to create and use knowledge. Similarly, a study of 202
Spanish companies established a strong and positive impact of support leadership on learning in
organizations (Llorens Montes 2005). Jung, Chow and Wu (2003) in their study used a sample of 32
Taiwanese companies and found that transformational leadership was positively related to organizational
innovation and that this relationship was partially mediated by empowerment and an innovationsupporting
organizational climate. The study in the Israeli non-profit sector showed that transformational
leadership has a significant positive direct effect on organizational learning (Kurland & Hertz-Lazarowitz
2006).
While clear theoretical and empirical arguments for the influence of transformational leadership
on organizational learning exist, the role of authentic leadership remained unexamined. According to
Gardner, Cogliser, Davis and Dickes (2011) review of the literature concerning the authentic leadership
there are some research (Walumbwa, Luthans, Avey, & Oke 2009, Walumbwa et al. 2008) that finds effects
of authentic leadership on important work attitudes, behaviors and organizational outcomes. However,
there is no empirical evidence about the influence of authentic leadership on the characteristic of learning
organization.
In order to examine influence of authentic leadership on characteristics of the learning
organization, at the individual, group and organizational levels, authors propose employing of the
Dimension of Learning Organization Questionnaire (DLOQ) (Marscik & Watkins 2003) along with
Authentic Leadership Questionnaire (ALQ) (Walumbwa, Avolio, Gardner, Wernsing & Peterson 2008).
Combining four dimensions of authentic leadership (internalized moral perspective, self-awareness,
relational transparency, and balanced processing) and seven dimensions of the learning organization
(continuous learning, inquiry and dialogue, collaboration and team learning, empower people, create
systems, connect the organization, and strategic leadership) it is possible to discover correlations among
them that are statistically significant. By linking these two instruments researchers could provided a new
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insight on learning organization and leadership that has not been considered previously.
Discussions and conclusions
The transformation from traditional organizations, that relied on rules and regulations, to
learning organizations requires a leader who can help cope with the changes in the environment as well as
motivate the followers to work in collaboration towards the achievement of collective as well as
individual goals. In most previous studies authors suggested that transformational leadership carry the
values necessary to create a successful learning organization. This paper aimed to highlighting the value
of authentic leadership as a leadership style that could have a key role in the development and
improvement of the learning organization. By this approach authors provided a new perspective on
learning organization and leadership that has not been considered previously.
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173

Relationship Marketing: Towards a Definition
Dr P.R.Datta
University of Hertfordshire, UK
Ashru Bairagee
Academy of Business & Retail Management, UK
Keywords
Customer Relationship Marketing (CRM), Customer loyalty, Communication, Commitment, CSR,
Customer retention
Abstract
Relationship Marketing has emerged in business and academia over the past three decade as a new
marketing school of thought which aims at building a long lasting bonded relationship with customers by
identifying, anticipating and satisfying customer needs and wants profitably. The ultimate goal is to build trusted,
committed, satisfied and informed long term partner through continuous value creation. Thus increasing customer
loyalty and retention.
It is the view of the researcher that CRM as an idea is still evolving. Although it was developed as a major
source of attain organizational objectives (e.g. Profit maximization etc) through the marketing route, the focus has
now transcended to a holistic approach involving the organizational functions collectively. Having said that, the
researcher also consends that `communication` plays a vital role in building relational and transactional exchanges.
Organisations these days have to be sensitive enough to what the customer thinks about them as an entity, rather
than just the products. The contention here is, therefore, CRM should be aligned with an organization`s
communication strategy.
This paper examines the nature of Customer Relationship Marketing (CRM), its definitions in various
business contexts, based on which a holistic definition of CRM is established.
Introduction
Although CRM as a concept has been a part of business and marketing literature over the last
three decades, interestingly there is still much debate as to what CRM actually is (Nevin, 1995; Parvatiyar
& Sheth, 2001). Indeed, by looking at the various schools of thought in Relationship Marketing and the
associated literature it is very clear that, no universally accepted specific definition of the concept has
emerged as yet. Egan (2004),when he suggests that Relationship marketing is not easy to define. The
concept is very wide which consists of a range of activities and therefore it may have different meaning to
different organizations (Palmer, 1994).
Some of the Relationship Marketing themes offer narrow marketing functional perspectives while
others are broad (Nevin, 1995). Narrow version of CRM would include:
database marketing (Peppers and Rogers, 1995; Bickert, 1992);
electronic marketing (Blattber and Deighton, 1991)
Pre and After marketing (Vavra, 1992)
Internal marketing (Berry and Parasuraman, 1991)
Business alliances (Seth and Parvitiyar, 1992)
Service marketing (Berry, 1983; Crosby et al, 1990)
Parvatiyar and Sheth (2000) stated that Relationship Marketing has become rather ambiguous within
the marketing literature. Various authors have listed a range of selected definitions. Harker (1999) listed
26 definitions while Dann & Dann (2001) have identified from the literature 50 various definitions. While,
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the scope of the thesis does not allow discussion of all of these definitions in detail, nevertheless, the most
commonly used definitions are discussed below in order to identify the one(s) most suited to this thesis.
The following section discusses these definitions found in relevant literature and the table summarises
these definitions as indentify, the context and main themes.
Evolution of Relationship Marketing: Concepts & definition
Berry (1983) was the first who uses the term relationship marketing in the services sector. Since
then, over the last three decades, a considerable volume of literature, conference papers, working paper
series in this area have been published, it includes: Crosby and Stephens (1987), Crosby et al. (1990),
Parasuramam et al. (1988), Reichheld and Sasser (1990), Moorman et al. (1990), Christopher et al. (1991),
Gronroos (1994), Rust and Zahorik (1994), Morgan and Hunt (1994), Anderson et al. (1994), Heskett et al.
(1994), Sheth and Parvatiyar (1995, 2000), Gummesson (1996, 1998), Seth (1996), Hennig-Thurau and Klee
(1997) Sheth et al. (1999), Sivdas and Baker-Prewit (2000), Rao and Perry (2002), Hennig-Thurau et al.
(2002), Wang et al. (2004), Palmer et al. (2005), and others.
From a service perspective point of view Berry (1983) defined Relationship Marketing is a
strategy to attract, maintain, and enhance customer relationship’, which is fully supported by Berry and
Parasuraman (1991) and defined as Relationship Marketing concerns attracting, developing and retaining
customer relationship’. Now it can be seen that Relationship Marketing not only enhances customer
relationships but also retains that relationship, which indicates a long-term phenomenon. Although the
definition pioneered by Berry (1983) is classical in nature and look very comprehensive but it does not say
much about the purpose of the relationship, nor it include the various stakeholders group involving in
relationship. However, in later definition with Parasuraman (1991) it made clear that the purpose of the
relationship to retain customer. But of course all types of customers, although it is understandable as
different organizations generate different levels of profit and therefore to build and maintain relationships
with key or profitable customers (Carson et al, 2004).
Morgan and Hunt (1994), state: Relationship Marketing refers to all marketing activities directed
towards establishing, developing and maintaining successful relational exchanges’. It is so comprehensive
that it encompasses all marketing activities, but so comprehensive that it may lose some of the details of
the picture and it says nothing about the nature of the relational exchange (Rao and Perry, 2002). The
boundaries of relational exchanges between buyers and sellers were set by the traditional view of
transactional exchange/cost (Heide, 1994). Indeed most of the scholars see relational exchanges opposite
of transactional exchanges (Gummesson, 1996). According to Rao and Perry (2002) the duration of
exchange relationships is core element in distinguishing the two. Gundlach and Murphy (1993) defined
transactional exchange as a single, short term exchange with a distinctive beginning and ending. In
contrast, relational exchange is longer in duration, reflecting an ongoing process (Dwyer et al, 1987) and
participants engage social exchange and involves important personal and noneconomic satisfactions
derived, and relational exchange transpires over time in which each transaction must be viewed in terms
of its history and its anticipated future (Macneil, 1980). According to Day and Wensley, 1983) relational
exchange contributes to product differentiation and creates barriers to switching. However, the definition
has some broader scope which includes the concept of relational exchanges to cover the process of all
types of relationships. Morgan and Hunt (1994) identified ten forms of relationship marketing between
focal firm and its relational exchanges in supplier, lateral, buyer and internal partnerships which
constitutes Internal partnership: Business units, employees, functional department; Buyer partnership:
intermediate customers, ultimate customers; Lateral partnership: Government, non-profit organizations,
competitors and Suppliers partnership: services suppliers and good suppliers. Peterson (1995) also
attacked Morgan and Hunt`s (1994) definition as error of commission and stated that if “their definition is
true, the relationship marketing and marketing are redundant terms”.
However, Gronroos (1994) has given a holistic view of RM from a network perspective as
Relationship Marketing (RM) is to identify and establish, maintain, enhance, and when necessary
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terminate relationships with customers and other stakeholders, at a profit, so that the objectives of all
parties involved are met, and that this is done by a mutual exchange and fulfilment of promises’.
Fulfilment of promises seems to be an important and integral element of relationship marketing approach
(Calonius, 1988) and according to him giving promises is not only the responsibilities of marketing, but
persuading customers as passive counterparts on the market place to act in a given way and in keeping
promises and this view fully supported by Reichheld and Sasser, 1990) when they stated that fulfilling
promises is paramount important as means of achieving customer satisfaction, retention and long term
profitability.
Gronroos (1996) also stresses the importance of relationship marketing for organisational survival
in today’s business environment. An important aspects of Gronroos (1994) and Morgan and Hunt`s (1994)
definition is that they all recognize the process aspects of relationship development & maintenance.
Although marketing is to identify, anticipate and satisfy customer’s needs and wants but the true purpose
of marketing is to build and maintain strong relationships between the company and the customers.
Developing and maintaining satisfactory customer relationships can help to reduce perceived risk, reduce
transaction costs, increase customer loyalty and customer retention and thus impact on organisational
performance. For a buyer – seller relationship it is very important and widely accepted that a company
should have customer orientation rather than sales orientation (Gronroos, 1995). There are number of
studies have demonstrated that seller relationship with customers can help to create loyalty and retention
(see Hunt, 1997; Mattesson, 1997; Morgan & Hunt, 1994; Reichheld & Sasser, 1990; Rust & Zahorik, 1993).
Shani and Chalasani (1990) viewed relationship marketing as an integral effort of organization
and defined relationship marketing as “to identify, maintain and build up a network with individual
customers and to continuously strengthen the network for the mutual benefit of both sides, through
interactive, individualized and value added contacts over a long period of time.” Although this definition
differs somewhat from the definition given by Gronroos (1994) they both indicate that relationship
marketing focuses on the individual customer-seller relationship and relationship is longitudinal in nature
where both parties are benefitted and customer retention is the core focus of relationship marketing.
Nevertheless, Gummesson (1995) saw Relationship Marketing as relationships, network and
interaction’. In 2002 Gummesson offers yet another definition of relationship marketing. According to
him, relationship marketing is marketing based on networks and interaction with customers that
recognizes that marketing is embedded in the total management of the networks of the selling
organization, the market and the society with a long term perspective. Prior to the 1990s most of the
European marketing scholars focused on network marketing as one of the effective means to increase
organisational profit. Although both concepts roots are the same as building relationship between sellers
and buyers, but they do not overlap and interact (Mattesson, 1997). Sheth and Parvatiyar (1995) viewed
Relationship Marketing as attempts to involve and integrate customers, suppliers and other
infrastructural patterns into firm developmental and marketing activities’. An ultimate goal of
relationship marketing in today’s cluttered environment where shoppers’ behaviour is affected by various
macro environmental forces, is to secure customer loyalty and hence their retention. Sheth (1996)
suggested that the domain of relationship marketing should be limited to only those cooperative and
collaborative marketing actions that are focused on serving the needs of customers.
Lancaster et al (2001) defined relationship marketing as all of the activities an organisation can use
to build, maintain and develop customer relations. It has received considerable attention in recent year as
one of the very important value creation methods between buyer and seller through the exchange process.
Such value is paramount in maximising both parties’ satisfaction. But it is also important to understand
that to create such value relationship marketing requires a building of trust between the company and its
customers. The main objectives of relationship marketing are to build customer loyalty, thereby leading to
customer retention (Lancaster et al, 2001).
Yet another version of RM definition is given by (Shani and Chalasani (1992) as “an integrated
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effort to identify, maintain and build up a network with individual customers and to continuously
strengthen the network for the mutual benefits of both sides, through interactive, individualized and
value added contacts over a long period of time”. Parvatiyar & Seth (2001) have taken the core notion of
customer selectivity to define the concept. Several research studies have shown that not all customers are
profitable for the organization (Storbacka, 2000). Therefore organization should segment and target their
customers accordingly.
After extensive review of the literature Harker (1999) identified 26 definitions (see above also)
which has been analysed, synthesized and later develop own version of his definition of relationship
marketing which integrates the various definitions and creates a comprehensive approach to RM as
“Relationship Marketing occurs when an organization engaged in proactively creating, developing and
maintaining committed, interactive and profitable exchanges with selected customers or partners over
time.” It is holistic in nature and placed emphasis on the purpose and benefits of relationship marketing.
Relationship is possible when parties are proactive and committed and the process is interactive.
However, it supports the argument of Carson et al (2004) that RM should be directed to selected and
profitable customers. It also includes the word `partners` which implies RM can refer to many
stakeholders in addition to customers (Rao and Perry, 2002).
Thus various authors have defined relationship marketing in several different ways and the
subject has been part of studies to understand the collaborative behaviour that exists between buyers and
sellers. Payne (2000) asserts that CRM is concerned with “the creation, development and enhancement of
individualized customer relationships with carefully targeted customers and customer groups resulting in
maximizing their total customer life-time value” while Berger (1998) offers a divergent view of the subject
of relationship marketing. Berger (1998) defined relationship marketing as proactively creating,
developing and maintaining committed and interactive exchanges with selected customers that is
profitable. The keywords of this definition compares with that of Heide (1994): maintaining and
developing. Thus, relationship marketing is about ensuring that relationships with customers is not oneoff
but collaborations that expands lifetimes of the company and the customer, too. Parvatiyar and Sheth
(1994) view relationship marketing as an orientation “that seeks to develop close interactions with selected
customers, suppliers, and competitors for value creation through cooperative and collaborative efforts”.
Morgan and Hunt (1994) broaden this definition by stating, “Relationship marketing refers to all
marketing activities directed towards establishing, developing, and maintaining, successful relational
exchanges”. Morgan and Hunt proceed to categorize the marketing activities into four broad partnerships:
supplier, buyer, internal, and lateral. Doyle (1995) offers a general framework for relationship marketing
identifying a series of dyadic relationships between the firm’s central core and types of network partners,
namely, internal, external, supplier, and customer. Peck, Payne, Christopher, and Clark (1999) propose the
six markets model (after several rounds of revision) with customer markets as the focal point and other
markets, namely, supplier and alliance markets, internal markets, referral markets, influence markets, and
recruitment markets, all revolving around the customer markets.
Relationship Marketing: Towards a new definition
It can be said that although the above definitions differ somewhat, they all indicate that the core
theme of CRM and relationship marketing perspectives revolves around its focus on individual buyerseller
relationships, that these relationships are longitudinal in nature, and that both parties benefit in the
relationship established. In short, from a firm’s perspective, relationship marketing concepts can be
viewed as a distinct organizational culture/value that puts the buyer-seller relationship at the centre of
the firm’s strategic or operational thinking.
It is the view of the researcher that CRM as an idea is still evolving. Although it was developed as
a major means to help an organisational attain its objectives (eg. Profit maximization etc) through the
marketing route, the focus has now transcended to a holistic approach involving the organizational
functions collectively. This has well been reflected in the writings of Gronroos over the years, and also
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Morgan and Hunt, Gummesson, Lancaster and Harket amongst others. Having said that, the researcher
also acknowledges that `communication` plays a vital role in building relational and transactional
exchanges. Organisations these days have to be sensitive enough to what the customer thinks about them
as an entity, rather than just the products. Customers will hesitate to be supportive of those organization
without any involvement in community affairs as reflected in the vitally important concept of corporate
social responsibility (CSR), and CSR is now a crucial sub function of communication, because it boosts
company`s image and reputation. Morgan et al (2006) also pointed out the importance of CSR in
relationship marketing. According to them customers will engage in relationship only with those
organizations are socially responsible (Morgan et al, 2006, p-76). Indeed, this is reflected in corporate
advocacy of many reputed organizations for example Microsoft. The contention here is, therefore, CRM
should be aligned with an organization`s communication strategy.
Further, the researcher contents that it would be difficult to universalize CRM because of the
intrusion of `culture` through the backdoor. CRM would, therefore, lead to be influenced by geographical
segmentation of markets; and even within a market by consideration of ethnocentricity, which by itself, is
culture oriented. CRM, accordingly, has to be culture, demography and lifestyle supportive too, for it to
be an effective mechanism to increase organizational productivity. The inclusion of these variables further
implies that CRM has to be an on-going process with the renewal, removal and addition of data built in. A
one off concise might yield disappointing results because the prediction power of the package is not being
put to test, nor is it being given the opportunity to show its strength having a pro-active capability in
customer retention and creation, through either relational or transactional avenues.
Therefore, the proposed definition by the researchers is given below. This definition combined
most of the key elements discussed above and based on Gronroos (1994, 1996) definition of relationship
marketing.
“Relationship Marketing is a holistic approach involving the organizational functions collectively to
identify, establish, maintain and enhance long term mutual relationships with key customers and various
stakeholders involved in relational exchanges. This would naturally involve continuous communication, interaction
and networking in a trustworthy environment to create superior value for the organization, key customers and
stakeholders.”
Conclusion
Although there are various definitions can be identified in the literature and all these definitions
differ somewhat. However, they all indicate that the core principles of relationship marketing are to
enhance buyer-seller relationship which is longitudinal in nature and both parties are mutually benefited.
This long lasting relationship cannot be built without the strong commitment from both parties and
communication plays a vital role in building relational and transactional exchanges between parties. The
current definitions identified in the literature lack some of the core elements. Thus this proposed
definition of CRM combined most of the key elements.
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Table: Definition of CRM, contexts and authors
YEAR AUTHOR(S) Context DEFINITION
1983 Berry Service Relationship Marketing is attracting,
maintaining and in multi service
organisations enhancing customer
relationships.
1985 Jackson Industrial marketing Marketing oriented toward strong,
perspective
lasting relationships with individual
accounts
1987 Dwyer, Schurr and
Oh
B2B and B2C
Relationship Marketing refers to all
marketing activities directed toward
establishing, developing and
maintaining successful relationships
1990 Gronroos Valid in all context Marketing is to establish, maintain and
enhance relationships with customers
and other partners, at a profit, so that
the objectives of the parties involved are
met. This is achieved by a mutual
exchange and fulfilment of promises
1991 Berry and
Service perspective Attracting, developing & retaining
Parasuraman
customer relationships.
1992 Shani and
Chalasani
An integrated effort to identify,
maintain and build up a network with
individual customers and to
continuously strengthen the network for
the mutual benefit of both sides,
through interactive, individualised and
value added contacts over a long period
of time.
1992 Bickert Database marketing CRM is a database marketing focusing
the promotional aspects of marketing
linked to database efforts
1994 Gummesson Network Relationship Marketing is marketing
seen as relationships, networks and
interaction.
1994 Gronroos All context Identify and establish, maintain and
enhance and when necessary also
terminate relationships with customers
and other stakeholders at a profit, so
that the objectives of all parties involved
are met. This is done by mutual
exchange & fulfilment of promises.
1995 Sheth and
Parvatiyar
Attempts to involve and integrate
customers, suppliers, and other
infrastuctural partners into a firm`s
developmental and marketing activities.
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1996 Gronroos Network perspective To identify and establish, maintain and
enhance relationships with customers
and other stakeholders at a profit so that
the objectives of the partners interests
are met, and this is achieved by a
mutual exchange and fulfilment of
promises
2001 Parvatiyar A &
Jagdish N. Seth
CRM: Emergence
practice, process &
discipline
Customer Relationship Management is a
comprehensive strategy and process of
acquiring, retaining and partnering with
selective customers to create superior
value for the company and the
customer. It involves the integration of
marketing, sales, customer service, and
the supply-chain functions of the
organisation to achieve greater
efficiencies and effectiveness in
delivering customer value.
2002 Kim and Cha A series of marketing activities that
attract, maintain & enhance customer
relationships for the benefit of both
sides, emphasizing retaining existing
customers.
2008 Singh and
Srivastava
Network
2009 Shirshendu, G et al A critical evaluation of
research stream
Relationship Marketing can be defined
as an strategic marketing approach
which is oriented towards attaining
long-term profitability and value
creation by interactions and mutual
exchange among customers suppliers
and other stakeholders.
The aim of relationship marketing is to
have long term positive effects on the
business with optimum resource
utilization through constant interaction,
extensive networking and cooperation
among all members (employees,
customers, suppliers, business partners
etc) with proper commitment to create
superior value for all stakeholders in a
trustworthy environment.
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ERP System Implementation CSFs For Korean Organizations:
A Delphi Study
Yeong Real Kim
Chungbuk National University, South Korea
Keywords:
ERP, CSF, Delphi study, Korea, Implementation
Abstract
This study focused on the factors that are critical to Enterprise Resource Planning (ERP) system
implementation success. This study employed a Delphi panel to explore the characteristics of ERP project success.
The expert panel was comprised of executives from Korean organizations who had participated in and were
experienced with ERP implementation projects. The two round Delphi study found the importance of senior
management involvement/top management support in project. Additionally, the study found that the same Critical
Success Factors(CSFs) existing in large-sized Korean organizations are also applicable to small or mid-sized Korean
organizations.
Introduction
The market for Enterprise Resource Planning (ERP) software has grown dramatically since 1990.
ERP is defined as an integrated, multi-dimensional system that encompasses all functions of an
organization, including planning, control, and global optimization of the supply chain using state of the
art information technology tools (Jarrar, Almudimigh, and Zairi, 2000). There are many reasons provided
in the literature for the popularity and adoption of ERP. Davenport (1998) argued that some executives
implement ERP to inject discipline in their organizations and eliminate redundant data and costly legacy
code maintenance expenses. Allen, Kern, and Havenhand (2002) added that ERP is implemented by
organizations to increase decision-making speed, to improve the control of operations and costs, and to
improve enterprise wide information dissemination.
This study focused on the factors that are critical to ERP implementation success. The expert
panel was comprised of executives from Korean organizations who had participated in and were
experienced with ERP implementation projects. Specifically, the expert panel was assembled to review a
list of ERP implementation critical success factors(CSFs) that were developed by the researcher. The
expert panel was asked to add additional critical ERP success factors to the list if necessary, and then rank
them in order of importance. Through subsequent rounds of the study, the expert panel was asked to
refine the list and their ranking based on feedback from other members of the expert panel. Last, they
were asked to distinguish between factors for small or mid-sized organizations(under $200 million in
annual revenues) and large organizations($200 million and greater in annual revenues). This study
addressed the following questions.
a) What are the specific ERP implementation critical success factors that lead to implementation
success for Korean large-sized Organizations
b) Are there differences in ERP implementation critical success factors between small or mid-sized
Korean organizations and large Korean organizations
Critical Success Factors (CSFs)
The literature shows lots of information that addresses ERP implementation CSFs. In order to
analyze ERP implementation CSFs, the researcher undertook an analysis of 30 distinct sources and located
22 different CSFs raised by the authors of literature reviewed. The literature review conducted of ERP
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project CSFs across 30 sources listed 22 project success factors. The 10 most frequently mentioned CSFs
across all implementation categories are listed in .
Table 1
Critical Success Factors Appearing in Literature
_____________________________________________________________________
Rank Critical Success Factors % of Mentions
_____________________________________________________________________
1. Senior Management Support/Involvement 82
2. Skilled/Empowered Project Team 75
3. Commitment to Change Management 68
4. Commit to Business Process Reengineering 66
5. Effective Project Communication 59
6. Develop a Detailed Project Plan 47
7. Strong Project Management 46
8. Effective Knowledge Transfer to End Users 42
9. Develop Clear Vision, Objectives and Mission 34
10. Engage Effective External Resources 34
______________________________________________________________________
In Table 1, critical success factors are rank listed by the percentage of mentions they appeared in the
literature reviewed.
Research Design Strategy
The Delphi method was chosen as the underlying research methodology employed for this study.
The Delphi method is a qualitative research tool that seeks the opinions of an expert panel concerning the
relevant research questions. The ERP industry is a relatively young industry that came to prominence in
the early 1990s. Fowles (1978) posited that the testimony of experts, as under the Delphi method, is
particularly applicable in fields that have not yet developed their own scientific laws. Fowles (1978) listed
the following Delphi steps as critical: (a) panel selection, (b) first round Delphi questionnaire
development, (c) questionnaire piloting, (d) forwarding the first round questionnaires, and (e) collection
and analysis of first round questionnaire results. Subsequent study rounds continued by following steps
(d) and (e) until the survey results stabilized.
The study was conducted over a number of weeks with the use of iterative questionnaire rounds.
The questionnaire process was administered through the use of Internet-based, web survey tool. If
participants did not have Internet access to complete the survey, they were given the option to hand
complete and submit surveys via mail. The survey questionnaires in this study consisted of a
combination of closed-ended and open-ended questions. Delphi participants were asked to rank order
ERP critical success factors so that a group composite ranked list could be determined. Both open and
closed ended question responses were accumulated and collated by the researcher and returned in later,
iterative rounds to the Delphi panel. Based on the information provided, the participants were asked to
revisit responses after reviewing the responses and, reviewing the responses and comments of other panel
members.
4. Presentation and Analysis of Data
4-1. Round One Survey Process
Round One survey was forwarded to 20 survey participants via an e-mail cover letter and a link
to the web-based survey. After a two-week period, 16 completed surveys were returned, yielding 80 %
response rate. Multiple reminder messages were sent to the survey participants to encourage a higher
response rate. The survey was constructed not only to gain information regarding the principal questions
of this research, but to also compile demographic data about the survey participants. Round one survey
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participants consisted of two chief information officers, 10 vice-presidents of information technology
department, 10 directors of business information service department. All survey participants had
participated in at least one ERP implementation.
Round one survey explored the survey participants' opinions as to ERP implementation critical
success factors. The researcher provided the survey participants with an alphabetized list of 10 ERP
implementation critical success factors as shown in . The survey instrument was posed as
follows:
The following items are some examples (list in alphabetical order) of possible ERP
implementation critical success factors. Please add any additional factors that you believe are critical to
ERP implementation success.
a) Commitment to business process reengineering
b) Commitment to change management
c) Development of a clear vision, objectives and mission
d) Development of a detailed project plan
e) Effective knowledge transfer to end users
f) Effective project communication
g) Involvement of effective external resources
h) Involvement of senior management/top management support
i) Use of a skilled/dedicated/empowered project team
j) Use of strong project management skills
The survey participants were asked to add additional ERP implementation critical success factors
per their experiences. As a result, the survey participants who responded suggested additional 18 ERP
implementation critical success factors to consider. Next the survey participants were asked to select 10
ERP implementation critical success factors from the list of possible 28 success factors. The survey
instrument was posed as follows:
Please review the previous list (both the items provided you and those you added) and compile a
consolidated list of the top 10 ERP implementation critical success factors. The ERP implementation
critical success factors should be ranked from most important to least important.
Table 2 lists the ERP implementation critical success factors as selected by the survey participants.
Table 2
ERP Implementation Critical Success Factors (CSFs)
__________________________________________________________________________
ERP CSFs Total %(*)
__________________________________________________________________________
1. Involvement of Senior Management/Top Management Support 14 87.5
2. Use of a skilled/empowered project team 12 75.0
3. Commitment to business process reengineering 10 62.5
4. Effective project communication 10 62.5
5. Commitment to change management 9 56.3
6. Involvement of effective external resources 8 50.0
7. Development of a clear vision, objectives and mission 8 50.0
8. Use of strong project management skills 6 37.5
9. Effective knowledge transfer to end-users 6 37.5
10. Development of a detailed project plan 5 31.3
___________________________________________________________________________
(*) % represents the frequency that critical success factor was mentioned by a survey participant.
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The additional series of questions in the Round One survey pertained to ERP implementation
critical success factors in small or mid-sized organizations. Small or mid-sized organizations became
important new targets in the marketing of ERP software. (Small or Mid-sized organizations were defined
as organizations with annual revenues of less than $200 million.) The justification behind the inclusion of
these questions in the Round One survey was to determine if the survey participants would identify
different ERP implementation critical success factors if they knew that the implementing organization was
categorized as a small or mid- sized organization. The researcher referred the Delphi participants back to
the ranked list of ERP implementation critical success factors formulated previously. The Delphi
participants were permitted to add new critical success factors, if necessary, when answering the
following question:
Many larger organizations (annual sales greater than $200 million) have already implemented
ERP and increasingly software vendors are focusing on selling to small or mid-sized organizations
(annual sales of less than $200 million). When focusing exclusively on small or mid-sized organizations,
please rank ERP implementation critical success factors from most important to least important.
Detailed analysis (as shown in ) of the responses showed that seven different ERP
implementation success factors were listed as the most important critical success factors by the survey
participants.
Table 3
ERP Implementation CSFs in Small or Mid-Sized Organizations
___________________________________________________________________________
ERP CSFs Total %
___________________________________________________________________________
1. Involvement of senior management/Top management support 13 81.3
2. Use of a skilled/empowered project team 12 75.0
3. Effective project communication 12 75.0
4. Development of a clear vision, objectives and mission 10 62.5
5. Commitment to business process reengineering 10 62.5
6. Effective knowledge transfer to end-users 9 56.3
7. Use of strong project management skills 9 56.3
8. Involvement of effective external resources 8 50.0
9. Commitment to change management 7 43.8
10. Development of a detailed project plan 6 37.5
___________________________________________________________________________
In fact, the same ten ERP implementation critical success factors were listed by the participants,
although in a different order, in both large-sized organizations and in small or mid-sized organizations. It
appears that the survey participants did not see many differences in ERP implementation critical success
factors in small or mid-sized versus large-sized organizations.
At the conclusion of the Round One survey process, the researcher compiled the results and
provided the data back to the survey participants. To ensure the anonymity of the Delphi process, all
participants were assigned letters of the alphabet (instead of using their names) for use as their responses
were being compiled. To ensure the integrity of the survey, the respondents' exact answers were
provided in the feedback documents with no editing.
Round Two Survey Process
Round Two surveys were forwarded to the 16 survey participants of the Round One survey. After a
two-week period and several follow-up e-mails to the survey participants to encourage a higher response
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ate, 14 responses to the Round Two survey were received. This response yielded an 87.5% Round Two
response rate. represents the Round Two responses. Again, the survey participants identified
the importance of the involvement of senior management/Top management support. In Round Two,
100% of the survey participants listed this factor as an important ERP implementation critical success
factor.
Table 4
Round Two ERP Implementation Critical Success Factors (CSFs)
____________________________________________________________________________
ERP CSFs Total %
____________________________________________________________________________
1. Involvement of senior management/Top management support 14 100.0
2. Use of a skilled/empowered project team 12 85.7
3. Commitment to business process reengineering 12 85.7
4. Effective project communication 11 78.6
5. Effective knowledge transfer to end-users 10 71.4
6. Development of a clear vision, objectives and mission 10 71.4
7. Commitment to change management 9 64.3
8. User involvement and scope control 9 64.3
9. Use of strong project management skills 8 57.1
10. Involvement of effective external resources 7 50.0
____________________________________________________________________________
The Round Two survey process also addressed the open-ended responses provided by the survey
participants regarding their reasoning in selecting the ERP implementation critical success factors. The
researcher was interested in gaining insight into the survey participants' reasoning for ranking ERP
implementation critical success factors. Again, the ability to gain strong support from the senior
management is listed as an important ERP implementation success criterion. Commitment to change
management, User involvement and scope control, and empowering end-users were mentioned
frequently in the open-ended responses.
The Round Two survey also addressed ERP implementation critical success factors that exist in
small or mid-sized organizations. With this question, the researcher was interested in determining if the
participants believed there were significant differences between ERP implementation critical success
factors in small or mid-sized organizations and large-sized organizations. As shown in ,
involvement of senior management/Top management support and the use of skilled/empowered project
team were chosen with 100% frequency by the survey participants.
Table 5
Round-Two ERP Implementation CSFs in Small or Mid-sized Organizations
____________________________________________________________________________
ERP in Small or Mid-Sized Organizations Total %
____________________________________________________________________________
1. Involvement of senior management/Top management support 14 100.0
2. Use of a skilled/empowered project team 14 100.0
3. Effective project communication
4. Commitment to business process reengineering 12 85.7
5. Effective knowledge transfer to end-users 11 71.4
6. Involvement of effective external resources 11 50.0
7. Development of a clear vision, objectives and mission 10 71.4
8. Commitment to change management 9 64.3
9. User involvement and scope control 9 64.3
10. Use of strong project management skills 8 57.1
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____________________________________________________________________________
The question in the Round One survey process asked the survey participants directly if they
believed there were any differences between ERP implementation critical success factors in small or midsized
versus large-sized organizations. In the Round Two survey, the survey participants were asked to
review these responses and to select the five responses that most accurately reflected their viewpoints.
Many of the responses appeared to indicate that the differences in ERP implementation critical success
factors were largely attributable to the limited resources such as capital and personnel available to smaller
organizations as compared to their larger counterparts.
Conclusion and Recommendations
Conclusion
This study resulted in the development of two conclusions, First, while over 22 ERP
implementation critical success factors were identified by the survey participants, some factors were
mentioned more frequently than others. Specifically, 8 of the 22 ERP implementation CSFs identified by
the study participants were mentioned on at least 70% of the returned surveys. The involvement of senior
management/Top management support during ERP implementations was the most frequently mentioned
CSF. The survey participants mentioned this CSF on 100% of the final round surveys. The second
conclusion reached is that there does not appear to be much difference in ERP implementation CSFs as
they related to small or mid-sized and large-sized organizations. When the survey participants were
asked to report ERP implementation CSFs for small or mid-sized organizations, the involvement of senior
management/Top management support was mentioned on 100% of the final surveys. This result was the
same as when the size of the organization was not used as qualifier in the research question.
Additionally, in small or mid-sized organizations, the use of skilled, empowered project team as a CSF
was mentioned on 100% of the final survey responses.
This study recognized the involvement of senior management and obtaining top management
support during ERP implementation as a CSF. This finding is congruent with the literature reviewed on
the topic of CSFs in ERP implementation.
Cliffe (1999) posited that because ERP projects are very risky, senior management should manage
ERP projects very closely. The comments from the survey participants were very consistent with
comments gleaned from the literature pertaining to the study questions. Panelist A commented for a
successful implementation, "strong direction and support from upper management" is required. Thus,
there is agreement between the literature presented earlier and the results of this study regarding the
involvement of senior management on ERP projects.
General Recommendations
The primary recommendation resulting from this study is that organizations implementing ERP
should apply the lessons that the involvement of senior management be assured through all phases of the
ERP implementation process. The primary role of senior management on ERP projects, in addition to
leadership, may be in the establishment and measurement of project goals and objectives throughout and
at the conclusion of an ERP implementation.
Small or mid-sized organizations implementing ERP may do well to learn from implementers of
ERP in larger organizations. The research indicated that many of the ERP implementation CSFs in larger
organizations are the same as those in small or mid-sized organizations. Due to resource constraints in
small or mid-sized organizations as compared to larger organizations, small or mid-sized organizations
may benefit from a more focused use of external resources to guide them through the complex process of
an ERP implementation.
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Recommendations for Future Research
The study's findings supported many of the findings uncovered in previous research. However,
future researches need to focus on the steps necessary to ensure that these CSFs are understood and
employed by implementing organizations. Such future research that helps to identify exactly how and to
what extent senior managers should be involved in ERP implementations may be beneficial.
There have not been many studies in ERP implementations for small and mid-sized organizations.
As more of these organizations attempt to implement ERP, more knowledge of implementation in smaller
organizations would be beneficial.
References
Allen, D., Kern, T., & Havenhand, M (2002). ERP critical success factors: An exploration of the contextual
factors in public sector institutions (HICSS-35'02). Proceedings of the 35th Hawaii International Conference on System
Sciences 2002: IEEE Computer Society.
Byrod, D. (2002 August). ERP market forecast and analysis, 2002-2006, and first half calendar 2002 review
(27794). Retrieved September 6, 2003 from http://www.jdedwards.com
Clayton, M.J. (1997). Delphi: A technique to harness expert opinion for critical decision-making tasks in
education. Educational Psychology, 17(4), 373-387.
Cliffe, S. (1999). ERP implementation. Harvard Business Review, 77(1), 16.
Creswell, J.W (2003). Research design: Qualitative, quantitative and mixed methods approaches (2nd ed.).
Thousand Oaks, CA: sage.
Davenport, T. H. (1998). Putting the enterprise into the enterprise system. Harvard Business Review, 76(4)
121-131.
Dunham, R. (1998). Organizational behavior: The Delphi technique. Retrieved March 12, 2004, from
http://instruction.bus.wisc.edu/obdemo/readings/deplhi.htm
Gordon, T (1994). The Delphi method. Futures research methodology from the AC/UNU Millennium Project
Retrieved http://www.futurovenezuela.org/-curso/5-delphui.pdf
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http://www.pcworld.com
Holland, C P., & Light, B. (1999). A critical success factors model for ERP implementation. IEEE Software, 30-
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impact of business process management. ICMIT 2000.
Mabert, V. A., Soni, A., & Venkataramanan, M. A. (2001). Enterprise Resource Planning: Common myths
versus evolving reality. Business Horizons, 44(3) 69.
Markus, M. L., Axline, S., Petire, D., & Tanis, C. (2000). Learning from adopters' Experiences with ERP:
Problems encountered and success achieved. Journal of Information Technology, 15(4), 245-265
McLeod, R., & Schell, G. (2001). Management information systems (8th ed.). Upper Saddle River, NJ:
Prentice-Hall
Parr, A., & Shanks, G. (2000). A model of ERP project implementation. Journal of Information Technology,
159(4), 289-303.
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Proceedings from the America's Conference on Information Systems (1999), http://www.aisorg.net
Teltumde, A. (2000). A framework for evaluating ERP projects. International Journal of Production Research,
38(17), 4507-4520.
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Decision Sciences Institute 2002 Annual Meeting. Retrieved
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Wah, L. (2000). Give ERP a chance. Management Review, 89(3), 20-24.
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188

The Effects of Extrinsic Cues on the Relationship between Brand Image
and Purchasing Intention-
Evidences from Chinese Exchange Students’ Perspectives
Luke Hsiao, Ming Chi, Hsiao and Jen-Ting, Sun
College of Management, I-Shou University, Taiwan
Keywords
Brand Image, Extrinsic Cues, Chinese Students, Purchasing Intention
Abstract
In the 21 st century today, tea is getting more and more attention due to its healthy function with the
changing of consuming structures and higher living standard. According to the Council of Agriculture of Taiwan’s
research (2009), there are over 60 countries that plant tea, and there are over 160 countries that purchase and
consume tea, more over, there are over 20 billion people around the world that consume tea and the number is
continually growing. According to Ministry of Education in Taiwan, there are a lot of China students come for
traveling and studying in a short period, and these students will be trend in the future. Base on that, this is a study
of the effects of extrinsic cues on the relationship between brand image and purchasing intention—evidences from
Chinese exchange students’ perspectives. This study will take the exchange students from Mainland China in I-shou
University as samples. The total number of the samples is 171. Based on brand image, purchasing intention, and
extrinsic cues, we conducted descriptive statistics, reliability test, factor analysis, Pearson product-moment
correlation coefficient analysis, scalar regression, one-way ANOVA and independent sample t test, and concluded as
follows: (1) Brand image of Taiwanese tea has significantly impact on purchasing intention. (2) Extrinsic cues have
significantly varieties on purchasing intention. (3) Extrinsic cues disturb significantly between brand image and
purchasing intention.
In addition, the study provided explanation for the results as well as its application. Further suggestions
include: (1) Highlight the Quality of Taiwanese Tea and Mental Feeling after Purchasing. (2) Make the products
lighter and aluminum cans as first choice. (3) Match Products with Selling Strategy.
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189

Employee Stock Ownership and Employee Psychological Ownership:
The Moderating Role of Individual Characteristic
Ann Lin
Chang Gung University of Science and Technology, Taiwan.
Keywords:
Employee stock ownership, employee psychological ownership, personality characteristics
Abstract
In response to the development of new economy and the need of compensation reformation, employee stock
ownership was created. The purpose of this study is to further understand issues on employee psychological
ownership within organization that implements equity incentive compensation practice. Further, this research
attempts to extensively understand the dynamic of employee ownership by investigating the psychological process
involved with it. More specifically, it is the intension of this study to understand variable as individual characteristic
that influence the formation of employee psychological ownership through stock incentive. The research is based on
data derive from a multinational high-tech firm with all-employee stock option program. A two-step approach to
structural equation modeling (Anderson & Gerbing, 1988; James, Mulaik, & Brerr, 1982) will be applied to test the
hypotheses, and all analyses and estimation will implemented in LISREL 8.54.
Introduction
Background of the study
In this new era of global competition, organizations have accelerated need and increasing
pressure to improve their performance. Growing recognition on the importance of human capital relative
to physical capital became a key to competitive advantage and business success. Kelso and Colleagues
proposed that expending the ownership of capital was necessary to promote individual and
organizational productivity in the modern industrial era where as technological developments were
enhancing the value of capital and diminishing the value of labor (Kelso & Kelso, 1984). Accordingly,
organizations world-wide implement strategies with the expectation that they will motivate employee
and improve performance to sustain competitive advantage globally.
Due to the change of this new economy, employees in many countries hold ownership stakes in
the companies that they work in, and the proportion of this trend is increasing (Rousseau & Shperling
2003). The ability to motivate workers and retain desired employees is also mostly influenced by
compensation scheme deliberated by organization’s human resource practices. In response to the newly
emerged workplace; the concepts of employee ownership were undertaken by the organizations as it
provides a frame work for a nontraditional paradigm of work motivation.
The idea to motivate employee though compensation has founded on the basis that worker
motivation will be improved though financial participation which would eventually link compensation
more closely to employee performance. Within the context of this fundamental reformation of economies
and firms; the shift towards contingent compensation systems is necessary especially due to the collapse
of fixed wage system. Contrasting from the traditional fix rate compensation; these alternative
compensation schemes include profit and value added sharing, employee share ownership, and
productivity gain sharing. According previous researches, financial participation measures promise to
exert fundamentally positive effects at work place.
In recent years, equity compensation has attracted the interest of managers, policy makers and
employees. Particularly in the contemporary high-technology, knowledge-oriented firms that are greatly
dependent on high-skilled workers, organizations have enforced a search for alternative ways of
management that encourages commitment, risk-taking, and innovation (eg., Harrison, 1983). Recent views
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190

of organizations have shown how traditional ways of management that enforced controls can be reduced
under conditions of strong goal alignment (Harrison, 1983; Walton, 1985). From Agency theory
perspective, since stock incentive is risk borne by employees, employee stock ownership would align the
interest of agent and principles for company growth. In this sense, employee ownership programs are
thought to reconcile the mutual interest between owner and employee. Having employee as owners of the
company, the relationship between employer and employee has changed. Thus, this change of ownership
identity affects the way that employees think and behave like owners of a firm (Ben-Ner and Jones, 1995;
Kruse and Balasi, 1997; Rousseau and Shperling, 2003; Wagner, Parker, and Christiansen, 2003). Therefore,
it is essential to study attributes that makes stock compensation work.
Motivation of This Research
Importance on issues related to compensation
Human resource management is one of the domains within organizational science that deals with
the whole employment relationship and all the policies, decisions and practices associated with the
relationship. The main focus of this relationship between employers and employees is the compensation
exchange. The reason most people work is because they depend on salary or wages to exist to live. Hence,
compensation has plays a central role in the reason for employee to seek and remain in employment
relationship.
The problem of traditional compensation
Traditionally, organization hierarchy was in the hiring process. Employees progress along well
defined job ladders, wage setting determined by way of a series of bureaucratic procedures and the
assignment of wages to jobs rather than to personal characteristics, rewarding employees for seniority,
and promotion from within. At the time, compensation practices were aim to standardized wage rates for
different jobs, in order to reduce turnover and efficiently deploy labor.
Since 1980’s , there have been enormous macroeconomic changes such as globalization, the
movement from a manufacturing to a knowledge and service-based economy, trade liberalization,
deindustrialization, decrease in unionization, the movement of production overseas, changes in
technology, and changes in organizational structures and reductions in organization size, and changes in
approaches to production. Due to the radical economic changes, workers with the right skills are able to
move from organization to organization and not be affected through not having particular firm-specific
skills. Attendant pay practices by organizations now include paying workers for their skills and
productivity rather than paying for jobs. As stated in The Economist (2000), “The old social contract
between employers and workers is being shredded. It is still unclear what will replace it.… This means
that the old model of a career, in which an employee worked his way up the ladder in a single company,
is becoming rarer”. Managers need to come up with new compensation schemes that would attract and
retain those talented knowledge workers.
Literature Review
Employee Stock Ownership and Compensation
In response to the development of new economy and the need of compensation reformation, employee
stock ownership was created. Employee stock ownership is a phenomenon that has developed since the
mid-1980s in most industrialized countries and in some of the emerging market economies and that has
aroused a considerable interest both in scholars and practitioners (Kuvaas, 2003, pp. 193; Pendleton,
Wilson, & Wright, 1998, pp. 99). The concept of employee ownership is increasingly common throughout
the world and the proportion of workers hold ownership stakes in the firms is still increasing. Globally,
most high technology companies provide stock options to employees. Formerly, stock compensation is
most often associated with a limited number of senior executives at a company. A trend initiated within
US from the 1990s was that technology companies offering company stock and options to all of their
employees. That is, employee ownership has been extended beyond the CEO and top management team
to all employees. For the past decade more companies had also implemented broad-based stock option
plans worldwide.
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Researches on Employee Ownership
Numerous empirical research was done to provide evidence of believe and rationale to explain
that employee ownership promise to exert positive effects at the work place (Wagner et al., 2003).
Researches that exert with explicit theoretical base use a number of approaches. A number of studies use
principal/agent theory (e.g. Blasi et al. 1996), some use socio-psychological rationales (e.g. Long 1978;
Pierce, & Morgan, 1991), and several use self-selection models (e.g. Blair and Kruse 1999; Richardson and
Nejad 1986).
A number of studies suggested that employee ownership initiatives are associated with favorable
employee attitudes, such as job satisfaction (Buchko, 1992; Long, 1978; Russell, Hochner & Perry, 1979;
Tucker, Nock, & Toscano, 1989; Van Dyne & Pierce, 1993) and organization commitment (Buchko, 1992;
Hammer, Landau & Stern, 1981; Rhodes and Steers, 1981; Russell et al., 1979; Tucker et al., 1989).
However, other research has found no relationship between employee ownership and employee attitudes,
such as job satisfaction (French & Rosenstein, 1984; Hammer et al., 1981) and organizational commitment
(Long, 1982). Some research has suggested that employee ownership results in reduce employee turnover
(Buchko, 1992; Rhodes and Steers, 1981) and improved organizational performance (Marsh & McAllister,
1981; Rosen & Klein, 1983; Rosen & Quarrey, 1987; Wagner & Rosen, 1985). The summary are listed as
follow (see Table 1 a.b.c.&d).
Underlying Theory of Employee Ownership: Motivation and Satisfaction
For as long as organizations have existed, rewards have been recognized as a major motivator of
employees as well as an important tool and expense for organizations. Efficiency wage theory proposes
that employers can improve workforce productivity by paying wages above the opportunity cost of labor.
However, although it has been suggested in past reviews, few studies have looked at how other factors
interact with pay at the individual level to affect outcomes (Opsahl & Dunnette, 1966 and Welbourne &
Gomez-Mejia, 1995).
In this research, I propose that it is over simplifying to claim that organizations which offer equity
incentive (a form of external incentive) would automatically motivate employee. It is logical to argue that
there is more to this cognitive process of forming psychological ownership belief. In this paper, it is my
intension to extensively investigate the influence of individual characteristic on formation of
psychological ownership feeling.
Further, the “three models of satisfaction” written by Klein in 1987 has been widely accepted as
well-grounded approaches for distinguishing the ways employee ownership may affect attitudes (Klein,
1987). The “Intrinsic Satisfaction Model” suggests that ownership itself is the critical variable in explaining
the psychological impact of employee ownership. According to the “Instrumental Satisfaction Model”, EO
has some attitudinal effects if it enhances the employees' rights to information and participation in
decision making. Finally, the “Extrinsic Satisfaction Model” suggests that EO has positive attitudinal
effects if it is financially rewarding to employees (Klein, 1987, pp. 320–321). In about 30 years of empirical
research the three models of Klein have been tested in several ways with different ways of conceiving the
mere ownership of stock (comparisons between employee owners and non-owners working in the same
company, individual or collective levels of stock ownership...), the financial value of stock ownership
(stock return, size of the company's contribution, financial value of individual ownership...) and the rights
to information and participation in decision-making (perceived participation, actual voting rights...).
Overall, the majority of existing evidence suggests that employee ownership may have positive attitudinal
effects, while some studies found no effects or negative effects (Kaarsemaker, 2006, pp. 44). Concerning
the processes by which employee ownership operates, three main conclusions may be drawn: first, stock
ownership itself rarely appears to lead to major changes in individual work attitudes (Pendleton, 2001, pp.
155), second, the positive effects of employee ownership seem to be related more to the capacity of such a
management practice of being rewarding in terms of financial returns (extrinsic model) and rights of
participation (instrumental model), and third, some studies underline the importance of psychological
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ownership as a moderating variable (Pierce et al., 1991, Van Dyne and Pierce, 2004 and Wagner et al.,
2003).
Hypothesis 1. There is an association between employee stock ownership and psychological ownership.
Psychological Ownership
Feeling of ownership is a part of human condition that has a critical effect on people
psychologically and physically (Pierce et al., 2001). Tannenbaum (1983) noted that, “ownership is
attractive to most people… being owner is ego enhancing”. Scholars have asserted that people have an
innate need to possess; and psychological ownership, describe by Pierce, Kostova and Dirks (2001),
emerges as it satisfies certain human motive that are either genetic and/or social in nature.
Pierce (1991) has describe psychological ownership is the psychologically experienced
phenomenon in which an employee develops possessive feeling for the target. Building on Furby (1978)
and Dittmar (1992), Pierce and colleagues (2001) associated feelings of possession with feelings of
ownership and defined psychological ownership as the state in which an individual feels that an object is
experienced possessively described as “mine” or “ours”. Pierce et al. (2001) theorized that psychological
ownership can be differentiated from the other constructs based on its conceptual core (possessiveness)
and motivational bases. They argue that when employee experience psychological ownership, they are
able to satisfy the basic three basic needs: sense of belongingness, feeling of efficacious and self-identity.
As all the basic needs described are related to personal character, it is the aim of this paper to examine
individual differences in personality characteristics and human cognition influences on formation of
psychological ownership feeling.
Individual Characteristic and Psychological Ownership
Individual disposition influence in work
Most researchers in organizational behavior and psychology now accept that behavior is a
function of characteristics of the person and the environment (Lewin, 1935) to predict behavior. Thereby,
human behavior can be predicted by both environmental and individual dispositional capacity and
fortitude to take the initiatives and responsibility to adapt to environmental influences. In the
sociocognitive view, people are not just reactive organisms shaped by external events; they are selforganizing
and self-regulating. That is, personal factors are very much involved in regulating one’s
cognitive and behavioral exertion and executed in the transactions of everyday life. Correspondence on
the cognitive theory that was discussed in the previous chapter, cognitive schemata inhabit within each
person’s cognitive structures to support individual interpretation of environmental events. Therefore, a
particular individual tends to draw on the same personal cognitive schemata repeatedly give meaning to
the events happened to the person. This personal cognitive schemata is proposed in this study to be
altered by person’s personality.
This section addresses a number of the major studies contributing some of the psychology
background and management literature on personality traits, cognitive processes, and behaviors and will
detail how the Five-factor Model of Personality should moderate between financial equity and
psychological ownership feeling.
Personality effect on change of Identity from Employee to Owner
Past researched have also examine psychological ownership in the domain of social exchange and
self-identity, especially the relationships between employee and organization that are characterized by
transformations in self-identity. As employee grant financial ownership of an organization, they tend to
form the feelings of ownership and engage in positive behavior driven alone with the sense of
responsibility. Exchange theory explains this type of transactional exchange between employee and their
organization as the organization satisfies the needs of participants, who in turn reciprocates by
developing feelings of ownership and a corresponding sense of responsibility. Exchange theory (Blau,
1964) emphasized that people maximize gain through a series of such exchanges.
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Within each organization, employee each has their job role. However, everyone can have a role
that corresponds to being only physically engaged but not be psychologically committed to that role. The
psychological manifestation comes with the conjunction of the role into one’s identity and the cognitive
and emotional commitment made to the role. This idea is corresponding to the Erikson’s (1968) concept of
identity crisis. Specifically, people may spend some time considering and occupying roles without being
psychologically committed to their roles. As part of the identity exploration process, people may try a
number of roles to match with personal character such as moving from various jobs before they actually
commit as part o exploration process. In this paper, I believe that employee who actually owns company
stock will increase the chance and accelerate the process to choose and make cognitive and emotional
commitments to their job roles. As I assume that the distinction between occupying a role and being
psychologically committed to a role is important because, as the paper will carry on below, equity
incentive should deliver more psychologically meaning and, therefore, result in stronger relationships to
personality variables such as traits and motives than simply possessing a role. In conclusion, this research
examines issue under the assumption that ownership helps people come to define themselves, express
their self-identity to others, and maintain the continuity of the self across time.
Brief Development of five-factor model
The five factor model of personality is the end result of an analysis of trait terms. Allport and
Odbert (1936) began the taxonomic effort by compiling a list of 4,500 English words form a dictionary
used to represent innate personality traits that could be further applied to distinguish one human being
from another.
In the last two decades, a robust set of five factors has been recovered from almost every major
personality inventory. Although acceptance of the classification is far from universal (e.g., Block, 1995),
the robustness of structure across cultures and measures, as well as strong evidence of the heritability of
the traits, has led to widespread acceptance of the five-factor model among personality researchers.
The Big Five traits are broad personality constructs that are manifested in more specific traits.
The Five-Factor Model of Personality (commonly called the Big Five) is a descriptive
representation (typology) of the five major dispositional dimensions that encompass human personality. It
has been used extensively in industrial psychology as a basis to measure job-related attitudes, personorganization
fit, and other personnel selection interests. Five-Factor Model of Personality is commonly
accepted among personality researchers due to its robustness of structure across cultures and a variety of
measuring techniques.
Relevance of the Big Five Model and Management Research
Organizations have turned to personality experts to assist them in the early identification of
employees who are likely to be achievement motivated, conscientious, and stable. It is in the area of
personnel selection that the field of management has focused its Big Five based research. An important
consideration for the field of management is that the Big Five personality dimensions are also relatively
independent measures of cognitive ability (McCrae and Costa, 1987). Thus, it can be reasoned that job
performance capability can be gauged by matching an applicant’s personality structure with the
personality demands of a particular job.
Personality and Psychological Ownership
Personal values make certain objects more-or-less esteemed (Pelham, 1991). From the viewpoint
of self-concept, people may strive to increase the feeling of self-worth by attempting to psychologically
possess items of that important to them. As ownership is also one mean to boost self-esteem, individuals
are likely to feel ownership over those objects consider to be more important to their personal value.
From the beginning of interest in psychological ownership are the aspect that employee will exert
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preferable organization behavior as employee perceive organization as their own; where they belong.
Pierce et al. (2001) propose that when employee experience psychological ownership, they are able to
satisfy the basic three basic needs: sense of belongingness, feeling of efficacious and self-identity. Pierce
and his colleague (2002) have recognized that as individual is ready for psychological ownership due to
the innate motives for having a place, effectance, self identity, different people will differ on this strength
of motive. They further argued that personality should have impact on this development of feelings of
ownership as traits will affect how an individual goes about pursuing relationships with ownership
objects. However, as researchers recognized the importance to understand the psychological process and
dynamic of psychological ownership, individual factor as personality characteristic was totally ignored.
There have been no studies that examine the relationship of the Five-Factor Model of Personality to
psychological ownership. In this study, I expected that individual differences in personality characteristics
as five factor model of personality that would to an extent influence person’s exertion on psychological
ownership feelings.
The personality factors comprising the Big Five are (1) Extraversion, which represents the
inclination to be sociable, assertive, dynamic, and directive, (2) Agreeableness, representing the tendency
to be friendly, cheerful, accommodating, and supportive, (3) Conscientiousness, comprised of two major
subfactors, achievement and dependability, (4) Neuroticism, which is the tendency to exhibit poor
emotional adjustment and experience disparaging effects such as fear, anxiety, and rashness, and (5)
Openness to Experience, which is the propensity to be inquisitive, creative, nonconforming and
independent (Judge and Cable, 1997). Each dimension is scaled from high to low with high scores being
representative of the most positive aspects of the dimension’s characterization while low scores signify the
reverse. However, in this research, only two of the dimension will be further examined as formation of
psychological ownership seem to be most related with those 2 dimensions. Those two dimensions are
agreeableness and conscientiousness.
Agreeableness
Agreeableness suggests the dimension of personality that involves getting along with others in
pleasant, satisfying relationship. Agreeable individuals are generally cooperative, courteous, flexible,
forgiving, good-natured, softhearted, tolerant and trustful or trusting (Barrick & Mount, 1993; John et al.,
1988). This dimension has been previously labeled as conformity, likeability, friendliness, social
conformity, etc. Digman (1990) suggests that the label Agreeable is too timid for a dimension that seems to
involve the more humane aspects of humanity such as caring, nurturance, and emotional support. As to
satisfied basic need of belongingness, and striving for social recognition, agreeableness should be a factor
that influences individual’s formation of psychological ownership feelings.
H 2:Agreeablenss as moderator between employee equity ownership and psychological ownership feelings.
Conscientiousness
Conscientiousness is indicated by two major facets: achievement and dependability.
Conscientiousness is the trait from the five-factor model that best correlates with job performance (Barrick
& Mount, 1991). Individuals who score high on the Conscientiousness dimension tend to be achievementoriented,
careful, hardworking, orderly, persevering, responsible, and thorough (Barrick & Mount, 1993;
John et al., 1988). There are elements of both dependability and volition to this trait (Barrick et al., 1993;
Costa & McCrae, 1992; Stewart, 1999). High conscientiousness scorers are also active planners, organized,
and carry out tasks (Costa & McCrae, 1992; Stewart, 1999). People scoring high on a conscientiousness
scale set goals autonomously and demonstrate high commitment to goal achievement (Barrick et. al.,
1993.) To satisfied basic need of self efficacy, conscientiousness should be that factor that formation of
psychological ownership feelings.
H 3: Conscientiousness as moderator between employee equity ownership and psychological ownership
feelings.
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195

METHOD
Data
The Respondents for the study used for testing our hypotheses were employees of the world's
largest dedicated semiconductor foundry located in Taiwan. Similar to other ‘new economy’ firms, many
Taiwanese high-tech firms have launched broad-based stock incentives to motivate employee
participation and collaboration (Sesil et al., 2002). The broad-based stock plans in Taiwan resemble to
restricted stock plans in United States with shorter vesting periods, which are generally between three
months to two years depending on recipients’ positions in the company. Employees usually have full
autonomy to keep or liquidate their awarded stocks after the restricted period.
Psychological ownership beliefs. The measure of psychological ownership belief is adapted from Wagner,
Parker, and Christiansen’s (2003) four-item instrument. The items in this composite included: “Making the
company a good investment for stockholders is important to me”, “My job performance has an impact on the
profitability of this company”, “I should share the benefits of this company’s financial successes”, and “I should
share in the consequences of this company’s financial setbacks”. Each item is based on a Likert scale and ranged from
1 to 5, where 1 represents “strongly disagree” and 5 represents “strongly agree”. The Cronbach’s alpha reliability is
0.73.
Ownership Feeling
Ownership feeing was measured by using Pierce et al. (1992) 3-item measurement instrument.
The three items measuring feeling of possession exhibited internal acceptable consistency reliability
(=0.8181).
Big five personality
The Big Five personality traits were measured with the Mini-Maker developed by Saucier (1994)
adopted from NEO-PI-R (Costa & McCrae, 1992) contains five domain scales: Neuroticism (N), Openness
to experience (O), Conscientiousness (C), Agreeableness (A), and Extraversion (E). The Mini-Maker
adopted a 5-point Likert scale format, ranging from “strongly disagree” to “strongly agree”, to assess
participants’ level of agreement with each of the 40 self-report items founded on the test (Saucier, 1994;
Mooradian & Nezlek, 1996). Although the most widely used five-factor model is the 240-item NEO
Personality Inventory--Revised (NEOPI-R; Costa & McCrae, 1992). However, to raise our response rate,
for this research, a smaller scale of 40 item developed by Saucier (1994) will be used.
Data Analysis
A two-step approach to structural equation modeling (Anderson & Gerbing, 1988; James, Mulaik, &
Brerr, 1982) will be applied to test the hypotheses, and all analyses and estimation will implemented in
LISREL 8.54. The first step is to test the measurement of the variables in the proposed model.
Confirmatory factor analysis (CFA) should be used to test and verify the distinctiveness of the underlying
constructs of the proposed variables in our study. In the second step is to use structural equation model to
confirm with the theoretical model. This research will also applied a model comparison procedure to
evaluate whether the theoretical model has the better overall fit than other alternative models. In addition
to the theoretical model, it is estimated there may be few alternative structural models to assess the effects
of changing the order of constructs, and the goodness of fit of these structure models should be then
compared.
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197

Adoption of Job Rotation as a Component of
Staff Development in Polytechnics in Ghana
Patience Kwakyewa Asirifi
Koforidua Polytechnic, Koforidua, Ghana
Keywords
Job rotation; Job design; Management commitment; Staff development; Job rotation model.
Abstract
Job rotation (JR) has become critically important in organizations today, especially in relatively young
organizations where innovation is key and its staff have little industrial experience. It involves a systematic lateral
transfer of employees within an oraganisation or to another organization in order to make him or her versatile. It is
tightly linked to succession planning and a useful tool in job placement. Though it has immense benefits like reduced
monotony, increased job satisfaction, etc, Management of Polytechnics in Ghana have ignored this process of human
resource development to formal workshops, classroom learning and skill acquisition. As a result most employees are
less enthused as there is no formal model to be adopted. This research therefore sought to assess the process in
Polytechnics and developed a model that will assist Management in its implementation since relatively little research
had been done on the subject. The population of ten polytechnics in Ghana was selected and six were sampled where
open and close-ended questionnaire were administered. Formal and informal interviews with members of staff were
also conducted to clarify information obtained from questionnaire. The research proved that employees of
Polytechnics were aware of JR because it was taught formally in tertiary institutions and also lacked Management
commitment. This paper therefore presented Polytechnics with a model for job rotation to ensure its effective
implementation.
Introduction
Employees of organizations are their prominent assets which must be motivated, capable and
efficient and staff development is one crucial means to attaining job satisfaction. This will induce
employee commitment to achievement of organizational goals. Hence job rotation which is one form of
on-the job training plays a pivotal role in employee development. According to research, it is the process
whereby an employee is assigned not to a single and specific task but a set of tasks among which he or she
rotates as with some frequency (Cosgel and Miceli, 1998). The goal of staff development according to Paul
(online paper) is to train staff to meet the organization’s minimum standards. This training must be
ongoing and should ensure that employees know the size and scope of their authority and responsibility,
who they report to for guidance and support, and also have the tools to effectively do their jobs.
The development of staff is closely linked to the JD of the institution which is the personnel or
reengineering activity of specifying the contents of the job, tools and techniques to be used, surroundings
of the work and the relationship of one job to the other. Campion, Cheraskin and Michael (1994) describe
JR as lateral transfers of employees between jobs. These could be a set of tasks, or an entire job, organized
to determine what, how, and the order of execution. A well designed job encourages a variety of good
body positions, reasonable strength requirements, mental activity, and foster feelings of achievement and
self-esteem. This addresses issues like work overload or under-load, repetitiveness, limited control over
work, isolation, shift, delays in filling vacant positions, excessive working hours, and limited
understanding of the whole job process. Liu Yinhua mentions other types of JR like daily JR for ergonomic
issues and regular rotations for appointments and orientation. Various methods exist in the design of jobs
which are job enlargement (JEL), job enrichment (JER) and job evaluation which are periodic in addition
JR to determine the strategic worth and weight of jobs for the achievement of corporate objectives. JEL
includes more or different tasks and boast interest but may or may not give employees more
responsibility to motivate them. JER allows employees to assume more responsibility, accountability, and
independence when learning new tasks, thus, allows for greater participation and new opportunities
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Three theories of JR exist and these are employee learning, employer learning and employee
motivation theories. Erikson and Ortega (2001) assert that the employee learning theory is an effective
way to develop the abilities of employees. They iterate that employees who rotate accumulate more
human capital since they have a wider range of job experiences. This movement of employees from one
task to another distributes group tasks as a sequential activity in the form of job assessment through
discussion of process with the employees and supervisors involved for clarity, training needs analysis
cutting across policies, incentives, and feedback to achieve efficiency and motivate employees. It is
imperative that the process of execution and coordination of tasks are implemented on a small scale at the
first instance to allow for adjustments and a continual revaluation. It is common knowledge that
employees who have less industrial experience must be rotated more frequently as against the others who
have more industrial experience. Champion, Cheraskin and Stevens (1994) assert that it is an effective way
to develop employees abilities.
The employer learning theory according to Erikson and Ortega (2001) explains that the
organization learns more about its employees to identify their performances on different jobs for effective
job placement and this could be achieved only through the movement of employees from one job to the
other. The Polytechnic would be able to identify the abilities of staff for effective job placement and
improve overall productivity. It provides information for job placement and Ortega (2001) affirms this
intuition. It also states that if an organization is young, it information on jobs may not be precise, therefore
JR would be the best option.
The third theory, employee motivation asserts that JR makes work more interesting especially
with employees who have reached the peak of their careers. Cosgel and Maceli (1999) have said that there
is increase job satisfaction from performing variety of activities and this goes a long way to reduce
agitations among staff.
This approach in question helps in the development of competency level of staff is JR which is a
crucial process in an employee quest to improve upon himself and his For example, an electrical engineer
may move from fabrication to assembling plants and to circuit design section at designated times.
Through this process, he is exposed to other aspects of the job and his skills are improved, thus making
him more efficient and versatile but in industry today, JR is viewed as just another transfer rather than as
an important tool for implementing HR strategy. It has become a ritual at best, without any focus on the
outcomes achievable through a little planning and implementation effort and also a means of punishing
poor performers and settling scores resulting from organizational politics, etc.
Job rotation (JR) as a management development (MD) tool is not new in the development of
human resources (HR) of an organization but has not received much recognition from both management
and staff irrespective of its immense benefits. It is observed that JR is the best way of keeping the HR from
complacency and boredom of routine since it is very difficult to sustain interest in a given job for any
substantial length of time. This is because human beings by nature have the tendency to outgrow their
jobs through the learning and experience gained over a period of time (http;/www.alagse.com).
Therefore, stimulating human mind through diversity of challenges is a means to developing creativity
and improving institutional performance.
Consequently, a well planned job rotation programme has immense positive impacts on the job
satisfaction and retention of cherished HR. Whiles there is relatively little research undertaken in this area
a prospective emancipatory action research study has been on-going in North West London health
services for several years by Patrick Coyne, Dr. Ricky Lucock, Prof. Buchan and Jane Ball, with the local
health communities (www.nurserotation.com).
It is identified to have contributed greatly to the successes of firms in Japan. An influential study
by Ouchi (1981) identifies non-specialised career paths as one of the fundamental properties from which
others can learn as affirmed by Appelbaum and Batt, (1994), Osterman (1994), the evidence of the
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innovative transformations at the workplace through the practice of effective JR as a result of
management’s commitment.
It was further argued that innovations in the firms emerged consequently from JR by allowing
workers to apply their knowledge of one task to the improvement of the other (Meltin M. Cosgel, Thomas
J. Miceli 1994]). A well known Communal Society, the Israeli Kibbutz, practiced job rotation for years
(Helman (1988), Leibenstein (1989) since the positive derivations outweighed the cost of its
implementation.
According to Andrews (1963), a variety in schedules is viewed as “a source of pleasure” and the
frequency precludes monotony which results in low productivity. This could be done without necessarily
sending the individual to another department as in some cases; but rather, to a supplier to observe how
the business operates from the suppliers view point to broaden employees outlook or to a foreign
organization to gain a global perspective. This allows the employee to perform diverse roles to gain a
better understand of the different issues.
Similarly, Campion, Chereshin and Stevens (1994) say, JR has benefits like job satisfaction and
stimulation, improves ability to deal with difficulties like sabotage, backbiting and other forms of
resistance that come along with the implementation of change.
In an era where tertiary education has become paramount and competitive, there is the need to
have a well resourced staff in terms of job proficiency to be able to satisfy the customer base and enhance
corporate image. This has made employees of Polytechnics aware of the need for development. As a
result, are undergoing various forms of training whether sponsored or not and ignoring the critical
practical experience and versatility of the workforce that is needed.
However, there has been the realization that JR is not given the necessary attention and
seriousness and is either done as a form of punishment or as stop gab during periods of shortages. It is
therefore the objective of this research to access the process and develop a model for its implementation in
organizations. This is critical in the career development process of every staff since it contributes greatly to
their productivity.
This will create the necessary awareness, boost staff interest and desire to bring about a higher
level of creativity and innovation and has also designed a model make it a very effective employee
development practice. As such, this research, sought to ascertain whether JR is employed in Polytechnics,
its basis, level of management and staff enthusiasm and the constraints. The limitation was mainly the
availability of funds and cooperation staff of sampled Polytechnics.
Methodology
The target population included all Polytechnics in Ghana with a sample size of six; namely
Takoradi, Accra, Kumasi, Sunyani, Cape Coast and Koforidua and made up of two strata; heads of
department and senior staff or members in the various departments. Questionnaires, interview guides,
telephone interviews and participatory observations were used to collate the data which allowed a sizable
amount of information to be gathered. This was preceded with pre-testing of the questionnaire for the
design, structure, and content to reduce ambiguity and ensure clarity. Statistical Package for Social
Sciences SPSS was used in the processing and analysis of data and was presented by the use of frequency
distribution tables and graphs.
Results
The respondents answered similar questions but related to rank and position in the Polytechnic.
Research question one: How long have you been in this institution Respondents were asked to indicate
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their length of stay in their respective Polytechnics as shown in Table 1 below.
Table 1 Length of Stay in Polytechnic
Length HOD STAFF
Frequency Percent Frequency Percent
0 – 1 yr
2yrs
3yrs
4yrs
5yrs and above
Total
4
12
24
32
72
5.6
16.7
33.3
44.4
100.0
24
27
43
28
111
233
10.3
11.6
18.5
12.0
47.6
100.0
From the table 1, it is observed that 32 (44.4%) of the HODs had stayed for 5 years and above, 24 (33.3%), 4
years and 12 (16.7%), 3 years. The least stay was 1 year and below represented by 4(5.6%). For the
supervised staff, 111 (47.6%), over 5 years, 28 (12.0%) and 43 (18.5%), 3 and 4 years respectively.
Research question two: How long have you been at this position
Table 2 shows how long the staff had remained at their current positions over the period in the
Polytechnics.
Table 2 Length of Time at Position
YEARS HOD STAFF
Frequency Percent Frequency Percent
0 – 1 yr
2yrs
3yrs
4yrs
5 yrs & above
Total
24
4
8
24
12
72
33.3
5.6
11.1
33.3
16.7
100.0
50
56
47
28
45
224
22.2
24.4
20.9
12.4
20.0
100.0
It is observed that for HODs, 12 (16.75%) and 24 (33.3%) had been at their current positions for over 5 and
4 years respectively. 24 (33.3%), a year and below, 8(11.1%) three (3) years. On the part of the supervised,
50 (22.2%) and 56 (24.4), a year and below and 2 years respectively. 47 (20.9%) and 45 (20%) 3 and 5 or
more years and above respectively.
Research question three: Does your institution use the tool of job rotation as an essential part of job
placement None of the respondents answered this question.
Research question four: Does management support job rotation
The respondents were asked to indicate whether management supported the process.
Fig. 1 Management Support
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It can be inferred from figure 1above that as many as 60 (88.2%) responded in the affirmative and 8
(11.8%) responded in the negative.
Research question five: Do you consider it as a form of staff development
The respondents were asked whether they considered job rotation as a form of development of staff
capabilities.
Table 3 Form of Staff Development
RESPONSE HOD STAFF
Frequency Percent Frequency Percent
Yes
No
Not at all
Total
52
8
12
72
72.2
11.1
16.7
100.0
191
15
16
222
82
6.4
6.9
100
The table 3 above indicates that 52 (72.2%) of the HODs believe that job rotation is a form of staff
development. 8 (11.1%) and 12 (16.7%) said no and not at all respectively. For the staff, 191(82%)
responded in the affirmative. 15 (6.4%) and 16 (6.9%) of them said no and not at all respectively.
Research question six: Have you been able to develop your subordinates through job rotation
Table 4 Ability to Develop Staff
Response Frequency Percent
Yes
No
Total
40
32
72
55.6
44.4
100.0
Table 4 above shows that 40 (55.6%) of the HODs said “yes” and 32(44.4%) said “no”
Research question seven: What is the level of staff enthusiasm
Respondents were asked to indicate their level of enthusiasm about the process if it carried out in their
respective Polytechnics.
Fig 2 Level of Staff Enthusiasm
From figure 2 above, 8 (12.5%) HODs said they were very enthused and enthused about the job rotation
process. 32 (50%) and 16 (25%) respectively were somehow enthused and not enthused by the whole
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process. On the part of the other staff, 12 (5.5%) and 62 (28.2%) were very enthused and enthused
respectively. 90 (40.9%) and 56 (25.5%) were somehow enthused and not enthused about the process at all.
Research question eight: Is the process competency-based
This question sought to find out whether the process is competency-based.
Fig. 3 Competency base
Figure 3 indicates that for the HODs 16 (26.7%) responded “yes”, 6 (6.7) responded “no” and 40(66.6%)
said “somehow”. The figure also reports that for the other staff, 99(45%) said “yes”, 39 (17.7%), “no” and
82 (37.3%), “somehow”.
Research question nine: Do you wish it to be part of your human resource strategy
No response was received for this question.
Research question ten: are you aware of job rotation
It was expected of respondents to indicate their awareness or otherwise of job rotation.
Fig. 4 Self - Awareness
The figure 4 above shows that as many as 190 (81.5%) said they were aware of job rotation. 35 (15.0%) and
8(3.5) of them respectively said no and not at all.
Research question eleven: Are other members of staff aware
Respondents were asked to assess their colleague’s awareness of the process.
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203

Fig. 5 Other Staff Awareness
Figure 5 above indicates that 44 (61.1%) of the HODs said their surbodinates were aware. 8 (11.1%) and 20
(27.8) of them said no and not at all. 132 (58.7%) of the other staffs said yes, 28 (12.4%), no and 65 (28.9%),
not at all.
Research question twelve: which tools does your institution use in selecting people for job rotation
The respondents were asked to select from a list tools that were used for the selection of individuals for
job rotation.
Table 5 Selection Tools
TOOLS HOD STAFF
Freq(HOD) Percent Freq(staff) Percent
Observation 24 40 89 45.6
Coaching 4 6.7 32 16.4
Interview 12 20 16 8.2
Assessment
test 4 6.7 28 14.4
Others 16 26.7 30 15.4
Total 60 100 195 100
It is inferred from table 5 above that the response for observation is 24 (40.0%), interview 12 (20.0%) with
coaching and assessment test representing 4 (6.7%) respectively. 16 (26.0%) also mentioned other tools like
experience, qualification among others. For the other staff the highest mode of selection is observation
89(45.6%), 32 (16.4%) and 28 (14.4%) indicated coaching and assessment test respectively. The least
method used in the view of the respondents is through interview. 30(15.4%) of them also mentioned
experience and qualification as some of the other tools for selection.
Research question twelve: have you ever been selected
This question sought to find out from the respondents if any of them had been selected to undertake job
rotation in the Polytechnic or an analogous institution.
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Fig. 6 Personal Involvement
The figure above shows that out of the 229 respondents, 80 (34.9%) of them said they have once been
selected for job rotation. The remaining 149 (65.1%) responded in the negative.
Research question thirteen: will you encourage your colleagues to make themselves available for the
process
Fig. 6 Recommendation to Others
The figure 6 above shows that 19(87.6%) of the respondents indicated ‘yes” and 27(2.4%), “no”.
Research question fourteen: State some benefits derived from job rotation.
Few of the respondents mentioned multi-skill, reduction in boredom, among others as some benefits of
job rotation.
Research question fifteen: What are some of the problems which have evolved from this process
No response was received for this question.
DISCUSSION
Process
From the afore presented results, majority of the staff had stayed in the Polytechnics for at least five years
and had remained at their current positions for up to a year or four. This means that they may have
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205

gained much experience and therefore had more control over what they do, but with little diversification
and so are limited in scope. This process was however not used as condition for job placement in the
Polytechnics. However, though Management support was present but it was not committed to it. As a
result, it was not used effectively and for the right purposes. Respondents indicated that they considered
it as a form of staff development but were not enthused about effective because management is perceived
to be unfair in job placement and appointment to positions. There was a perception that it is competency
based but could not indicate whether they wanted to be part of the HR strategy. This Appalbum and Batt
(1994) asserted that it is management’s involvement that makes the process effective. According to Janni
(eHow member), job rotation programmes sometimes offer customized assignment to promising
employees in an effort to give them a view of the entire organization. These assignments could rum for a
year or more and sometimes vary in size and formality. Paul Nicolazzo also explains that competency
based recruitment and promotional standards together with an effective staff development system helps
to ensure consistency in quality and safety.
Awareness
Staff responses indicated that they were aware by virtue of knowledge from school but could not explain
individually that it was practiced in their respective Polytechnics. This lack of participation is
confounding given that rotation programs are a respected means for learning how other functions
operate, and that such knowledge is essential to becoming a better business partner (Adrienne Fox, 2003).
Erikson and Ortega (2001) asserts that the when employees are rotated or exposed to a number of varying
jobs the more experienced they become and this supports the learning theory of job rotation.
Selection
Considering the responses, observation was perceived as the tool used for the process. Though none had
been selected for the process but they were willing to make themselves available as well as encourage
their colleague because they were aware of the immerse benefit. According to Erikson and Ortega (2001),
rotation boasts employees morale in availing themselves for the process affirmed by the motivation theory
of JR.
Benefits
According to respondents, some of the benefits gained for participating in job rotation include, multiskilled
employee thus, the ability to handle different tasks. There is also high sense of integrity, reduction
in boredom, resulting self empowerment and job enhancement. All these will increase competency level of
staff and eventually result is efficiency and higher productivity. This is affirmed by Andrews (1963) that a
variety in work schedules at the workplace is viewed tends to provide some pleasure and the frequency
precludes monotony which usually results in low productivity. This is supported by the employee
motivation theory that it makes work more interesting and confirmed by Cosgel and Maceli (1999) that job
satisfaction reduces agitations among staff but because this process is formally absent, there are a lot of
staff agitations which has led to a number of strikes.
Campion, Chereshin and Stevens (1994) also asserts that job rotation has numerous benefits like job
satisfaction and stimulation, the organization’s ability to deal with difficulties like sabotage, backbiting
and other forms of resistance that come along with the implementation of change whiles Ortega (2001)
indicates it decreases the function of seeking prior information about employees who have experienced
various work assignments. According to Ference, Stoner ans Warren (1077), it acts as a form of motivation
for plateaued employees.
Problems
Much could not be identified in terms of the problems as a result of the fact that it is not carried out as a
formal exercise and the few that are undertaken, staff are not well informed about them. The general
perception gathered from interviews was job transfer from one department to another, not job rotation as
done in most Polytechnics.
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From observation Management commitment to the implementation of job rotation is low especially when
employees have to move to another organisation for further training. Janni (eHow member) asserts that
irrespective of the fact that job rotation has immense benefits, lack of time, resources, etc, do not allow
organizations to embark on this activity. According to Lin Yinhua problems in human resource
management have to be faced and gradual measures put in place to mitigate their effects on both the
employees and management.
Conclusion
It is observed from the analysis that though most staff in the various categories have knowledge on JR,
they do not see the importance because few have been selected specifically to be part of this process but
there were no set objectives to be measured. Also the non-existence of an HR strategy has not allowed JR
to be part of as a result of management unawareness of the immense benefits like reduction in boredom
and stress associated with particular jobs, creativity and innovation among staff.
It was realized that the lack of management commitment was also due to lack of time and inadequate
resources among others and the lack of managements understanding of the process JR and its immense
benefit as asserted by the employee motivation theory of JR.
Recommendation
It is commended that Management and Heads of departments or Sections remain fair and firm to be able
to achieve the mission of the Polytechnics with regards to adherence to set procedure to gain employee
confidence. The recommendation further includes a job rotation plan outlined below:
Model for job rotation
For any job rotation process to be effective, there must be a model or laid down procedure to make it less
cumbersome and results oriented.
Fig 7 Proposed Job Rotation Model
Feed back to employees after going through this process is essential to abreast themselves with their
performance and also help them identify their weakness to enable them improve. The employee on the
other hand must also submit reports to Management periodically as on the job rotation in order to abreast
Management with difficulties to enable them monitor and evaluate the process better.
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Precautions:
Heads of departments and sections must also be sensitized encourage staff to give off their best
and also be able to identify potential staff.
The staff who are selected must also be sensitized since it a psychological exercise.
There must be systematic.
The objectives setting should be done in consultation with staff in question.
NB:
The staff could be sent to other organizations for further training or go on exchange programmes.
References
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ehow.com/how_4763302_effective-job-rotation-program-company.html
Acknowledgement
I wish to express my sincere gratitude to Mr. Kojo Haizel, HR Manager, Alisa Hotel, Rev. Paa Ekow
Quaye, Head of Department, HR, Central University College and Dr. Smile Dzisi, Koforidua Polytechnic,
Ghana and Dr. Joel Barimah, London College of Management Studies for their immense contribution in
diverse ways.
The Business & Management Review, Vol.2 Number 2, July 2012
208

Water – The missing ingredient in real and
sustained economic development
Mark T Jones
Park Royal College, London, UK
Keywords
Consumption, economic revitalisation, supply, sustainable development, water security.
Abstract
Access to water and water security are essential prerequisites for sustained economic development. The fact that
such remittances invariably feature individuals, regions and indeed virtually whole nations that themselves are often
deemed to be on the economic margins has ensure that the issue is often overlooked or rarely given the prominence it
deserves. When the topic is mentioned at all it is routinely assumed that it is purely an environmental matter, such a
simplistic approach ignores the increasingly important role that water plays as one of the fundamentals that
stimulates entrepreneurial activity. Companies rightly set store by access to a reliable source of energy, good
communication and a developed infrastructure, but water seems to be taken for granted and minimal time or effort
employed in guaranteeing the source of supply and implementing water conservation and management measures.
‘The commoditization of water’ (World Without Water, Channel 4 documentary – 29/04/2006) would appear
to raise serious questions about water management, which in turn has serious implications for security,
stability and economic development.
In these times of economic difficulty and signs of growing geo-political tensions there is an even greater need to
explore the role water plays in stimulating economic activity. This presentation seeks to elucidate something of the
reasons why it is imperative to recalibrate our thinking in this regard.
Introduction
The inter-connective nature of the global economy means that nations and entire regions are easily
destabilised by both natural and man-made activity. As much as countries might try to insulate
themselves from such difficulties, no country can remain immune to the ramifications of the travails of
others. Water is so elemental to human existence that it seems surprising that it rarely seems to factor in
economic planning. Rather like the oxygen we brief there would appear to be an assumption that it will be
there. Water intensive industries such as the beverage sector do take the issue seriously, although even
here there are periodic tensions such as those between Coca Cola and farmers in the state of Kerala, India
in 2000. The United Nations Human Development Report (2006) states that: “Every $1 spent in the (water)
sector creates on average another $8 in costs averted and productivity gained.” Water as an economic driver
warrants far greater analysis.
Governments and economist the world over are busy exploring ways to stimulate home and inward
investment. The United Nations Conference on Trade and Development (UNCTAD) takes considerable
care in publishing annual data on Foreign Direct Investment, yet until relatively recently there has been a
paucity of comparable data concerning inward investment into countries from Diaspora communities and
migrant workers. Economists and monetary committees the world over are currently being exercised by
fear of a prolonged economic malaise, double dip recessions and the burden of mounting national and
personal debt, so naturally anything that has an impact on macroeconomic indicators. With the
International Organisation for Migration (IOM) having estimated the number of migrants being 200
million the role they play cannot be ignored. A recent World Bank (2011): Outlook for Remittance Flows
2012-14 makes startling reading, not least because it concludes that remittance flows to developing
countries exceeded $350 billion in 2011. Even if as little as 10% of such a sum went into economic
investment the outcome would be significant.
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Markets in Financial Instruments Europe Directive (MiFID):
A Method of Controlling Ethical Banking.
Amaia Jone Betzuen Álvarez
University of the Basque Country – Universidad del País Vasco- Euskal Herriko
Unibertsitatea (UBC-UPV-EHU), Spain
Keywords
Financial products, Mifid, Clients and Ethical banking
Abstract
The European guideline MiFID that was transferred to the Spanish legislation by means of 47/2007 Law
and 217/2008 Royal Decree regulates the services of investment made by any financial or investment institution that
undertakes giving information, advising and/or selling financial products to its clients and/or potential clients, as
well as the form in which the institution offers the services of execution of operations on financial and/or investment
products.
The objective of this guideline is to protect the client, regulating the behavior of the financial or investment
institutions. The financial or investment institutions must facilitate to the clients information on themselves, the
financial services and products offered, as well as act in the best interest of the client. The present researching work
tries to expose the application of this guideline to the financial or investment institutions in Spain, considering a
critical vision of the author on the basis of its professional experience as a Financial Advisor in the Spanish banking
sector.
Introduction
This article is based on the document “A consumer´s guide to MiFID. Investing in financial products”
published by The Committee of European Securities Regulators (CESR). CESR is an independent
Committee of European Securities Regulators of Shares Market, which undertakes the National
Commission of Shares Market (NCSM).
CESR has contributed to the preparation of legal texts of the MiFID and to its public spreading. One of the
main objectives of CESR is to foster cooperation between its members of their core functions, including
raising public awareness on financial services issues and investor information.
MiFID legal text
The MiFID Directive is the European legislation that harmonises in Europe the regulation of the Shares
Market, the financial instruments negotiation, the financial or investment firms and the relation with its
clients, and the protection to the investor.
The “Markets in Financial Instruments’ Directive” is well-known by its abbreviation in English MiFID. It
has been incorporated to the Spanish Law by means of Law 47/2007 of the 20 th of December, which
modifies the Law of the Shares Market, and Royal Decree 217/2008, of the 15 th of February.
Its origins come from the modification of Law 24/1988, of the 28 th of July, which modifies the law of
Shares Market and incorporates the following European Directives to the Spanish legal texts:
- The Directive 2004/39/EC of the European Parliament and the Council, the 21 th of April (2004),
related to financial instruments market;
- The Directive 2006/73/EC of the Commission, of 10 th of August (2006), that modifies the Directive
2004/39/EC of the European Parliament and the Council related to the organizational
requirements and the operating conditions of the firms of investment.
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- The Directive 2006/49/EC of the European Parliament and the Council of the 14 th of June 2006,
related to the accommodate of the investment enterprise capital.
MiFID regulation’s objectives
The MiFID guideline´s porpoise is to modernize the Spanish Shares Markets to adapt them to the present
necessities. Necessities that, in the last few years, have experienced an important evolution, as the
financial markets have increased their complexity and variety and that the investors have modified their
profile remarkably; increasing, on the one hand, its professionalism and at the same time a remarkable
increase in the direct access of the retail investor in the financial markets.
In order to respond to these new necessities, the guideline extends the catalogue of investment services
offered by the firms and the range of negotiable financial instruments, recognising different systems or
methods for the execution, etc.
The guideline has the high-priority objective of reinforcing the measures of protection for the investors
through Europe.
Indeed, as a result of the increasingly complexity and sophistication of investment products, and the
constant increase in the access of the investors to markets, the protection of the investor acquires highpriority
relevance, having shown the necessity to differentiate between different types of investors based
on its knowledge, etc. Thus, the Law establishes a catalogue of norms for those firms and individuals who
want to offer an investment assessment.
A better protection for the investor
The level of protection for any investor should be the maximum, regardless of the complexity of the
financial product. That is the reason why, the new MiFID guideline enphasises the way of working of the
financial firms when a client (fixed, or potential) decides to invest in a financial firms´ products.
In order to improve the protection of the investor, MiFID sets some principles that will apply to the
financial or investment firms when they are doing investment business with the client. These are:
‣ Get information about the client in order to know him/her as best as possible. This way, it will be
possible to advise the client, offering him/her the most suitable advising service according to
his/her necessities, characteristics and objectives.
‣ Having obtained the necessary data, the firm will offer the client those products that are
considered the more suitable for him/her, taking into account the knowledge and the experience
he/she has, and having valued previously, the nature and risks of the financial products.
‣ Provide a professional advising, at any moment, which assures that the service is agreed to the
knowledge, experience, objectives and financial situation of the client.
MiFID, also stresses that:
‣ The financial firm will have to facilitate the best information about the investment, (before, during
and after) inherent risks to the product, and direct and indirect commissions and expenses of the
business.
‣ In addition to this, when executing the orders of the client, the financial firms will try to obtain the
best result for the client.
One of the MiFID guideline´s porpoise is to become the client, being professional or not, an active part in
the process of the investment/financing business.
The financial or investment organization must insist on the client in reading the information offered
thoroughly, and to demand information that could solve out any doubt with the aim of helping him/her
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in taking decisions in investment/financing.
We must stress that, with the aim of doing all previously said in an optimal way, the firm must know the
client as best as possible to offer him/her the best service.
Despite the previous thing, in our opinion, MiFID has not covered the predicted expectations and we have
detected some weaknesses in its application and development, which we will analyse throughout this
article.
MiFID guideline´s protection for the investor
If we analyze the number of financial products owned by Spanish population, we could found a big
amount of people with more or less complex products.
The data would show us that a great percentage of the population has a sample of a bank account, some
loan (mortgage or personal loan), a credit/debit card and perhaps, some shares, investment funds, one or
more insurances (car, home, life…) and perhaps a pension plan.
Some of these products, that at first could be catalogued like not complex, depending on the specific
characteristics they have, they could become a high complex products for an investor, and still more, if
he/she is a retail investor.
It is striking that the guideline is not applied to all financial products. The MiFID guideline is only applied
to some of products before mentioned, considering them complex, as it is the case of shares, bonds,
derivatives and units investment funds. It is not applied, to other kind of banking products like deposits
or loans, nor to insurance products.
In our opinion, in the Spanish market there are structured deposits or mortgages of high risk and
complexity, which are offered with a supplementary financial product or insurance (“Mortgage clips”) to
safe the investor of the “interest risk” and that should be subjected to the guideline as complex products.
We have successfully obtained information of different Spanish financial firms to get an evidence of the
interpretation of this catalogue of complex products and have elaborated, in a summarized form, the
following investment or financial product composition according to our criteria, and taking into account
what MiFID says and going further than what some firms:
Non-subjected products by MiFID guideline
Products subjected by MiFID
Complex products
Non-Complex Products
In a later section, we will analyse this classification with more detail according to the typology of products
offered by the financial firms.
MiFID establishes the level of protection towards the client based on the complexity of products and
services firms offer and the capacity of the client to understand or assume the nature of the products and
their inherent risks. According to our experience and, as already has been commented in previous
sections, in the banking sector, this level of protection would must be the maximum regardless of the
complexity of the product and the characteristics of the investor.
In order to improve the protection of the investor, MiFID says that the client must know all the
information necessary to assume or understand the risks of products and investment and/or financing
business. With that objective, MiFID emphasizes and sets three obligatory basic principles when the
financial firms offer investment business:
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‣ To act honestly, fairly, and professionally, and in accordance with the best interests of the client.
Evidently, the firm will always be in a better position than the client and therefore, in an
advantageous situation. This principle tries to protect the clients when they are dealing with any
type of abuse and interest conflict between both parts (firm and client).
‣ To provide impartial, clear, comprehensive and not misleading information to the clients.
‣ To provide the clients with products considering his/her profile, necessities and personal
expectations.
MiFID guideline clients´ typology
Another important aspect to remark in the MiFID guideline is the application of certain rules of conduct in
the relations between clients and firms.
With the porpoise of adjusting as best as it is possible those services and products to the features and
necessities of protection of each category of investor, each client will be informed about the category in
which he/she has been classified.
Before providing an investment service, the firm is required to categorise their clients as a Retail client or a
Professionals based on their experience, knowledge of the values markets and taking into account the
amounts of investments they usually make. The majority of individuals are included in the category of
Retail clients.
The fact that a client belongs to the category of retailer, guarantees the highest level to him/her of
protection and forces the firm to fulfill the maximum exigencies envisaged in the MiFID guideline. All
this, requires the client to provide information to the firm with a highest detail to fit the variety of
products to the profile of the investor.
Those clients with the consideration of Professional clients must have experience, investment knowledge
and qualification necessary to make their own decisions for investment and to value any type of risk
correctly. Some examples of Professional clients are:
a) Financial firms and corporate bodies able to operate in the financial markets that have been authorized
or regulated by the States, being or not members of the European Union. Credit firms, Investment
services companies, Insurance agencies, Collective Investment Managing Institutions and their societies
will be included in this group among others.
b) Regional States and Administrations, Public Organizations who manage the national debt, Central
Banks and International and Supranational Organisms, like the World Bank, the International Monetary
Fund, the European Central Bank, the European Bank of Investments and others of similar nature.
c) Employers who individually fulfill, at least, two of the following conditions:
- Their assets are equal or superior to 20 million euros;
- The amount of their annual volume of sales (businesses) is equal or superior to 40 million euros;
- Their own resources are equal or superior to 2 million euros.
d) The institutional investors not included in letter a) whose usual activity is not to invest in shares or
other financial instruments. We will include in this section, in particular, capital risks managing
organizations and their societies.
e) The rest of clients who ask for it, previously, and resign expressly to their treatment like Retail clients.
The admission of the request and resignation will be conditioned to suitable evaluation of their experience
and knowledge in relation to financial services and products made by the firm. This will imply that the
client can make its own decisions of investment and understands correctly the risks of any offered
product.
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When carrying out the mentioned evaluation, the company will have to verify that at least two of the
following requirements are fulfilled by the client:
‣ The client has made operations of significant volume in the shares market, with a media
frequency of more than ten per trimester during the four previous trimesters.
‣ The value of the cash and deposited shares is superior to 500,000 euros.
‣ The client´s job, during at least a year, has been a professional job in the financial sector that
requires knowledge on the financial operations or services.
The Government and, with their express rating, the Minister of Economy and Treasury Department or the
National Commission of the Shares Market will be able to determine the way of estimate the magnitudes
indicated in this section and to fix requirements for the procedures that the firms must follow to establish
a classification of clients.
Returning to the category of retailers, MiFID indicates that firms must consider a retail client all those that
are not professional clients.
The resignation to the category of retail client will only be valid if the firm carries out a suitable evaluation
of the experience and knowledge of the client, who offers reasonable guarantees about he/she´s abilities
to make his/her own decisions about investment and to understand the risks in which he/she incurs. In
that case, the financial company must warn the client clearly and in a written way, about the protection
which he/she can be private of. The client must declare in a written way too, that is conscious of the
consequences of his resignation to those protections.
If the client wishes to accede to non-available products for retail clients or if the client wants to become a
professional client, it will have to be classified like professional client. The treatment as a professional client
can be requested, for special service of investment or a certain operation or generally, thus resigning to
part of the protection that MiFID offers.
In our opinion, this lack of information and warnings subject to the professional category of clients would
not have to take place in any case, and with any type of investor. In addition to this, the distinction
between clients made by the own financial firm and that gives the possibility to the client to be catalogued
in any group (retail clients or professional clients), is at least, dangerous and hardly recommendable.
Types of MiFID guideline´s benefits
When a client goes to a financial firm, has the opportunity to contract several investment/financial
services.
The most habitual investment services of a firm and offered in MiFID guideline are:
‣ To purchase and sale of financial products. In this type of operations, it is the financial
organization that transacts the orders of the client.
‣ To advice in the investment and/or financing. The financial organization will be obliged to give
customized recommendations about the investment.
‣ Portfolios management.
The financial company will be the one who manages the totality of the client´s investments. In order to be
able to make all the services above indicated, the financial firm will ask the client for information about
different personal aspects, such as the average education, income or job. It is an obligation for the firms to
ask for that kind of information. Those data will have to be confidential between the organization and the
client.
The reason for such questions is to know better the client and to be able to help him/her to decide in
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usiness of investment being rendered a better service. It is responsibility of the client to give or show the
required information and to do it with the maximum rigor.
The offered data must allow the firm to know the experience and knowledge, financial situation and
objectives of investment of the client. The company will try to obtain successfully information about the
following aspects:
‣ Types of services, financial operations and instruments whereupon the client is familiarized,
‣ Nature, volume and frequency of the operations on financial instruments
‣ Level of education and his/her present and past job
‣ Level and source of his/her periodic income
‣ Possession of assets (liquid, immovable and investments)
‣ Level of periodic financial commitments
If the client refuses to offer the necessary information to evaluate his/her appropriateness about a product
or service to the financial company, or it provides it in a partial form, the firm will be able to do the
operation, giving the client a previous warning, saying that it is not possible for the firm to determine if
the product or service is correctly adapted to the client. If this information was necessary to evaluate the
suitability of the product or service, when making workings of advising or portfolio management, the
institution could not recommend or manage the portfolio.
The financial firm should only have to offer the client those products adapted to its profile. That is why, it
turns out indispensable to obtain data about the knowledge of the client and previous experience in
financial markets with the purpose of making sure that the client is able to understand the nature and risk
of the products that are offered to him/her.
To decide if a financial or investment product or service is adapted to the client´s profile, it is necessary
that the client compliments a specific questionnaire, known as: Appropriateness Test.
The Appropriateness Test tries to evaluate the knowledge and the experience of the client. For that reason, it
is necessary for the client to answer some questions, such as:
‣ The types of products and services which the client is familiarized with.
‣ The nature, frequency, volume and period which the client had operated previously in.
‣ The level of education and present or previous profession.
If the client is a fixed client of the financial firm, the company would have part or all the required
information, and it would not be necessary to request it again to him/her.
The company must inform the client about the result of the Appropriateness Test. If the client does not
provide the necessary information, the institution will inform him/her that he/she is not taking part in an
active way in the service of investment and that the organization cannot perform that kind of duty for
him/her. Even so, and as we already said, according to the guideline, the order of the client would be
feasible.
In our opinion, this aspect should be elaborated rigorously in the guideline with the aim of fixing correctly
which are the responsibilities of the client and of the adviser/financial firm. The guideline should specify
which are the specific rules to follow in case an operation is denounced in a court. Even if the guideline
points out the right of the investor when contracting any type of operation regardless of the typology of
client in which he/she was classified and of the result obtained in the Appropriateness Test. In the case of
operations with a negative result in this test, and having received an efficient advising from the financial
advisor, as far as we are concern, the operation and its result would have to be assumed by the client.
According to the NSMC, only when the client makes the decision to contract a non-complex product, the
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company will not have the obligation to make the Appropriateness Test to him/her and the order of
purchase will be executed. These types of operations practiced with certain clients are known as “Only
execution”.
From our point of view, this type of operations could be risky and dangerous. The NSMC and the MiFID
guideline established a guide to know the difference between the subjected and non-subjected financial
products, and give freedom to the financial firms to catalogue their products into complex and noncomplex
products. This aspect should be more rigorously specified in the regulation. Something similar
happens with the obligation of the institution in making the Appropriateness Test with certain products.
In particular, the NSMC classifies products into the following way:
Non-subjected products to the MiFID guideline
Subjected products to the MiFID guideline:
Complex products:
Options, futures, swaps, warrants and other derivatives
Financial Contracts for differences
Free investment funds
Non-complex Products:
Shares admitted to trading on a regulated market
Money market instruments
Many types of bonds
Units in certain investment funds
Fixed rate bonds
In our point of view, the previous classification, is low precise and do not take into account most of the
products managed by a financial Spanish firms.
According to an analysis of financial products enumerated by different Spanish banking firms and made
in our country, we have elaborated, as a summary, the following classification:
Non-subjected products to the MiFID guideline: Current accounts, deposits, credit and debit cards
or fixed term-deposits.
In our opinion, products such as the pensions plans, savings insurances or deposits on credit with
variable yield, would not be due to exclude from the guideline. We consider them a complex
product to understand for the investor.
Subjected products to the MiFID guideline:
Complex products: products such as the subordinated debt, preferred participation, free
investment funds - hedge funds-, derivatives - future, options, warrants, caps, floors-…,
atypical safe financial contracts of change and options on currencies.
Non-complex products: Actually, the banks usually include following products: negotiable
shares, instruments of the monetary market (promissory notes, national debt, certificates
mortgages, and investment funds - except Hedge Funds- and SICAVs. We understand that
several existing investment funds could be catalogued like complex products in the guideline.
If we now approach the institutions´ advising service, and taking into account what the guideline says,
this service could only be offered by authorized firms. This measurement tries to increase the control of
this activity to improve the quality of a service in investment business that the investors demand more
and more.
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The advising in investments is an execution of customized recommendations, in a precise or continued
form. The client will have to be advised and recommended about the products that better fit their personal
situation. For this reason is necessary to analyse his/her knowledge and previous experience, as well as
his/her objectives of investment and his/her financial situation.
The set of questions that will be made to the client to obtain all the required data is known as the
Suitability Test. This test tries to assure that the customized recommendations the firm does to the client
consider his/her particular situation.
The Suitability Test could ask questions about the following private aspects:
‣ The client´s previous knowledge and experience (Appropriateness Test).
‣ The client´s financial situation, that could be analysed with information on:
‣ The source and level of the regular income
‣ His/her patrimony, including financial assets and liabilities, investments, buildings,
liquidity…
‣ His/her periodic expenses and payments
‣ The client´s investment objectives, that could be determined with questions on:
‣ The time in which the client wishes to maintain the investment
‣ The client´s profile and aversion or not to the risk.
If the client does not provide the necessary information so that the financial company cannot evaluate
properly the suitability of the products, it will not be able to advise the client correctly.
In order to conclude with this section, we will analyse another common operations of a financial
company: the portfolios´ management.
When a client contracts his/her portfolio management with a financial company, he/she is
trusting on the firm, on the product selection, on the decision of investment made by an advisor and the
execution of operations in his/her name. The company would have to assure a service adapted to the
knowledge and experience of the client profile, his/her objectives and financial situation. Therefore, a
Suitability Test would also be done to carry out the appropriate information. In the same way, if the
company does not have necessary information to complete the test, the service to the client will not be
able to be done.
In our opinion, to make a correct advising of a portfolio management, it would be very
recommendable to create another type of test, different from both seen previously, that would show
totally different types of portfolio management for different profiles of clients.
MiFID guideline´s suggestions
The financial companies must facilitate the client, the information necessary to help him/her to make its
decisions for investment. All the information that the client receive must be “impartial, clear and nondeceptive”
about the content and the form in which it appears.
In our opinion, this type of information would never have to replace the personal and
professional advising of a professional advisor.
With the new MiFID guideline:
‣ The publicity of the financial firm must be impartial, clear and not misleading.
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‣ The financial company will have to facilitate the data that allow him/her to verify if the
institution belongs to the NSMC authorized companies allowed to sell financial products or
services.
‣ The company must provide the client, with the necessary details, information on the nature and
supplied risks of products and services.
‣ Before contracting a product or service of investment, the client will receive detailed information
on the expenses, and direct and indirect costs or charges of the operation or business.
‣ At the time of subscribing a contract, the company will offer a contract to the client in which the
rights and obligations of both parts are clearly written down. When the financial company offers
an advisory service of investments it will not be necessary the signature of a contract, it will be
enough with the written and reliable customized recommendation.
In addition to the previous one, MiFID guideline points out that, at any moment, the financial company,
will avoid to harm the client solving any kind of interest´s conflicts. The institution will guard clients´
investments; it will inform him/her on the guarantee funds in case of insolvency and will take care of
his/her claims in an appropriate and regulated way.
The financial firm must be correctly organized and have at its disposal those means that allow it to fulfill
their obligations and to act with “honesty, impartially, professionally and in the best interest of the client”.
Discussions and Conclusions
First
Considering the MiFID guideline the suggestions offered by the NSMC, the criteria for the subjection or
not of different financial products would have to be defined and developed in a more specific and
detailed way for all the Spanish and European firms. Consequently, the distinction between complex and
non-complex products would have to follow an agreed model. In the banking sector exists different kind
of products that organizations have catalogued like non- complex, and whose characteristics and risks,
hardly would be catalogued within that section. The freedom of the companies to make this type of
classification would have to be regulated rigorously.
Second
In a purchase and/or sale of a financial product, we see ourselves in the obligation to stress the danger in
allowing the operation regardless of the result obtained in the Appropriateness Test and/or Suitability Test.
An operation of high risk and with requirement of a professional advising, is characterized by its
complexity and if the result of it do not fulfill the expectations of the client and it is taken to court, the firm
would have to be conscious and able to apply the necessary mechanisms to palliate the possible demand
and defend the advisory service offered by the advisor.
Third
The new guideline claims the financial or investment company to act, at any moment, with honesty,
impartially, professionally and in the interest of the client. In our opinion, this is hardly possible to be
fulfilled, if the own company is governed under a policy of fulfilling some objectives in a pre-fixed period
of time, where the commercialization of certain products and services is stimulated by means of
premiums on volume of sales of them. On the other hand, if the financial firm commercializes its own
products or supplier´s products under incentives, it turns out complex to satisfy and to justify values as
the impartiality in selling this kind of products, or giving advice about them and, fulfilling the aim of do
the best work in the interest of the client.
Fourth
One of the habitual activities of the financial companies is the portfolios´ management. Throughout the
guideline, we have been able to observe the non-existence of a specific test for the evaluation of the
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convenience and/or suitability of this type of operations. To our understanding, the design of a specific
test for this activity would be more than recommendable for the investors.
Direction for further research
One of our objectives after written this article is to focus our attention in banking ethics on financial and
banking products related to the elderly, such as Life Insurances, Long Term Care Insurances, or the
Reverse Mortgage.
Those products are relatively young in our country and need a good regulation to be correctly
sold by financial companies or advisors.
References
“Criterios de buenas prácticas bancarias”. Spanish Bank.
www.bde.es/webbde/es/secciones/servicio/reclama/criterios.html
National Share Market Comission (NSMC). www.cnmv.es and www.cnmv.es/portalinversor/
Spanish guideline 2006/73/CE 10 th of August of 2006. European Union Official Register.
Spanish Law 47/2007
Spanish Royal Decree 217/2008
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219

Efficiency of EC Greenhouse Gas Abatement Measures and
firms in the European Union: Evidence from Plant Level
Allocations and Surrendered Permits
A. Gregoriou & J. V. Healy
University of Hull Business School
Keywords
EU-ETS, Plant Level Allocations, Surrendered Permits, STAR Models.
Abstract
We are the first study to test for efficiency in the European Union Emissions Trading Scheme (EU-ETS), by
analysing European Commission data for annual Plant Level Allocations and Surrendered Permits. We do this by
examining the properties of the misalignment between installation’s actual carbon emissions, and the allocated
carbon emission permits, for each nation involved in the EU-ETS trading scheme. Using a standard linear unit root
test we find evidence of non stationarity, indicating that the EU-ETS is inefficient. However, once we utilize a nonlinear
mean reverting adjustment mechanism for carbon emissions relative to carbon allowances, in the form of an
Exponential Smooth Transition Autoregressive Model (ESTAR), we discover that although deviations of carbon
emissions from their allowances can exhibit a region of non-stationary behavior, overall they are stationary
indicating successful implementation of a market led approach to carbon reduction.
The Business & Management Review, Vol.2 Number 2, July 2012
220

Corruption, democracy and tax compliance:
Cross-country evidence
Teymur Rahmani, Ph.D. (Correspondent Author)
Associate Professor, Department of Economics, University of Tehran
Saman Fallahi, M.A.
Ph.D. Student, Department of Economics, University of Tehran
Keywords:
Tax compliance, corruption, democracy
Abstract
Tax compliance and reduction of tax avoidance and tax evasion are important issues in the field of
economics in the public sector, especially in developing countries in which taxes are essential to finance the new
development programs. Although there are many factors affecting tax compliance, our focus is on two main factors
from the taxpayers’ viewpoint that bear the burden of taxes and are benefited from the provision of public goods by
public sector; that is, democracy and corruption. Our theoretical framework emphasizes the role of corruption
compared to democracy, although both higher democracy and less corruption increase the tax compliance. Our
empirical findings, based on a sample of 117 countries, suggest more significant effect from corruption on the ratio of
taxes to GDP, controlling for the government’s size. A policy implication is the importance of the control of
corruption to increase tax compliance, especially in developing countries.
Introduction
The study of tax compliance is important both theoretically and empirically. In a broad sense, all
public sector activities, even the implementation of monetary policy, could be described as the provision
of public goods. Public goods bring about utility for all individuals. But, tax incomes are needed to finance
the provision of public goods. Paying taxes decreases the utility by lowering the consumption of private
goods. Therefore, there is a tradeoff between the consumption of public goods and private goods and
consequently a tendency to comply or to avoid taxes. In a standard model of a world in which there are
two goods (private and public) and perfect information with homogenous individuals and homogenous
utility function, efficiency or Pareto optimality requires the equality between the marginal rate of
substitution and the marginal rate of transformation.
If the amount of public goods that are provided by public sector is not observed, it could be
inferred from information function in which two main arguments are the level of corruption and the level
of democracy. Both higher level of democracy and lower level of corruption are signals of higher level of
the provision of public goods in the information function of individuals who do not observe the amount
of public goods directly. Simultaneously, the level of corruption is more important in this information
function. Therefore, both the higher level of democracy and the lower level of corruption cause the
individuals to have more tax compliance, but with more significant effect from corruption.
To test for the importance of democracy and corruption in determining the level of tax
compliance, a panel data regression of the ratio of taxes to GDP is run on some variables including an
index of the kind of government (the level of democracy) and an index of corruption. Our empirical
findings are in line with the theoretical analysis that emphasizes a greater impact from corruption on the
level of tax compliance.
The article is organized as follows. The next section provides a short review of literature. Section 3
introduces the theoretical model. Section 4 discusses the data and section 5 is on empirical results. Section
6 is on conclusion and policy implication.
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Review of literature
Tax evasion, tax avoidance, tax compliance, and the public acceptance of taxation have been of
interest in many fields of research including public sector economics, political economy, social science,
accounting, auditing, law, and psychology. There is no doubt that more tax compliance and less tax
avoidance or tax evasion could be influenced by many factors. It is clear that tax compliance and public
acceptance of taxation could not be examined within any field comprehensively. Our main interest is an
examination of the issue within the framework of public sector economics with a focus on the effects of
democracy and corruption. For this reason, we will have a short review of the related literature and
especially empirical studies.
Torgler (2005) analyzes the impact of direct democracy on tax morale in Switzerland by using a
survey from the International Social Survey Program 1998. Since participation rights are quite different
across different cantons in Switzerland, the examination reveals the effects of democracy on tax morale
and tax compliance. Furthermore, the findings show a significant positive effect from direct democratic
rights on tax morale and compliance. This could be interpreted as the positive effect of the higher level of
democracy on tax compliance. By using the similar data in three phases of the International Social Survey
Program but for a panel of European countries, Bernasconi (2006) finds that very few citizens are satisfied
with tax systems. Specifically, most believed that taxes on low and middle incomes are too high, and taxes
on high incomes are too low. The results also indicate a strong effect of ideological values on the support
for tax system and its redistributive role in democracies. In addition, the results raise questions on the
effectiveness of democracy in satisfying citizens' preferences. Hug and Sporri (2011) examine the
relationship between referendums, trust, and tax evasion as a test for the effect of direct democracy on tax
morale and tax evasion, especially for the countries that engaged in transition from centrally planned
economies to democracy and market economies. They find that allowing for referendums as a way of
implementing direct democracy strengthens the link between trust and democracy. In other words, direct
democracy increases tax compliance that is highly needed for those countries.
Some studies analyze the effects of democracy in determining the tax rate and tax structure.
Carbonell-Nicolau and Klor (2003) examine the effect of democracy on the marginal tax rates on income.
In a political system with an exogenous set of political parties and a fixed cost of running for election, they
conclude that there is an increasing marginal tax rates in some Nash equilibriums, and in any strong Nash
equilibrium. In other words, democracies tend to have higher tax rates. Markussen (2011) examines the
relationship between redistributive taxation and the private provision of public goods in a democratic
political system. He concludes that a median voter may choose a negative tax rate in order to stimulate
private production of public goods even if he or she is poorer than the mean. This means that democracy
does not necessarily increase the tax rates.
Riahi-Belkaoui (2004) examines the relationship between tax compliance and determinants of tax
morale for a sample of 30 countries. The results indicate that tax compliance is positively related to the
level of economic freedom, the level of importance of the equity market and the effectiveness of
competition laws, and high moral norms. Cummings et al (2009) examine the effects of tax morale on tax
compliance by using art factual field experiments. They believed that cross-cultural differences in tax
compliance behavior have foundations in the institutions of tax administration and citizen assessment of
the quality of governance. Their results show that observed differences in tax compliance levels persist
over alternative levels of enforcement in countries with substantially different political histories and
records of governance quality. Park and Hyun (2003) examine the determinants of tax compliance using
experimental data for Korea. They find that taxpayers have the same degree of compliance regardless of
their income levels, both the tax audit and the penalty rate are important deterrents from tax evasion but
the latter is more effective, taxpayers have a strong tendency for a free-ride, and tax education is one of
the effective tools to induce taxpayers to comply more.
There are some studies that look at the problem of tax compliance by addressing the effect of
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corruption, although indirectly. Cule and Fulton (2009) analyze business culture and tax evasion. They
concluded that as tax evasion and corruption increase, they become more acceptable and their cost is
lowered. More fraud committed by firms is good for bribe-taking tax inspectors and more bribe-taking
inspectors are good for fraud committing firms. This is the result that Hillman (2004) emphasizes for lowincome
countries in which governments need to finance public development expenditures to promote
economic growth and end poverty, but corruption reduces tax revenues and makes public expenditure
policies ineffective for achieving social objectives. Fjeldstad and Tungodden (2003) analyze the effect of
corruption on tax incomes by focusing on the effect of strengthening the bargaining power of corrupt tax
officers. They conclude that in contrast to the belief that strengthening the bargaining power of corrupt tax
officers could reduce tax evasion and increase tax revenues, corruption could result in more tax evasion
and lower tax revenues in the long run (although it could lead to more tax revenues in the short run). Fan
(2006) analyzes the effect of corruption in a kleptocracy. The ruler implements anti-corruption measures
including wage incentives and monitoring to discourage corrupt officials from rent-seeking for
themselves. As a result, the leader sets an inefficiently high tax rate in order to discourage the officials
from demanding bribes.
Theoretical background
To examine the effect of democracy and corruption on tax compliance and tax revenues and also
to test whether more democracy or less corruption is the main determinant of the incentive to comply and
agree to pay taxes, a theoretical background is needed. Our theoretical model is an extension of public
sector economic textbooks on the provision of public goods. It is assumed that the production and
consumption of pure public goods is decided in a political economy model in which different parties offer
their plan (their proposed amount of public goods) and people vote for their programs. The winner is
determined by the majority of voters. It is assumed that after the decisions are made about the amount of
public goods, their cost will be levied on all individuals equally on a lump sum tax basis. Therefore, it is
assumed that individuals reveal their preferences and willingness for the consumption of public goods
and then their willingness to pay taxes to finance the production of public goods by taking part in the
election. In this context, higher taxes mean higher preferences for the consumption of public goods.
It is assumed that there are two goods: a private good, C, and a pure public good, G, from which
individuals obtain utility. The representative individual's utility function is as follows:
It is assumed that utility function is a kind of homogenous utility functions and is the same for all
individuals. It is assumed that C is commonly observable and measurable but G is not directly observable.
For example, it is not far from reality to assume that the representative individual does not have a clear
perception of the amount of the benefits that public goods such as public education, health care, and
infrastructures provide for her or him. Then, it could be assumed that the representative individual infers
the amount of the public goods that are provided for her or him via an information function as follows:
In which, DE, is an index implying the kind of government or the level of democracy (an index of
the perception of the individual's taking part in the decision making about public goods) and, CO, is an
index of the level of corruption (an index of the quantity and quality of the public goods that are provided
for her or him by the elected officials). It is assumed that a higher level of democracy is interpreted by the
individual as an indication that the elected body considers individual's preferences more. Therefore, a
higher level of democracy means a higher quality and quantity of public goods. On the other hand, it is
assumed that a higher level of corruption means a lower quantity and quality of public goods for a given
level of taxes. It is assumed that individuals just consider the effect of corruption on the level of provision
of public goods and not corruption per se. Therefore, the relation (2), as the information function, implies
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that a higher level of democracy and a lower level of corruption mean a higher level of the provision of
public goods that in turn means a higher level of utility, ceteris paribus.
The general equilibrium solution of the model (which is based on the assumption that individuals
reveal their preferences, an assumption that is not too strong when individuals are assumed the same
with regard to their preferences) is stated as the following condition:
P
MRS
P
C
G
In which
P
P
C
G
is the marginal rate of transformation or the slope of the production
possibility curve in the point of tangency with the indifference curve or relative price of the private to
public goods that is determined in the general equilibrium of the above model.
The above equilibrium is also shown in the Figure 1. Initial equilibrium is shown by point E in
which an indifference curve is tangent to the production possibility curve AB. The straight line OE
indicates that the points with the same slope on various indifference curves are on a straight line from the
origin for homogenous utility functions.
(3)
Figure 1
Now, suppose that a decrease in the level of democracy, DE, or an increase in the level of corruption, CO,
to occur. Such a change is interpreted as a reduction in the potential of the production of public goods by
the representative individual. This is concluded from the information function in the relation (2). The
effect of the above change is shown as a counterclockwise rotation in the production possibility curve and
a reduction in its intersection with the vertical axis on which the amount of public good is measured.
It is clear that point E is not equilibrium anymore and the new equilibrium will be in the point of
tangency of an indifference curve and the new production possibility curve. Since we have assumed that
utility function is homogenous, the new tangency will not be on the straight line OE, but will be in a point
like E’. As is seen in the Figure 1, the amount of production and consumption of the public good is
reduced and there is a substitution between the private and the public goods. In fact, the increase in the
level of corruption or a decrease in the level of democracy have been like an increase in the relative price
of the public good that has brought about a reduction in the willingness to the consumption of the public
good.
Since the willingness to the consumption of the public good has decreased, the willingness to pay
taxes to finance its production has reduced, too. If we assume that there is no tax evasion, the
representative individual votes for a lower level of the production of the public good and therefore a
lower level of taxes. If tax evasion is possible, the level of actual taxes is lower than the level of the taxes
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that is determined by the officials. In both cases, the ratio of taxes to the income of the representative
individual will be lower which is reflected in the lower ratio of taxes to GDP in reality.
Therefore, it is concluded that a lower level of democracy and a higher level of corruption, holding
other things the same, will bring about a lower ratio of actual tax incomes to GDP. To analyze the relative
significance of corruption and democracy on the ratio of taxes to GDP, it is assumed that the variable CO
is more important than the variable DE in the information function (2). The justification for such an
assumption is that democracy is just a way of the revealing of voters' preferences and willingness to pay
for the provision of public goods that could be ignored by the elected body to some extent. This issue is
common in countries with many political parties, especially in developing countries. On the other hand,
corruption is more reflected in everyday life of people and could be a better indication of the quality and
quantity of the provision of public goods. For example, the biggest democracy of the world but with an
unsatisfactory level of corruption, India, does not have a good experience of economic performance and
especially the provision of public goods compared to China which is not a democracy but has a better
performance in the provision of public goods. Then, it could be concluded that higher level of corruption
is more significant in the reduction of the ratio of taxes to GDP compared to the lower level of democracy.
It must be known that the effect of democracy on the overall performance of the economy is not
quite clear while the effect of corruption is more agreed upon. Theoretically, it may appear that more
democracy and less corruption should improve the overall performance of the economy. If the economic
growth is a good indication of the overall performance of the economy, empirical findings show an
adverse effect from corruption on the economic growth (for example, Mauro (1995) finds negative effect
from higher level of corruption on economic growth) while the effect of democracy on the economic
growth is not so clear (Tavares and Wacziarg, 2001)). Our assumption regarding stronger effect from
corruption on taxes compared to democracy is in line with the above findings about the effect of
corruption and democracy on economic growth.
Data and methodology
In order to test what have been introduced in the above analysis, a static panel data regression is
used. The dependent variable is the ratio of taxes to GDP, TGDP. The explanatory variables include the
index of corruption, CORR, the index of the kind of government or the level of democracy, DEMOC, log
of per capita GDP, PGDP, the share of agriculture sector in GDP, AGRI, the degree of openness, OPEN,
the growth rate of per capita GDP, GG, the rate of inflation, INF, the ratio of government expenditures to
GDP, GOV. So, the following equation is estimated:
)4 (
Per capita GDP is real per capita GDP in dollars and in year 2000 prices. In most empirical works
on the determinants of the ratio of taxes to GDP, this variable is included and has a positive coefficient
that reflects Wagner's law in public sector economics.
The share of agriculture sector in GDP is usually included in empirical studies to capture the
exemption of agriculture sector from paying tax. Therefore a negative coefficient is expected here.
The degree of openness, that is the ratio of the sum of imports and exports to GDP, is included
because levying and collecting taxes on foreign trade is easier. So, we expect a positive effect for this
variable because countries which are more open can collect more tax incomes on these activities.
The effect of economic growth on the ratio of taxes to GDP could be theoretically ambiguous.
However, it could be assumed that in a better condition of economic performance firms and individuals
comply more compared with bad economic performance. Also, if taxes are progressive, higher economic
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225

growth could increase the ratio of taxes to GDP. So, a positive coefficient is expected for this variable.
The effect of inflation on the ratio of taxes to GDP is not clear. On one side, higher inflation
increases inflation tax for government and decreases the need to levy conventional taxes. Also, in
inflationary conditions, firms and individuals tend to evade or at least to delay paying taxes to benefit
from the erosion of their real tax liabilities due to inflation. On the other hand, inflation increases tax
liabilities because nominal incomes increase and taxes are usually levied on nominal incomes.
The size of government or the ratio of government expenditures to GDP is included as a control
variable because countries with bigger governments tend to have higher ratio of taxes to GDP on average.
Therefore, a positive effect is expected for this variable.
The data for the ratio of taxes to GDP, per capita GDP and its growth rate, the share of agriculture
sector in GDP, the degree of openness, the rate of inflation, and the ratio of government expenditures to
GDP are from IMF and World Bank.
Regarding two important variables that are the focus of this study, the data is from the following
sources. For corruption two different indices have been tried. The first one is the Control of Corruption
Index from World Bank which has a range between -2.5 and 2.5, with a lower level of corruption for the
higher values of the index. The second one is the Freedom from Corruption index from Heritage
foundation which has a range between 0 and 100, again a higher value implying less corruption. Since our
theoretical analysis implies a negative effect from corruption on the ratio of taxes to GDP and since both
above indices imply less corruption for higher values of the indices, a positive coefficient is expected for
these indices in the regressions. For democracy and the kind of government, the data is from the study of
Marshall et al (2010). The index is between 0 and 10 and a higher value implies higher level of democracy
and political freedom. Based on the theoretical analysis in the previous section, a positive coefficient
(although not very significant) is expected for this variable. It should be added that countries with
substantial changes in the kind of government (for example, countries that have been subject to coups) are
excluded to get better and more reliable results.
Our sample includes 117 countries and the time period under study is 1996-2010 for which data is
available.
Empirical results
Based on the results of Fixed Effects and Hausman tests, the method of fixed effects is used in all
estimated regressions. The estimated regression is summarized in Table 1 when the Control of Corruption
Index is used as the proxy for the level of corruption. As it is seen in Table 1, all variables have the
expected sign except the rate of inflation that its effect is not clear theoretically. Therefore, this variable is
excluded in the final estimation that is reported in the last column. When both per capita GDP and the
share of agriculture sector in GDP are included, the latter has expected sign for its coefficient but
insignificant. It could be attributed to the high correlation of these two variables (on average, countries
with higher per capita GDP have lower share for the agriculture sector in GDP). When per capita GDP is
excluded, the coefficient of the share of agriculture sector in GDP is negative and quite significant that is
consistent with the above justification. The degree of openness has a positive and significant coefficient in
all regressions, as expected. The size of government has a positive and significant coefficient that means
countries with bigger government size have higher ratios of taxes to GDP that is necessary to finance
government expenditures. The growth rate of per capita GDP has a positive and significant coefficient
that is acceptable.
Both the index of democracy and the index of corruption, DEMOC and CORR, have positive
coefficients. But just the latter is significant, which is consistent with our theoretical model. In other
words, corruption is more important in affecting the willingness of people to pay taxes compared to
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226

democracy. Since these two variables are not highly correlated as may be expected, both are included in
the regressions.
In Table 2, the estimated regressions are reported, but the index of corruption is Freedom from
Corruption index from Heritage Foundation in this regressions. Again, the method of fixed effects is used,
based on the Fixed Effects and Hausman tests.
Again, per capita GDP has a positive and highly significant effect on the ratio of taxes to GDP that
is an indication that wealthier countries have higher tax rates on average. The share of the agriculture
sector in GDP has a negative coefficient in all regressions but its coefficient is only significant in the
regression that per capita GDP is excluded. Per capita GDP growth has positive and significant effects in
all regressions that are expected, implying that tax compliance is higher in better economic performance.
The coefficient of the degree of openness is positive and it is significant that is expected. The coefficient on
the government size or the ratio of government expenditures to GDP is positive and significant, implying
higher ratio of taxes to GDP in countries with bigger governments. Again, the rate of inflation has a
negative but insignificant coefficient in all regressions, which is consistent with what we said in the
previous section.
Table 1. The estimated equation using Control of Corruption Index Dependent Variable is TGDP (the
ratio of taxes to GDP)
Explanatory
Variables
(1)
(2)
(3)
(4)
Control of
Corruption
Index
0.9069
(1.98)**
0.8071
(1.84)***
1.1226
(2.41)*
1.0165
(2.24)**
Type of
government
0.0231
(0.29)
0.0259
(0.33)
0.0228
(0.28)
0.0306
(0.39)
GDP per capita
3.9803
(5.48)*
3.9585
(7.01)*
The share of
agriculture in
GDP
-0.0128
(-0.32)
-0.1472
(-4.66)*
-0.1478
(-4.91)*
Degree of
openness
0.0138
(2.04)**
0.0125
(1.89)**
0.0246
(3.71)*
0.0243
(3.82)*
GDP per capita
growth
3.9551
(1.92)**
4.9872
(2.57)*
3.8765
(1.84)**
3.9950
(1.94)**
Rate of
Inflation
0.0007
(0.40)
0.0005
(0.29)
0.0009
(0.50)
Government
expenditure
(% GDP)
Method of
estimation
0.0368
(3.75)*
Fixed Effect
0.93
0.0407
(4.7)*
Fixed Effect
0.93
0.0404
(4.04)*
Fixed Effect
0.93
0.0398
(4.01)*
Fixed Effect
0.93
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227

Number of
observations
741
778
The numbers in parentheses are t-statistics
*significant at 1%, **significant at 5%, *** significant at 10%
741
764
Table 2. The estimated equation using Freedom from Corruption Index
Dependent Variable is TGDP (the ratio of taxes to GDP)
Explanatory
Variables
(1)
(2)
(3)
(4)
Freedom
from
Corruption
0.01674
(1.87)**
0.0208
(1.7)***
0.0275
(2.17)**
0.0291
(2.35)*
Type of
government
0.05782
(0.73)
0.0645
(0.82)
0.0739
(0.92)
0.0803
(1.01)
GDP per
capita
3.8761
(5.22)*
4.0262
(6.91)*
The share of
agriculture in
GDP
-0.0324
(-0.8)
-0.1608
(-4.9)*
-0.1588
(-5.13)*
Degree of
openness
0.0130
(1.84)***
0.0108
(1.58)
0.0218
(3.13)*
0.0212
(3.2)*
GDP per
capita growth
4.3633
(2.08)**
5.3852
(2.73)*
4.4088
(2.06)**
4.5252
(2.17**)
Rate of
inflation
0.0008
(0.45)
0.0004
(0.27)
0.0010
(0.56)
Government
expenditure
(% GDP)
Method of
estimation
0.0357
(3.6)*
Fixed Effect
0.93
0.0396
(4.02)*
Fixed Effect
0.93
Number of
observations
726
763
The numbers in parentheses are t-statistics
* Significant at 1%, ** significant at 5%, *** significant at 10%
0.0386
(3.83)*
Fixed Effect
0.92
726
0.0379
(3.79)*
Fixed Effect
0.93
749
Table 2 shows the same results for our two variables of interest, corruption and democracy, as those in
Table 1. The coefficient on the Freedom from Corruption is positive and significant, implying that less
corruption brings about more tax incomes and higher ratio of taxes to GDP. On the other hand, the kind of
government or the level of democracy has a positive but insignificant coefficient. This finding is consistent
with our theoretical analysis; that is, the level of democracy is not too important in determining the ratio
of taxes to GDP compared to the level of corruption.
The empirical results in Table 1 and Table 2 show robust findings and more or less the same results
for two indices that are used as proxies for the situation of corruption. Based on the above results, it could
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228

e concluded that although both higher level of democracy and lower level of corruption cause the tax
compliance and public acceptance of levying taxes to increase, it is corruption that is more important in
tax compliance and tax evasion in real world
Conclusion
Tax compliance and lower tax evasion are important in public finance, especially in developing
countries. Our attention in this study is on the standard analysis in public sector economics and the
political economy of the decision making about public goods, especially on the effect of corruption and
democracy in the formation of tax compliance. Our analysis uses a two goods general equilibrium
regarding the amount of production and consumption of public good and therefore the willingness to pay
taxes to finance it. We introduce an information function that reveal the amount of provision of public
good that is not observable directly. We can infer that more democracy and less corruption increase tax
compliance and willingness to pay taxes, which is reflected in higher ratio of taxes to GDP in the real
world. At the same time, corruption is more important which is expected to have a greater impact.
To test our theoretical contention, a panel data regression for the time period 1996-2010 including
117 countries is estimated. Along with usual variables in the empirical studies concerning the
determinants of the ratio of taxes to GDP, two variables are included to capture the effect of democracy
and corruption on the ratio of taxes to GDP.
Our empirical results show the expected effects from explanatory variables on the ratio of taxes to
GDP. Specifically, the results imply that less corruption brings about more tax compliance and higher
ratio of taxes to GDP while the effect of higher democracy is not statistically significant. Therefore,
development process in developing countries requires more emphasis on the control of corruption instead
of expanding democracy. However, it should be noted that democracy is perhaps a human value that may
not be judged only on the basis of its economic outcomes. Also, it is expected that getting a higher level of
development will bring about higher level of democracy endogenously. As a policy implication, it may be
better for international bodies like IMF to emphasize more on the control of corruption as a requirement
for development, instead of expansion of democracy.
We suggest a focus on the effect of the structure of political system and especially the number of
political parties on the tax compliance for further research.
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Are High Interest Loans a Debt Trap or Access to Credit
Evidence from a Field Experiment of Payday Borrowers
Marc Anthony Fusaro
Arkansas Tech University, USA
Patricia J. Cirillo
Cypress Research Group, USA
Keywords:
Credit Access, Payday Loans, Cycle-of-Debt, Household Finance, Controlled Field Experiment,
Regulation, Usury Laws
Abstract
Central to whether high-interest, short-term consumer credit is welfare enhancing is whether it causes a
debt-trap. We test this by conducting a field experiment whereby a random sample of borrowers receive interest-free
payday loans. We then track these loans and find no difference in loan repayment rates between this treatment group
and a control group. This result forms strong evidence that high interest rates on short-term, low-value loans do not
cause a debt-trap. The obvious implication for the Consumer Financial Protection Bureau, the new consumer credit
regulator, is that capping interest rates attempting to reduce serial borrowing will not work.
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The expectations of potential acquirers of real estate rights and decisions
to purchase property in times of recession
Bojan Grum
European Law Faculty in Nova Gorica, Slovenia
Darja Kobal Grum
University of Ljubljana, Slovenia
Keywords
Expectations, potential buyers of real estate, demographic factors, recession
Abstract
This study shows the results of survey conducted in Slovenia between years 2009 and 2011. The fundamental
objective was to identify factors, which are critical to potential acquirers of real estate right in deciding to purchase
property. The next aim was to analyze any differences between these expectations expressed in observed years and to
determine whether the modern economic environment (recession) is negatively associated with these expectations.
We follow the hypothesis, that differences in the expectations of potential acquirers of real estate right regardless
during observed years changed, which is attributed to the occurrence of recession.
The central device for measuring expectations is the questionnaire which was constructed by authors. It was
answered by 1006 participants in year 2009 and 402 in year 2011. The results are still in progress but partly results
showed that we could confirm the hypothesis. Results show that participants generally expressed higher expectations
in year 2009 than then in year 2011, as specially reflected by younger participants. Results show differences in
expectations regarding the time of purchasing their own property according to the education level. In contras to year
2009, students expressed the highest expectations recording to financial and socio-economic main factors, greater
autonomy and a sense of complacency.
We note that it would be necessary to analyze and explore the impact of statistically significant differences of
potential acquirers of real estate right on the real estate market, both in spatial as well as terms of value, within the
current economic environment.
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The Role of Micro and Small Enterprise in Employment
Opportunity and Poverty Reduction in Addis Ababa, Ethiopia:
The Case of Addis Ketema Sub City
Moges Teshome
Wageningen University, Ethiopia
Keywords
Micro and small Enterprise, employment opportunity, poverty line
Abstract
Establishing and organizing Micro and small Enterprise(MSE) is one of the strategies used by developing
countries to create employments opportunities and alleviate poverty in urban centre. Addis Ababa, the capital city of
Ethiopia, is predominately affected by rapid rural-urban migration and population explosion that created excess
labour forces above the absorption capacity of the formal sector. To curb the problems of unemployment and urban
poverty, the government of Ethiopia has introduced different types of Micro and Small Enterprises package at
different cities of the nation especially in Addis Ababa. The objectives of the study were to examine the personal
characteristics of MSEs operators and investigate the role of micro and small enterprise in employment creation and
poverty reduction as well as to identify the major problems of MSE practitioners. Data were collected from primary
and secondary sources. Primary data were collected from sample practitioners using a structured questionnaire. In
total 120 operators were interviewed. A two-stage random sampling procedure was used to select sample
respondents. The study shows that MSEs are contributing for employment creation for women, illiterate and
economically active society who have no means of subsistence. Moreover, the study indicates that MSEs have created
an employment opportunity for the society. The study also verifies that MSEs has a great contribution for income
generation, improvement in income and means of livelihood for un employed groups of the society. The study also
shows that the contribution of MSEs for poverty reduction by increasing income of operators above the poverty lines.
The study identifies that most of MSEs activates are highly dominated by Micro enterprise owing to small start-up
capital. The study identifies that MSEs operators are highly constraints by socio-economics and institutional factors
i.e., shortage of capital, shortage of credit, place of operation, raw materials including power and water supply.
Moreover, MSEs activates are highly constrained by market related problems like market uncertainty, high
competition and lack customer preference of the products. Therefore, in order to create employment opportunity and
to reduce poverty, the government should give strong emphasis for MSEs. Moreover, supportive polices like
training, financing, technical and management should be taken to promote the overall development of the sector.
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Innovation Policy in Poland – Challenge for Intensive Growth
Marek Dziura
Cracow University of Economics
Keywords
Innovation, economic policy, innovation strategy, R&D, growth
Abstract
Growth in Poland in the last two decades has been based on capital accumulation and on improving
productivity driven by technological change. Endogenous growth theory shows how innovation, knowledge
spillovers, and R&D are indeed key factors driving self-sustained, long-term economic growth. Growth in countries
below the notional technological frontier is mainly driven by diffusion and absorption of new technologies from
countries on the frontier that are new-to the-firm or new-to-the country below the frontier but not to the world.
A country’s absorptive capacity is a key driver of economic growth and industrial productivity, but it
requires a favorable investment climate, an educated workforce, and R&D on the part of absorbing firms. Trade
flows, foreign direct investment (FDI), and labor mobility and training are important channels for firms to access
technology. But technology absorption is not automatic. While R&D investment oriented to new-to-the-world
innovations is predominant in economies on the technological frontier, in countries below the frontier, such as
Poland, R&D principally serves the need for firms to absorb new technologies and keep up with existing global
technological trends. R&D is critical for the identification, acquisition, and assimilation of new technologies and for
supporting implementation on the part of the firm. Firm-level R&D does not solely contribute to innovation.
For Poland to maximize benefits from any additional investments in R&D, and before attempting to meet
the European Commission’s 3 percent target, policy makers ought to take a hard look at the efficiency of the current
public expenditures on R&D. As figure 11 suggests, Poland classifies as a low spender with roughly 0.6 percent of
GDP spent on R&D, with the majority of it dedicated to basic science. Also, Poland ranks poorly among EU
countries with regard to the efficiency of public expenditures, measured as a ratio of innovation and technology
absorption indicators (for example, patents) to R&D.11Thus, every effort must be made to improve the efficiency of
public spending and leverage it to increase private sector expenditures on R&D, which in Poland are around 40
percent of total R&D compared to 60 percent in most OECD countries.
Introduction
The current crisis is the first of this severity to hit many countries, since they have shifted to
knowledge-based service economies where investment in intangible assets is of equal importance as
investment in machinery, equipment and buildings. Efforts to stimulate the economy need to both reflect
the current drivers of economic growth and take advantage of the process of “creative destruction” to
accelerate structural shifts towards a stronger and more sustainable economic future. Innovation policies
need to be adapted to current conditions both in terms of how such policies are crafted to work, but also
as elements of stimulus packages that may often be the foundation for these medium- and long-term
initiatives. Poland is developing a strategic response to the crisis focusing on two priority areas: finance,
competition and governance; and restoring long-term growth. As part of this strategic response, the Polish
government has analysed the likely impact of the downturn on the drivers of long term economic growth
and the innovation-related items in policy responses of major countries.
The development of an innovation strategy
In 2007 many governments (including Polish) called upon the OECD economic policy to develop
a strategy to strengthen innovation, increasing productivity and the potential for long-term growth and
development were already pressing policy objectives. Since then, the economic context has taken a
dramatic turn for the worse, with the financial crisis having spread to the real economy, bringing a steep
drop in growth and millions of new unemployed.
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Today, as the crisis continues to unfold around the globe, the development of the Polish
innovation strategy has taken on even greater relevance. Innovation will be one of the keys to accelerating
recovery and putting countries back on a path to sustainable – and smarter – growth. Yet the crisis itself
poses a number of serious risks and challenges to the innovation ecosystem. Getting the policies right is
vital. Today’s exceptional economic stimulus measures represent a unique opportunity for
public policy to foster innovation. By providing the incentives for innovation-related investments, and
accelerating activities for which barriers may have been otherwise too high, governments can help lay the
foundations for a greener economy and durable growth. If this opportunity is handled effectively,
countries could be reaping the benefits for decades to come.
There is an emerging view that the global economy may be at a turning point, leading to a shift in
paradigm. This is indeed an era of transition. The current crisis is the latest in a series of important
phenomena which continue to transform modes of production and consumption and drive the search for
new and more sustainable routes to value creation. Over the past decade, globalisation and the emergence
of new and diverse players have continued to accelerate, opening up new markets and opportunities, but
also requiring new strategies to benefit and to stay competitive. One result has been a change in the
geography of innovation, with a more complex division of labour across cities, regions and countries.
Changing demographics throughout the world has also been driving the need for innovation. In such
country like Poland, dealing with an ageing workforce calls for new responses, be they restructuring,
migration, upgrading of skills or outsourcing.
Against this backdrop of transformation, the World Bank Report: Europe 2020 Poland – Fueling
Growth and Competitiveness in Poland Through Employment, Skills, and Innovation is an important step
towards developing an innovation strategy for the 21st century. It examines the contribution of innovation
to growth, and to addressing key global challenges such as climate change, health, food security and
economic development. It takes account of the new landscape and dynamics of innovation: the important
linkages between traditional and new forms of innovation; its changing geography; and the challenges of
governance. In examining these shifts, the report pinpoints the areas where the policy framework may
need to be reassessed, or new policies and indicators developed. Specific attention is given to the
foundations needed to enable innovation, including human capital, entrepreneurship, research
institutions and universities, knowledge markets and infrastructure, among others. Analysis underway
will result in a set of policy principles to harness innovation in the 21st century.
Innovation is crucial for growth
Innovation – the introduction of a new or significantly improved product (good or service),
process, or method – has long been viewed as central to economic performance and social welfare, and
recent empirical evidence has confirmed the links between innovation and growth.
Innovation entails investment aimed at producing new knowledge and using it in various
applications. It results from the interaction of a range of complementary assets which include research and
development (R&D), but also software, human capital, design, marketing and new organisational
structures – many of which are essential for reaping the productivity gains and efficiencies from new
technologies. These “intangible” assets have become strategic factors for value creation by firms. Their
role in the economy has become as important as that of tangible assets, accounting for 5 to 12% of GDP.
Better accounting of the intangible capital which drives innovation is important in furthering our
understanding of the patterns and sources of economic growth. Adding it to the standard growth
accounting framework changes significantly the analysis. For example, R&D expenditures and intensity
have been found to have a significant effect on per capita GDP growth. And estimates for several
countries show that intangible investment more generally accounts for around 20 to 25% of labour
productivity growth. Poland is working with the international research and statistical community to
produce a better measure of investment in innovation and its impact at the macroeconomic level.
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Innovation is a “must” to meet global challenges a number of unprecedented global
challenges are calling for innovation-driven solutions. Just as globalisation has made the world a
“smaller” place, there is an increasing realisation that many of today’s pressing challenges know no
borders and cannot be tackled by a single country – global challenges require collective responses. The
ability to address increasingly urgent issues such as climate change, health, food security and poverty
depends on stronger innovation and new forms of international collaboration. Effective enabling
mechanisms are needed, and the OECD is working to identify policies, frameworks, and governance
mechanisms that can accelerate scientific and technological progress and diffuse innovation as widely as
possible.
Different global challenges naturally call for different approaches to support scientific and
technical co-operation. Nevertheless, some common strategies are emerging. These include greater
involvement of the private sector, non-governmental and philanthropic organisations, and other
stakeholders in the innovation process; building greater capacity for innovation in developing countries;
devising new financing mechanisms which provide incentives for global and local innovations; and
experimentation with mechanisms that enhance technology transfer to developing countries.
Climate change in Poland is one of the biggest challenges of our time, and one which can only be
solved collectively. Innovation can reduce the economic costs of climate change by putting economies on
growth paths that are less greenhouse gas-intensive. While this requires major progress in development
and deployment of key technologies, there is evidence that innovation in climate change mitigation
technologies is accelerating. Better use of existing knowledge and technologies, across sectoral boundaries,
also offers important opportunities to address this and other global challenges.
A wide range of policy actions will be needed to mobilise innovation to address climate change.
Setting a price for carbon emissions (whether through tradable permits or a carbon tax) and the provision
of targeted R&D support for mitigation technologies by governments can be particularly effective in
inciting innovation in climate change mitigation technologies. The concept of eco-innovation is being
applied by the Polish government as a way of meeting sustainable development objectives. More
generally, in order to encourage innovation, it is important to provide a stable and long-term policy
horizon for investors. This is particularly important for “breakthrough” technologies with a long planning
horizon. And, in order to realize reductions in emissions in a cost-effective manner, developing countries
need access to mitigation technologies and an incentive to adopt them.
Innovation for development policy and innovation policy
Likewise, innovation can be better mobilised to propel development and prosperity in the poorest
regions of the world. In the agriculture sector in particular, innovation can be a key driver of poverty
reduction in rural economies. Policies also need to provide affordable access to communications
technologies, especially broadband Internet, which is vital to accessing knowledge and can trigger local
innovations, boosting rural development beyond agriculture. Improving rural productivity also requires
significant investments in basic infrastructure including transportation, rural energy, and irrigation. There
will be little progress without these foundations.
Stimulating entrepreneurship and facilitating private sector development in developing countries
should be high on the agenda, as they can promote the autonomy needed to turn opportunity into
prosperity. These are important investments, which need carefully tailored incentives and risk-sharing
mechanisms supported by government. Donors can play a critical role in priority setting, but also in terms
of operations and implementation. To make this happen, links between development policy and
innovation policy need to be established, and coherence between the two strengthened.
In recent years in Poland, the notion of innovation has broadened. In particular, interest has
grown in non-technological forms of innovation – for example organisational changes, marketing and
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design – and their contribution to productivity growth. This interest reflects a growing appreciation of the
interaction between – and complementary nature of – technological and non-technological forms,
particularly in terms of wider application and adoption of innovations.
The focus on non-technological innovation has been most prominent in the services sector, which
now accounts for more than 70% of GDP in OECD countries. Indeed, empirical evidence shows that
innovation in this sector takes different forms than in the manufacturing sector. Services firms innovate
through informal R&D, the purchasing and application of existing technologies, as well as the
introduction of new business models.
There is a growing recognition that innovation encompasses a wide range of intangible activities,
in addition to R&D. Efforts to improve measures of such innovative activity, or show that R&D needs to
be supported by a complementary range of other investments, are still underway. Nevertheless, it is
already clear that investment in intangibles is as important as tangible investments in machinery,
equipment and buildings.
Moreover, the understanding of the innovation “cycle” has grown. The links between policies to
enhance investment in the creation and application of knowledge and new technologies, and policies that
provide incentives for innovation through to the tail end of the innovation cycle, e.g. in supporting
demand for innovative goods and services, are increasingly recognised.
The contribution of entrepreneurship to innovation is unique. Innovation often occurs through
entrepreneurs’ exploration of new markets, ideas and opportunities. New companies are created to
exploit technological or commercial opportunities which have been neglected by more established
companies and bring them to market. In 2005, half of business R&D in the United States was conducted by
companies that were less than 25 years old. A policy environment that fosters the startup and growth of
new firms is therefore critical to allow innovation to flourish.
Furthermore, networked innovation processes, underpinned by the spread of broadband Internet
connections, enable a much larger participation in the innovation process, opening it beyond the realm of
corporate R&D laboratories to users, suppliers and consumers in the public, business and non-profit
sectors. Tapping into this source of ideas offers a potentially important new source of innovation and
enhances the influence of market demand on innovation.
The wider range of actors on the Polish “stage” now involved in the innovation process
underscores the need to develop “soft skills” that equip people to work in multi-disciplinary and multicultural
problem-solving teams. Innovation also involves the capacity to adapt, or to retrain following the
introduction of radically new products and processes. Therefore, it is important to ensure that educational
institutions, as well as vocational education and training programmes, equip younger people and
graduates with flexible and broad skill sets to accommodate the changing nature of innovation.
Community engagement is also important in the uptake of innovation. In many countries, the
public is demanding a role in decisions relating to the adoption of new technologies, particularly when
these challenge strongly-held values. The backlash witnessed against new technologies such as genetically
modified foods is just one example of the role and influence of communities. Early-stage engagement with
the public can play a key role in the acceptance of innovations, and can influence the applications derived
from new technologies.
Drivers of public attitudes towards new technologies and innovative processes – including
perceptions of risks and benefits – therefore need to be understood by technology developers and policy
makers.
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Innovation raises challenges for policy in Poland
These and other changes in the innovation process present a challenge to existing Polish national
policy frameworks, many of which remain primarily focused on strengthening public research and on
providing incentives for market participants to invest in research. A shift towards fostering a wider range
of innovation activities is needed. Understanding how important such new forms of innovation are, how
they interact with each other, and what factors drive them is the key to developing appropriate policies.
Improving the measures of innovation is critical to provide new tools for policy making and
evaluation. The Polish government and the research community are working to develop a new set of
indicators to examine the broader notion of innovation and its link to economic performance and growth.
This will require additional collection and use of internationally comparable data at the firm level, as well
as a better understanding of currently unmeasured factors in the innovation process.
Just as the notion of innovation has broadened, innovation processes have become more complex
and interactive. The production and commercialisation of significant innovations such as the discovery of
the transistor, the invention of antibiotics or the introduction of organisational changes in the workplace
has never been a simple or risk-free task. But there is a now a more explicit recognition that the process of
innovation is not merely a linear progression from scientific research to discovery, to technological
improvements, to finished products and diffusion.
The complexity and costs of engaging in innovation – in particular at the frontier – have risen.
Increasingly, innovations are achieved through the convergence of different realms and technologies (e.g.
social sciences, microelectronics, engineering and life science technologies). Such innovations promise
new added value but are risky, since business models are uncertain, costs are high and new potential
competitors emerge in a very fluid business environment. Thanks to decades of trade liberalisation,
markets have become more globalised, opening new opportunities, as well as intensifying the level of
competition. Product life cycles have also shortened or are under pressure – owing to more intense and
global competition and continued technological progress. This is forcing companies to innovate more
quickly and develop products and services more efficiently.
These trends have had several impacts on the innovation process in Poland. First, innovators have
narrowed their focus to those elements where they believe they have a competitive advantage. While
science and innovation activities still tend to cluster in particular locations or around certain institutions,
other regions are increasingly emerging as a hub for innovative activity.
Second, confronted with intense global competition and rising R&D costs, companies are
increasingly collaborating with external partners. The aim is to stay abreast of developments, expand their
market reach, tap into a larger base of ideas and technology and get new products or services to market
before their competitors. Suppliers and customers are among the most sought-after innovation partners.
These networks and ecosystems are increasingly global.
As the practice of “open innovation” spreads, new forms of knowledge sharing and exchange
between firms, individuals and institutions are growing. These collaborations are giving rise to
“knowledge markets”. Using a number of different mechanisms and platforms, buyers and sellers can
pool or trade data, information, contacts and know-how. Steering markets toward innovation and
attracting outside investment also depends on an effective and balanced intellectual property regime. All
of these mechanisms help to enable the use, sharing, or exchange of information and knowledge.
All of these developments call for individuals and institutions to adopt a more “open” and
flexible approach to innovation, where collaboration and competition coexist in the innovation process.
For governments, it implies a coherent and interdisciplinary set of policies to foster innovation.
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The capacity to innovate in this dynamic environment depends on many factors, including the
infrastructures and institutions that support the creation and diffusion of knowledge on the one hand, and
the demand for innovation on the other. On the supply-side, this includes educational institutions that
support the formation of human capital, and research institutions and universities, which play a key role
in the creation and diffusion of basic knowledge.
Although business funds a greater share of global R&D in comparison to government, public
support for longer-term fundamental research in universities and public research organisations remains
critical. It is key to developing new scientific and technological knowledge that can lead to innovations to
benefit the economy and society. By nature, this type of research has a long time horizon and uncertain
returns. Indeed, while business has reduced its investments in basic research over time, it continues to
rely on public research for important knowledge spillovers that can trigger innovation.
On the demand side, market-based institutions, consumers, and entrepreneurship and new firm
creation play an important role. But capacity for innovation also relies on linking mechanisms that help
match supply and demand, as well as scientific and technological infrastructure and platforms built
around general purpose technologies (GPTs), such as information and communications technologies
(ICTs), and especially the Internet.
A new and potentially huge driver of innovation is emerging: the demand for processes and
technologies to address environmental and sustainability challenges. The search for innovative responses
in these areas is likely to grow sharply in the coming years, driving new investment and further
exploration of resource and energy-efficient technologies, renewable energies, new business models and
crosssectoral application of ICTs, biotechnologies, nanotechnologies, and others.
Complex market and societal needs often require multidisciplinary, innovative solutions. This
calls for more systemic application and diffusion of existing innovations, but also more international and
interdisciplinary research and development at the technological frontier. These developments have
implications for governance, international collaboration and the mix of skills needed, as well as the costs
and risks of engaging in innovative activities.
Polish government not only play the role of “rule setter”, but is increasingly a central innovation
actor playing within those rules. Demographic pressures, burgeoning demands, higher public
expectations and ever-tighter fiscal constraints mean that the public sector is seeking innovative solutions
to enhance productivity, contain costs and boost public satisfaction. The “innovation imperative” is
therefore equally strong for the public sector itself. Government can also contribute to creating demand
for innovation through public procurement.
In this increasingly complex and shifting landscape for innovation, developing an effective
governance strategy requires coordination at the local, regional, national and international levels, across a
wide range of actors and government ministries – Science & Higher Education, Economy, Administration
and Informatisation, Environment, Health, Foreign Affairs, Labour and Social Policy, and Education.
Yet, achieving co-ordination and coherence is a difficult challenge. Coherence involves not only
co-ordination of simultaneous policy actions, but also an evaluation of their possible interactions with
policies aimed at other objectives. For example, supporting the growth of young dynamic firms require
close co-ordination between innovation and entrepreneurship policies. Likewise, a closer integration of
policies fostering innovation and a cleaner environment can help guide economies towards greater
sustainability. In many cases, innovation policy in Poland remains compartmentalised in different
departments and agencies that face obstacles to co-operation.
In developing their innovation policies, government also need to consider the need to adapt to the
evolving needs of actors in the innovation process over time. Putting in place mechanisms that enable
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learning and policy development can help ensure that government is effective and efficient in meeting the
needs of society in the field of innovation.
A new policy agenda for innovation in Poland
The challenge is therefore to adjust the way innovation policies are designed and implemented to
ensure they respond to the new landscape.
Changes in the way we innovate; the pace of innovation; the need for better risk management
tools; the pressures of globalisation, both organisational and in governance; and the growing expectations
of civil society, beg the question: are the public policy instruments in use today “right” for the job And
how can approaches be tailored to country specificities: the level of economic development, economic
structure and institutional setting
A systemic but flexible strategy is needed to enable governments, firms and individuals to
harness innovation for better economic and social outcomes. Key elements of such a policy agenda
include the following.
Innovators in Poland today increasingly collaborate with external partners, including suppliers,
customers and universities, to tap into new knowledge, expand their reach or share risks and costs. Policy
can facilitate such collaboration, which is increasingly global, for example by lowering barriers to
international knowledge flows and by encouraging the development of knowledge markets.
Innovation today (not only in Poland) relies on networks and institutions that support the
creation and diffusion of knowledge and help link the supply of innovation to the market. The Internet
and related ICTs are arguably the most important platform for innovation today, enabling flows of
knowledge and linking innovators around the world. Policy needs to ensure a competitive environment
for the development of these and other technology platforms, with broad access for users. Moreover,
while business accounts for the bulk of investment in innovation, government support for longer-term
fundamental research remains essential in creating the seeds for future innovation.
Innovation today is a global undertaking, in particular for multinational enterprises, but is built
on local strengths. Drawing the benefits of the globalisation process for national and local economies
requires policies that enhance the attractiveness of national and local economies for innovation, e.g. in
improving frameworks conditions, strengthening universities and building local networks.
In additional to traditional science and technology skills, the competencies that are needed for
innovation today have widened to include management, leadership, marketing and business skills, as
well as creativity and collaborative and team-working skills. Innovation today crosses borders, mixes
disciplines and involves a wide range of actors. Policy makers need to ensure that education and training
systems deliver the right mix of skills and competencies needed for innovation, which will require
reforms in curricula, vocational training systems and adult learning.
Entrepreneurs are key players in both the supply and demand for innovation. They also help
generate competitive pressures on incumbents, forcing them to innovate. Policy can foster
entrepreneurship by facilitating the entry, exit and growth of firms, for example in lowering
administrative and regulatory barriers, improving bankruptcy regimes and easing access to finance.
Innovation can play a major part in addressing global policy challenges, such as climate change,
health and food security, as well as poverty. Responding to these challenges will require global solutions
and stronger international co-operation. More effective mechanisms for this collaboration, and for the
diffusion of innovations as widely as possible, must be developed. Co-operation in research and the
development of effective solutions are among the key actions that policy can take to address these
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challenges.
Polish government has a wide range of policies in place to foster innovation. Improving the
design of these programmes, e.g. in using competitive processes or public-private partnerships, can help
enhance their effectiveness and increase value for money. Evaluation is essential to improve policy
making, and this depends on improving the availability of data and the development of indicators that
reflect the complexity of the innovation process.
Government is (and should be) increasingly a key player in the innovation process. New
approaches and new technologies, such as e-government, can help solve problems and improve how
services are delivered by increasing responsiveness and improving efficiency and transparency.
The development of innovation policies needs to be supported by conducive “framework
conditions” – sound macro-economic policy, competitive markets, smart regulations, openness to
international trade and foreign direct investment, a supportive tax climate and a healthy financial system.
Polish government should play an important role in setting these conditions. At the same time, the
challenges for innovation policy differ across countries, and policy advice will need to be tailored to the
specific needs of each country.
Given the importance of innovation for core policy objectives, and the broad range of policies
needed to foster innovation, it is clear that innovation has become a central pillar of government policy.
Political leadership in Poland in advancing the innovation policy agenda and good governance at all
levels of government are therefore of key importance.
These broad principles will be developed over the coming year and complemented with detailed
policy guidance that can help underpin the development and implementation of effective, whole-ofgovernment
policies for innovation.
Conclusion
As part of its strategic response to the economic crisis and the innovation strategy, Poland is also
focusing on measures to restore long-term growth. This paper shows how current economic policy
(especially innovation policy) include measures directed towards investment in research and
development, a modern (smart) infrastructure, education, the greening of the economy, support to
innovation and to enterprises.
This paper should also help setting priorities and uncovering good practices, including in the area of
evaluation and co-ordination of planned measures and increased international co-operation. It can also
help debates on how to reconcile necessary short-term stimulus measures and plans to foster long-term
economic and sustainable growth.
Raising employment, improving skills, and enhancing technology absorption and innovation could
help offset the projected decline in potential growth and put Poland back on track for even higher growth
rates. To achieve these goals, it would be worth to pointed out the following findings and
recommendations in the area of innovation:
- improve the investment climate to spur firm investments in R&D;
- channel public funding to support co-inventions in addition to domestic inventions, to promote
international collaboration and knowledge spillovers;
- establish a system of insider privatization, that is, transfer of ownership to research and
development institutions (RDIs) managers and researchers, (excluding the real estate), to
complete the restructuring of commercialized RDIs and those volunteering for privatization;
- reform the RDI financing system to strengthen applied research and links with the needs of Polish
companies (especially small and medium enterprises) and industry.
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To conclude, more work will be needed to monitor the implementation and assess the impact of these
economic and innovation policies in Poland.
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The Business & Management Review, Vol.2 Number 2, July 2012
242

Structural Changes and Development of the SME Sector
in Poland after EU Membership
Ryszard Borowiecki &
Barbara Siuta-Tokarska
Department of Economics and Organization of Enterprises
Cracow University of Economics, Poland
Keywords
SME sector, structural changes, functioning of enterprises.
Abstract
The transformation process of the Polish economy, which started in the late 1980s, has initiated and caused
the occurrence of numerous phenomena and structural changes in the national economy of Poland. One of the first
signs of the transformation was an explosion of entrepreneurship expressing itself, among others, in the emergence of
numerous business entities of the private sector on the economic market. By the end of 1990s, the situation in this
respect stabilized and an increase in the number of new business entities did not have such an intense character any
more.
Poland’s accession to the European Union in 2004 is related to numerous changes in the conditionings of
the activities of business entities in Poland, including the SME sector enterprises and their structural changes. The
changes are connected, among others, with bigger opportunities within the scope of operations on new economic
markets (Western European countries). On the other hand, however, they bring about certain limitations and
impediments connected with it.
During the whole period of the transformation, small and medium-sized enterprises have played a
significant role in the development of the Polish economy and they are still its core, which is proven, among others,
both by their share in the number of business entities (over 99%), and in the GDP generation (about 50%).
Therefore, an analysis of structural changes in the SME activities in the post-accession period made in this paper and
the conclusions arising from it are an important element in undertaking pro-developmental activities and the needs
for prognostic analyses with reference to this sector in the context of, among others, global conditionings, the
economic crisis included.
Introduction
Since the early-1990s, that is from the beginning of the period of system transformation from the
centrally planned economy to the market economy, the small and medium-sized enterprise sector in
Poland, called the SME sector, has been playing a significant role in the development of economy. First of
all, in the non-financial enterprise group, it has a dominating share in the Gross Domestic Product (GDP)
generation and in employment, regardless of other indicators of the business entities’ activity, such as, for
example, a considerable share in the foreign trade.
Taking into consideration the indicated role and significance of the SME sector in the
development of the Polish economy, it is worth paying attention to the condition and fundamental
changes which have occurred in this sector after Poland’s accession to the European Union as of 1 May
2004, accounting for the influence of global conditionings related to the economic crisis on this sector.
Thus, the aim of this publication is to present the main changes in the SME functioning, and to
indicate the appropriate conclusions resulting from it for the opportunities for their further development.
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243

Changes in the number and the structure of the SME sector enterprises in the years
2001-2010
Active entities in Poland constitute as little as a half of the registered businesses. It means that for
some reasons, a large part of the enterprises has not been removed from the Polish National Business
Registry (e.g. because of the suspension of activity), whereas they actually do not conduct business
activity, Hence, for the needs of this analysis, only active enterprises were taken into account.
Table 1 presents data concerning the number and the dynamics of enterprises in Poland.
Table 1. Changes in the number and the dynamics of active enterprises in Poland by their size classes in
the years 2001-2010[previous year=100%]
Year
Enterprises in
total
micro
(0-9 workers)
small
(10-49
workers)
including
mediumsized
(50-249
workers)
SMEs in total
(0-249
workers)
large
(>249
workers)
2001 1657630[93.9] 1601964[93.7] 39439 [101.1] 13419 [94.3] 1654822 [93.9] 2808 [91.4]
2002 1735424
[104.7]
1682473[105] 37142[94.2] 13086[97.5] 1732701[104.7] 2723[97.0]
2003 1709542 [98.5] 1654094[98.3] 39453[106.2] 13330[101.9] 1706877[98.5] 2665[97.9]
2004 1714983
[100.3]
1653856[100] 44369[112.5] 14003[105] 1712229[100.3] 2754[103.3]
2005 1676775 [97.8] 1615167[97.7] 44519[100.3] 14254[101.8] 1673940[97.8] 2835[102.9]
2006 1714915
[102.3]
2007 1777076
[103.6]
2008 1788336
[100.6]
1652998[102.3] 44228[99.3] 14708[103.2] 1711934[102.3] 2981[105.1]
1713194[103.6] 45184[102.2] 15452[105.1] 1773830[103.6] 3246[108.9]
1714789[100.1] 54262[120.1] 16078[104.1] 1785129[100.6] 3207[98.8]
2009 1673527 [93.6] 1604417[93.6] 50189[92.5] 15808[98.3] 1670414[93.6] 3113[97.1]
2010 1726663
[103.2]
1655064[103.2] 52591[104.8] 15841[100.2] 1723496[103.2] 3167[101.7]
Source: authors’ownstudybased on Borowiecki, Siuta-Tokarska (2008); Przedsibiorczo w Polsce (2011),
Dziaalno przedsibiorstw niefinansowych w 2010roku (2011).
What results from the analysis of the data included in Table 1 is that in the years 2001-2002,
namely in the pre-accession period, there was an increase in the total number of enterprises by over 77
thousand entities, mainly thanks to micro-enterprises, but a decrease in the number of business entities in
that period was observed in medium-sized and large enterprises. In the following year, there was an
overall drop in the number of business entities by nearly 26 thousand, micro- and large enterprises
included.
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244

In the years 2004-2010, that is after Poland’s accession to the European Union, there was a slight
rise in the total number of active entities, amounting to 0.68%, and in absolute numbers, 11,680 entities.
However, it is worth emphasizing that it was the global economic crisis that had crucial influence on this
situation, because in the years 2004 - 2007 (before the global crisis),the growth in the number of active
enterprises in total was 3.6%.
In 2009, the Polish economy took a heavy toll of the crisis, which expressed itself in the dynamics
of the totality of active enterprises equal to 93.6% (a decline by 114,809 entities), including the biggest
decrease which was observed among micro-enterprises, namely 110,372, followed by small ones: 4,073,
medium sized ones: 270, and large ones: 94 entities.
What results from the analysis of average value for the years 2001 - 2003 (pre-accession period)
and for the years 2004 - 2007 (the first post-accession period) and 2008 -2010 (the second post -accession
period) is that the dynamics of changes in the pre-accession period and in the first post-accession period
within the scope of the number of active business entities was on a similar level, namely over 103%, which
may indicate that the fact of Poland’s accession to the European Union structures itself did not influence
significantly the changes in the number of active business entities in Poland. On the other hand, in the
second post-accession period the dynamics on the level of 96.6% was observed, which shows that
enterprises in Poland experienced some consequences of the global economic crisis. Showing the whole
period of the years 2004 - 2010 (post-accession period) comprehensively, irrespective of the fluctuations in
absolute numbers in the individual years, there was generally an increase in the number of active entities
from the level of 1,714,983 units in 2004 to 1,726,663 in 2010, including the SME sector enterprises from
1,712,228 entities in 2004 to 1,723,496 in 2010, which should be assessed positively.
Table 2 presents the structure of enterprises in Poland by their core activity and their size classes
in the post-accession period, in the years 2004-2010.
Table 2. The structure of enterprises in Poland by their core activity and their size classes in the postaccession
period, in the years 2004-2010 (in %)
Specification Industry Trade and
repairs
Constructi
on
Transport and
warehousing
Health care
and social
welfare
Others
2004 small 11.9 35.8 9.3 7.3 5.6 30.1
medium-sized 50.2 19.3 9.4 4.6 1.4 15.1
large 59.7 11.4 5.4 7,4 0.1 16.0
2005 small 11.2 35.4 9.6 8.2 6.4 29.2
49.8 19.7 9.4 4.5 1.4 15.2
large 58.3 11.8 5.8 7.3 0.1 16.7
2006 small 11.3 35.6 9.9 8.3 5.9 29.0
mediumsized
mediumsized
49.2 19.7 9.9 4.7 1.1 15.4
large 58.4 12.6 5.9 7.2 0.1 15.8
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245

2007 small 33.1 30.1 10.1 4.7 3.4 18.6
48.2 20.3 10.1 4.9 1.1 15.4
large 57.1 13.3 5.7 6.9 0.5 16.5
2008 small 30.5 30.1 12.3 5.2 3.1 18.8
45.5 20.3 10.4 4.9 1.1 17.8
large 55.2 13.9 5.2 7.1 0.6 18.0
2009 small 29.7 30.3 12.7 4.7 3.8 18.8
44.4 21.4 11.1 4.8 1.7 16.6
large 52.7 14.2 6.0 6.5 2.0 18.6
2010 small 29.1 30.4 13.1 4.6 3.6 19.2
mediumsized
mediumsized
mediumsized
mediumsized
44.1 21.8 11.1 4.8 1.9 16.3
large 53.2 13.3 5.6 6.3 2.2 19.4
Source: Authors’ ownstudy on the basis of: Dziaalno przedsibiorstw niefinansowych w 2004 roku
(2006), Dziaalno przedsibiorstw niefinansowych w 2005 roku (2007), Dziaalno przedsibiorstw
niefinansowych w 2006 roku (2008), Dziaalno przedsibiorstw niefinansowych w 2007 roku (2008),
Dziaalno przedsibiorstw niefinansowych w 2008 roku (2010), Dziaalno przedsibiorstw
niefinansowych w 2009 roku (2011), Dziaalno przedsibiorstw niefinansowych w 2010 roku (2011).
According to the data concerning active enterprises for the years 2004-2010, the total number of
enterprises decreased, among others, in trade and repairs by 86,141 units, in industry by 24,247 entities, in
transport by 3,474 enterprises, whereas it increased, among others, in construction by 73,062 entities
(Dziaalnoprzedsibiorstw, 2011).
Moreover, what results from the analysis of the data included in Table 2 is that:
among small enterprise, the biggest number of the conducted business activity was in trade and
repairs (from 35.8% in 2004 to30.4% in 2010), then in the remaining kinds of activity (from 30.1%
in 2004 to 19.2% in 2010), in industry (from 11.9% in 2004 to29.1% w 2010), and in then in
construction (from 9.3% in 2004 to 13.1% in 2010) and in transport (from 7.3% in 2004 to 4.6% in
2010),
among medium-sized enterprises, entities conducting activity in industry had the biggest share
(from 50.2% in 2004 to 44.1% in 2010), and it was followed by entities operating in trade and
repairs (from 19.3% in 2004 to21.8% in 2010) and in the other kinds of activities (from 15.1% in
2004 and 16.3% in 2010),as well as in construction (from 9.4% in 2004 to 11.1% in 2010). On the
other hand, in transport and in health care and social welfare, the shares did not exceed 5%,
in the group of large business entities, enterprises operating in industry prevailed (from 59.7% in
2004 to 53.2% in 2010), and then the remaining kinds of activity followed (from 16% in 2004 to
19.4% in 2010), as well as enterprises conducting activity in trade and repairs (from 11.4% in 2004
to 13.3% in 2010). Among large enterprises, the percentage of construction and transport entities
was between 6%-7%.
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Takingmicro-enterprises into account, it should be claimed that in the SME sector in Poland,
entities conducting trade and service activity prevail, but alongside the growth of the size class of these
entities, the share of enterprises conducting industrial activity is rising, which is to a great extent
connected with their asset-capital abilities and an access to external sources of financing (the bigger the
entity, the bigger chances for external financing) (Stan dostpu...2010, MP pod lup. Raport 2011).
Changes in the number and the structure of people working in the SME sector
enterprises
Table 3 compares data concerning people working in non-financial enterprises in Poland, with special
attention given to the SME sector enterprises, in the years 2004-2010.
Table 3. Changes in the number and the dynamics of people working in enterprises in Poland by their size
classes (in thousands) [the previous year =100%]
including
Year
Enterprises
in total
micro
(0-9 workers)
small
(10-49
workers)
mediumsized
(50-249
workers)
SMEs in
total
(0-249
workers)
large
(>249
workers)
2004 8160.7[100.3] 3383.5[99.6] 967.3[101.4] 1461.5[98.8] 5812.3[99.7] 2348.4[101.7]
2005 8287.5[101.6] 3403.1[100.6] 972.0[100.5] 1494.1[102.2] 5869.2[101.0] 2418.3[103.0]
2006 8556.2[103.2] 3474.6[102.1] 976.5[100.5] 1542.4[105.2] 5993.5[102.1] 2562.7[106.0]
2007 8969.3[104.8] 3592.8[103.4] 1007.5[103.2] 1619.3[105.0] 6219.6[103.8] 2749.7[107.3]
2008 9494.0[105.8] 3727.2[103.7] 1195.0[118.6] 1698.2[104.9] 6620.4[106.4] 2873.0[104.5]
2009 8830.0[93.0] 3464.2[92.9] 1123.3[94.0] 1643.4[96.8] 6230.9[94.1] 2599.1[90.5]
2010 8859.1[100.3] 3399.1[98.1] 1143.5[101.8] 1649.1[100.3] 6191.7[99.4] 2667.4[102.6]
Source: Authors’ ownstudy on the basis of: Raport o stanie sektora maych i rednich przedsibiorstw...
(2010), Dziaalno przedsibiorstw niefinansowych w 2009 roku (2011), Dziaalno przedsibiorstw
niefinansowych w 2010 roku (2011).
What results from the data included in Table 3 is that according to the indicated four classes of
enterprise sizes, after 2004, that is after Poland’s accession to the European Union, until 2008 inclusive, a
quantitative increase in the number of people working in these entities was observed practically in all
their classes. The number of people working in enterprises in total went up from 8,160.7 thousand in 2004
to 9,494 thousand 2008, which is an increase by 1,333.3 thousand.
We may assume that in the mentioned period the situation on the labour market in Poland
improved significantly. On the one hand, an increase in the number of people working in enterprises in
Poland, and on the other hand, opening labour markets in the Western European countries was the reason
for which the registered unemployment rate decreased from 19% in 2004 to 9.5% in 2008. Distinct
worsening in this respect was observed in the following years, which was related to the economic crisis. In
2009, the number of people working in enterprises in Poland dropped to the level of 8,830 thousand and
rose slightly in 2010 (at that time,the unemployment rate amounted to 12.1% in 2009 and 12.4% in 2010).
Fig.1. The shares of enterprise size classes in the total number of people working in enterprises in Poland
in the years 2004-2010.
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247

Source: Authors’ own study.
What results from the data in Fig.1 is that:
in the years 2004 - 2010, the share of people working in micro-enterprises was gradually going
down in comparison with the totality of people working in non-financial enterprises from 41.5%
in 2004 to 38.4% in 2010,
in the years 2004-2010, the share of people working in large enterprises was rising from 28.7% in
2004 to 30.1% in 2010 in relation with the enterprises in total,
in the years 2004 - 2007, the share of small enterprises was gradually decreasing from 11.9% to
11.2%, and then, in the years 2008-2010, the share increased from 12.6% in 2008 to12.9% in 2010,
the share of medium-sized enterprises maintained at the level of about 17.9% to 18.0% in the years
2004-2008, and then it grew to the level of 18.6% in the years 2009-2010.
Generally, changes in the structure were not so big in the analyzed years, but to the greatest extent
they referred to macro-enterprises (the difference of 3.0%), then, large entities (the difference of 2.0%),
whereas to the least degree to small (1.7%) and medium-sized enterprises (0.7%).
Undoubtedly, the impact of the global economic crisis, especially in the years 2009- 2010, was
noticeable, and it also exerted specific influence on the changes in the number and the structure of people
working in the SME sector enterprises, as well as in large enterprises.
Changes in the size and financial indicators of enterprise activity in Poland with
special attention given to the SME sector entities
Within the framework of the financial analysis of the enterprise sector activity, apart from the
size/value of certain asset-capital elements, also three basic groups of indicators are taken into
consideration on the basis of which their condition is assessed.They are the indicators of: debt and an
ability of debt service, liquidity and profitability. Basically, an analysis of the financial values and
indicators is a fast and effective method of the access to economic operations and the results of enterprise
functioning (Sierpiska, Jachna 2004), which creates a base for shaping their future, considering the
existing and the predicted external conditionings.
Table 4 compares the data concerning short- and long-term debt of enterprises in Poland in the years
2004-2010.
Table 4. The value and the dynamics of short- and long-term liabilities of enterprises in Poland in the
years 2004-2010 by their size classes (the previous year =100%)
Year small enterprises medium-sized
enterprises
large enterprises Enterprises in
Poland
Short-term liabilities in billions of zloty(%)
2004 69.5 (114.3) 99.9 (100.2) 175.9 (100.3) 345.3 (102.9)
2005 66.7 (96.0) 103.0 (103.1) 194.8 (110.7) 364.6 (105.6)
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248

2006 68.6 (102.8) 118.0 (114.6) 222.2 (114.1) 408.8 (112.1)
2007 77.1(112.4) 129.7 (109.9) 255.6 (115.0) 462.4 (113.1)
2008 87.4 (113.4) 140.5 (108.3) 305.3 (119.4) 533.2 (115.3)
2009 82.6 (94.5) 148.3 (105.6) 291.5 (70.4) 522.4 (98.0)
2010 97.0 (117.4) 151.3 (102.0) 322.7 (110.7) 571.0 (109.3)
Long-term liabilities in billions of zloty (%)
2004 24.9 (108.7) 37.1 (85.3) 101.3 (89.1) 163.2 (90.6)
2005 27.9 (112.0) 37.3 (100.5) 100.1 (98.8) 165.3 (101.3)
2006 26.2 (93.9) 41.7 (111.8) 99.2 (99.1) 167.2 (101.1)
2007 33.4 (127.5) 52.8 (126.6) 99.8 (100.6) 186.0 (111.2)
2008 44.5 (133.2) 59.6 (112.9) 133.5 (133.8) 237.5 (127.7)
2009 43.0 (96.6) 63.7 (106.9) 141.8 (106.2) 248.4 (104.6)
2010 47.8 (111.2) 70.6 (110.8) 144.8 (102.1) 263.1 (105.9)
Source: Authors’ own study on the basis of: Przedsibiorczo w Polsce (2011).
What results from the data in Table 4 is that short-term debt (related to the ongoing operations of
an enterprise) in small, medium-sized and large enterprises in total in Poland constitutes over the
doubleness of long-term liabilities (basically related to investment activity), and their value was generally
increasing gradually over the whole analyzed period, that is 2004 - 2010 (an exception: 2009 in short-term
liabilities).
Total short-term liabilities of the indicated enterprise size classes increased from the level of 345.3
billion zloty in 2004 to 571.0 billion zloty in 2010, that is by 225.7 billion zloty(an increase by 65.4%),
whereas long-term liabilities from the level of 163.2billion zloty in 2004 to 263.1 billion zloty in 2010, that
is by 99.9 billion zloty (61.2%). Taking into consideration the size classes of economic entities, short-term
debt of small and medium-sized enterprises altogether rose by 46.6%, and of large ones by 83.5%, whereas
in the long-term liabilities the situation was different - in small and medium-sized enterprises the total
debt rose by 91%, and in large ones by 43%.
The dynamics of the short-term debt of the total number of enterprises was from 98% in 2009 to
115.3% in 2008, whereas, the dynamics of long-term debt - from 90.6% in 2004 to 127.7% in 2008. With
reference to small enterprises, the dynamics of short-term liabilities fluctuated from 94.5% in 2009 to
117.4% in 2010r., and of long-term ones from 93.9% in 2006 to 133.2% in 2008. In medium-sized
enterprises, changes in the dynamics of short-term liabilities were not so big as in case of small entities.
The highest level of dynamics was reached in 2006: 114.6%, and the lowest one in 2004: 100.2%, and with
reference to long-term liabilities, the lowest level of dynamics was reached in 2004: 85.3% (which, to some
extent, could be connected with Poland’s accession to the EU), and the highest one in 2007: 126.6%.
Generally, in the indicated two years, namely in 2004 (the period directly following Poland’s
accession to the EU) and in 2009 (an impact of the global economic crisis), a decrease in short and longterm
liabilities, or a decline in its growth ratewas observed.
Within the framework of the analysis of the assessment of enterprises’ debt in Poland, Table 5
compares data concerning the value of their debt ratio in the years 2004-2010.
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249

Table 5. Indicators characterizing the debt of enterprises in Poland by their size classes in the years 2004-
2010
Year small enterprises medium-sized
enterprises
large enterprises Enterprises in
total
Debt ratio (liabilities/assets)
2004 0.51 0.43 0.41 0.43
2005 0.48 0.42 0.39 0.41
2006 0.45 0.43 0.38 0.41
2007 0.44 0.41 0.37 0.39
2008 0.49 0.43 0.39 0.41
2009 0.45 0.43 0.38 0.40
2010 0.47 0.45 0.37 0.40
Liabilities/ equity
2004 1.13 0.83 0.79 0.85
2005 0.99 0.79 0.74 0.79
2006 0.89 0.82 0.73 0.78
2007 0.85 0.76 0.67 0.72
2008 1.03 0.83 0.75 0.81
2009 0.89 0.83 0.72 0.77
2010 0.99 0.93 0.68 0.78
Source: Authors’ own study on the basis of: Przedsibiorczo w Polsce (2011).
Debt ratio for the enterprises in total in the years 2004-2010 stayed on the level from0.39 in 2007 to
0.43 in 2004, for small entities from 0.44 in 2007 to 0.51 in 2004, for medium-sized from 0.41 in 2007 to 0.45
in 2010, whereas for large ones from 0.37 in 2007 and 2010 to 0.41 in 2004.
Changes in the “liabilities/equity” ratio among enterprises in total in Poland to some extent
fluctuated from 0.77 in 2009 to 0.85 in 2004.In all the indicated size classes of the economic entities, the
ratio did not exceed 1 in the whole period 2007-2010 (an exception in small enterprises in 2004, where the
ratio value was 1.13).The debt ratio analysis shows that enterprises in Poland are in moderate debt in
comparison with their asset value and equity value.
To assess the financial situation of the enterprises functioning in Poland in the years 2004-2010
(after Poland’ accession to the European Union), Table 6 compares data concerning liquidity ratio.
Financial liquidity is an extremely important issue, necessary to keep the continuity of the
implemented economic processes. It is basically understood as an ability of the enterprise to settle its
current liabilities on time.
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Table 6. Financial liquidity ratiosof enterprises in Poland by their size classes in the years 2004-2010
Year small enterprises medium-sized
enterprises
large enterprises Enterprises in
total
Current ratio
2004 1.14 1.32 1.37 1.31
2005 1.32 1.37 1.40 1.38
2006 1.45 1.40 1.41 1.41
2007 1.52 1.46 1.41 1.44
2008 1.48 1.49 1.34 1.40
2009 1.56 1.52 1.42 1.47
2010 1.59 1.53 1.45 1.49
Increased liquidity ratio
2004 0.80 0.93 0.98 0.93
2005 0.95 0.99 1.00 0.98
2006 1.02 1.00 1.02 1.01
2007 1.05 1.02 0.99 1.01
2008 1.02 1.03 0.94 0.98
2009 1.10 1.06 1.03 1.05
2010 1.16 1.07 1.06 1.08
Source: Authors’ own study on the basis of: Przedsibiorczo w Polsce (2011).
An analysis of the data from Table 6 shows that in the current liquidity, the level of the ratio in the
enterprises in total was within 1.31 to 1.49 in the years 2004 - 2010. In small enterprises, the level of this
ratio was relatively high, amounting to 1.45-1.59 in the years 2006 - 2010 (only in the first years after the
accession it reached a lower value). A similar correlation was observed in medium-sized enterprises. The
level of the current ratio in large enterprises was relatively high, 1.40 in the years 2005 - 2010 (a decrease
in liquidity only in 2008 - the ratio was 1.34). On the other hand, with reference to the increased liquidity
ratio, its value above 1 was achieved in small and medium-sized enterprises in the years 2006 - 2010, but a
little better situation was observed in small enterprises (ratio 1.1 and 1.16) than in medium-sized ones
(ratios 1.06 and 1.07) in the years 2009-2010.
On the other hand, with reference to the increased ratio, its value above 1 was achieved in small
and medium-sized enterprises in the years 2006-2010, whereby,a little better situation was observed in
small enterprises (ratio 1.1 and 1.16) rather than in medium-sized ones (ratio 1.06 and 1.07) in the years
2009-2010.
In addition to the presented indicators of enterprise activity, namely debt ratio and liquidity ratio,
an important element of the analysis are also data and indicators referring to profitability, which reflects
the effectiveness of managing an enterprise. In Table 7, the Authors compared some data concerning
achieved revenues, incurred costs and obtained net financial results in enterprises in Poland.
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Table 7. Financial data of enterprises in Poland and the dynamics of their changes by their size classes in
the years 2004-2010 (the previous year =100%)
Year small enterprises medium-sized
enterprises
large enterprises Enterprises in
total
Total revenue in billions of zloty(%)
2004 263.1 (116.7) 456.0 (118.1) 821.5 (115.6) 1540.6 (116.5)
2005 265.9 (101.1) 464.5 (101.9) 870.2 (105.9) 1600.6 (103.9)
2006 290.7 (109.3) 517.8 (111.5) 1001.8 (115.1) 1810.3 (113,1)
2007 325.7 (112.0) 589.0 (113.8) 1152.9 (115.1) 2067.7 (114.2)
2008 366.9 (112.6) 652.5 (110.8) 1281.5 (111.2) 2300.9 (111.3)
2009 360.3 (98.2) 662.0 (101.5) 1300.3 (101.5) 2322.6 (100.9)
2010 388.6 (107.9) 652.3 (98.5) 1410.7 (108.5) 2451.6 (105.6)
Total costs in billions of zloty(%)
2004 251.3 (118.5) 435.6 (115.2) 768.6 (111.6) 1455.6 (113.8)
2005 254.0 (101.1) 446.0 (102.4) 822.4 (107.0) 1522.4 (104.6)
2006 276.2 (108.7) 490.6 (110.0) 942.3 (114.6) 1709.1 (112.3)
2007 305.7 (110.7) 556.4 (113.4) 1078.4 (114.4) 1940.1 (113.5)
2008 348.3 (113.9) 626.9 (112.7) 1226.7 (113.8) 2201.8 (113.5)
2009 342.3 (98.3) 633.6 (101.1) 1230.6 (100.3) 2206.5 (100.2)
2010 366.9 (107.2) 624.9 (98.6) 1327.8 (107.9) 2319.6 (105.1)
Net financial result in billions of zloty(%)
2004 9.8 (104.3) 16.9 (344.9) 44.8 (350.0) 71.5 (264.8)
2005 9.8 (100.0) 14.6 (86.4) 38.2 (85.3) 62.6 (87.6)
2006 12.1 (123.5) 22.3 (152.7) 47.6 (124.6) 82.1 (131.2)
2007 17.5 (144.6) 27.6 (123.8) 60.6 (127.3) 105.7 (128.7)
2008 15.2 (86.9) 20.4 (73.9) 42.9 (70.8) 78.6 (74.4)
2009 15.1 (99.3) 23.3 (114.2) 57.5 (134.0) 95.8 (121.9)
2010 18.2 (120.5) 22.4 (96.1) 69.3 (120.5) 109.9 (114.7)
Source: Authors’ own study on the basis of: Przedsibiorczo w Polsce (2011).
In general, total revenues of enterprises in Poland in the analyzed period,2004-2010, were
gradually rising (except for 2009 in small enterprises and 2010 in medium-sized entities) from 1,540.6
billion zloty in 2004 to 2,451.6 billion zloty in 2010. Similar changes were observed in total costs where
their value went up from 1,455.6 billion in 2004 to 2,319.6 billion zloty in 2010. It should be stressed that in
comparison with the previous year (the year of Poland’s accession to the EU)the dynamics of both
revenues and costs reached the highest value or one of the highest values in all size classes of enterprises,
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which may be interpreted as a significant effect of the influence of the accession process. The situation also
refers to the net financial result achieved by these enterprises (with the exception of small enterprises,
which is rather connected with their basically local market of conducting business activity). On the other
hand, in the last two years, in 2009 and 2010, the dynamics of revenues and costs distinctly dropped,
especially when compared to the years 2006 - 2008, which is related to the conditionings both in the
domestic and the world economy (global economic crisis). It may be proven by the data concerning the
share of profitable entities. Among small enterprises, this share was going up from over 74% to over 81%
in the years 2004-2007, and then it went down to over 76% in 2009. (Przedsibiorczo, 2011). Similar
changes concerned medium-sized enterprises (an increase from over 75% to 82.6% in the years 2004-2007,
and then a decrease to 76.8% in 2009).
Synthesis of the research findings
1. In the period following Poland’s accession to the EU, there was a significant growth in the
number of active enterprises in Poland, both the SME sector entities in the years 2006- 2008, and
large enterprises in the post-accession period, which was impeded in the era of the global
economic crisis, particularly in 2009. In 2010, a certain improvement was observed in the
activeness of enterprises in all classes of their size, expressing itself in the number of active
entities.
2. In the structure of enterprises by their core activity and their size classes, tendencies of changes
were observed in the years 2004 - 2010, expressing themselves in a decline in the share of
economic entities in industry in all size classes in favour of activities connected with trade and
repairs, whereby in small and medium-sized entities the share of construction companies also
went up.
3. The number of people working in non-financial enterprises in total was increasing in the years
2004-2008, and then it rapidly decreased in 2009. The SME share in employment in non-financial
enterprises stayed on the same level and was within 71.3% in 2004 to 69.9% in 2010.
4. As far as current liquidity and increased liquidity are concerned, there was generally an increase
in these indicators in the years 2004 - 2010 in the indicated size classes of business entities, which
should be assessed positively. It is worth emphasizing that in the analyzed period, the total debt
of enterprises also rose, from the level of 508.5 billion zloty in 2004 to 834.1 billion zloty in 2010
(the dynamics of 164%), whereby an increase in the short-term debt was 65.4% at that time (the
biggest growth of the dynamics characterized large enterprises - over 83%, the medium-sized
enterprises - over 50%, and small ones - over 39%), and the long-term was 61.2% (the biggest
growth of the dynamics characterized small and medium-sized enterprises - over 90%, whereas
moderately, large enterprises - over 42%).
An increase in debt, particularly with reference to the smallest entities, namely macro-enterprises
and small enterprises, in the situation of the turbulences occurring on the economic market may
threaten their functioning and significantly influence their financial liquidity, hence, a decrease in
the dynamics of debt and/or its rate in the period of the last two years among these entities
should be interpreted positively. An impact of the global economic crisis is visible also with
reference to the revenues and total costs of non-financial enterprises in Poland in the years 2009 -
2010, including a decline in the dynamics in comparison with the previous years.
References
Borowiecki R., Siuta-Tokarska B. (2008), Problemy funkcjonowania i rozwoju maych i rednich przedsibiorstw w
Polsce. Syntezabadaikierunkirozwoju, Difin, Warszawa.
Dziaalno przedsibiorstw niefinansowych w 2004 roku (2006), the Central Central Office, Warszawa.
Dziaalno przedsibiorstw niefinansowych w 2005 roku (2007), the Central Central Office, Warszawa.
Dziaalno przedsibiorstw niefinansowych w 2006 roku (2008), the Central Central Office, Warszawa.
Dziaalno przedsibiorstw niefinansowych w 2007 roku (2008), the Central Central Office, Warszawa.
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Dziaalno przedsibiorstw niefinansowych w 2010 roku (2011), the Central Central Office, Warszawa.
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MP pod lup. Raport. Europejski Program ModernizacjiPolskich Firm (2011),
EuropejskiFunduszLeasingowy, European Investment Bank, Council of Europe Development Bank, European Bank
for Reconstruction and Development, Warszawa.
Przedsibiorczo w Polsce (2011), the Ministry of Economy, Warszawa.
Sierpiska M., Jachna T. (2004), Ocena przedsibiorstwa wedug standardów wiatowych, PWN, Warszawa.
Stan dostpu do finansowania zewntrznego i potrzeby MP w Polsce (2010), PARP, Warszawa.
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254

The Identification and Measurement of Financial Threat
Vs. The Cases of Insolvency in the Period of Poland’s
Economic Transformation
Jarosaw Kaczmarek
Department of Economics and Organization of Enterprises
Cracow University of Economics, Poland
Keywords
Corporate crisis, risk management, early warning systems, insolvency
Abstract
The contemporary economy is characterised by a turbulent business environment, a great pace of changes
and their radical nature – the economy is becoming increasingly unstable. These factors have an impact on corporate
functioning. The major objectives of the undertaken measures are survival and development. The company’s survival
is conditioned by its ability to anticipate and assess its market position, which implies the ability to take effective
action and expand in the changing environment. Taking appropriate steps is of vital importance in the face of a
threat of crisis. The possibility of the dysfunctions of an economy in the environment of radical changes threatens the
company’s position, increasing the likelihood of its insolvency.
The identification of threats as part of the Early Warning System is based on a number of tools used in
technical, economic and financial analyses as well as in statistical methods for going concern and insolvency threat
predictions. The defined measures provide quantitative information related to anticipatory warning signals and
perform the function of threat predictors.
The commonly recognised as efficient and continuously developed measures include empirical and
inductive methods – discrimination analysis (one – and multivariate models) as well as the conditional probability
account (multivariate cogit models).
The concept of insolvency can be analysed at three different levels: legal, economic and organizational ones.
The assessment of the crisis of Polish companies in 1990–2011 is based on two measures: the percentage of
insolvency proceedings and the degree of going concern threat. These measures describe the concept of insolvency in
its economic dimension. The results of the conducted analysis and assessment are presented in the empirical analysis
presented in this paper.
Introduction
Companies functioning in the environment of real economy, affected by regulation, are
vulnerable to crises resulting from the impact of external factors. These factors occur in the surrounding
business environment (competitors and micro–environment) and a more remote environment of
macroeconomic factors. Other factors occur in the organization’s internal environment. The deteriorating
conditions in this area have a negative impact on companies, leading to crises. A crisis is understood in
different ways from a microeconomic perspective, depending on the particular trends and theories which
deal with company operations. Generally, a crisis is an outcome of unplanned events which disturb or
threaten the normal corporate functioning [Oldcorn 1996].
The company’s exposure and vulnerability to threats is diversified, and it is very high in the case
of Polish companies – both from the organizational and financial perspective. It results from the instability
and changeability of Polish companies’ strategic potential [Zelek 2003]. In addition to that, the on–gong
process of several parallel transformations in the Polish economy increases the uncertainty (the qualitative
category) and risk (the quantitative category) of business operations, which is further enhanced by the
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negative impact of the economic slowdown. Moreover, the area of strategic management – which is of key
significance in such conditions – is neglected in most Polish companies. It increases the strategic
uncertainty, leading to the domino effect [Mczyska 2011].
Detection, identification and measurement of threats
An integrated model for the organization’s development proposed by B. Quinn and K. Cameron
stresses the fact that apart from the ability to overcome crises, a significant role is played by the ability to
predict and prevent them [Quinn, Cameron 1983]. Therefore, companies must develop and apply
solutions which diagnose the symptoms of crises – early warning systems. They are risk optimization
tools applied as part of quantitative risk management methods [Crocford 1982]. Such tools, along with a
strategic approach, play an increasingly important role in the environment of economic instability and
uncertainty [Mczyska 2011]. The need for predicting threats seems unquestionable – the problem is
what methods should be adopted to minimise the risk of erroneous forecasts. However, the commonly
used term ”warning” is not appropriate and misleading. An act of warning can indicate both an attempt
to detect threats and identify opportunities. The term “identification” seems to be a more appropriate
term in this context [Cabaa 2008].
The most general classification of EWS is based on a subjective criterion (who creates and for
who) and an objective criterion (the choice of tools and assessment methods) [E.I. Altman, P. Narayanan
1997; H.D. Platt, M.B. Platt 2002] making use of three types of information: alarm signals, deviations, weak
signals (weakly structured) [H.I. Ansoff 1985].
An early warning system should be considered as one of the components of the assessment of the
company’s economic and financial condition; it is composed of a number of in–depth analyses falling
under one of the three categories: strategic, financial and technical and economic analyses (also viewed
from the perspective of the decision–making process) [M. Zaleska 2002; A. Zelek 2003; Kasiewicz, Krysiak,
Gogowski 2004]. It aims to detect the signs of deterioration, but it is frequently – which is not well–
grounded – treated as bankruptcy prediction [Fraser, Fraser 1996].
In identifying threats, EWS makes use of a number of tools applied in the technical and economic
analysis as well as statistical methods for predicting going concern and insolvency threats. The defined
measures quantify early warning signals, performing the function of threat predictors [Lam 2003]. The
application of these methods can be divided into four stages which are marked by a visible increase in
complexity and advanced analytical methods (applicable to chaos theory, an integrating approach and
process orientation). EWS methods are usually classified from the point of view of two criteria: the
character of analysed factors and deduction methods [Rogowski 1999]. The former one is related to
quantitative, qualitative and mixed methods, while the latter one applies logical and deduction as well as
empirical and induction methods [Wieczerzyska 2009]. According to Zavgren, methods can be divided
on the basis of discriminate analysis (one– and multivariate models) and the conditional probability
account (multivariate models) [Zavgren 1983]. In connection with the above, this area makes use of
exclusively empirical and induction methods – they are considered to be useful and they are constantly
developed.
In the group of methods identified from the point of view of the character of factors the most
frequently applied ones include the financial ratio analysis and scoring models (with one synthetic
measure) as well as multi–criterion models (quantitative and qualitative measures). Considering a number
of weaknesses of single–measure analyses, other concepts may be applied including EVA (Economic
Value Added), SVA (Shareholder Value Added) and MVA (Market Value Added based on the values
determined on the capital market). This approach considers the main objective of corporate functioning –
creating shareholder value through increasing corporate value. However, the results of research studies of
the Polish economy indicate the lack of statistically significant correlation between the above measures
and the degree of going concern and insolvency threats [Prusak 2007; Cwynar, Cwynar 2002; Siudak 2001;
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Róaski 2001].
Logical and deduction methods rely on the financial analysis to assess the company’s financial
standing (quantitative and qualitative assessment, hierarchical systems), but they do not provide a basis
for comparative analyses [Siegel, Shim, Hartman 1995]. Empirical and induction methods do not
concentrate on one company, being an example of a comparative analysis based on statistical methods (an
analysis of the groups of companies which are threatened and not threatened). Depending on the number
of variables, these methods are referred to as one– or multivariate methods, and their main strength is
their effectiveness (the ability to identify threatened and non–threatened businesses) [Antonowicz 2009].
The use of these methods in EWS is conditioned by meeting the basic requirements related to their general
efficiency. The measures of effectiveness include the ability to detect threats, take action in due time,
ensure testing in stable conditions and determine the critical level (moment) of threat [Bartkowiak 1997;
Rogowski 1999].
The strategic area relies on gap methods, consistency, excess, deficit (comparisons of the pace of
growth in a given industry or sector), profitability matrix (based on the economic concept of value added
and relative market share), Argenti’s scoring model (financial and organizational areas, management
efficiency, accounting, weak signals), SPACE (developed by H. Rowe, R. Mason and K. Dickel), BSC –
Balanced ScoreCard (developed by R. Kaplan and D. Norton), REC – Risk Exposure Calculator (R.
Simons), or a system for detecting weak signals through peripheral vision (G.S. Day and P.J.H.
Schoemaker).
Insolvency – a destructive effect of crisis and failure to respond
An overt crisis, characterised by visible difficulties in corporate functioning, poses a threat to the
company’s economic existence. It is the last phase in which crisis can be overcome through taking
appropriate sanative measures, otherwise leading to insolvency. This condition usually results from a
long–term financial crisis – a smoldering crisis. A crisis which is not overcome in due time inevitably leads
to insolvency and bankruptcy [Zelek 2002]. More specifically, insolvency is a legal interpretation of the
company’s crisis from the point of view of insolvency and recovery laws in which the term insolvency is a
key concept. In a broad sense, insolvency is an economic phenomenon resulting from the entrepreneur’s
right to carry out independent activities and the acceptance of risk of losing that right, leading to
corporate insolvency (insolvency sensu largo and economic distress). It can be caused by economic or
financial factors, and it can be identified and assessed with the use of NPV (Net Present Value), which
translates into two types of this phenomenon [Wihlborg, Gangopadhyay 2001]. Insolvency as an economic
condition is referred to by some authors as bankruptcy to differentiate it from the legal term of insolvency
(in Polish law), which is not always consistent with the terminology of international law. Moreover, the
legal construct is a broader concept which, apart from insolvency procedures, also includes recovery
measures. Its objective is to help companies recover their ability to compete on the market.
Corporate insolvency is defined in different ways, and the term bankruptcy is often used interchangeably,
being currently referred to in literatures as insolvency or distress [Prusak 2011].
A. Zelek defines three main aspects of understanding the notion of insolvency: the legal aspect
(insolvency resulting from the company’s failure to meet its financial obligations, court judgments and
enforced satisfaction of creditors’ demands); the economic aspect (financial distress – difficulties related to
payments and/or company assets); the organizational aspect (bankruptcy proceedings) [Zelek, 2003].
Insolvency can also be viewed as a financial condition (lack of funds for debt servicing – closer to the legal
concept) or a process (deteriorating financial results – closer to the notion of crisis) [Nahotko 2003].
Moreover, deteriorating financial conditions do not necessarily imply insolvency or its inevitability.
Therefore, it is of vital importance to be able to define the moment in time when insolvency occurs.
The notion and occurrence of insolvency imply a certain contradiction. On the one hand, corporate
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functioning is based on the going concern principle – companies are not restricted in their activities in
terms of the time of their operations or the necessity or intention to cease their business activity or to
considerably reduce its scope. On the other hand, a capitalist economic system accepts the possibility of
business failure, thus ensuring a more effective allocation of resources. J.A. Schumpeter makes a very clear
statement: insolvency implies “creative destruction” – the destruction and elimination of companies
which do not create value but destroy it. As a result, better conditions are created for establishing new
companies [Schumpeter 1995].
E. Mczyska shares the view on the inevitable failure of ineffective and unrecoverable
companies, but she also recommends offering public support to those entities which are in the condition
of temporary crisis. Ineffective companies are the ones whose assets could be more profitable in
alternative business conditions (as a result of insolvency proceedings). Effective companies, on the other
hand, create greater value when they continue to carry out business operations (going concern), and they
deserve external assistance [Mczyska, Zawadzki 2006].
In conclusion, insolvency is closely related to, or results from corporate threats and crises. It is
widely discussed in economic theories, especially those which focus on corporate operations. A. Schwartz
identifies two major trends: the positive trends – they identify the correlations between corporate
insolvency and other fundamental economic categories (economic growth and its dynamics, demand and
supply, business cycles, etc.), and the normative trends – they seek new solutions for improving
insolvency procedures, and they focus on developing rules for rationalising this phenomenon [Schwartz
2005].
In a broader sense, insolvency should also be viewed in its macroeconomic dimension. It refers to
the insolvency of the particular nations as well as to the correlation between corporate insolvency and
business cycles. According to D. Appenzeller, one of the symptoms of deteriorating macroeconomic
conditions is the number of companies which file for bankruptcy. He treats it as a barometer of the
soundness of an economy and government policy [Hadasik 1998]. The results of research studies confirm
a correlation between the current economic situation and the number of business failures. This correlation
is much stronger in advanced economies than in developing ones due to a great number of disturbances
in weaker economic systems.
Methods for analysing threats to corporate functioning
An analysis of corporate crises is based on two measures: the percentage of insolvency proceedings and
the degree of going concern threat.
The degree of threat can be referred to corporate insolvency in an economic sense – a threat to the going
concern principle and insolvency threat (insolvency sensu largo). Apart from the economic approach, the
legal approach can be adopted (insolvency sensu stricto), i.e. insolvency proceedings stipulated by Polish
bankruptcy and recovery laws and opened by the courts of general jurisdiction against debtor companies.
The percentage of insolvency proceedings represents the relation between the number of such
proceedings and the number of companies (calculated per 10,000 entities).
An assessment of the degree of financial threats is based on the author’s financial threat and going
concern threat prediction model with the use of Firth’s logistic regression. The need for developing a
unique model results from the fact that the existing prediction models are not applicable due to their
structural deficiencies and restricted scope of applications, especially in terms of the size of training sets
which do not exceed several dozen companies filing for bankruptcy. An analysis of the entire sector of
non–financial organizations must be based on a different research tool.
In Firth’s logistic regression model likelihood function
is replaced by its modification:
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where represents diagonal elements of matrix , – data matrix, and W –
diagonal matrix whose –th diagonal element equals . The modification of
equation is identical with the modification of likelihood function , where
represents information matrix, while function is referred to as penalized likelihood function. The
above described approach, as compared with the maximum likelihood method, considerably reduces the
assessment burden, while trust levels are characterised by better probabilistic properties.
The research studies conducted over the period of several years on a large sample of logistic regression
models (one general and 3 specific ones) lead to unique results thanks to the application of innovative
specific techniques [Kaczmarek 2011]. The training set is composed of 426 insolvent companies and 1,936
solvent entities (selected with the use of case–control ”1 to 5” technique), belonging to 8 basic categories of
PKD (the Polish Classification of Activities), including production, service and trading companies.
Table 1. The construction elements of the estimated financial threat model
Model formula, assessment of parameters and transformation of ratios
Z 1 = (W 1 – 1,89)/1,09; W 1 – asset productivity ratio,
Z 2 = (W 3 – 0,39)/0,31; W 3 – self–financing ratio,
Z 3 = (W 6 – 0,47)/0,27; W 6 – short–term debt ratio,
Z 4 = (W 19 – 2,94)/13,46; W 19 – asset operating profitability ratio.
Note: model efficiency: sensitivity 82.4%, specificity 82.1%, AUC 0.894 (Area Under Curve – area under
ROC curve – Receiver Operating Characteristic).
Source: author’s research based on Kaczmarek (2011).
The measure resulting from the application of the model – a degree of financial threat – assumes values
within the range (0,100%). Higher values indicate a higher probability of insolvency in the period of one
year. It facilitates a quantitative description of the scale of changes of the phenomenon of insolvency in a
dynamic approach, comparing the degrees of threat in the particular categories and groups of companies.
The models developed so far and described in literatures do not have such properties.
A retrospective assessment of threats to corporate functioning in Poland
Three distinct periods can be identified in the Polish systemic transformation with regard to the
percentage of insolvency proceedings. The initial period of the transformation process is characterised by
a rapid increase in the number of insolvency proceedings in relation to a negative value of GDP growth
rates, which was positive again in 1992, while the number of insolvencies rose steadily. Undoubtedly,
such relations are due to the scope and character of changes resulting from the shift towards a new type of
economy.
The 1993–2008 period records three cases of the occurrence of the above described regularity: GDP growth
– decrease in the number of insolvency proceedings, lowered GDP growth – increase in the number of
insolvencies. The global crisis of 2008, resulting in an economic slowdown in Poland, disturbed the
hitherto recorded regularity. Apart from an economic recovery in 2010 and 2011 (GDP growth rate
changes: 3.8% and 4.3%, respectively), the percentage of insolvency proceedings increases (see Fig. 1). Q1
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2012 figures indicate an increase in the absolute and relative numbers of insolvent companies in Poland.
Considering the expected decrease in GDP growth rates in 2012 to the level of 2.5%, it is a pessimistic
scenario for the sector of non–financial companies in Poland (the sector accounts for more than 45% of
GDP and nearly 53% of total value added). The negative trend is likely to change in 2014, if the GDP
growth rate reaches the level of 3.2%.
Figure 1. Changes in GDP and the number of insolvency proceedings in Poland in 1990–2011
8.0%
450
400
3.0%
-2.0%
-7.0%
350
300
250
200
150
100
-12.0%
Changes in GDP (left axis)
Percentage of insolvency proceedings - per 10,000 entities (right axis)
50
0
Source: author’s research based on figures published by the Central Statistical Office, Warzawa, PontInfo
Ltd. Warszawa, Coface Poland Warszawa.
The monitoring of companies from the point of view of going concern and insolvency threats, based on
the estimated models and conducted since 2007, facilitates a multidimensional national and regional
analysis of their condition by core business (production, trade and services), size (small, medium and
large) and category of activity (PKD). The economic slowdown recorded since 2008 increases the degree of
corporate threats. A negative trend is recorded in service companies (a steady increase), trading
companies are characterised by higher levels of fluctuations, while production companies operate in more
favourable conditions (lower levels of financial threat) – see Fig. 2.
Figure 2. Degree of financial threat in non–financial companies in Poland by core business from the first
half of 2007 to the second half of 2011
28.00%
26.00%
24.00%
22.00%
20.00%
18.00%
16.00%
14.00%
12.00%
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260
Q1-2 2007 Q3-4 2007 Q1-2 2008 Q3-4 2008 Q1-2 2009 Q3-4 2009 Q1-2 2010 Q3-4 2010 Q1-2 2011
Total Production Trade Services

Source: author’s research based on figures published by the Central Statistical Office, Warzawa, PontInfo
Ltd. Warszawa, Coface Poland Warszawa.
Conclusions
The direct applicability of the value of measures to the cases of insolvency in an economic and legal sense
is conditioned by a clear identification of information conveyed by these measures. However, it does not
imply that there is no correlation between the measures in question. The figures related to going concern
and insolvency threats and insolvency proceedings are similar in the period from the first half of 2007 to
the first half of 2011. This is another argument confirming the effectiveness of the estimated model for
determining the degree of corporate insolvency threat. Tests for correlation in time series for the values of
both measures have been conducted to assess their mutual interdependence. In the case of the logistic
regression model for companies Spearman’s rank correlation coefficient stands at the level of 0.67. It
implies a strong and statistically significant correlation (P

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263

Challenges of Sustainability and Urgan
Development in Nigeria:
Reviewing the Millenium Development Goals
Gladys Ann Owobu
Department of Urban and Regional Planning
Esan South East LGA, Edo State
Keywords
Urbanisation, global challenge, erective environmental consciousness, planning and development.
Abstract
Sustainable urbanization is a global challenge. Rapid urban expansion without effective environmental
consciousness means that in virtually every urban center, a substantial proportion of the population is at risk from
natural and human-induced environmental hazards.
This paper examines some of the challenges of urbanization and sustainable development in Nigeria. An
assessment of the nation’s implementation of the United Nations Millennium Development goals is done. The paper
examines the goals pertaining to poverty alleviation and environmental sustainability and their application in
Nigerian urban centers.
It was discovered that none of the identified goals or targets has been adequately addressed. Therefore, the
Nigerian City is far from achieving Sustainable Development. The paper concludes by recommending some urban
planning strategies for achieving sustainable urban development.
The Business & Management Review, Vol.2 Number 2, July 2012
264

Incentives to encourage Socio-environmental
Responsible Corporate Actions: Willingness to
Pay for Non-use value of land – Case of Backpackers
in Fiji
Filipo Tokalau
School of Economics, University of the South Pacific,
Suva, Fiji Islands
Keywords
Land conflict, traditional societies, willingness to pay, communal use of land, backpacker tourism,
sustainability
Abstract
Land conflict is a perennial problem of development in Fiji. I-taukeis or Indigenous Fijians perceive land in
its entirety so they tend to expect more than just the payment to the economic or direct values of land. This study
examined the extent to which backpackers were willing to pay (WTP) for the communal use of land and in doing so
tended to vindicate that this type of tourists can also be socially responsible to improving the welfare of I-taukeis
especially in tourism-related businesses. Using a Mixed approach technique, the paper study found that a relatively
high proportion of backpackers were willing to pay for the communal use of land because they perceive it as
important to landowners welfare. The paper suggested that in the long term, WTP can provide a basis for
economically analyzing the use of passive values of environmental tourism resources which could facilitate the
industry’s growth and performance. In the interim, the study suggested that WTP for communal land use could also
alleviate potential land-related problems. In that regard it was considered that WTP would be an incentive to
encouraging socio-environmental responsible corporate actions towards business and development in Fiji. The study
had wider implications for land-scarce traditional economies in developing countries of the South Pacific and
elsewhere where this resource is owned as a communal resource.
.
The Business & Management Review, Vol.2 Number 2, July 2012
265

Testing the Export-led Growth Hypothesis for Sub Saharan
Africa Countries (SSA). A Panel Data Analysis
Francis Atsu & Samuel Adams
Ghana Institute of Management and Public Administration, Ghana
Extended Abstract
In the global economy, there is the perception that an economy exposed to international trade has the
opportunity to benefit from consumer markets, new technologies, FDI and consequently overall economic growth
(Araujo and Soares, 2011). Indeed, many economists claim that trade liberalization that leads to export expansion
promotes growth (Krueger, 1978; Balassa, 1978; Feder, 1983). It is not surprising that the success of many Asian
economies especially China has been attributed to an export-led strategy.
Economic theories indicate that the beneficial effects of trade occur through both static and dynamic gains
(Thirlwal, 2000). The static gains occur through the reallocation of resources from one sector to the other as
increased specialization based on comparative advantage takes place as explained by the classical trade theories of
Adam Smith, Ricardo, and Hescher and Ohlin. These trade creation gains, according to Thirlwal are once-for-all.
The dynamic gains, on the other hand, are associated with externalities related to exports, for example, the influx of
FDI, new technology diffusion and transfer, and higher productivity levels associated with economies of scale, which
continually shifts outward the production possibility frontier (Thirlwal, 2000; Agosin, Alvarez, and Bravo-Ortega,
2011). This paradigm is part of a consensus among economists about the benefits of economic openness, which has
been used to justify globalization (Palley, 2011). The claim is that trade encourages technology diffusion and
knowledge spillovers that contribute to faster productivity growth as suggested by the modern and new trade
theories (Grossman and Helpman, 1999; Helman and Krugman, 1985). Empirically, while some studies report that
export promote economic growth (Shiok et al., 2011; Bbaale and Mutenyo, 2011; Galimberti, 2009), others suggest
that it is growth that rather causes export exports (Nushiwat, 2008; Bahmani-Oskooee et al, 2005; Reppas and
Christopoulos ,2005)
and some studies also indicate no relationship exports and economic growth (Pazim, 2009; Palley, 2011; Mishra,
2010)
The discussion above suggests that the export growth relationship is an empirical one and most studies have
not considered the threshold effects of exports on economic growth Africa. Consequently, this paper adds to empirical
literature by investigating the export-led growth hypothesis and threshold effects of exports on economic growth for
selected Sub Saharan Africa (SSA) countries. The paper uses the Arellano and Bond(1991) difference (AB) and
Arellano and Bover (1995)/Blundell and Bond(1998) system (BB) generalized methods of moments (GMM) as panel
dynamic estimation techniques to study the long-run dynamics among exports growth and real output growth over
the period of 1970–2010.
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266

Cross Country Analysis of GCC Economic Risk
Hassan Mounir El-Sady,
Gulf University for Science and Technology, Kuwait
Vasilya Sultanova,
Australian College of Kuwait, Kuwait
Keywords
GCC, Country Risk, Economic Risk Analysis.
Abstract
In literature, Gulf Cooperation Council’s (GCC) economies are classified as Oil & Gas economy with the
same macroeconomics drivers. This paper provides the first empirical analysis of the GCC economies to explore the
drivers of each GCC country economic risk and how they differ from one GCC country to another. It examines and
compares the GCC country economic risk in a cross sectional analysis methodology over the period of January 2000
to December 2011. The six GCC countries; Kingdom of Saudi Arabia (KSA), Kuwait, United Arab of Emirates
(UAE), Qatar, Sultanate of Oman, and Bahrain are included in the study.
Results reveal that Kuwait and UAE, in term of economic risk, are the safe land for local and international
investment to be allocated in GCC due to their very high rating and stability of economic risk in comparison to other
GCC countries. Results also reveal that KSA, Qatar and Bahrain are considered to be countries with instable
country economic risk in comparison to other GCC countries. Findings also disclose that each GCC country is a
unique case in term of its drives of economic risk. Results indicated that while KSA’s economic risk is driven by
budget balance as percentage of GDP, Kuwait’s economic risk is driven by real GDP growth, and UAE’s economic
risk is driven by GDP per Head of Population; Qatar, Oman, and Bahrain economic risk are driven by current
account as percentage of GDP.
Introduction
The macro drivers of country risk received extensive interest of researchers reflecting a major
concern of country risk. This growing body of literature did not show enough interest to study GCC
country risk. Also, the international economic society is dealing with GCC countries as one Oil & Gas
economy with the same trends. The neglected efforts to explore the drivers of GCC country economic risk
and its subcomponents of macroeconomic factors did not attract enough international capital to be
allocated in the GCC. In contrast, GCC’s capital is increasingly allocated overseas.
The aim of this paper is to provide the first extensive empirical analysis of the drivers of GCC
country economic risk which has been neglected in literature, except KSA. It is designed to investigate the
macroeconomic drivers of each GCC country economic risk. Results from this study can assist both
international and local investors to allocate their capital in GCC by providing them a list of the important
and volatile macroeconomic factors that drive each specific GCC country economic risk. Also, GCC’s
policy makers can benefit from the attempt of this study to highlight the drivers of GCC’s economic
system that discourage international and/or local capital from being allocated in GCC and negatively
influence the country investment profile.
We argue that economic risk is driven differently across GCC countries. To prove this argument,
time series analysis is applied to explore and indicate the impact of macroeconomic factors on each GCC
country economic risk. These relationships will be investigated utilizing the Ordinary Lest Squared (OLS)
estimator on predetermined macroeconomic factors. The study is carried out over the period of January
2000 to December 2011 and capitalizes on the monthly published reports by the International Country
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Risk Guide (ICRG) of the Political Risk Services Inc. (PRS), the World Bank. This study includes all GCC
countries: KSA, Kuwait, UAE, Qatar, Sultanate of Oman, and Kingdom of Bahrain.
This paper is organized as follows. First part contains an introduction to the study. Literature
review of country risk and its impact on capital markets in developed and emerging markets will be
provided in the second part. Third part intents to set the problem definition, objectives, dependent,
independent variables, and methodology. Analysis and discussion of the findings will be presented in the
fourth part. Finally, fifth part is to conclude the study and to provide recommendations to policy makers
and investors. Limitations and further researches related to this study will also be highlighted in the last
part.
Literature Review
In their study, Vij and Kapoor (2007) investigated whether the economic, political and social
cultural factors have any effect on the Indian risk rating. Results show that the country risk in India is
driven by economic factors more than by the political risk. Vij and Kapoor (2007) indicated that different
investors do invest in the Indian capital market for its low political risk. Examining the magnitude of
political, financial, and economic risk and their components on a portfolio and direct investment
decisions, El-Sady et al. (2003 A, B, C) pointed out that country risk measures are correlated with equity
returns and capital allocation in emerging markets more than in developed markets. The developed
model by Clark and Tunaru (2001) that measures the impact of country political risk on investment shows
the ability to price country political risk. While the study of Flannery and Protopapadakis (2001) pointed
out that markets risk and return, therefore allocation of capital are driven by economic risk. Examining the
impact of country’s macroeconomic factors on the capital market return, Diamonte et al. (1996) shows that
political risk plays more important roles in emerging markets as a driver of capital markets returns than it
does in developed markets. Investigating the drivers of country risk and capital market development, El-
Sady et al. (2009) results show that country economic, financial, and political risk play crucial roles in
driving specific country risk.
In a multiple factors model, Vij (2005) investigated the effect of political and economic factors on
its country rating and found that country economic and political risk serve as good indicators of country
risk rating. El-Sady et al. (2003, B) provide strong evidences that country economic and political risk drive
Latin America emerging markets risk and return. This evidence was also supported by El-Sady et al. (2003,
A), results show that Middle East and Africa emerging markets risk are driven by different
subcomponents of their countries economic, political, and financial risk. The investigation of Chen et al.
(2005) for the relation between political risk and emerging markets risk revealed that political risk has
important rules in explaining emerging markets’ risk. Within the context of developed markets, El-Sady et
al. (2003, C) proved the impact of country risk on developed markets risk and return. Susan (2008) claimed
that country risk have received poor track record of investigation before the financial crises.
Clark and Radu (2001), Khoury (2003), and Dar-Hsin et al. (2005) examined the relationship
between country macro drivers of risk and capital allocation, they found that country risk can be used to
assist investors in their selection of countries for international capital allocation. The relationship between
the country risk and country return in emerging and developed markets was examined by Diamonte et al.
(1996), Harvey (2004), Vij (2005), and Hsin et al. (2005). All mentioned studies provide evidences of strong
relationship between country macro drivers of risk and country return. The relationship between return
and country financial risk was verified by Harvey (2004), and Hoti (2004). Country economic risk is found
to have a predictive power in the studies of Flannery and Protopapadakis (2001), Harvey (2004), Hoti
(2004), and Vij (2005).
As shown in literature review, GCC countries’ risk analysis did not receive attention in literature.
Only the study of Onour (2007) investigated the short and long-term drivers of GCC capital markets’
return volatility. It shows that the change in the oil price has its way to influence major macroeconomic
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268

indicators that influence GCC stock markets return. Therefore, this study considered to be the first in
literature to investigate empirically the drivers of GCC country economic risk to give an insight to
international, regional, and local investors when they allocate their capital worldwide. Also, it put a
roadmap for GCC’s policy makers to improve their economies’ attractiveness.
Methodology and Data
This paper investigates empirically the drivers of each GCC country economic risk to explore
whether it is formed differently by macroeconomic factors, or not. It argues that there is a causal
relationship between country economic risk and its macroeconomic factors. The independent variables
that serve the purpose of this study are macroeconomic factors. These factors are; GDP per Head of
Population (GDP/HP), Real GDP Growth (RGDPG), Annual Inflation Rate (AI), Budget Balance as a
percentage of GDP (BB), Current Account as a Percentage of GDP (CA/GDP).
The aim of this study is to provide an empirical analysis of country economic risk rating of all
GCC’s members. Time series analysis will be utilized for a comparative assessment of ICRG’s economic
ratings regarding GCC countries. Ordinary Least Squares (OLS) analysis is used to examine the
relationship between each GCC country economic risk and its sub-macroeconomic factors using monthly
rating for the period January 2000 – December 2011 provided by the ICRG. Measures are ex-ante measures
since it is reasonable to expect that they could have impact on the country economic risk and the capital
market.
This paper hypothesizes to answer the following major question: “Is country economic risk driven
by different macroeconomic factors across the GCC” The null hypothesis (H 0) and alternative hypothesis
(H a) are stated as follows:
H 0: GCC country economic risk cannot be explained differently across the GCC by its specific submacroeconomic
factors.
H a: GCC country economic risk can be explained differently across the GCC by its specific submacroeconomic
factors.
Also, this paper assumes that there is a causality relationship between GCC country economic risk
and its sub-macroeconomic factors. The H 0 and H a are stated as follows:
H 0: There is no causal relationship between GCC country’s economic risk and its sub-macroeconomic
factors.
H a: There is a causal relationship between GCC country’s economic risk and its sub-macroeconomic
factors.
We argue that GCC country economic risk can be explained differently across GCC countries
based on their sub-macroeconomic factors. Also, we argue that there is a causality relationship between
GCC country economic risk and its sub-macroeconomic factors.
The model examines the impacts of five sources of economic risk, GDP/HP, RGDPG, AI, BB, and
CA/GDP. In the model: each GCC country economic risk is a function of its sub-macroeconomic factors.
Firstly, I assume that Country Economic Risk (CER) is a function of its sub- macroeconomic factors
expressed by equation (1):
Secondly, the causality relationship between CER and its sub- macroeconomic factors expressed by the
following equation (2)
(1)
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269
(2)

Where is a standardized vector of country economic risk at time , is a
standardized vector of country GDP per Head of Population,
is a standardized vectors of
country Real GDP Growth, is a standardized vectors of country Annual Inflation, is a
standardized vector of country Budget Balance as Percentage of GDP, is a standardized
vector of country Current Account as Percentage of GDP, represent the parameters of the model, and
is a random error term. The standardized vector value is , where is a vector of observed
values, is a vector of mean values, and is a vector of standard deviations.
According to equation (2), all independent variables in the model's right side are non-random
variables, except the error ( ) term which assumed to follow a normal distribution with zero mean and
constant variance ( 2 ), while is a dependent variable with the same normal distribution of the
random error term ( ), variance ( 2 ), and the following mean:
It is assumed by the model that there is no correlation between the error ( ) term. The model
represented by equation (2) is to explore the covariance between GCC country economic risk and its submacroeconomic
factors.
Descriptive Data Analysis
According to ICRG rating systems, for any macroeconomic factors with 00.00%-49.5% of any
factor’s maximum points is considered as very high risk, 50.00%-59.50% is considered as high risk,
60.00%-69.50% is considered as moderate risk, 70.00%-79.50% is considered as low risk, and 80.00%-100%
is considered as very low risk. Tables (1) to (6) provide the descriptive statistics of each GCC country’s
economic risk.
Table (1) discloses the drivers of Kingdom of Saudi Arabia (KSA) economic system. It is ranked
with very low economic risk rating on average as measured by the mean of 43.18 points (86.3%). KSA’s
Std. deviation of economic risk is very high and counts for 4.31 points of expected value for the country
economic risk. The high Std. deviation is explained by the range of 14 points between the minimum of
34.5 and highest of 48.5 points. The very high Std. deviation of KSA’s economic risk is driven by the high
volatility of KSA’s budget balance as percentage of GDP (BB) and current account as percentage of GDP
(CA/GDP) with 2.02 points and 1.7531 points respectively. CA/GDP and BB have the highest ranges
among the rest of the factors that compose KSA’s economic risk with 5.5 points range for both of them.
Also, over the study period and in term of KSA’s mean economic risk rating, annual inflation (AI) and
GDP per head of population show moderate risk with mean rating percentage of 65.32% and 68.27%
respectively, driving KSA’s economic risk rating down.
Also, table (1) shows that GDP per head of population (GDPG/HP) and annual inflation (AI)
contribute onto the stability of KSA economic system since they have the minimum volatility measured by
the Std. deviation of 0.1901 and 0.5330 points among other economic risk factors. It is interesting to point
out that the low Std. deviation of KSA’s GDP/HP and AI are driven by the low and stable rating points
with the narrowest range of 0.50 points of all sub-macroeconomic factors, but not by high rating points of
these two sub-macroeconomic factors.
(3)
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270

Table (1): Descriptive Statistics of Kingdom of Saudi Arabia’s Economic Risk.
Macroeconomic
Factors
Rating
(Points)
Range
(Points)
Min.
(Points)
Max.
(Points)
Mean
(Points)
Mean
(In %)
Std.
Deviation
CER 50 14.00 34.50 48.50 43.19 86.38% 4.31
GDP/HP 5 0.50 3.00 3.50 3.41 68.27% 0.19
GDPG 10 4.00 6.00 10.00 8.14 81.44% 1.17
AI 15 0.50 9.50 10.00 9.80 65.32% 0.53
BB 10 5.50 4.50 10.00 8.24 82.36% 2.02
CA/GDP 15 5.50 9.50 15.00 13.60 90.64% 1.75
Source: Author calculation based on published data by ICRG for the period Jan. 2000 to Dec. 2011.
For the State of Kuwait, table (2) reveal that Kuwait has a stable economic risk with Std. deviation
of 1.83 points. This stability is driven by the high minimum rate of 42.5 points (85%), which disclose that
Kuwait was enjoying a very stable economic system with a very low economic risk over the study period.
The mean of the economic risk rating counts for 46.40 points (92.8%) allows Kuwait to be in the category
of very low economic risk. This stability of Kuwait economic system resulted in high rating and very low
economic risk is driven meanly by current account as a percentage of GDP with zero Std. deviation, where
Kuwait enjoy a very liquid economy with huge surplus. Also, GDP/HP, AI, and BB with Std. deviation of
0.32, 0.42, and 0.58 points respectively play major roles in positioning Kuwait economic risk as a very low
risk.
Although Kuwait is assigned a very low economic risk, it has a major volatility fluctuating issue
where GDPG has a Std. deviation of 1.32868 points with minimum rating points of 5.00 (50%). The stable
high annual inflation (AI) contribute positively to the stability of Kuwait economic risk with its very low
Std. deviation of 0.42 points, but negatively to the economic risk rating with mean of 9.39 (62.63%) which
categorize the AI as moderate risk.
Table (2): Descriptive Statistics of Kuwait’s Economic Risk.
Macroeconomic
Factors
Rating
(Points)
Range
(Points)
Min.
(Points)
Max.
(Points)
Mean
(Points)
Mean
(In %)
Std.
Deviation
CER 50 7.00 42.50 49.50 46.40 92.81% 1.83
GDP/HP 5 1.00 4.00 5.00 4.29 85.77% 0.32
GDPG 10 5.00 5.00 10.00 8.14 81.44% 1.33
AI 15 2.00 8.00 10.00 9.39 62.63% 0.42
BB 10 1.50 8.50 10.00 9.58 95.77% 0.58
CA/GDP 15 0.00 15.00 15.00 15.0 100% 0.00
Source: Author calculation based on published data by ICRG for the period Jan. 2000 to Dec. 2011.
Descriptive statistics reported in table (3) disclose the steadiness of United Arab Emirates (UAE)
economic system with its very low Std. deviation of 1.35457 points and mean of 45.74 points (91.48%).
These results rank UAE as one of the countries with very low economic risk. The very low economic risk
of UAE was driven by the CA/GDP and GDPG with mean of 14.6 points (97.34%) and 9.15 points
(91.49%) respectively, followed by BB and GDP/HP with mean of 8.49 points (84.90%) and 4.19 points
(83.85%) respectively. In contrast, annual inflation (AI), as shown in table (3) contribute negatively to the
stability of UAE’s economic system and economic risk rating with its high Std. deviation of 1.8 points and
low mean rating points of 8.49 of 15 points (58.01%).
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271

Table (3): Descriptive Statistics of United Arab Emirates’ Economic Risk.
Macroeconomic
Factors
Rating
(Points)
Range
(Points)
Min.
(Points)
Max.
(Points)
Mean
(Points)
Mean
(In %)
Std.
Deviation
CER 50 6.00 35.50 41.50 45.74 91.48% 1.35
GDP/HP 5 0.50 4.50 5.00 4.19 83.85% 0.17
GDPG 10 3.00 7.00 10.00 9.15 91.49% 0.88
AI 15 6.00 5.50 11.50 8.70 58.01% 1.80
BB 10 2.50 7.50 10.00 8.49 84.90% 1.04
CA/GDP 15 4.00 11.00 15.00 14.60 97.34% 0.88
Source: Author calculation based on published data by ICRG for the period Jan. 2000 to Dec. 2011.
As shown in table (4), Qatar can be classified as a country with instable economic system. The
economic risk rates of 48 points as maximum, 34.5 points as minimum, and 13.5 points as range resulted
into the very high Std. deviation of 5.27875 points. Thus, this would categorize Qatar as a country with
unstable economic system.
Table (4) indicates that Qatar is within the range of very low economic risk with its mean of 44.13
points (88.27%). This high rating for Qatar economic risk, showing very low economic risk, is driven by
GDP/HP and GDPG of 98.56% and 92.60% respectively. This result is supported by the fact that over the
last decade, Qatar is classified as one of the top world economies with the highest GDP/HP and GDPG.
Still, Qatar has a major volatility issue as noted in table (4). The volatility of Qatar economic risk is driven
by the CA/GDP which shows Qatari economy as illiquid economy. The high and stable AI is another
issue of concern that contribute positively to the stability of Qatar economic risk with its low Std.
deviation of 0.85 points, but negatively to Qatar economic risk rating with its mean of 59.47% as source of
high risk.
Table (4): Descriptive Statistics of Qatar’s Economic Risk.
Macroeconomic
Factors
Rating
(Points)
Range
(Points)
Min.
(Points)
Max.
(Points)
Mean
(Points)
Mean
(In %)
Std.
Deviation
CER 50 13.50 34.50 48.00 44.13 88.27% 5.28
GDP/HP 5 0.50 4.50 5.00 4.93 98.56% 0.18
GDPG 10 2.50 7.50 10.00 9.26 92.60% 0.83
AI 15 2.50 7.50 10.00 8.92 59.47% 0.85
BB 10 2.00 8.00 10.00 8.37 83.65% 0.78
CA/GDP 15 10.00 5.00 15.00 12.46 83.08% 4.21
Source: Author calculation based on published data by ICRG for the period Jan. 2000 to Dec. 2011.
According to table (5), Sultanate of Oman (Oman) enjoys a very low economic risk with mean of
43.27 points (86.56%). This high rating is driven meanly by CA/GDP and GDPG with mean of 13.11
points (87.43%) and 8.95 points (89.59%) respectively. Although CA/GDP is the main driver of high rank
of Oman’s risk rating with its mean of 13.11 points (87.43%), it is considered to be the main driver of
Oman economic system instability with its Std. deviation of 1.79 points.
Also and as shown in table (5), although GDP/HP and AI contribute to the stability of Oman
economic system as explained by their very low Std. deviation of 0.23 and 0.47 points respectively. They
effect negatively Oman economic risk rating as a result of their low mean of 62.88% and 65.22%,
respectively.
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Table (5): Descriptive Statistics of Sultanate of Oman’s Economic Risk.
Macroeconomic
Factors
Rating
(Points)
Range
(Points)
Min.
(Points)
Max.
(Points)
Mean
(Points)
Mean
(In %)
Std.
Deviation
CER 50 8.00 39.00 47.00 43.2788 86.56% 2.56359
GDP/HP 5 0.50 3.00 3.50 3.1442 62.88% 0.22762
GDPG 10 3.00 7.00 10.00 8.9596 89.60% 0.84469
AI 15 2.00 8.00 10.00 9.7837 65.22% 0.46616
BB 10 3.50 6.50 10.00 8.3269 83.27% 0.90245
CA/GDP 15 5.00 10.00 15.00 13.1145 87.43% 1.79259
Source: Author calculation based on published data by ICRG for the period Jan. 2000 to Dec. 2011.
Table (6) discloses that Kingdom of Bahrain economy was showing steady growth over the study
period with high mean of 9.17 points (91.68%) and low Std. deviation of 0.29 points. Kingdom of Bahrain
economy is ranked as one of the economies with very low risk on average as measured by the mean of
41.42 points (82.84%).
Table (6) shows that Bahrain enjoys very low economic risk with its mean of 41.4183 points
(82.84%). This very high rating, showing very low economic risk, is driven by GDPG of 9.17 points
(91.68%). The macroeconomic factors of CA/GDP, GDP/CA, and BB fall in the range of moderate
economic risk with their average points of 11.99 (79.94%), 3.59 (71.83%), and 7.06 (70.58%) respectively.
Also, table (6) shows that GDPG/HP, GDP, and AI contribute onto the stability of Bahrain’s economic
system since they have the minimum volatility measured by the Std. deviation of 0.35, 0.29, and 0.21
points among other economic risk factors.
Table 6: Descriptive Statistics of Kingdom of Bahrain’s Economic Risk.
Macroeconomic
Factors
Rating
(Points)
Range
(Points)
Min.
(Points)
Max.
(Points)
Mean
(Points)
Mean
(In %)
Std.
Deviation
CER 50 12.50 37.00 49.50 41.42 82.84% 4.56
GDP/HP 5 1.50 3.50 5.00 3.59 71.83% 0.35
GDPG 10 1.00 9.00 10.00 9.17 91.68% 0.29
AI 15 0.50 9.50 10.00 9.61 64.07% 0.21
BB 10 4.50 5.50 10.00 7.06 70.58% 1.85
CA/GDP 15 5.50 9.50 15.00 11.99 79.94% 2.35
Source: Author calculation based on published data by ICRG for the period Jan. 2000 to Dec. 2011.
Reported results by tables (1) through (6) conclude that GCC countries enjoy very low economic
risk. Kuwait is showing its safe economic environment with the highest rating of 46.40 points (92.81%)
among other GCC countries. Kuwait is followed by UAE, Sultanate of Oman, Qatar, KSA, and Kingdom
of Bahrain with mean rating of 45.74 points (91.48%), 44.13 points (88.27%), 43.27 points (86.56%), 43.18
points (86.38%), and 41.41 points (82.84%) respectively. In term of economic system stability, UAE is the
most stable GCC economy with low Std. deviation of 1.35 points followed by Kuwait, Sultanate of Oman,
KSA, Bahrain, and Qatar with Std. deviation of 1.83, 2.56, 4.3109, 4.56, and 5.27 points respectively.
Tables (1) to (6) evidence that GCC country risk is driven differently by its sub-macroeconomic
factors. It is evidenced that the very low economic risk of Kuwait, KSA, and UAE is driven by CA/GDP,
by GDP/HP in Qatar, and by GDPG in Sultanate of Oman and Bahrain. The common macroeconomic
factor that drives GCC economic risk is annual inflation (AI) which found to be the main driver of all GCC
country economic risk with its low rates. This explained by the fact that all GCC economies are pegged to
US dollar, therefore GCC inflation is imported through exchange rate. It is shown by tables (1) to (6) that
while KSA and Bahrain economic system instability are driven by BB, the economic system instability of
Kuwait is driven by GDPG, by GDP/HP in UAE, and by CA/GDP in Qatar and Sultanate of Oman as
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measured by Std. deviation.
In conclusion, shown results in tables (1) to (6) leads us to reject the null hypothesis that “GCC
country economic risk cannot be explained differently across the GCC by its specific sub-macroeconomic
factors” since they are explained and driven differently.
Summary and Analysis of the Empirical Results
In modelling the relationship between country economic risk and its components’ coefficients of
equation (2) is estimated for each of the GCC countries and reported in table (7).
Table (7) reports the results of the OLS estimation for the GCC counters’ economic risk. The
results in all the cases show a positive and significant relationship between country economic risk and its
sub-macroeconomic factors of GDP/HP, RGDPG, AI, BB, and CA/GDP. All results are significant at the
1% significance level. Moreover, we capitalized on the analysis of variance (ANOVA) to test the adequacy
of the model and to indicate the largest explanatory variables among independent variables.
Table (7): GCC Countries’ OLS Economic Risk Estimates
GDP/HP GDPG AI BB CA/GDP
Panel (A): 0.1934*** 0.3977*** 0.1434*** 0.7643*** 0.6562***
KSA Seq. SS 15.62 22.27 15.35 32.20 33.16
P-Value 0.000 0.000 0.000 0.000 0.000
Panel (B): 0.1728*** 0.7244*** 0.2268*** 0.3149*** N/A
Kuwait Seq. SS 21.54 66.36 9.36 5.74 N/A
P 0.000 0.000 0.000 0.000 N/A
Panel (C): 0.9711*** 0.113*** 0.1464*** 0.1281*** 0.1528***
UAE Seq. SS 99.59 1.25 0.01 0.91 0.597
P 0.000 0.000 0.000 0.000 0.000
Panel (D): 0.0334*** 0.1573*** 0.1608*** 0.1471*** 0.7976***
Qatar Seq. SS 54.81 22.75 1.81 13.13 10.51
P 0.000 0.000 0.000 0.000 0.000
Panel (E): 0.0888*** 0.3295*** 0.1818*** 0.3520*** 0.6993***
Oman Seq. SS 2.67 40.27 1.78 22.67 35.61
P 0.000 0.000 0.000 0.000 0.000
Panel (F):
Bahrain
0.0775*** 0.0641*** 0.0457*** 0.4046*** 0.5149***
Seq. SS 18.83 73.41 0.15 2.14 8.47
P 0.000 0.000 0.000 0.000 0.000
*** Refers to the 1% significance level.
The results for KSA reported in panel (A) of table (7) show that economic risk has a significant
positive relationship with CA/GDP which can explain 33.16% of KSA’s economic risk. It is followed by
BB and GDPG which can explain 32.20% and 22.27% of the Kingdom’s economic risk. Although GDP/HP
and AI have positive and significant relationship with KSA’s economic risk, they can explain only 15.62%
and 15.32% of the KSA’s economic risk respectively.
Also, results reported in panel (A) of table (7) indicate that a one unit increases in BB and
CA/GDP will improve the country economic risk rating by 76.43% and 65.62% of that unit respectively,
while a one unit increase in GDPG, GDP/HP, and AI will increase the economic risk rating by 39.77%,
19.34%, and 14.34% of that unit respectively. Moreover, the results indicate that the most influencing
source of the KSA’s economic risk is CA/GDP, followed by BB, GDPG, GDP/HP and AI.
Table (7) panel (B) reports the results of the OLS estimation for Kuwait’s economic risk. It reveals
that Kuwait economic risk has a significant positive relationship with GDPG which explains 66.36% of
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Kuwait’s economic risk. It is followed by GDP/HP which can explain 21.54% of Kuwait’s economic risk.
AI and BB have significant, but less positive relationship with Kuwait’s economic risk; they can explain
only 9.36% and 5.74% of Kuwait’s economic risk respectively. Reported results in panel (A) of table (7)
state that one unit increases in GDPG will improve Kuwait’s economic risk rating by 72.44% of that unit,
while a one unit increase in BB, AI, and GDP/HP will increase the economic risk rating by 31.49%,
22.68%, and 17.28% of that unit respectively. In term of the most influencing source of the Kuwait’s
economic risk, results indicate that GDPG which explains 66.36% of Kuwait economic risk is the most
influencing factor followed by GDP/HP which explains 21.54%, AI which explains 9.36%, and BB which
explains 5.74% of Kuwait’s economic risk. For CA/GDP, the model did not show any significant
relationship with the Kuwait economic risk since it is constant over the study period with zero Std.
deviation.
The results of UAE reported in table (7) panel (C) show that UAE’s economic risk has a significant
positive relationship with GDPG/HP, GDPG, AI, BB, and CA/GDP. Results indicate that GDP/HP is the
main driver of UAE’s economic risk where one unit increases in GDPG/HP will advance UAE’s economic
risk rating by 97.11% of that unit. GDPG, AI, BB, and CA/GDP are less important in advancing UAE’s
economic risk rating where one unit increase for any of them will improve the economic risk rating by
11.3%, 14.64%, 12.81%, and 15.28% of that unit respectively. Results indicate that the most influencing
source of UAE’s economic risk is GDPG/HP which explains 99.59% of UAE’s economic risk.
Qatar’s results reported in Table (7) panel (D) show a significant positive relationship between
Qatar’s economic risk and its sub-macroeconomic factors. Results reveal that GDP/HP has the highest
explanatory power of all Qatar’s macroeconomic factors; it can explain 54.81% of Qatar’s economic risk.
The GDPG has moderate explanatory power for Qatar’s economic risk; it can explain 22.75% of it. BB and
CA/GDP have low explanatory power; they can explain 13.13% and 10.51%, respectively, of Qatar’s
economic risk. Reported results in panel (D) of table (7) clarify that a one unit increases in Qatar’s
CA/GDP will advance the country economic risk rating by 79.76% of that unit, while one unit increase in
GDPG, AI, and BB will improve the economic risk rating by 15.73%, 16.08%, and 14.71%, respectively, of
that unit. Furthermore, results in panel (D) of table (7) indicate that the most influencing source of Qatar’s
economic risk is GDP/HP which explains 54.81%, followed by GDPG which explains 22.75%, BB which
explains 13.13%, CA/GDP which explain 10.51% of Qatar’s economic risk.
It is shown in table (7) panel (E) that Oman’s economic risk has a significant positive relationship
with GDP/HP, GDPD, AI, BB, and CA/GDP. The results suggest that one unit increases in CA/GDP will
improve Oman’s economic risk rating by 69.93% of that unit, while a one unit increase in BB, GDP/HP,
AI, and GDP/HP will improve the economic risk rating by 35.20%, 32.95%, 18.18%, and 8.88% of that unit
respectively. In term of the most influencing source of the Oman’s economic risk, results indicate that
GDPG which explains 40.27% of Kuwait economic risk is the most influencing factor followed by
CA/GDP which explains 35.61%, and BB which explains 22.67%. GDP/HP and AI have the lowest
influencing source of the Oman’s economic risk which can explain only 2.67% and 1.78%, respectively, of
Oman’s economic risk.
Panel (F) of table (7) shows that Bahrain’s economic risk has a significant positive relationship
with GDPG/HP, GDPG, AI, BB, and CA/GDP. Results indicate that CA/GDP and BB are the main
drivers of Bahrain’s economic risk where one unit increases in CA/GDP and BB will advance Bahrain’s
economic risk rating by 51.49% and 40.46%, respectively, of that unit. GDPG/HP, GDPG, and AI are less
important in advancing Bahrain’s economic risk rating where one unit increase for any of them will
improve the economic risk rating by only 7.75%, 6.41%, and 4.57% of that unit respectively. Results
indicate that Bahrain’s economic risk is highly influenced by CA/GDP and BB which can drive 51.49%
and 40.46%, respectively, of Bahrain’s economic risk.
The analysis of variance (ANOVA) reported in table (8) show that, at any level of significance, one
can conclude that economic risk of all GCC countries is driven differently by the five sub-macroeconomic
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275

factors included in the study.
Table (8): GCC ANOVA Analysis
Country Source DF SS MS F-value P-value
KSA Regression 5 132.041 5.760 3.25202E+1 0.000
Residual 132 0.002 0.000
Total 127 132.043
Kuwait Regression 5 132.000 5.750 2.73103E+1 0.000
Residual 132 0.000 0.000 2
Total 127 132.000
UAE Regression 5 132.000 5.750 6.74427E+1 0.000
Residual 132 0.000 0.000
Total 127 132.000
Qatar Regression 5 132.000 5.750 3.80450E+1 0.000
Residual 132 0.000 0.000
Total 127 132.000
Oman Regression 5 132.000 5.750 3.33507E+1 0.000
Residual 132 0.000 0.000
Total 127 132.000
Bahrain Regression 5 132.000 5.750 7.77423E+1 0.000
Residual 132 0.000 0.000
Total 127 132.000
Discussion and Conclusions:
This paper provides the first analysis of GCC country economic risk. The study utilized time
series analysis technique using SPSS to calculate the range, minimum, maximum, mean and Std. deviation
for each GCC country covering the period of January 2000 to December 2011. The OLS estimator is used to
study the behaviour of the macroeconomic drivers of each GCC country’s economic risk. The source of
data provided in the analysis is the International Country Risk Guide that offers quantitative measures for
each GCC country economic risk assessment on monthly basis. The study was structured to answer two
major questions in that regard, first one about the ability of each GCC’s country sub-macroeconomic
factors to explain the country specific economic risk. The second major question was to explore the casual
relationship between each GCC country economic and GDP per Head of Population (GDP/HP), Real
GDP Growth (RGDPG), Annual Inflation (AI), Budget Balance as Percentage of GDP (BB), and Current
Account as percentage of GDP (CC/GDP).
The descriptive analysis shows that null hypotheses are rejected, which means that country
economic risk formed differently form one GCC country to another in mean and Std. deviation as well as
minimum, maximum and range, results also shows that economic risk in GCC countries is driven by
different sub-macroeconomic factors from one country to another. The highest rating of country economic
risk was given to Kuwait by the ICRG which position Kuwait as a first choice for capital allocation in
GCC. Results show that Kuwait has the highest economic risk rating, lowest economic risk, of 46.40 points
(92.81%). In Regards to KSA, the largest GCC economy player, results indicate that it is not a safe home to
allocate investment among other GCC countries since it has the second worst economic risk before
Kingdom of Bahrain.
In conclusion, the null hypotheses which stated that there is no causal relationship between GCC
country’s economic risk and its sub-macroeconomic GDP/HP, RGDPG, AI, BB, and CC/GDP is rejected.
Therefore, one can say that there is a positive and significant causality relationship between GCC
country’s economic risk and its sub-macroeconomic factors. These findings give the country risk analysts
the opportunity to predict GCC country’s economic risk through its components and to know which
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subcomponents of GCC’s economic risk is more investigated for early prediction of GCC’s economic risk.
Also, reported results explore that GCC country’s economic risk is driven differently from one
country to another. Results indicated that while KSA’s economic risk is driven by BB, Kuwait’s economic
risk is driven by GDPG, and UAE’s economic risk is driven by GDP/HP; Qatar, Oman, and Bahrain
economic risk are driven by CC/GDP.
Research Limitation and Direction for Further Research
This paper planned to examine the macro-relationship between GCC’s country economic and its
Sub-macroeconomic factors, but not designed to include micro or related industries variables in the
prediction model.
Further research can examine the following; (1) the causal relationship between GCC’s composite
risk and its specific country economic, financial and political risk, (2) the predictive power of country
economic, financial and political risk of market return, (3) examine the linearity and nonlinearity of
country composite, economic, financial and political risk in GCC, (4) the relationship between country risk
and stock market capitalization and turn over, (5) the relationship between country risk and financial
system creditworthiness, and others.
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The Business & Management Review, Vol.2 Number 2, July 2012
277

How to transfer knowledge to your work
Wen-Hui Mico Yang & Yen-Ting Tim Lin
Hsiuping University of Science and Technology, Taiwan
Cho-Pu Vincent Lin
St. John's University, Taiwan
Keywords
Learning performance, transfer of training, e-learning, banking industry
Abstract
Recently, e-learning is becoming a real alternative to traditional classroom learning. Against this
backdrop, many banks in Taiwan are now interested in methods of improving the efficiency of their e-
learning-based training systems. In practice, it is believed that the ultimate purpose of e-learning is not
only to reduce costs, but also to drive business results. The best benefit is that training can be in any place
and at any time. Employees keep working as usual, but also take training courses during or after work.
However, no matter how good the training courses are, the result is most important.
Besides, along with the development of technologies and a concomitant change in learners’
attitudes, the evaluation of training efficacy has moved beyond the traditional assessing of trainees’
learning performance to examining the application of learning results in these same trainees’ day-to-day,
post-training task performance.
The quantitative methods employed revealed the extent of learning performance influence on
trainees’ transfer of training in business training. Through structural equation modeling (SEM), the result
showed a positive relationship between learning performance and transfer of training. The present study
prioritizes the two factors: satisfaction and learning effectiveness, in that order. Therefore, satisfaction is a
most influential factor of trainees’ learning performance.
The Business & Management Review, Vol.2 Number 2, July 2012
278

Enterprise Development
under Globalization and the New Economy Conditions
Andrzej Jaki
Department of Economics and Organization of Enterprises
Cracow University of Economics, Poland
Keywords
Enterprise development, globalization, new economy, enterprise management.
Abstract
The market economies of the end of the 20 th and the beginning of the 21 st centuries have been marked with
significant reordering of business priorities, being fairly visible in e.g. reorientation of enterprise strategies, the ways
of defining and ranking its objectives, as well as in establishing new criteria and principles of assessing enterprises’
functioning and effectiveness of their development. The end of the 20 th century brought about quite new means of
measuring the competitiveness on the international market, as dictated by the advancing globalization of practically
all spheres of life. In consequence, national economies started to be more interdependent, thus forming the global
economic system. Thinking and acting globally would not be possible without radical changes in the sphere of
communications and the information flow, including the development of information technologies and the advent of
the Internet. The growing importance of the new economy, together with changes in the role of particular enterprise
economic resources, has confirmed that, despite the fundamental and fixed business rules, the 21 st century
enterprises must be aware of new challenges which significantly influence the creation of developmental
opportunities for enterprises and the occurrence of threats within this scope. For only the proper understanding of
the essence of such changes and adapting enterprises’ operations to make them fit will allow, in the long run,
development and successful competing on globalizing markets to take place.
Introduction
The market economies of the end of the 20 th and the beginning of the 21 st centuries have been
marked with significant reordering of business priorities, being fairly visible in e.g. reorientation of
enterprise strategies, the ways of defining and ranking its objectives, as well as in establishing new criteria
and principles of assessing enterprises’ functioning and effectiveness of their development. Radical
changes have also been observed as far as competitiveness rules on the global market are concerned,
where clear borderlines between the interweaving branches can no longer be seen. The traditional system
of branches is currently overturned and new hybrid branches are emerging. They integrate the products
of traditional, so far, distinct branches which had their own separate markets and integrated value chains
(Obój 2002). In these circumstances the evolutionary process of new business rules appears to be
something natural, a simple consequence of developing new branches, accelerating creativity, adopting
technological innovations, and of the omnipresent information technology revolution. In consequence, it
leads to the development of new means of communication and an increase in the significance of intangible
assets in the operations of enterprises, which is nowadays characteristic for so-called new economy
constituting in its essence another stage of historical economic development, following the industrial
revolution and the scientific and technical revolution. It is accompanied by the processes of the
progressing globalization and internalization of economic activity.
The enterprise development and objectives of its operations
Survival and development are the most common objectives of enterprise operation, the former
being, so to speak, the necessary condition to achieve other, more or less clearly defined aims.
Nonetheless, the enterprise sole striving for existence against turbulent changes of the environment and
growing competition might, in fact, result in its gradual decline. Taking the long view, an enterprise
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should focus on the development, the aim of which be a kind of secondary enterprise management
(Wdzki 2003). For it sounds logical to say that while aiming at survival, the enterprise should also aim at
its development (Marcinkowska 2000).
The effects of an enterprise development, as diverse as different are the aspects of its functioning,
may also be materialised through meeting the demands of particular interest groups - owners, managers,
creditors, co-operators, competitors, local communities and the state. In this context the concept of,
among others, “stakeholders” has been conceived, viewing business as an integral part of a society in place
of isolated, purely academic domain of economics. The stakeholders’ expectations are naturally
diversified, as shown in the Table 1.
Table 1. Enterprises’ stakeholders and their objectives
Stakeholders
Objectives
Owners maximization of the enterprise value
dividends
Managers remuneration
profit sharing
other benefits
Employees remuneration
other benefits
employment guarantee
Creditors repayment of loan with interests
attractiveness of an investment
Co-operators cheap and regular delivery (recipients)
expensive and regular purchases
(suppliers)
meeting needs
Competitors increasing the market
Local communities revenues from taxes and charges
guarantee for the future
supporting education, culture and
recreation
natural environment protection
The state revenues from taxes and charges
common wealth
Source: own study based on: (Marcinkowska 2000) and (Wdzki 2003).
The shareholders’ objectives, as diversified above, may lead to the conclusion that taking into
consideration and balancing individual objectives of different groups are barely possible. Yet, it should be
strongly emphasised that creating and increasing an enterprise value do not stand in contradiction to
other groups’ interests – value increased for owners does not have to be built up at the cost of all other
shareholders. Quite the reverse, the financial success of owners sets the conditions favourable for the
remaining parties to benefit from the value growth. It is thus the efficient enterprises that provide new job
vacancies and financial incentives for employees, pay higher taxes and which are reliable and desirable
clients of banks, as well as good contractors for co-operators. On this account, building up the enterprise
value is currently viewed as the most universal and thorough criterion to measure the effectiveness of a
given enterprise performance, and when taken as the primary objective, makes the capital owners
maximise their profits in the most comprehensive manner.
In effect, the long term enterprise functioning depends on financial interactions within all people
and subjects related to the enterprise. Thus accordingly, a universal model of building up the enterprise
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value should be based on balancing various aims of different interest groups, naturally by using suitably
chosen instruments. The instruments should be selected resultant of the analysis of specific stakeholders’
different motivations and the possibility of correlating them (McTaggart, Kontes & Mankins 1994).
The necessity of establishing effective relationships between enterprises’ owners and managers, as
well as with their other interest groups, led to the controlling system of the enterprise operations to be set
up. The control kept by stakeholders is currently termed “corporate governance” for, on the one hand, it
provides proprietary control while on the other one, it creates the mechanism of integrating its individual
stakeholders.
The analysis so far has proven that looking at the enterprise functioning and objectives from the owner’s
point of view highlights the financial model of the enterprise, characterised by its major financial
objective, that is, maximisation of its value. A systemic model, in turn, agrees with the concept of meeting
the aims of all interest groups, and is based on a relatively autonomous system, thus dependant on
external, market-related factors (contractors, local communities), and on the formal and legal
infrastructure (the state) (Bochenski 1987). Revealing the close connection between the enterprise
functioning and objectives, and its immediate environment may help to advance a thesis about a
considerable social responsibility on the part of the enterprise. This responsibility can be examined in four
different dimensions concurrently, i.e. economic (aiming at an enterprise growth), ethical (considering the
effects of an enterprise functioning viewed from the social norms perspective), sociological (creating new
job and staff training) and ecological (considering possible side effects of an enterprise operation)
(Adamczyk 2009).
Globalization processes and the enterprises’ functioning
The end of the 20 th century brought about quite a new means of measuring the competitiveness on
the international market, as dictated by the advancing globalization of practically all spheres of life – from
economics, law and politics, to patterns of consumerism and culture. In consequence, national economies
started to be more interdependent thus forming the global economic system (Rojek 2012). Growing
openness of the national economies together with developing unprecedented capital world-wide links
changed trading, which has ceased to be international and begun to resemble more regional one, within
the triad of the European Union, North America and Asia-Pacific markets, hosting subsidiaries, divisions
and sister companies of large international firms (Komiski 1999). This triad has gathered roughly 90%
of high value-added production and trade of all goods and services (Obój 2002). For the crucial feature of
the globally functioning enterprise is flexibility and the ability to relocate its resources quickly, the
products of the given enterprise are no longer limited to a local market, but can be marketed everywhere.
Globalization, associated with supranational view of the social, economic and political processes,
as well as with growing penetrability of borders of any kind, appears to be the predominant way of
thinking and functioning for the 21 st century economies (Borowiecki 2011). The origin and foundation of
globalization can be traced back to the diversified processes whose fragmentary effects essentially
constituted the causative factors and driving forces of the globalization, as presented in Table 2.
Table 2. The globalization origins and their effects
Globalization origins
Fragmentary effects
1. The processes or deregulation, increase of external and internal competition,
liberalisation, deetatization and rising demands in the realm of efficient
privatization of economies
management
2. Increasing openness of economies and facilitating cash flow,
abolition of tariffs
growth of capital mobility
growth of direct foreign investments,
establishing foreign capital liaisons,
setting up transnational corporations,
providing more possibilities of multiplying capital,
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growing investors’ demands
3. Intensifying the processes of mergers dominating role of institutional investors in
and takeovers
ownership structures of enterprises
4. The change in man’s role in an the increasing importance of intellectual capital,
enterprise functioning
formulating and advancing the concept of
knowledge management.
5. The development of information accelerating the flow of goods and cash,
engineering and technologies extending and accelerating information access.
Source: own study based on: (Dziura & Kaczmarek 2003), (Flejterski & Wahl 2003), (Penc 2003) and
(Perechuda (ed.) 2005).
Besides general origins and determinants of globalization presented in Table 2, there are also
cultural, psychological and political, increasingly important, idiosyncratic aspects, peculiar to different
countries and regions. For this instance, in post-communist countries all actions directed at releasing the
market mechanism to make it freely influential, and at creating the conditions for entrepreneurship to be
developed both domestically and abroad, found a particularly fertile ground and keen supporters
(Kozu-Cielak 2005).
Thinking and acting globally would never be possible if not for far-reaching innovations in the
realm of communication and information exchange, including information technologies and the Internet.
The development of information and computer technologies and engineering has fostered the products’
and capital’s quicker flow, enhancing the quality, quantity and the access to the information as such.
Consequently, the communication on the line: enterprise – investor or, in other words, enterprise –
owner, has been largely facilitated and new standards have been set, raising new possibilities in the
realm of competitive advantage as derived from knowledge management systems and recent information
technology achievements. For it is knowledge, regarded as a distinct enterprise asset, that constitutes the
primary source of competitive advantage on the field of the 21 st century economy. What is more, skills
acquired by employees, during their professional careers rather than in the process of school education,
may be viewed as a unique production factor (Dobija 2003). Through well managed knowledge an
enterprise may raise its competitiveness and set the conditions to make the knowledge its market value as
well.
The proper interconnection of the information technology achievements, the modern production
and distribution, and knowledge management systems helps to develop, on a massive scale, customized
customer service aimed at almost perfect meeting of customers’ expectations. Furthermore, it results in
optimising reserves, effective use of employees’ forces and economic reserves of enterprises often
scattered around the world.
“The new economy” – information revolution
The growing significance of intangible enterprise assets, such as knowledge and intellectual
property, was crucial for the coinage of the term “the new economy”, closely related to the development
of new telecommunications media, the Internet and the advancing processes of globalization. F. Krawiec,
in his thorough description of the new economy features, repeats after some American authors who state
that “the new economy of the turn of the 20 th and 21 st centuries is the economy which derives from
changes produced by responding to the application of technological innovations and new business
practices, and to growing global competitiveness – the changes aiming at considerable and stable
productivity growth” (Krawiec 2005). The new economy, understood this way, is in fact a further step in
the history of economic development, placed after the eras of the industrial and scientific, and
technological revolutions. The unprecedented dynamics of economic development, as observed in many
countries is, in the first place, the effect of human studying and employing their inventions and thus
making many physical reserves more and more obsolete (Krawiec 2005).
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The absolute indicator of the new economy enterprises’ development is the Internet, which, on the
one hand, has enabled the free global communication and quick flow of information with an easy access
to it, on the other hand, started to be the business and source of income for enterprises in itself. Hence a
whole lot of the Internet-service firms, companies operating in “e-business” or “e-trade” sectors, online
banks, and even some universities which offer education through “e-learning”. The Internet logic, based
on unrestrained, standardised and affordable connections, makes the distance between its users barely
significant. The Internet facilitates coordination of all types of logistic chains, which not only enables to
lower costs, offering cheaper products, but also makes the logistic systems even more reliable and capable
of meeting individual needs of particular customers (Obój 2002).
The immediate effects of developing and popularising the Internet also pertain to the growth of
competitiveness, since it offers great possibilities of the information access, extensive infiltration of
recipient and supplier markets, allowing to carry out suitable analyses. The Internet has become the motor
of globalization, revealing its essence not only in simple crossing the borders, developing international
trade or growing importance of transnational corporations, but also in breaking the bonds of material,
financial and information flows.
Enterprise management under globalization
The globalization of markets, products, technologies, legal regulations and organisational culture
requires a different approach to the enterprise management, enterprise objectives and strategies, as well as
to information bases employed to assess the enterprise functioning. Thus the processes of globalization
produce new challenges for enterprises to be efficiently managed in the changed environment. The
increasing activity of the owners of global enterprises has caused more emphasis to be put upon the
enterprise effectiveness. Perceived as financial profits of the owners, and in the present external and
internal conditions, the effectiveness can be accomplished only through appropriate management tools
and instruments.
The proprietary control is effective when it generates considerable profits from ownership right.
The interactions between enterprises and their owners vary, depending primarily on ownership types,
which in turn, imply different sorts of interdependence between enterprises’ owners and their managers.
The development of enterprises in this context has been related to the following processes:
separating ownership from enterprise management, that is abandoning a classic model of
privately-owned enterprise (Rappaport 1986);
dominating ownership structures of enterprises by so called “new owners”, that is
institutional investors, such as: banks, investment funds, retirement funds, insurance funds
and venture capitals (Pernsteiner (ed.) 2001);
advancing internationalisation of business activities, closely related to the processes of
globalization (Borowiecki 2011).
In these circumstances, a type of an enterprise, as derived from the classification of an ownership
title, an owner, the enterprise autonomy and its objectives, is, apart from a legal form, the crucial element
of the enterprise management. The economic development processes and changes in conditions
determining enterprises’ functioning have evolved, throughout many years, new types and varieties of
ownership, as presented in Table 3.
Table 3. The evolution of types and determinants of the enterprise’s ownership
Ownership type
Determinants
Classic privately-owned enterprise The correlation of ownership and management –
entrepreneurial capitalism
Non-standard privately-owned enterprise Separating ownership from management –
managerial capitalism
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Non-standard privately-owned enterprise Separating ownership from management, the
prevalence of institutional enterprise owners –
investor capitalism
Semiprivate enterprise
The prevalence of the state or local government in
the enterprise ownership structures, creating
collective enterprises and employees-stock
companies – central - and self-government
capitalism.
Non-standard privately-owned enterprise Separating ownership from management,
politicising private enterprises, growing influence
of external stakeholders – stakeholders capitalism
(economy)
Non-standard privately-owned enterprise Separating ownership from management,
prevalence of transnational corporations – global
investor capitalism.
Source: own study.
As it transpires from the above table, globalization processes have marked the evolution of
various types of the enterprise ownership, introducing a new category, that is one of “global investor
capitalism”.
The characteristics of different types of ownership demonstrated above, show that effective
management of enterprises requires suitably applied instruments, depending on a specific type, in order
to achieve the objectives and improve proprietary control. The instruments cover:
creating the system of active Corporate Governance, including proprietary supervision;
implementing the concept of Value Based Management;
creating motivation systems, related to the processes of increasing enterprise value;
employing a variety of tools for assessing enterprise functioning, among others through the
prism of creating its value.
The development of tools of the enterprise effectiveness assesment
In the new economy circumstances the enterprises’ development may be accomplished only if
tangible assets, i.e. information, modern technologies, organisational solutions, and intellectual capital are
successfully exploited. Hence the necessity of employing new measuring tools for effectiveness
assessment. Together with suitably utilized accounting and market information, they would allow
measuring the processes of the enterprise value creation by referring to factors, very often ignored in
traditional systems of financial reporting.
Financial reporting, being the primary source of accounting information, is the product of
bookkeeping and the final phase of the financial accountancy cycle. The financial report is drawn on the
basis of numerical information taken from account books of a given enterprise which illustrate both its
capital and assets, as well as financial results of its operations. It goes without saying that the financial
depiction of the enterprise, as based on information rendered in the financial report, reflects the
accountancy procedures deriving from the legally binding law regulations. Nonetheless, despite the law
regulations evolving and complying with entrepreneurial changes, the accounting information, as an
element of the management process, is highly insufficient. To complete a thorough and objective
evaluation of the enterprise effectiveness value creation activities, the market information is necessary,
giving on the one hand, the proper view of the enterprise from the capital market’s perspective, on the
other, revealing macroeconomic conditionings. The market information comprises the information on
forming the enterprise market value, as well as the information on interest rates which are the parameters
of the management process and the enterprise value creation assessment processes. By this reason, the
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proper evaluation of the enterprise effectiveness may be enriched by out-balance-sheet factors, which very
often have an essential, if not decisive effect upon the pace creating its value.
Employing various out-balance-sheet information in the enterprise management has also largely
influenced the evolution of financial analysis system, that is one of the management tools. For from the
historical perspective, the system of enterprise functioning assessment has steadily progressed, also as far
as paradigms of the value-measuring and the information used during the assessment are concerned
(Ehrbar 1998). The changes have consisted in reducing the role of tools and measures based on financial
and accounting quantities for the benefit of measures deriving from market quantities, more promptly
reflecting the processes of the enterprise value creation. And since it has been proved that analyses and
assessments employing the measures solely based on classic accountancy rules are rather unreliable and
highly inadequate (Stewart 1991), the market information has obviously been ranked higher. Table 4
depicts the above mentioned evolution of the measures employed in assessing the enterprise effectiveness.
Other conventional time intervals presented in this table (1920s, 1970s, etc.) show the development of
effectiveness and the scope of information necessary to be used by indicating new assessment tools that
were started to be commonly used in a given time interval.
Table 4. The evolution of the enterprise effectiveness assessment
Years Tools of the enterprise
Scope of information
effectiveness assessment
1920s Du Pont model
Book information
ROI
1970s EPS Book information
P/E
Market information – financial
Book information
1980s ROE
Book information
ROA
CF
Tobin’s Q
Market information – financial
Book information
1990s EBITDA Book information
CFROI
TSR
Market information – financial and non-financial
Book information
BSC
EVA
MVA
2000s VCI
VA/IC
Market information – financial and non-financial
Book information
ROI – return on investment,
EPS – earnings per share,
P/E – price-earnings ratio,
ROE – return on equity,
ROA – return on assets,
CF – cash flow,
EVA – economic value added,
MVA – market value added,
EBITDA – earnings before interest, taxes and depreciation,
CFROI – cash flow return on investment,
TSR – total shareholder return,
BSC – balanced scorecard,
VCI – value creation index,
VA/IC – value added of the intellectual capital.
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Source: own study.
Conclusions
The processes of globalization and the popularization of the achievements of the new economy
have posed new challenges to enterprises and created new opportunities for their development. Evolving
types of enterprise ownership, changes in the character of their owners and in relations between them and
executives managing enterprises, with the simultaneous strive of the owners at exercising power, are the
reason for which efficient management leading to the realization of the goals formulated at the beginning
requires the use of adequate methods and and instruments. An accompanying increase in the significance
of the new economy, and a related change in the role od individual kinds of economic resources of an
enterprise prove that, regardless of the awareness of new challenges posed to them by changes
undergoing in their environment, it is necessary for enterprises to adjust to fundamental and invariable
rules of conducting business. The rules are inherently related to an appropriate definition of business and
conditionings of conducting it, a necessity to generate profit and maintain balanced cash flow, as well as a
need to use human potential properly. Following the mentioned rules is a necessary condition for the
effective enterprise development, and through it, for the effective multiplication of its market value.
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286

Innovations in Enterprise Development Strategy
Tomasz Rojek, PhD
Cracow University of Economics, Poland
Keywords
Innovations, enterprise development, goals of enterprise activity, strategy of development, development
management.
Abstract
The environment of enterprises functioning in the market economy, through changes constantly undergoing
in it, keeps managing units in the state of constant stress and readiness to react to the effects of these changes.
Sensitization of an enterprise to changes may be very diverse and complex. It basically depends on the power of these
changes, the position of an enterprise on the market and the implemented strategy based on a vision of the future
which explains the sense of the changes and sets directions for its activity. As a result, entities functioning in the
market economy, regardless of their size or the industry in which they operate, ownership forms or the way they are
organized, should undertake developmental ventures as a way of flexible adaptation to market conditions.
Thus, developmental strategies of enterprises are closely connected with innovative and research and
development activities of the state, its sectors, they also serve the realization of certain social and economic goals
significant for the country and the society. Enterprise developmental activities consist in works related to a number
of scientific, technical, organizational, financial and commercial activities whose aim is to develop and implement
new or significantly improved products and processes. Some of these activities are developmental in themselves,
whereas others may not contain an element of novelty but are necessary to develop and implement innovations.
Developmental activity may be conducted by the enterprise itself on its own premises, or it may consist in acquiring
goods, services or knowledge from external sources. Achieving competitive advantage is performed not only through
achieving specific features of a qualitative or quantitative character but often by establishing cooperation, even
between competitors, which involves various institutions, bringing about faster and more effective exchange of
knowledge and contributing to an improvement of the competitive position of all interested parties.
Thus, the paper will present innovations as one of the basic determinants of enterprise development with the
consideration paid to their kinds, as well as results and barriers to their implementation. Then, the role, goals and the
exemplification of innovations in enterprise development strategy will be presented.
Introduction
The environment of enterprises functioning in the market economy, through changes constantly
undergoing in it, keeps managing units in the state of constant stress and readiness to react to the effects
of these changes. Sensitization of an enterprise to changes may be very diverse and complex. It basically
depends on the power of these changes, the position of an enterprise on the market and the implemented
strategy based on a vision of the future which explains the sense of the changes and sets directions for its
activity. As a result, entities functioning in the market economy, regardless of their size or the industry in
which they operate, ownership forms or the way they are organized, should undertake developmental
ventures as a way of flexible adaptation to market conditions.
The development of an enterprise also results from internal conditionings, natural needs of the
enterprise itself. Every economic unit which comes into existence with a view to its development, tries not
only to keep its existence as long as possible, but it aims at constant development and an increase in its
size and structure of its activity. Thus, enterprise development arises both from external conditionings
related to a necessity to meet newer and newer challenges of the environment, and from its natural,
internal needs. These two areas, integrally linked to each other, constantly push the enterprise to develop
from the very first moment of its establishment, as well as to the permanent process of development
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287

management.
Enterprise development management consists in prolonging the period of positive changes
undergoing in the enterprise and shortening the time of negative changes or its complete elimination.
Therefore, it is activity which always depends on the specificity of the situation in which the organization
currently is, on the strengths and weaknesses possessed by it, and on chances and threats, and
possibilities to avoid them.
Enterprise development is a complex process of changes. It is shaped by conditionings which,
partly, create a set of determinants of enterprise development. In most general terms, they may be defined
as instruments, objects or processes designating (determining) the development of an enterprise and
influencing the development directly or indirectly. At present, innovations, being a significant element of
competitive struggle and the fundamental component of the strategy of well-managed enterprises, the
ones which take both offensive actions consisting in entering new markets, and defensive actions
protecting them against the threat from potential and real competitors, are considered one of the
fundamental determinants of enterprise development. Developmental strategies of such enterprises
characterize with so-called innovative dynamism which is understood as opening to novelty, constant
search for new ideas, concepts and solutions, followed by their implementation.
Therefore, developmental strategies of enterprises are closely connected with innovative, as well
as research and development activities of the state, its sectors, they also serve the implementation of
certain social and economic aims, which are important to the state and the society. The developmental
activities of an enterprise are made of works connected with a number of scientific, technical,
organizational, financial, and commercial activities whose aim is to develop and implement new or
significantly improved products and processes. Some of these activities are developmental in themselves,
whereas others may not contain an element of novelty but are necessary to develop and implement
innovations. Developmental activities may be conducted by the enterprise itself on its own premises, or it
may consist in acquiring goods, services or knowledge from external sources. Gaining competitive
advantage is performed not only through achieving specific features of qualitative or quantitative
character, but often by establishing cooperation, even between competitors, which involves various
institutions, bringing about faster and more effective exchange of knowledge and contributing to an
improvement of the competitive position of all interested entities. Then, transfer of knowledge takes place,
networks of connections form, which strengthen mutual cooperation contributing to the growth of
competitiveness and innovativeness of enterprises. Thus, an interest of contemporary enterprises in
innovations is a consequence of treating knowledge as a factor of enterprise development. Enterprise
development should be realized taking into consideration success factors shaped on the basis of
knowledge possessed and developed by the enterprise. While implementing the assumptions of
development special attention should be paid to intellectual capital including knowledge, experience
used, organizational technologies, relations with a costumer, professional skills. This capital is identified
with knowledge capital. Knowledge-based management, comprising innovation, information and human
capital management is a source of permanent and distinguishing competitive advantage on individual
stages of its development, it is focused on long-term development through the processes of creation,
codification and transfer of knowledge.
Development in the hierarchy of enterprise goals
Survival and development continue to be the most general objectives of enterprise activity. The
first of these objectives is in a sense a prerequisite for the implementation of others, more or less minutely
formulated goals. However, the very existence of the enterprise, operating in the conditions of turbulent
changes of the environment and increasing competition, would result de facto in its slow languishment
(Marcinkowska 2000). Therefore, taking into consideration a long-standing perspective, it must aim at
development and this strive constitutes a kind of a secondary goal of enterprise management (Wdzki
2003). Thus, it is logical to say that while fulfilling the aim of survival, an enterprise must also be
development-oriented (Marcinkowska 2000). Nowadays, not only an increase in the significance and
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influence of shareholders and other stakeholders on enterprises is visible, but also a necessity to ensure
agreeable coexistence and permanent balance among various interests of individuals, groups,
organizations, local and central administrative bodies may be noticed.
Traditionally, development was identified with the size of an enterprise, resources of its factors of
production, the size of production, etc. Requirements of the market are the reason for which development
is perceived through qualitative changes, expressed in the changes in enterprise structure and its
effectiveness. It is a process of transformations, changes, passing to states, forms which are more complex
or more perfect in some respects. In a broader context, development is also a process of the transformation
of economic, social, political and mental structures which cannot be performed in a short time (Jakubów
1999).
A necessity of enterprise development is first of all imposed by external conditionings. Flexible
adaptation to changes undergoing in the environment of the enterprise gives grounds for its systematic
development understood as a continuous and far-reaching process. An organization’s survival and
development requires undertaking numerous procedures and measures enabling the maintenance of
long-term consistency between activities of the organization and the environment in which it has to
function (Brózda 2007). The enterprise is focused on satisfying the needs of the environment, and these
become more and more sublime and difficult to meet (Gabrusewicz 1996). In order to adapt to the
changing environment, it has to develop all the time. By decreasing an ability of the enterprise to win
resources it needs (human, material, financial ones), or to manufacture and launch its products or services,
every factor of the environment becomes an obstructing factor, and at the same time it is a power
triggering certain change influencing the way of conducting business and managing the enterprise (Penc
1999). These factors are the reason for which it is necessary to look for most efficient methods and tools of
enterprise functioning in order to increase its competitive advantage which could grow as much as the
enterprise would be more efficient than its competitors and as much it would satisfy social needs. In other
words, the competitive position of the enterprise, its effectiveness depends on the environment. Thus, all
the external factors impose certain changes which may be additionally stimulated by internal causes.
From this perspective, enterprise development is interpreted as a process of broadly understood
qualitative changes, discussed from the holistic (comprehensive, global) point of view. The process runs
over a specific period of time and may have purposeful or random, progressive or retrograde,
autonomous or forced, continuous or leap character. Changes of qualitative character, identified with
enterprise development, are simultaneously accompanied by an increase in the number of assets
possessed by the enterprise, as a result of which the scale of the activity conducted by it should increase,
and so should its value. Alongside the process of enterprise development, the growth of its abilities to
influence the external environment should also proceed. Hence, the notion of enterprise development
should be broadened by “changes in the systems of enterprise and (controllable) environment, ensuring
the achievement and maintenance (as well as an increase) of competitive advantage to the enterprise”
(Piercionek 1996). It should be accompanied by the growth (or at least keeping the existing) market
shares, as well as the diversification of the structure of the conducted activity because the development of
an organizational system is understood not only in the categories of an increase in the efficiency of its
functioning but also in the preservative aspect, thus, retaining the existing efficiency in the changing
conditions (Brózda 2001). It is not only a disclosure of potential abilities lying in the enterprise but also a
change of states resulting from an inability to keep the existing way of functioning
(Blauberg/Sadowski/Judin 1973).
Therefore, development as a guiding goal of an enterprise whose need results from natural
internal strives of every enterprise, as well as from objective external conditionings, consists in
intentionally and purposefully oriented internal changes of the enterprise, substantially transforming its
structure, methods and results of operations and brings clearly defined, structured and measurable
effects. They may concern both its parts and the whole of it, occur in all areas, namely implemented goals,
structure, technology, and refer to the human factor.
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The role of innovation in enterprise development
The changes undergoing in the environment, which were mentioned before, are the reason for
which contemporary enterprises face new reality, challenges and uncertainty because there is constant
pressure on the introduction of new solutions in all spheres of activity: production, technology,
marketing, finance, etc. Thus, flexible reaction to the appearing external changes requires constant
introduction of changes and innovations modifying or transforming the enterprise’s character and nature,
destroying the existing order and introducing new solutions enabling to perform its functions for the
environment better.
Enterprises in the market economy function under the influence of two fundamental powers,
namely: market, whose needs they try to meet through marketing, and technical progress, which enables
the fulfillment of future needs in a more effective way. Therefore, it is possible to say that contemporary
business entities perform two functions: marketing and innovations, which are developed simultaneously
but with the use of separate strategies and instruments. Mostly due to capital limitations, the majority of
enterprises concentrate their efforts on marketing and neglect innovations, disregarding the fact that the
fulfillment of the survival and development goal requires constant improvement of goods, technological
processes and the organization of production, which boils down to the search for innovative solutions and
their later implementation. Development requires working out strategies of promoting innovations and
creating favourable psychosocial climate and an efficient stimulation system for them. The lack of such a
strategy often leads to lowering competitiveness and discontinuing development. On the other hand,
conducting structured innovative policy in an enterprise enables to offer customers products which are
better, more technologically advanced, and equipped in new functionalities. Moreover, innovativeness
allows to provide new services which are more and more adjusted to individual needs and expectations of
the recipients. Such actions directly translate into benefits the enterprise may derive from the introduced
changes (Kalinowski 2008).
To sum up, innovations understood as changes made purposefully, consisting in the replacement
of the existing structures with others, assessed positively in view of the criteria of a given organization
and constituting its development, is an inherent element of its development strategy. They may adopt the
following forms:
Improvement and development of the currently manufactured goods and services,
Adaptation and development of the applied production processes,
Improvement of the organization of work, production, management and marketing,
Introduction of state-of-the-art technologies and production methods,
Introduction of new products based on state-of-the-art technologies,
Use of a new source of raw materials, materials or half-products,
Opening a new market.
The implementation of innovation processes, depending on various criteria and conditionings,
may be done with the use of a few most popular innovation strategies:
Offensive strategy – concerns enterprises creating conditions which encourage to develop new
solutions and their fast market implementation. The strategy is related to high risk but at the same
time may bring a lot of benefits. It requires the creation of a research and development
department with high potential of innovativeness, good marketing system and effective
production system.
Defensive strategy– implies low level of risk and beneficial results. Enterprises which apply it do
not incur a risk of losses related to innovative activity, they try to reduce production costs and
supply substitutes of new products to the market.
Strategy of purchasing licence – enables to make profits by purchasing technological licences of
other companies, which significantly reduces expenses on research and development.
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Strategy of entering a niche – aims at avoiding direct contact with competition. It consists in an
analysis of leaders existing on the market, defining their strengths and weaknesses, defining
market gaps, and innovative activities focused on these gaps.
Market creation strategy – is based on the dynamic segmentation of the market and conducting
activity on new or young markets, with small competition, which creates convenient conditions to
become their leader.
Independent strategy – consists in the constant modernization of the product, the growth of its
market share, without deep observation of competition within this scope. It is a typical long-term
strategy.
Strategy of winning specialists – is based on typical brain drain, consisting in finding and
employing specialists from a given industry, which promotes the company’s own innovations
and dilutes the innovative potential of the competition.
Strategy of winning companies – aims at the development of innovations via mergers and
takeovers, as well as strategic alliances with entities of high innovativeness.
An analysis of the above strategies shows that a lot of introduced innovations should bring effects
not only referring to the product itself, but mostly related to the functioning of enterprises in the market
environment. Among them we could mention, among others, winning new recipients, an improvement in
the relations with customers, building an innovative image of the company, as well as limiting harmful
impact on the environment. One of the beneficiaries of innovations are also employees. Benefits they may
derive from the introduced changes include, among others, an improvement of work conditions and
safety, and an improvement of skills and the level of motivation. The listed benefits very often occur
jointly, as a synergy effect of various innovative processes implemented in the enterprise (Kalinowski
2008).
Measurable results an organization may achieve through introduced changes of innovative
character are the reason for which such activities are more and more strongly emphasized in enterprise
strategies. In the literature on the subject we may even come across the notion of strategic innovativeness
(Bate/Johnston 2003; Amidon 2003; Kotler/Keller 2006). It is used with reference to innovative enterprises
whose strategy and management system is focused on constant introduction of innovations, as well as on
the maximization of benefits coming from them. Such as enterprise (Jasiski 1992):
conducts a wide range of research and development works (or purchases new products or
technologies),
allocates high financial expenditure to such activity,
systematically implements new scientific and technical solutions,
constantly introduces innovations to the market.
In order to characterize an innovative enterprise in more details, we may use a set of criteria, both
quantitative and qualitative ones, which express its nature better. The most important ones include:
an ability to generate innovations permanently,
creativity in developing new products and technologies,
an ability to create knowledge and use it in innovative activities,
an ability to forecast the future, strategic thinking,
cooperation with customers, recognition of their current and future needs,
flexibility in adaptation activities to changes in the environment,
possessing a team of innovators implementing enterprise strategic goals.
Innovative enterprise, characterizing with the qualities mentioned above, are also supported by
the governments of the European Union countries. Encouragement to establish such enterprises is an
important element of the Lisbon Strategy due to the fact that enterprises which are innovation-oriented
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are a source of modern products and technologies, and a good example for other entities in the field of
generating technical and technological progress and creating new workplaces (ótowski/Batorowicz
2004). Qualities supported by the European Union and referring to innovative enterprises are the
following:
the production profile, the choice and the content of an innovative company’s strategy is strongly
influenced by the personality of the entrepreneur (owner) and his personal qualities, such as:
creativity, an ability to predict the future, competition in action, a skill to manage a team,
striving at the specialization and standing out from the competition is a significant factor which
shapes an innovative firm,
innovative companies are trying to find place for themselves in the market or product niche and
then they care about the strengthening their competitive advantage,
in spite of achieving good results, innovative companies do not interrupt research and
development activities, constantly generate new products and develop new technologies.
To sum up the examination made so far, we can claim that innovative processes, accompanied by
a properly chosen strategy, are one of the basic factors of enterprise development. First of all, it results
from their essence and pro-developmental character. It is worth mentioning here that while discussing the
role of innovations in enterprise development, not only technological but also organizational, ecological,
economic and social progress should be taken into account.
The risk of implementing innovations in an enterprise
One of the characteristic and at the same time significant qualities of innovative processes is their
high level of risk. Managing innovative activity is a constant process of taking decisions, and these are
rarely taken in the conditions of absolute certainty, having gathered all necessary information and data,
and having fully identified future effects and consequences. Most often, it is necessary to assume the
probability of the occurrence of factors which may have influence on the implementation of innovative
activities and their final effects. The high risk level of innovations is influenced by the necessity to incur
considerable costs and high percentage of failures during the implementation of new solutions. High
expenditure on research and development, designing, building prototypes, testing, marketing research are
incurred before the product is launched, and in many cases the developed concepts of new products do
not even reach the commercialization stage. It means that the product whose development ended
successfully and has been implemented to the market must ensure the return not only on the costs of its
development, but also the expenditure spent on many other unsuccessful ideas.
Risk is most often defined as a danger of making a loss, a possibility of the occurrence of an
unfavourable event or not achieving an aim. It may be also defined as a situation in which it is not
possible to predict future conditions of managing for sure but the probability of their occurrence is
known. Therefore, enterprises have a possibility to assess risk, the probability of the occurrence of certain
threats, but also, partially, to control them. We may distinguish so-called systematic risk, referring to all
entities and independent on them (e.g. natural disasters, weather conditions, inflation and
unemployment, interest rate levels), but also so-called specific risk which may be at least partially
controlled (related, for example, to the way of managing the enterprise, its financial liquidity, adopted
strategy of innovative activity, etc.
The risk of innovative activity must be discussed from two points of view. Firstly, the probability
of the occurrence of threats, secondly, the effects this occurrence may bring, influence it may exert within
the framework of the conducted innovative process. Most dangerous are the threats which have strong
potential impact on the effects of the conducted works and at the same time, high probability of occurring.
Also the factors whose probability of occurrence is low but if they do occur, negative consequences will be
serious and may be considered dangerous for the enterprise. On the other hand, less attention may be
paid to the risks whose consequences are small, and the probability of occurrence is small.
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In the process of innovative project risk management, we may distinguish the following steps
(Butryn 2010):
Identification of threats occurring in a given project,
Defining probabilities of the occurrence of individual threats,
Assessing the consequences of the threat occurrence,
Establishing priorities for the identification of threats,
Determining an action plan aiming at the minimizing the probability of the occurrence of
threats and minimizing consequences.
Risk identification consists in specifying what events may have negative impact on the project,
that is defining potential sources of risk. The prepared list of sources should be exhaustive, that is include
all potential risky events, regardless of frequency and probability of their occurrence, it should also be
systematically updated throughout the whole duration of the project. Among the sources of risk,
significant for the conducted innovative activities, we may distinguish (Pomykalski 2001):
Micro level - risk resulting from the enterprise activity, which includes: organizational risk
(innovation management strategy, the choice of structures and adequate procedures,
permeability of innovation flow channels, etc.), marketing risk (the choice of proper
marketing strategies of creating and introducing innovations), production risk (localization of
production, expenditures on research and development, the selection of technology, the
choice of the suppliers of raw materials and possible subcontractors, stock management, etc.),
financial risk (liquidity control, the choice of capital structure, finance management, etc.),
personnel management risk (the choice of staff, employee training, the choice of the systems
of motivating and rewarding, etc.), the risk of the investment’s profitability;
Intermediate level - market risk which includes: economic situation in a given industry, the
level of competition, the barriers to enter the market, the ways of winning and retaining the
existing customers;
Macro level - the risk which is a result of macroeconomic and global conditionings: the
economic situation in a given country, the economic situation of the world economy,
changeability of exchange rates, tax regulations, customs regulations, changeability of interest
rates, political conditionings, global development, the flow of technologies, etc.
Another significant typology of risk is the classification of its sources with regard to the
consequences which risk implies in the innovation process. Within its framework, we can distinguish
technical and production, market and economic risk. Innovation may turn out to be ineffective
technologically, (when a new product does not comply with standards, does not meet expectations
concerning quality, cost and production time, productivity level, etc.), may not win market approval
(when it does not meet expectations of potential buyers), can also become a cause of financial losses of the
enterprise (when it does not achieve the planned levels of sales profitability).
Another step in the process of innovation risk management, following the identification of
potential threats, is the quantification of risk, namely the quantitative expression of its probability and
potential consequences. Since the attempts of such assessments concern future events and are made in the
situation of limited access to some, reliable information, and are exposed to distortions through subjective
assessments of threats, the results of risk quantification must be treated with proper caution. They are not
accurate and reliable calculations of losses possible to be made, but only certain bases to divide threats
into significant ones, that is the ones the attention should be paid to and proper measures of reaction may
be prepared, and insignificant ones, which can be ignored or accepted. For the needs of risk quantification,
basically mathematical and statistical assessment of probability, as well as computer tools of risk analysis
are used (Monte Carlo method, scenario analyses, sensitivity analyses).
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An effect of risk quantification is presenting it with respect to value in the form of so-called
expected monetary value being a product of two variables: probability of the occurrence an event and the
value of the result - a loss which will be caused if the risky event occurs. The calculations become then the
starting point to perform categorization and hierarchization of risk, establishing priorities for actions
preventing risk and building so-called decision tree presenting possible paths and interactions among
decisions and the probability of events occurring parallely or sequentionally (Butryn 2010).
The target element of innovation risk management is establishing the ways of reaction to
indentified and assessed risks. The reaction methods can be closed in three basic categories (Butryn 2010):
Avoidance - elimination of specific risk, usually by eliminating its cause (e.g. by acquiring
ready solutions or commissioning part of developmental works to another entity);
Alleviation - lowering the expected monetary value via reducing the probability of occurrence
(e.g. the application of a known technology or a proven supplier), or lowering the value of the
results evoked by the occurrence of a risky event (e.g. via creating proper reserves, applying
adequate provisions in contracts or taking out an insurance policy);
Acceptance – which may be passive (it is the acceptance of the occurrence of a threat with low
level of significance, whose influence on the effects of the innovative process is not
significant), or active (consists in developing an action plan in case of the occurrence of events
threatening the project, preparing alternative strategies).
In spite of presenting various risks related to the innovation process in this part of the paper, as a
summary it is necessary, however, to refer to Peter Drucker’s thought that truly risky behaviour of an
enterprise is not the implementation of innovative activities but the resignation from conducting them,
leading in further perspective to the permanent loss of competitiveness.
Conclusions
Dynamically developing economy forces enterprises to introduce changes which superficially or
deeply modify the enterprise. They may be adjusting solutions, easy to introduce and not too expensive,
but these may be also comprehensive actions which transform the whole organization, which require
involving all forces and means. Changes may also be slow or fast. The first ones do not destroy the
enterprise’s balance and are easier to control, but they characterize with smaller effectiveness. On the
other hand, fast changes disturb the balance of the organization’s functioning, require bigger outlay,
strengthen resistance of the employees but they enable quicker improvement of the situation of the
company and strengthening its competitive position.
Today, new techniques and technologies constantly appear, and competition is intensifying. In
this situation, an enterprise which does not introduce changes or reacts too slowly to events taking place
in the environment may have problems with the survival on the market, but it certainly cannot develop.
Therefore, at present, innovations are one of the key factors of enterprise development, as well as an
element of its competitiveness. Owing to innovations, there is the improvement and modernization of
manufacturing processes, an increase in productivity, efficiency and quality of work, the growth of
general efficiency and effectiveness of operation, the improvement of the organization and methods of
work, liquidation of barriers and activation of resources, improvement of safety and working conditions,
replacement of human labour as a result of better organization and higher performance based on richer
and more modern technical equipment; an increase in export abilities, etc. (Grudzewski/Hejduk 2001).
Thus, innovation management, inscribed directly in enterprise development strategy, plays an
important role. It consists in introducing broadly understood changes (innovations), primarily in all
critical areas of enterprise activity focused on its development. Therefore, the future aim of contemporary
management is creating an environment which will stimulate innovations.
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295

Research of Influencing Factors for Usage of
Facebook Willingness -A Case Study on College
Students in the Tamsui Area
Cho-Pu Vincent Lin
St. John’s University, Taiwan
Yen-Ting Tim Lin & Wen-Hui Mico Yang
Hsiuping University of Science and Technology, Taiwan
Keywords
Facebook; entertainment; technologies; fans page; Tamsui area; usage willingness
Abstract
The rise of social networking websites in recent rise has aroused the discussion among the society. Social
networking websites not only enable people to connect with friends, but also can conduct various studies. For
example, people can create events, conduct a “Human Flesh Search”, and so on. Furthermore, people are able to open
up new relationships on the internet. This study discusses the influencing factors to the usage of Facebook
willingness among college students in the Tamsui area. By statistical results, the six variables in this study
(relationships, privacy, entertainment, technologies, fans page and community loyalty) were verified as the most
important factors affecting the influencing for the usage of Facebook willingness among college students in the
Tamsui area. It was shown that three variables (relationships, privacy and community loyalty) had a positive
influence to the usage of Facebook to college students in the Tamsui area, which completely matched with the
discovery discussed in literature. However, the remaining three variables (entertainment, technologies and fans
page) showed to greatly differ with literature, which conversely had a negative influence to the usage of Facebook
among the subjects in this study; these three variables were therefore studied with in-depth analysis in this research.
Purpose of Research and Motives
Background of research and motive
With the advance of technology, we are currently in a new era where computers and mobile
phones are readily accessed to the internet. Social networking websites are shown to further stand out on
the internet, which as Facebook ranked second in the number of registered users among the world,
reaching more than 600 million. One of the reasons for the incredible and rapid growth is because it is
simple to register and easy to use. The huge influence is as described in the media, where “it’s
population size would make it the third largest country, after China and India”. The founder, Mark
Zuckerberg, has even been named Time magazine’s “Person of the Year” for 2010; the film The Social
Network was also made which portrays the phenomenon, making Facebook sweeping the whole globe.
Facebook’s capability to bring up major topics enhanced its commercial value, making itself unaffected by
the times of economic downturns.
The internet has shortened the distances among people. Social networking websites increase the
interactions of people and maintains the relationships in society. New friends are also made via social
networking websites. Facebook is based on interpersonal interactions, which the games, fan groups, blogs
and sharing of photos enable users to know others even better. Users use this function to connect social
development and maintain the relationship with others (Ellison et al, 2007). Facebook has successfully
captured the hearts of users and is currently the most popular social networking website.
Purpose of Research
This study uses the influencing factors to the usage of Facebook willingness to analyze the factors of
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Facebook usage among college students to understand the features of social networking websites and the
reasons which may affect users. The subjects chosen for this research were college students within the
Tamsui area. The main purposes of this study are described as follow:
a. To explore and discuss the characteristics of the social networking website, Facebook.
b. To find the possible factors which perhaps may affect the willingness of using Facebook.
This study verifies if these factors shall affect and increase the willingness among college students in
the Tamsui area of using Facebook; it also serves as reference to the operators of social networking
websites.
Literature Review
The Effect of Relationships to usage of Facebook Willingness
The most direct influence to interactions is how people get along with others. In past social
sciences research, analysis showed that the relations between friends shall mutually affect their behavior
and thinking, resulting into many similarities (Granovetter, 1973; Kandel, 1978; vanDuijn et al, 2003).
Facebook uses this mutually influence pattern and focuses on target groups. Facebook announced it now
has over 300 million users worldwide. The number of people who signed up for Facebook in Taiwan has
already exceeded 2.23 million just within the past several years (updated to September 7, 2009), and
continuously growing by an average of 200,000~300,000 persons per week (Huang et al., 2009). The data
published by Insight Xplorer showed that Facebook has successfully surpassed Taiwan’s originally largest
social networking website, “Wretch”, just within a short period of four months and become the second
largest website in Taiwan since June 2009 (Google ranks first). Many users indicated that Facebook helped
them reconnect with past friends. The application programs used in Facebook are not innovative
technologies but rather emphasizes on the concepts of “simple to use”, “connecting” and “share”; the
games and updates enable people to interact with friends, which increase discussion topics and bring
people closer (Shih, 2010). The relations are not only established among the virtual world of the internet,
but also are combined to realistic life. Besides being an online interactive website, Facebook also becomes
a media for relationships when offline.
Effect on Privacy
Facebook extremely holds the personal information of its users with great importance. Through
platforms, users can authorize their information and be sent to various application programs. Facebook
designed a series of privacy control options, allowing users to set who can the messages they posted.
People do not have to worry messages are revealed. This suitable level of information disclosure enables
easy interaction.
Based on the above literature, this study considers that privacy can evaluate the willingness of
using Facebook among college students in the Tamsui area.
Entertainment
The powerful links and interactive functions of Facebook aroused a popularity wave in Taiwan
during the summer of 2009. The number of registered users greatly increased. This was because the games
are entertaining; making people who already know each other can have even more interaction. The
Facebook games naturally become the motive of many people becoming users. As it is able to connect
friends and leave messages, friends invited other friends and eventually led to signing up.
The motive to sign up because of games was evident in Taiwan, which the number of users in
Taiwan grew from several hundred thousands to more than 5 million in five months, from July to
November, 2009. The start of this was quite interesting, however. Among the thousands of applications,
“Happy Farm” was extremely popular. As internet friends awaits the fun in “planting crops” and
“stealing crops”, the interaction among friends increased further. Friends invite unsigned friends to play,
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297

which naturally increased the number of users and formed a madness of becoming “farmers and planting
crops”. Furthermore, the game was designed where the number of friends shall directly affect the score
and rewards. This had therefore encouraged users to increase friends, to add strangers, and friends of
friends. As a result, the friend list not only included a list of original friends, but also included people one
done not know offline.
Therefore from the above literature, this study considers that entertainment can evaluate the
willingness of using Facebook among college students in the Tamsui area.
Technical Information and New Products Development
With the internet network and information, the advances in media technology and popularity,
and the continuous improvement of online/offline network access technology, the goal is to achieve
instant messaging. The priorities include: mobile wireless access technology and wired broadband access
technology.
Safko & Brake (2009) suggested social networking websites, such as Facebook, have seem to
possess media characteristics, and can therefore be called as group media; though multimedia, users
interact with others by conservation. The content produced from social networking websites is the
exchange of news or information. Users can not only control the information content but also can
determine the flow and influence of the information. Shih (2009) further indicated that technological
innovation has promoted the internet from the function of websites to users lead interpersonal network
contact. The use of social networking websites becomes organizing, filtering, contacting and integrating
the online social graph. Therefore, group media relates to how users capture and use information to
display oneself and social recognition, rather than receiving and using innovative technology; the effect of
group media to users is of privacy and personal rather than the capture of information or the capabilities
in technology. Shih considered that group media converted the power and control pattern of technology;
group media not only enhanced the energy among the voices of users, it also given users to practice and
create a self-identified control (Shih 2009).
For the aspect in new products development, in May, 2007, Facebook announced the plan to lets
users post free classified ads, known as “Facebook Marketing”. Holzner (2009) considered that Facebook
provided an even better marketing environment, also indicating that compared to the relatively chaotic
and non-order environment as in “MySpace”, Facebook provide users to make friend and group network
contact. Users not only can maintain contact with friends, observe their friends’ events, it becomes a series
connection among the society to form cohesiveness in groups. According to the 2011 bulletin by Visa, the
survey results among e-commerce consumers in 2010 showed that six items show rapid growth in the
electronic commerce market which consumers enthusiastically purchase online, where among these 6
markets about 87% of the respondents mentioned they purchased products and services online in the past
year; with an annual network consumption of USD 2,086 in average.
According to the ComScore report by ARROO in regards to Facebook in the Asia Pacific, the total
time on Facebook by users in this September was 22 billion and 577 million minutes, or about 376.28
million hours. Although the total time used in countries all reflect a growing trend, the growth status is
not necessarily the same. Taiwan had the highest growth percentage rate reaching to 986.81%, whereas
Indonesia was the lowest and only had 21.18% growth.
Fans Page
Holzner (2009) proposed the attitude and view of exchange platforms, and found out that 40% of
the consumers agreed to the description that “Facebook is an excellent channel to obtain related
information of a company and its products”.
According to a Rosetta, an interactive marketing agency, in January 2010, in a study of 100 brands,
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59 had Facebook pages. According to Facebook, it hosts about 1.6 million active pages today operated by
more than 700 thousands of companies and groups. These fans pages regularly update new information to
fans so that no boundaries (zero distance) are between the fans and the company or group.
The percentage of Taiwanese internet users interacting with their favorite brands via Facebook fan
pages reached to 33.3% high. In addition, they like to join fan pages which provide information for their
daily lives. The primary reasons of joining fan pages were because of the “search”, “connect”, “and
“cohesive” abilities, which users generally agree to be the most attractive things. Surveys indicated that
people will go online to search information before purchasing, especially for travel, hardware
information, buying clothes or for other consuming actions; further on, half of them shall go online and
share information of the brand after purchasing (Shih, 2010).
According to the well-known internet marketing and trend knowledge expert, Sun Chuan-hsiung,
in 2009, the creation of fan pages on one hand attracts the attention of general internet users, while on the
other hand use the group concept as basis to expand business. Brand operators can increase the
interaction with people on the internet, and also enhance the scale of the brand and product in the internet
to the group. Sun considers fans pages have the following properties:
1. Taiwan currently has more than 6.5 million members. The additional support by games and unique
qualities, fan pages increase the time users stay online time and access frequency each day. This
increases the usage and dependency for Facebook.
2. Facebook requires using use a real name to login. Therefore individuals hold the responsibility
when posting messages which reduce the possibility of malicious messages and attacks by users.
3. Complete group function. Operating the interface is based on a group concept as the start point. As
different groups have their own requirements, fan pages are managed and developed according to
a group’s characteristics.
4. The function of Facebook’s wall has eventually become well-developed and convenient, which
today also includes a micro-blog function, discussion threads, friend or fan posting function, and
instant messaging response. This also showed to benefit businesses for operating and managing
groups.
5. When fans pages are business-oriented, it shall greatly benefit the internet for integrating and
marketing. The support for Facebook developing application programming interface (API) enables
businesses to develop many customized marketing programs and events according to their own
needs, or write helpful and unique applications and games for the marketing events. When group
members participate in the brand events, increase interaction, and have a common marketing goal,
the implementation of different marketing plans can be planned according to different groups.
6. The fans window can display a company’s website or blog. When users browse the page or blog,
they can add it as a fans page through the window, making it easy to expand potential groups.
7. While integrating Facebook Connect with the websites of businesses, users can user their Facebook
account to login to the website members system. This can increases the possibility of users using
the resources of a business website.
From above, fans page have many positive effects to business operators. Fans page shall be
comprehensively developed with even more mature and multi-directional applications technology.
Therefore, this study considers that fans page can evaluate the willingness of using Facebook among
college students in the Tamsui area.
Community Loyalty
In the traditional consumer behavioral theory, Wu (2006) described that “brand loyalty” refers to
the degree of awareness and preference to the brand, which a consumer consistently purchases the same
brand or service. Day (1969) suggested that customer loyalty is the continuous behavior of the customer
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purchasing a certain product. Furthermore, Jones and Sasse proposed that the loyalty from the user is
reflected by behavior in three patterns. The first one is repurchasing willingness, which refers to the
degree of consumers willing to repurchase a product or service. The willingness of purchasing becomes a
strong indicator for future behavior. The second is initial behavior, indicating that repurchasing behavior
has been actually conducted. The last one is secondary behavior, which refers to the behavior where
consumers actively recommend toward friends or family (Shih, 2008).
Summary
By summarizing the above literature, the study variables in this research are listed as follow:
research variables
dependent degree of Facebook usage
variable
independent relationships
variable 1
independent privacy
variable 2
independent entertainment
variable 3
independent technologies
variable 4
independent fans page
variable 5
independent community loyalty
variable 6
Method of Research
Research Procedure
The research procedures in this study are mainly divided into nine steps, as shown in Figure3-1.
The first step was to determine the research direction from an interested theme, which was then inspired
by research background and motivation to collect data and discussion of associated literature. The
discussion of literature then determined the purpose of research, which then became the basis to create a
research framework, establish the research hypothesis and methods for data analysis. The follow-up steps
then included questionnaire design, distribute and collect the questionnaires. After the questionnaires
were returned, data compilation and analysis were conducted. The results from the analysis were
discussed with an overall relation view, and finally conclusions and suggestions were given according to
our analysis and discussed results.
Determine research theme
Literature review
Determine research variables and subjects
Questionnaire design
Collect distributed questionnaires
SPSS analysis
Results
Conclusions and suggestions
Figure 3-1 Research process flow chart
Data collection
Research Design
Research Subjects and Sample Size
This study used college students in the Tamsui area as research subjects. Four colleges are located within
the area, which are St. John’s University, Tamkang University, Aletheia University, Taipei College of
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Marine Technology and Commerce (TCMT), respectively. The sample distribution in this was according
to the percentage of students among the four schools. The subjects were not specifically selected by their
major, class year and gender. The expected return of valid questionnaires was 200.
Table 3-1 Questionnaire return distribution
Name of College Number of
students
Percentage
from total
Tamkang University appr. 28, 000 58.5 (%) 117
Aletheia University appr. 9, 500 20 (%) 40
St. John’s University appr. 7, 500 16.5 (5%) 33
Expected valid
questionnaire return
Taipei College of
appr. 2, 500 5 (%) 10
Marine Technology
and Commerce
(TCMT)
Total appr. 47, 500 100 (%) 200
Sampling
This study used convenience sampling to distribute the questionnaires. The respondents by
random choice were asked to fill the questionnaire. The questionnaires were distributed at the main gate
and side gate of the four schools. This was because they are the locations were students must walk by
when they attend or leave classes. It is also considered to be crowded locations. The questionnaires were
distributed randomly.
Data Analysis
After conducting the research, all returned data were carefully examined to remove any invalid
questionnaire information. The data were then coded and input into a computer. The statistical processing
and analysis was performed by SPSS15.0 for Windows. The method of data analysis was divided into two
parts: The first part was reliability analysis. In order to confirm the accuracy of our research results,
reliability analysis was performed to the questionnaire scale using Cronbach’s to check if the
participants and questionnaire content show consistency. The second part was multiple regression
analysis, used to explain the influential degrees of the 6 independent variables toward the dependent
variable.
Questionnaire Content
The study first referred to associated research from literature as basis to develop the research
framework and design the questionnaire. The questionnaire is divided into four categories, including the
usage status of Facebook, survey of willingness in using Facebook, the influencing factors to the usage if
Facebook willingness, and personal basic information
Results
Questionnaire Results
The questionnaires in this study were distributed by four waves, having a total return of 205
answered copies. Every time when returned the questionnaires were first checked of validness before
coded. A total of 12 invalid questionnaires were removed, and the total return of valid questionnaires was
193. The following sections shall describe the various statistical analysis used in this study.
Reliability Analysis
This study used Cronbach's value as the standard for measuring the reliability of the
questionnaires. The results are given in Tables 4-1 and 4-2. The reliability coefficient, value, for all of the
questions (44 total) in the questionnaire was 0.746. This indicates that the results have middle consistency.
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Table 4-1 Case Processing Summary
N %
Cases Valid 180 93.3
Excluded (a) 13 6.7
Total 193 100.0
Listwise deletion based on all variables in the procedure.
Table 4-2 Reliability Statistics
Cronbach's Alpha
N of Items
.746 44
Multiple regression analysis
This study used multiple regression to analyze the influence of the 6 independent variables
(relationships, privacy, entertainment, technologies, fans page and community loyalty) toward the
dependent variable (usage of Facebook willingness). The purpose was to verify the research hypothesis
below:
Hp: “The six variables (relationships, privacy, entertainment, technologies, fans page and
community loyalty) are the most important factors for affecting the willingness of Facebook among
college students in the Tamsui area”
Results from multiple regression analysis show (Tables 4-3~4-5) that the model was suitable (F
value = 4.939, p value =.000), where the adjusted R square (R2) value was 0.119. This indicated that R2 in
the model was 11.9%. As for the variables validness from the perspective of the t value, three out of the six
independent variables reached significance, which were relationships, privacy and community loyalty; the
remaining three failed to reach significance. As for the influential degree of the variables, from the beta
value it was shown that the greatest factor to affect the willingness of using Facebook among college
students in the Tamsui area was “community loyalty” (Beta=0.204). The multiple regression equation for
the model is:
Y (usage of Facebook willingness) = 0.168X (relationships) + 0.209X (privacy) – 0.029X (entertainment) – 0.085X (technologies) – 0.1X
(fans page) + 0.204X (community loyalty) + e i.
Table 4-3 General Model: Model Summary
Std. Error
R Adjusted
Model R
of the
Square R Square
Estimate
Change Statistics
R
Square
Change
F Change df1 df2
Sig. F
Change
1 .386 (a) .149 .119 .82582 .149 4.939 6 169 .000
Predictors (Constants): relationships, privacy, entertainment, technologies, fans page, community loyalty.
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Table 4-4 General Model: ANOVA
Model Sum of Squares Df Mean Square F Sig.
1 Regression 20.212 6 3.369 4.939 .000 (a)
Residual 115.255 169 .682
Total 135.467 175
• Predictors (Constants): relationships, privacy, entertainment, technologies, fans page, community
loyalty.
• Dependent variable: The usage of Facebook
Table 4-5 General Model: Coefficients
Unstandardized Standardized
Collinearity
Model
Coefficients
Coefficients t Sig. Statistics
Std.
Tolerance
B Error Beta
1 (Constant) 2.513 .852 2.950 .004
Relationships .251 .124 .168 2.022 .045 .727
Privacy .320 .121 .029 2.651 .009 .807
Entertainment -.044 .120 -.029 -.369 .713 .801
Technologies -.125 .111 -.085 -1.130 .260 .883
Fans page -.207 .157 -.100 -1.322 .188 .874
Community loyalty .387 .149 .204 2.598 .010 .815
• Dependent Variable: The usage of Facebook
Results and Suggestions
The statistical results in Chapter 4 verified the 6 variables in this study (relationships, privacy,
entertainment, technologies, fans page and community loyalty) were the most important factors for affecting
the willingness of using Facebook among college students in the Tamsui area. Among them, 3 variables
(relationships, privacy and community loyalty) had a positive effect to the willingness of using Facebook
among college students in the Tamsui area, which completely corresponds to the findings in the literature.
However, the other three variables (entertainment, technologies and fans page) on the other hand differed
from the literature, and conversely showed to have a negative effect. As a result, these three variables
were given an in-depth analysis in this study.
Entertainment
According to the discussion in literature, there are many reasons why Facebook is very popular in
Taiwan. One of the reasons is that Facebook has many fun games. In 2009, the rise of the extremely
popular “Happy Farm” game in Taiwan led to users increasing their relationships while planting and
stealing crops. These games are usually designed where the number of friends shall directly affect the
score and rewards. This encourages players who wanted to get high scores to continuously invite friends
regardless he/she is a friend of friends or even a stranger. Therefore the assumption in this study is quite
reasonable, which the entertainment games provide shall increase the willingness of using Facebook
among college students in the Tamsui area. However, according to our statistical results, it was found that
“entertainment” shall conversely have a negative effect to the usage of Facebook willingness among
college students in the Tamsui area.
Although Facebook games are appealing, it can also cause worries to users in regards of privacy.
According to research, even though Facebook users had the highest privacy setting, they are considered as
invisible once game applications were installed. Not only were all information recorded in the personal
account were collected, including friends list, date of birth and so on, but also friends were affected and
may even danger the security of the individual’s internet banking account. A true case has proved that
Facebook games applications will seriously invade users’ privacy. One example is the once-popular City
Ville. The total players worldwide exceeded 95 million persons, which in average 1 out of every 7 users
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played the game. In 2010 news spread that the company of the game, Zynga, collected the personal
information of the players and transferred to a third party. Based on these findings, this study reasonably
surmised that Facebook entertainment and privacy are fundamentally in conflict. Based on worries in
privacy, college students in the Tamsui area shall conversely not increase their willingness of using
Facebook because of the numerous fun games. This assumption supports with the statistical results in this
study.
Technologies
Meanwhile, results from this study also showed that the “technologies” used by Facebook will
also reduce the willingness of using Facebook among college students in the Tamsui area. This result
differs from discussions in the literature. In September 2011, Facebook’s update of page display was
expected to receive praise by users but rather received numerous negative criticisms. Some users even
thought that the new display was overcrowded and too complicated. What was worse was that an analyst
indicated that the new version design enabled Facebook to collect even more information or likes of users,
making it easier to perform one-to-one marketing. This discovery was similar to the “entertainment”
variable, which would conversely reduce the usage of Facebook willingness among college students in the
Tamsui area. The reason was same – privacy protection. Whether Facebook claimed that the new version
or new function is to bring more convenience to users, it cannot be denied that the latest technologies
represent that Facebook will have more opportunities to collect personal information from users.
This was the very important discovery in our research: “entertainment”, “technologies” and
“privacy” are in conflict. In accordance to this research, based on college students in the Tamsui area,
users shall place “privacy” as the first priority when evaluating these factors.
Fans page
According to the discussion in literature, the fans page function in Facebook is an effective
channel to communicate with online users. Facebook users are able to obtain brand messages by fans
page, which are more accurate than the information from Google or other search engines. In specific,
Facebook fans page also enables users to have high interaction with their favored brands. Therefore this
study reasonably predicts that fans page shall increase the usage of Facebook to college students in the
Tamsui area.
However, our statistical results indicated that the effect of fans page to the usage of Facebook by
college students in the Tamsui region was negative. The reason may likely be that among the numerous
fans pages, most are created by business groups, which the messages are mainly of:
1. Latest updates of the company
2. Product promotion messages
3. Public service/charity activities
Therefore based on our statistical results, this study reasonably surmised that when users found out that
businesses spread company-related messages or promoting events though fans page to achieve
commercial interest, the willingness of receiving messages shall decrease. On the contrary, when fans
page post news less related to the company but rather issue information related to our lives, new fashion
or interesting articles, users have a higher acceptance as there are no sense of advertising.
References
Ellison, Nicole B., Charles Steinfield, and Cliff Lampe (2007), “The Benefits of Facebook „Friends: Social Capital and
College Students Use of Online Social Network Sites,” Journal of Computer-Mediated Communication, 12(4),
article 1. http://jcmc.indiana.edu/vol12/issue4/ellison.html.
Granovetter, M. S. (1973). The Strength of Weak Ties. The American Journal of
Sociology, 78(6), 1360-1380.
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Holzner, Steven (2009), Facebook Marketing: Leverage Social Media to Grow Your Business. Indianapolis, IN: Que
Publishing.
Kandel, D. B. (1978). Homophily, Selection, and Socialization in Adolescent
Friendships. The American Journal of Sociology, 84(2), 427-436.
Van Duijn, M. A. J., Zeggelink, E. P. H., Huisman, M., Stokman, F. N., & Wasseur, F.
W. (2003). Evolution of sociology freshmen into a friendship network. The Journal of Mathematical Sociology,
27(2), 153 - 191.
Shih, Clara (2009), The Facebook Era: Tapping Online Social Networks to Build Better Products, Reach New
Audiences, and Sell More Stuff. Boston, MA: Prentice Hall.
Safko, Lo and David K. Brake (2009), The Social Media Bible: Tactics, Tools & Strategies for Business Success.
Hoboken, NJ: John Wiley & Sons, Inc.
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305

Scientific Advance and Perceptions about the
Effectiveness of Democracy in MENA
Hoda Abd El Hamid Ali
Department of Economics and International Trade
Helwan University, Cairo, Egypt
Keywords
Democracy. MENA Region. Scientific and Technological Development. World Values Survey. Economic
Development
Abstract
The study employs individual- level data on more than 6000 individuals from three countries in the MENA
region to investigate the extent to which an individual's own perception about the importance of giving scientific
and technological development in the near future impact their perceptions of the effectiveness of democracy and it
reduces the desire for a rouge leader. We find a positive and strong relation between the perceptions regarding the
importance of scientific and technological development, and the perceptions regarding the effectiveness of democracy
in the whole region. The evidence of such relationship is much stronger in low democratic countries like Egypt, and
Morocco than in a higher democratic countries like Turkey. People's beliefs about the effectiveness of democracy as a
system of governance are also shaped by more income equality, economic prosperity, and the level and satisfaction
with household income especially in countries with low levels of democracy. The results suggest that there should be
more emphasis on scientific and technological development in the near future in order to have a effective democracy
in the low democratic countries in the region.
Introduction
Perhaps one of the most robust and enduring empirical findings of post-World War two social
sciences is the existence of a strong positive relationship between economic development and
democratization.
Economists are increasingly interested in the analysis of the political determinants of economic
development after the pioneering work by Robert Barro (1996) that explores the causal linkages between
long- run economic performance and features of government policy and institutions. The potential impact
of economic development on the extent of democracy is an equally important research question, and
whether an increase in income of a country causes its democracy to improve has been a subject of recent
debate.
Barro(1999) finds that the propensity for democracy rises with per capita GDP. Despite the lack of
clear predictions from theoretical models, the cross-country evidence examined in Barro (1999) confirms
that the Lipset/Aristotle hypothesis is a strong empirical regularity. In particular, increases in various
measures of the standard of living forecast a gradual rise in democracy. Similarly, Barro's version of the
modernization thesis stresses the role of education and, to a lesser extent, urbanization, widespread
education thus emerges as a necessary condition for democracy.
The calls for democracy in some countries in the MENA region have made some authors reject
Huntingtonk's argument on the incompatibility of Islam and democracy for dead. Others have,
particularly declared Lipset's classic modernization argument in relation with the Tunisian revolution,
pointing to the relatively higher income level and the size of the middle class in that country. Revolutions
in Libya, Syria and Yemen at their calls for democracy surprise many observers and political scientists,
and questioned the sincerity of such calls regarding the future prospects of democratization efforts.
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This paper aims to contribute to the literature on the determinants of democracy in MENA region.
As the recent waves of revolutions and revolutionary attempts in this region have not only been
important political events, they have also re-sparked old academic debates.
The study employs individual- level rather than country level data; however, it differs from
previous work in an important way, the paper investigates the extent to which an individual’s own
opinion about the importance of giving more emphasis on scientific and technological development in the
near future makes him/her more likely to reveal the effectiveness of democracy in his/her country.
Specifically, an increase in overall scientific advance may increase the individual’s subjective probability
of future prosperity & development, and increase in the level of per capita income in a country, and
therefore it would increase his/her expected future utility. This could in turn influence his/her propensity
for satisfaction with democracy as a system of governance.
Model
The Basic model can be specified as follows:
D ict = ict + S&TA ict + X ict + Y ict + ict,
Where:
D ict, measures individual i's propensity for happiness with democratic efficiency who lives in country c,
and surveyed in year t. It is observed to be equal to 1 when individual strongly or absolutely agrees that it
is important for him or her to live in a democratic country, and zero otherwise.
When D ict > 0 so that (D ict=1) = Prob ( ict + S&TD ict + X ict + Y ict + ict> 0). If the error term ict is
normally distributed, then the result is a standard single-equation probit specification.
ic, Differences across individuals with respect to their general attributes towards democracy. Larger
values indicate higher baseline propensity for dissatisfaction with democracy, this could be caused by
differences in cultural, historical, and institutional differences between countries.
S&TA ict, measures individual i's propensity for happiness with scientific & technological development,
who lives in country c, and surveyed in year t. It is observed to be equal to 1 when he/ or she agrees or
strongly agrees that it is good to have more emphasis scientific and technological advance in the near
future.
X ict, stands for personal attributes of the individual, such as, gender, employment, marital status, the
number of children, religion, the level of education, and the level &satisfaction with personal income.
Y ict , stands for individual i's beliefs towards the importance of some characteristics of democracy such as
income equality, and economic prosperity who lives in country c, and surveyed in year t. It is observed to
be equal to 1 when he/ or she strongly or absolutely agrees that it is important to have income equality,
and economic prosperity.
Data
The primary data obtained from the (2005-2008) wave of the World Values Survey (WVS). We use micro
data on 6000 individuals from three countries in the MENA region (Egypt, Morocco, and Turkey) 1 , to
investigate the extent to which personal's judgment regarding the importance of scientific and
technological development impact their perceptions of the efficiency of democracy.
Policy Implications
The results underline the importance of science and technology to policy makers in developing countries,
especially in MENA region, as nowadays some of these countries are struggling and in their ongoing
movements towards democracy. We also find that not only scientific advance and technological
development are very important for the effectiveness of democracy; there are other important
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determinants of the effectiveness of democracy as household income, income equality, and income
prosperity.
The paper proceeds as follows: section one introduces the introduction of the study, a literature review of
the impact of science and technology on democracy and the other determinants of democracy will be
discussed in section two, Section three deals with the specification of the model and results of estimation,
and finally section four gives the summary and conclusions of the study.
Literature Review
As noted above, the literature on determinants of democracy is large, and points to a vast set of
quite different potential explanatory factors. We do not take aim to review the entire literature, but rather
focus on some particularly important proposed explanatory factors and debates from the literature.
Economic factors are among the most studied potential determinants of democracy. There are
two main open questions in the debate on the relationship between economic development and
democratic institutions. One is whether or not countries become democratic only at higher levels of per
capita income, and the second is whether or not democracy enhances economic development, captured by
per capita GDP growth. 2
On both questions there are disagreements amongst scholars. Most observers would agree that
richer countries are democracies, as argued by Lipset (1959) famously argued that a high GDP per capita
increased the probability of a country being democratic, and several later studies corroborated this result.
Barro(1999), finds that the propensity for democracy rises with per capita GDP by using a panel data of
over 100 countries from 1960 to 1995. Minier (2001) shows that an increase in per capita GDP is associated
with an enhanced demand for democracy. Papaioannou and Siourounis(2008) report that economic
development is a key factor determining the intensity of democratic reforms in a country.
However, Acemoglu, et al. (2008) find insignificant impact of the level of income on democracy by
adding country fixed effects in repeated cross- country regressions.
The modernization literature and other contributions point to a set of variables related to
economic development, other than income level, that may be of particular relevance for democracy. First,
as emphasized by Lipset (1959, pp.83-84) a high level of education and an enlarged middle class are key
elements to democracy; see also Almond & Verba (1963), and Diamound (1992).
Second, Industrialization and the transformation of a country from an agrarian to a
manufacturing and trading one, generates social differentiation, as specified by Rueschemeyer, et al.
(1992). Other potentially important modernization variables are related to communications infrastructure,
which allows for rapid diffusion of ideas and information across and within borders, perhaps enhancing
the prospects of democracy as noted by Diamond (2008).
Also short-term economic fluctuations may impact movements against existing undemocratic
regimes that experienced a decreasing GDP per capita in the previous year were much more likely to fall
than those experiencing positive economic growth, see for example Przeworski et al.(1996).
Income inequality may also affect regime change and stability, for example Boix (2003), argues
that a decrease in economic inequality leads to a higher probability of democratization, since the rich will
have less to lose from taxation in relatively equal societies. However, a low degree of inequality may also
reduce the likelihood of democratization, as the poor are less eager to fight for democracy as they have
little to gain economically from democratization. Acemoglu and Robinson (2000) find that in unequal
societies on the other hand, the poor have much to gain from democratization, and the rich are not able to
credibly commit to redistribution in the future under dictatorship. Houle (2009) finds no clear effect of
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inequality on the probability of democratization, and finds evidence indicating that low inequality
stabilizes existing democracies.
Altindag et al. (2010), find that personal joblessness experience translates into negative opinions
about the effectiveness of democracy; they also find evidence that people's beliefs about the effectiveness
of democracy as a system of governance are also shaped by the unemployment rate in countries with low
levels of democracy.
Despite the lack of clear predictions from the theoretical models of the effect of economic
conditions on the extent of democracy especially scientific advance as a measure of economic
development and modernization, the present analysis by using micro data on more than 6000 individuals
from three countries in MENA region ( Turkey, Morocco, and Egypt), for which data are available, we
analyze the extent to which individuals' perception of the importance of scientific advance and
technological development affect their perceptions of the effectiveness of democracy .
Also different types of non-economic factors have been put forth as important determinants of
democracy. One group of explanations are related to particular values, or other cultural traits, having
important impact on democratization as specified by Almond and Verba (1963), and more recently by
Inglehart and Welzel(2006). Huntington (1996) argues that Islamic, and Catholicism countries are less
susceptible to democracy compared with Protestantism, also Treisman (2000) show that in religions such
as Protestantism religion, there may be stronger emphasis on monitoring potential abuses of state officials
than in more traditional religions such as Islam or Catholicism.
The ethnic fractionalization structure of a country may also impact the country's regime type.
Lijphart (1999) emphasizes that various types of heterogeneity in the population, among them ethnic,
linguistic and religious heterogeneity, is an importation determinant of the design of political institutions
and regime type.
Model Description and Estimation
Descriptive statistics are provided in Table 1. The two dependent variables are democracy is
important for the economy, and Rogue Leader is bad for governing the economy. Democracy is important
for the economy takes the value of 1 if the respondent strongly or absolutely agrees with the statement
that" It is important to live in a country that is governed democratically", and zero if the respondent
disagrees or strongly disagrees. Rouge Leader is bad takes the value of 1 if the respondent indicated that
"Having a strong leader who does not have to bother with parliament and elections" is very bad or fairly
bad; and zero if the respondent replied that such a leader is good or very good.
Scientific Advance: takes the value of 1 if the respondent agrees with the statement that "it is good
to have more emphasis on the development of technology in the near future", and zero if the respondent
replied that he /she doesn't mind with such development or it is bad.
Income: takes the value of 1 if the respondent earns a middle or high income, this is if he/she
codes from five (moderate decile) to ten (highest decile), and zero otherwise. The study uses also another
indicator to estimate the impact of income which is the satisfaction with income position, which takes the
value of 1 if the individual strongly or absolutely, satisfied with his/her financial position, and zero
otherwise.
Education Level: Low Education takes the value of 1 if the person has completed at most
elementary education, but has not completed a technical or vocational training, and zero otherwise,
Middle Education takes the value of 1 if the individual completed the secondary education but has not
completed the tertiary education, and it is zero otherwise. The indicator variable High Education is equal
to 1 if the respondent has a university degree, or some university-level education, without degree, and
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zero otherwise.
Economic Fluctuations: takes the value of 1 if the respondent strongly or absolutely agrees that
"The economy is prospering" is an essential characteristic of democracy, and zero otherwise.
Income Equality: takes the value of 1 if the respondent strongly or absolutely agrees that
"Governments tax the rich and subsidize the poor" is an essential characteristic of democracy, and zero
otherwise.
Family characteristics of the individuals are captured by dummies for martial status, sex, and the
number of children. Specifically, we categorized individuals into three groups according to their martial
status: Single, Married, and Divorced/Widowed, where Divorced/Widowed includes those who are
separated. The study uses dummy variable for female, and male. similarly, we use dummy variable for
those who have children.
Jobless: takes the value of 1 if the respondent is unemployed, and zero otherwise.
Religion: religion is a major part of culture; the study uses dummy variables for Islam, and Eastern
Orthodoxy & Catholic religions. As the recent waves of revolutions and revolutionary attempts in the
region in which most of its citizens are Muslims or Orthodox and Catholics.
Table 1 Summary Statistics and Description
Variable Description Mean std
Dev
Democracy is important = 1 if the individual strongly or absolutely 0.93 0. 259
For the economy
agrees that it is important to live
in a country that is governed
democratically
Rogue Leader is Bad for
Governing he economy
= 1 if the individual strongly or absolutely 0.74 0.439
agrees that a strong leader who does not
have to bother with parliament and elections
is bad or very bad for governing
the country
Scientific and = 1 if the individual strongly or absolutely 0.78 0.417
Technological advance agrees that there should be
more emphasis On the
development of technology
Male Dummy for Males. 0.55 0.497
Female Dummy for Females 0.45 0.497
Income =1 if the individual strongly or absolutely 0.34 0.473
Satisfied with his /or her
financial situation
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Medium and
High income Dummy for medium and high income. 0.20 0.402
Economic
Fluctuations =1 if the individual strongly or absolutely 0.86 0.347
agrees that to have democracy in
any economy it should be prospering
Income
equality =1 If the individual strongly or absolutely 0.78 0.413
agrees that to have democracy in
any economy the government should tax
the rich and subsidize the poor
Single =1 if the individual is single 0.22 0.414
Married =1 if the individual is married or living 0.69 0.463
together with a partner
Divorced =1 if the individual is divorced or widowed 0.09 0.286
Having
Children Dummy for one or more children 0.78 0.417
Low Education =1 if the individual hasn't completed or fully 0.52 0.500
completed elementary education or hasn't
adequately completed secondary school
Middle Education =1 if the individual has completed secondary school
But not tertiary 0.34 0.474
High Education =1 if the individual has completed tertiary 0.14 0.346
education in full or in part
Unemployment =1 if the individual is unemployed. 0.47 0.499
Muslim =1 if the individual is Muslim 0.97 0.183
Orthodox or
Catholic
=1 if the individual is Orthodox
Or Catholic 0.00 0.042
-Sources of the variables used are from the World Values Survey wave (2005-2008).
- Numbers of non-missing observations for the dependent variables "Democracy is important", "Rogue
Leader is bad" are 4844, and 4685, respectively.
Results:
Table 2 displays the marginal effect obtained from estimation of eq.1 using probit regression, standard
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311

errors are reported in parentheses.
Column (1) reports the results of the model where the dependent variable is whether the respondent
believes that democracy is important for governing the economy. The second column displays the results
of the model where the dependent variable is whether the respondent believes that a strong leader who
does not bother with parliament and elections is bad or very bad for the country.
Column (1) demonstrates that if the individual aggress that it is good to have more emphasis on the
development of technology in the near future is associated with about a 17 percentage point increase in
the propensity to declare that democracy is important for the economy. Similarly, column 2 shows that if
the individual aggress that it is good to have more emphasis on the development of technology in the near
future is associated with about a 31 percentage point increase in the propensity to declare that a rogue
leader is bad or very bad for managing the country. Consistent with our expectations, the coefficients of
scientific advance in the two models are estimated to be positive and highly significant, indicating that
perceptions about the importance of scientific advance and technological development have a positive,
and strong impact on perceptions of the effectiveness of democracy.
Individuals who are strongly or absolutely satisfied with their financial position are from almost
11(model 2) to 37(model 1) percentage points likely to reveal positive feelings towards the efficiency of
democracy, the coefficients of the satisfaction with financial position are positive and significant in the
two models. Also individuals who earn middle or high income are from almost 1 (model 2) to 19(model 1)
percentage points likely to reveal positive feelings towards the effectiveness of democracy, coefficients in
the two models are also positive and significant.
Individuals who are strongly or absolutely agree that the government should tax the rich and
subsidize the poor is important to have democracy in a country display positive feelings towards the
effectiveness of democracy, coefficients are almost 12 percentage points in the two models and they are
also significant .
The same is true for individuals who are strongly or absolutely agree that it is important for the
economy to be prospering to have democracy display positive feelings towards democracy, coefficients
are positive and range from 8 to 65 percentage points , the coefficient for this variable is only highly
significant in the first model.
Education of the individuals has a significantly negative impact on the propensity to have
positive feeling towards democracy. Specifically, those who completed secondary school or attend college
are about 16 to 40 percentage points less likely to disagree that democracies are important for the
economy in comparison to those who have elementary school education or less, thus all coefficients of
education are negative and significant, they are highly significant for low education individuals.
There is interesting result obtained from the Islamic, Catholism &, and Orthodoxy religions, the
study finds a negative and low significant feelings of Muslims , but positive and low significant feelings of
Catholics and orthodox towards democracy, and this may contradict with Huntington (1996), and
Treisman (2000), as they argues that Islamic, and Catholicism countries are less susceptible to democracy
compared with Protestantism.
Being single or married is correlated with negative and significant feelings toward democracy; the
same is true for males, divorced, and unemployed, or having children but without a significant impact.
The coefficients of higher education and female are equal to zero in the two models. As will be discussed
below their impact will not change direction if the models are estimated for each country.
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312

Table 2: Influence of Scientific Advance on perceptions about performance of Democracy
Democracy is Rogue
important for Leader is bad
the economy
Scientific Advance
Single
Married
Divorced
Having Children
Satisfaction with Financial
position
Income Equality
Economic prosperity
0.171***
(0.064)
-3.443***
(0.173)
-3.262***
(0.106)
-3.110
(000)
-0.130
(0.133)
0.374***
(0.073)
0.123*
(0.068)
0.651***
(0.069)
0.307***
(0.046)
-5.959***
(0.110)
-6.181***
(0.070)
-6.253
(000)
-0.019
(0.083)
0.106**
(0.046)
0.122*
(0.049)
0.081
(0.058)
Muslim
Catholic & Orthodox
Male
Low Education
Middle Education
Jobless
Middle and High Income
-1.382*
(0.641)
1.321*
(0.609)
-0.108
(0.069)
-0.472***
(0.124)
-0.402***
(0.123)
-0.106
(0.069)
(0.191)*
(0.078)
0.450
(0.299)
0.409
(0.299)
-0.048
(0.047)
-0.266***
(0.070)
-0.156*
(0.069)
-0.035
(0.047)
0.097*
(0.054)
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313

The dependent variables, listed at the top of rows 1 and 2, take the value of 1 if the individual
strongly or absolutely agrees that democracy is important for governing the economy, and a strong leader
is bad or very bad to manage the country respectively. The descriptions of the other variables are
presented in Table 1. indicate significance at the 1%, 5%, and 10% levels, respectively. Standards errors are
reported in parentheses.
It is plausible that the impact of individuals' perceptions towards the importance of scientific
advance and technological development on their beliefs about the effectiveness of democracy is different
in countries with high levels of democracy in comparison to countries with a lower level of democracy.
Therefore, we estimated the models separately for countries with high levels of democracy countries
(Turkey), and for countries that have a lower level of democracy (Egypt, and Morocco). The results are
presented in Tables from (3-5).
As Expected there are differences in the results that are obtained from high level of democracy
(Turkey), and countries with low levels of democracy (Egypt, and Morocco) with respect to the impact of
scientific advance. Scientific Advance has a positive and strong impact on the feelings toward democracy
for people in countries where the level of democracy is low (Tables4, and 5). While the scientific and
technological development has a positive and weak (or even negative) impact on people's feelings
towards the effectiveness of democracy in countries where the level of democracy is higher (Turkey).
There are also interesting contrasts between the results obtained from the two groups of countries.
The Islamic religion has almost a positive impact on the feelings towards the effectiveness of democracy
for people in the countries with low levels of democracy; it has a weak positive impact in Egypt, while it
has some negative impact on people's beliefs toward democracy in Turkey. The Catholism religion has a
negative and insignificant impact on people's beliefs towards democracy in the two groups of countries.
There are some commonalities in the results obtained from education of the individuals in the two
groups of countries which has a significantly negative impact on the propensity to have positive feeling
towards democracy, we only find a positive and strong impact of middle and low education on the
effectiveness of democracy in Turkey (model 2). The same commonalities could be found with respect to
being single or married which is correlated with negative and significant feelings toward democracy; the
same is true for those being divorced, and unemployed, or having children but without a significant
impact.
Individuals who are Satisfied with their financial position , and those who earn middle or high
income have positive and strong beliefs towards the effectiveness of democracy in low level of democracy
countries (Egypt, and Morocco). The impact is similar in Turkey but it is slightly weaker. The same result
is found with respect to income equality and economic prosperity, more specifically in Egypt, and
Morocco people strongly agree that the government should tax the rich and subsidies the poor is an
important characteristic of democracy; they also agree that the economic prosperity is an important
characteristic of democracy more than in Turkey.
This means that in countries with low level of democracy, positive feelings towards the
effectiveness of democracy can only be achieved with an increase in scientific and technological
development, with more income equality, economic prosperity, and increase in household income in
comparison to countries with higher level of democracy in the region.
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314

Table 3: Influence of Scientific Advance on perceptions about performance of Democracy in Turkey
Democracy is Rogue
important for Leader is bad
the economy
Scientific Advance
0.316*
(0.132)
-0.012
(0.090)
Single
Married
Divorced
Having Children
Satisfaction with Financial
position
-3.318***
(0.380)
-3.315***
(0.272)
-3.6-7
(000)
-0.083
(0.265)
0.371**
(0.140)
-5.949***
(0.259)
-5.989***
(0.209)
-6.016
(000)
0.068
(0.157)
0.084
(0.083)
Income Equality
0.150
(0.133)
0.289**
(0.089)
Economic prosperity
0.790***
(0.143)
-0.344**
(0.122)
Muslim
Catholic & Orthodox
Male
Low Education
Middle Education
Jobless
Middle and High Income
-4.110
(000)
000
(000)
0.191
(0.148)
-0.527*
(0.0.284))
-0.550*
(0.123)
-0.182
(0.156)
-0.276
(0.170)
0.335
(0.367)
000
(000)
-0.0.153*
(0.090)
0.381**
(0.143)
0.392**
(0.132)
-0.240*
(0.095)
0.110
(0.108)
Observations
1215
1073
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315

The dependent variables, listed at the top of rows 1 and 2, take the value of 1 if the individual strongly or
absolutely agrees that democracy is important for governing the economy, and a strong leader is bad or
very bad to manage the country respectively. The descriptions of the other variables are presented in
Table 1. ***, **,* indicate significance at the 1%, 5%, and 10% levels, respectively. Standards errors are
reported in parentheses.
Table 4: Influence of Scientific Advance on perceptions about performance of Democracy in Egypt
Democracy is Rogue
important for Leader is bad
the economy
Scientific Advance
0.092*
(0.087)
0.376***
(0.065)
Single
Married
Divorced
Having Children
Satisfaction with Financial
position
Income Equality
Economic prosperity
Muslim
Catholic & Orthodox
Male
Low Education
Middle Education
Jobless
-3.98*
(0.216)
-0.137
(0.123)
000
(000)
-0.078
(0.162)
0.333***
(0.096)
0.249**
(0.097)
0.593***
(0.097)
0.024*
(0.012)
000
(000)
0.095
(0.101)
-0.467***
(0.0.284))
-0.411**
(0.146)
-0.082
(0.103)
-0.012
(0.165)
0.073
(0.087)
000
(000)
-0.205*
(0.122)
0.167*
(0.069)
0.204**
(0.078)
0.267***
(0.080)
0.009
(0.007)
000
(000)
0.0094
(0.007)
-0.138
(0.100)
-0.063
(0. 097)
-0.007
(0.076)
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316

Middle and High Income
Observations
0.061
(0.546)
2966
0.112
(0.080)
2923
The dependent variables, listed at the top of rows 1 and 2, take the value of 1 if the individual
strongly or absolutely agrees that democracy is important for governing the economy, and a strong leader
is bad or very bad to manage the country respectively. The descriptions of the other variables are
presented in Table 1. indicate significance at the 1%, 5%, and 10% levels, respectively. Standards errors are
reported in parentheses.
Table 5: Influence of Scientific Advance on perceptions about performance of Democracy in Morocco
Democracy is Rogue
important for Leader is bad
the economy
Scientific Advance
0.243*
(0.145)
0.372***
(0.116)
Single
Married
Divorced
Having Children
Satisfaction with Financial
position
Income Equality
Economic prosperity
-1.619*
(0.687)
-0.711*
(0.344)
000
(000)
-0.954
(0.597)
0.444*
(0.236)
0.111**
(0.156)
0.641***
(0.162)
0.233
(0.360)
0.149
(0.0.192)
000
(000)
-0.076
(0.299)
0.198
(0.171)
0.263**
(0.216)
0.551***
(0.153)
Muslim
Catholic & Orthodox
Male
Low Education
3.071
(4.365)
-3.013
(4.250)
0.052
(0.142)
-5.361***
(0.187)
7.596
(000)
-7.179
(000)
0.034
(0.111)
-0.348
(0.279)
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317

Middle Education
Jobless
Middle and High Income
Observations
-5.147
(000)
-0.060
(0.219)
0.047
(0.162)
665
-0.212
(0.291)
-0.189
(0.168)
0.560***
(0.130)
691
The dependent variables, listed at the top of rows 1 and 2, take the value of 1 if the individual
strongly or absolutely agrees that democracy is important for governing the economy, and a strong leader
is bad or very bad to manage the country respectively. The descriptions of the other variables are
presented in Table 1. ***, **,* indicate significance at the 1%, 5%, and 10% levels, respectively. Standards
errors are reported in parentheses.
Summary and Conclusions
This paper employs micro data on more than 6000 individuals from three countries in the MENA
region to investigate the relationship between personal perceptions of the importance of scientific and
technological development and personal perceptions towards the effectiveness of democracy.
We find a positive and strong relation between the perceptions regarding the importance of
scientific and technological development, and the perceptions regarding the effectiveness of democracy in
the whole region. The evidence of such relationship is much stronger in low democratic countries like
Egypt, and Morocco than in a higher democratic countries like Turkey.
Given the research that indicates a strong impact of modernization and economic development on
democracy, it is important to identify the determinants of democratization. The results of this paper
suggest that the beliefs about the effectiveness of democracy in the region as a system of governance are
shaped by scientific advance, and technological development. This in turn implies that in low level of
democracy countries like in Egypt and Morocco, there should be more emphasis on scientific and
technological development in the near future in order to have an effective democratic system. We also
find other important determinants of democracy in the region such as income equality, economic
prosperity, and income.
References
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Barro R (1999) Determinants of democracy. Journal of Political Economics 107(S6):S158-S183.
Boix C (2003) Democracy and redistribution. Cambridge: Cambridge University Press.
Diamond L(1992)Economic development and democracy reconsideration. American Behavioral Scientist
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Houle C (2009) Inequality and democracy: why inequality harms consolidation but does not affect
democratization. World Politics 61(4):589-622.
Huntington S (1996) The clash of civilization and the remarking of world order. New York: Simon& Schuster.
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Inglehart R, Welzel C (2006) Modernization, cultural change and democracy . The Human Development
Sequence. Cambridge: Cambridge University Press.
Lijphart A (1999) Patterns of democracy. New Haven: Yale University Press.
Lipset S (1959) Some social requisites of democracy: economic development and political legitimacy.
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457.
The Business & Management Review, Vol.2 Number 2, July 2012
319

What explains innovative outcomes at the start-up stage
Masatoshi Kato
Kwansei Gakuin University, Japan
Hiroyuki Okamuro
Hitotsubashi University, Japan
Yuji Honjo
Chuo University, Japan
Keywords
Start-up, Founder, Human capital, R&D, Innovation outcome.
Abstract
This paper explores the determinants of innovative outcomes at the start-up stage. Using a sample from an
original questionnaire survey in Japan, we examine whether R&D cooperation affects innovative outcomes of
start-up firms. We provide evidence that innovative outcomes are positively associated with R&D cooperation.
Also, it is found that founders’ human capital affects R&D cooperation. These findings suggest that founders’
human capital plays a role in innovative outcomes through R&D cooperation, which would indicate the
indirect effects of founders’ human capital on innovative outcomes.
The Business & Management Review, Vol.2 Number 2, July 2012
320

Does Vice Pay A Traditional Investigation
of “Irresponsible” Investing
Greg M. Richey
California State University, San Bernardino
Keyword
Vice Fund, VICEX, S&P 500 Index, sin funds, sin stocks
Abstract
This paper examines the risk and return characteristics of the Vice Fund, a mutual fund that invests in socially
“irresponsible” corporations that partake in the sales of alcohol, tobacco and firearms. First of all, I use the traditional
Sharpe, Treynor and Jensen measures to evaluate the Vice Fund compared to its benchmark, the S&P 500. Secondly,
I apply an indication of downside risk to the Vice Fund to test the volatility and performance during market
corrections. Using a different data set, I find my results are similar to those of other studies that focus on the Vice
Fund and sin investing in general. That is, sin investing can perform better than the S&P 500 on a risk-adjusted
basis.
Introduction
In the seminal paper on finance theory, Markowitz (1952) finds that the optimal portfolio is
constructed by exclusively considering assets based on a combination of risk and return, without
considering where the elements of risk and return originate. Since Markowitz, corporate finance theory
has evolved to consider social norms, psychological biases, and other factors to measure risk and return in
order to earn abnormal returns and “beat” the market. As a result, from Markowitz to Sharpe to Fama &
French to Shleifer & Vishny, finance theory has expanded to consider every element possible in portfolio
construction. One of the latest additions has been the emergence of Socially Responsible Investing (SRI),
whereby investors construct portfolios of firms that do not engage in the production of tobacco, alcohol,
or gaming activities. On the contrary, an even newer class of investing has emerged—“vice investing.”
This market strategy entails a direct contrast to Socially Responsible Investing by investing heavily in the
“Sin Triumvirate” of tobacco, alcohol, and gambling. Investors hope the cash flows and defensive nature
of these industries provide risk-adjusted abnormal returns when compared to a benchmark. One
drawback of vice investing is the lack of mutual funds and hedge funds that employ investing in sinrelated
industries as a dominant strategy of investor focus. In fact, only one such mutual fund, the Vice
Fund (VICEX), fits the bill of a true investment dedicated to sin industries.
This article compares the traditional performance measures of the Vice Fund, a mutual fund that
invests in “sin” related industries such as alcohol, tobacco, and gaming to those of the S&P 500, an index
of the five hundred largest U.S. based firms. I begin analyzing the Vice Fund with the traditional
performance measures of Sharpe, Treynor and Jensen. However, since these measures 1) are appropriate
when the means and variances are normally distributed and 2) insist the portfolio returns can be
characterized by the mean and the variance of the return distribution and 3) consider investors care only
about the mean and the variance of the return distribution a la classical finance theory, further analysis
requires considering return distributions containing “fat tails” and “skewness.” Basically, time-series
asset returns are rarely normally distributed. As a result, I will use the Lower Partial Moment (Baillie and
DeGenarro (1990)) as an alternative risk-measurement technique to capture the downside risk and
compute the Sortino ratio of the Vice Fund, following Beer, Estes, and Munte (2011), who use the
aforementioned technique on Socially Responsible Funds.
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321

The remainder of this article is organized as follows: Section 2 provides a literature review.
Section 3 describes the data and methodology. The results of the estimations are presented in Section 4.
Finally, Section 5 provides concluding remarks.
Literature Review
Although an abundance of literature exists on specialty mutual funds such as Socially Responsible
Investments, the amount of literature dedicated to “Sin Investing” remains limited in both quantity and
theoretical relevance. In fact, all of the articles dedicated to the market performance of sin stocks reflect an
empirical approach or borrow a market theory and apply it to the realm of sin investing. In many regards
considered the seminal paper, authored by Chong, Her and Phillips (2006) the scholars use the traditional
performance measures to evaluate the Vice Fund and then apply a generalized autoregressive conditional
heteroskedacticity (GARCH (1, 1)) model. The authors found the Vice Fund outperformed the Domini
Social Equity Fund (the benchmark for socially responsible investing) over a three-year period from 2002-
2005.
Other researchers have built on Chong, Her, and Phillips with various results. Hong and
Kacperczyk (2008) use data from 1965-2004 and find sin stocks outperform their benchmarks by up to 30
basis points per month. They found no systematic relationship between sin stock returns and the
association of litigation risk, which states sin stocks generate a higher return to compensate investors for
the risk of the firms being sued. Hong and Kacperczyk also concluded that sin stocks are underpriced due
to neglect by institutional investors who lean on the side of Socially Responsible Investing. Moreover, they
find the defensive nature rests in the addictive nature of the products produced by sin industries. Goodall
(1994) focused on gaming stocks and found that these stocks are more sensitive to market downturns than
to upswings in the stock market. This seems plausible and follows Kahneman and Tversky’s Prospect
Theory, which states that investors are more sensitive to losses that they are to gains.
Salaber (2009) found that sin stocks earn an excess return relative to the overall market, but that
the excess return disappears when sin stocks are compared to a portfolio of stocks with similar defensive
characteristics. Furthermore, Salaber concludes that sin stocks outperform during market downturns but
underperform during market upswings. Fabozzi, Ma, and Oliphant (2008) concluded that sin stocks
outperform the market in terms of both magnitude and frequency. They identify the main reason for the
outperformance of sin stocks lies in not abiding to or upholding implicit or explicit costly social standards.
Finally, Areal, Cortez and Silva (2010) use data from 1993-2009 and find the “irresponsible fund”
outperforms the market when volatility is low, but underperforms the benchmark during high-volatility
regimes. They attribute the results to changing risk throughout the period. They conclude the
“irresponsible fund” exhibits a higher level of systematic risk (beta) in low volatility regimes, a lower level
of systematic risk in high volatility regimes, and deserves further research.
Data & Methodology
Using weekly data from September 2002 to June 2012, I compare the Vice fund with its
benchmark, the S&P 500. I chose the Vice Fund to represent “sin investing” since it is still the only mutual
fund that exclusively invests in sin industries and to defer from the temptations of data mining.
The Vice Fund (ticker: VICEX) was launched on August 30, 2002, and has an investor focus that
concentrates on “growth of capital.” Management emphasizes dividend-paying companies with positive
cash flows, adequate debt-service coverage (TIE ratio), and avoids firms with financial “red flags,” large
pension obligations, and recurring write-offs. However, the prospectus states that the Vice Fund primarily
invests in the tobacco, alcohol, gaming and defense industries so the fund has more exposure to
unsystematic risk than a diversified mutual fund does. Also, the fund invests in foreign firms, which
contain political, social, and currency exchange risks not present in domestic securities. For clarity, Table 1
lists the firms held in the portfolio.
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322

TABLE 1- VICE FUND PORTFOLIO
SECURITY
ALTRI GROUP
ANHEUSER BUSCH INBEV SA/NV
ANHEUSER BUSCH INB
BOEING
BRITISH AMERN TOB PLC
BROWN FORMAN
CARLSBERG
CHURCHILL DOWNS
COMPANHIA DE BEBIDAS DAS AMERS
CONSTELLATION BRANDS
DIAGEO PLC
GALAXY ENTERTAINMENT
GENERAL DYNAMICS
HEINEKEN NV
HONEYWELL INT
IMPERIAL TOBACCO
INTERNATIONAL GAME TECHNOLOGY
L-3 COMMUNICATIONS
LADBROKES
LAS VEGAS SANDS
LOCKHEED MARTIN
LORILLARD
MGM RESORTS INTERNATIONAL
MOLSON COORS BREWING
NORTHROP GRUMMAN
PENN NATL. GAMING
PERNOD RICARD
PHILLIP MORRIS INTL.
RAYTHEON
REYNOLDS AMERICAN
ROCKWELL COLLINS
ROLLS ROYCE HOLDINGS
SABMILLER
SANDS CHINA LTD
UNITED TECHNOLOGIES
WYNN MACAU
WYNN RESORTS
Table 2 presents the summary statistics of the Vice Fund and the S&P 500 over the sample period.
The weekly data over the multi-year sample period yield a sample size of 508 observations. The table
shows the mean return of the Vice Fund is higher than that of the S&P 500, and its standard deviation was
also smaller over the sample size. These summary statistics give the first glimpse that indicate that the
performance ratios will show a higher risk-adjusted return for the Vice Fund over its benchmark.
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323

TABLE 2 - SUMMARY OF DATA
VICEX S&P 500
No. of Obs. 508 508
Mean 0.0013746 0.0008606
Maximum 0.1540329 0.113559
Minimum -0.1866511 -0.2008375
Standard Deviation 0.0243237 0.0264051
FIGURE 1
Growth of the Vice Fund Over the Sample Period
Figure 1 shows the performance of the Vice Fund from September 2002 to June 2012. Obviously, the
series lacks stationarity and has a unit root, so I construct the rate of growth of the weekly returns by ln(P t
– P t-1) where P t represents the closing price at time t and P t-1 represents the weekly closing price from the
prior week. The results of the weekly Vice Fund returns, which appear stationary, are shown in figure 2
below. I confirm the stationarity by conducting an augmented Dickey-Fuller test and the resulting Z-
statistic yields -14.406, so I can reject the null hypothesis of the presence of a unit root and accept the
alternative hypothesis that the series is stationary.
FIGURE 2
-.2 -.1
x
0
.1 .2
5
10 15 20 25
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
t
Weekly Return Distributions of the Vice Fund
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
t
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324

Performance Measures:
Sharpe Ratio
The Sharpe Ratio (1966) is calculated by subtracting the risk-free rate (90-day U.S. T-Bills) from the
fund considered and then dividing the difference by the standard deviation of the fund under
investigation. The Sharpe Ratio is illustrated by formula (1) as follows:
Sharpe Ratio = (r v,j – r f) / (r v,j) (1)
Where r v,j and r f denote the continuously compounded weekly returns of Vice Fund v and the
continuously compounded return of the 90-day U.S. treasury bills (the risk-free rate of return)
respectively. (r v,j) represents the standard deviation of the Vice Fund over the sample period. A higher
Sharpe Ratio provides an indication of superior performance whereas a lower Sharpe Ratio is indicative of
subpar performance in comparison to a benchmark.
Treynor Ratio
Developed by Jack Treynor, the Treynor Ratio (1966) uses systematic risk as opposed to total risk
and is calculated by subtracting the risk-free rate (90-day U.S. T-Bills) from the fund considered and then
dividing the difference by the beta coefficient of the fund under investigation. The Treynor Ratio is
illustrated by formula (2) as follows:
Treynor Ratio = (r v,j – r f) / (r v,j) (2)
Where r v,j and r f denote the continuously compounded weekly returns of Vice Fund v and the
continuously compounded return of the 90-day U.S. treasury bills (the risk-free rate of return)
respectively. (r v,j) represents the systematic risk of the Vice Fund over the sample period. Like the Sharpe
Ratio, a greater Treynor Ratio provides an indication of superior performance whereas a lower Treynor
Ratio is indicative of subpar performance when compared to a benchmark.
Jensen’s Alpha
Developed by Michael Jensen (1968) to assess the performance of mutual fund managers, Jensen’s
alpha is a performance measure based on the Capital Asset Pricing Model (CAPM) that uses beta as a
measure of risk and assumes asset returns are driven by their degree of systematic risk (Sharpe, 1964).
Jensen suggests that a fund’s financial performance can be approximated by its systematic return
component unexplained by the overall market portfolio return. With the S&P 500 as a proxy for the
market portfolio and a bench mark for the Vice Fund, Jensen’s Alpha can be described as follows:
r v,j = v + [r f + l,v (r m,j-r f)] + v,t (3)
Where r v,j and r m,j denote the continuously compounded weekly returns of Vice Fund v and the market
portfolio in excess of the continuously compounded return of the 90-day U.S. treasury bills (the risk-free
rate of return) at time t. The coefficient l,v represents the fund’s systematic risk of being exposed to the
return of the market portfolio during the sample period. v,t represents a random disturbance term.
Lower Partial Moment
The traditional measures of Sharpe, Treynor, and Jensen assume that investors have a concave
utility function whereas in reality, investors are concerned about earning less than expected, but not
concerned about earning more than expected. In order to capture the downside volatility, an alternative
measure of risk, the Lower Partial Movement (LPM) used by (Kahneman and Tversky (1979), and Thaler
The Business & Management Review, Vol.2 Number 2, July 2012
325

(1993)) can capture the non-standard utility preference that investors possess when considering security
returns. The Lower Partial Movement can be computed by:
LPMv(BEN, k) = [E(BEN –r v) k | BEN > r v] 1/k (4)
Where BEN represents the benchmark used (in our case, the S&P 500), k represents the sensitivity to
extreme downside returns, and I create dummy variable to use only the observations where the S&P 500
outperforms the Vice Fund to focus on downside risk. This will be computed by following the semistandard
deviation (SSD) version of the Lower Partial Moment, which uses a derived CAPM to introduce
the risk measurement SSD in order to show a semi-covariance with the market portfolio (Beer et al.
(2011)). I apply the SSD case to the Lower Partial Moment equation to obtain:
SSD = LPMv(r f,2) = [E(r f –r v) k | BEN > r v] 1/k (5)
Following Hogan and Warren (1972), I apply the SSD derived CAPM to the traditional performance
measures above to obtain the Treynor (SSD), the Jensen Alpha (SSD), and the Sortino ratio, which uses the
SSD in the denominator as opposed to Sharpe’s use of standard deviation.
Treynor Ratio (SSD) = (r v,j – r f) / SSD (6)
Jensen’s Alpha (SSD): r v,j = v + ( SSD r m,j) + v,t (7)
Sortino Ratio = (r v,j – r f) / SSD (8)
1. RESULTS
The results of the performance measures are presented in Table 3. Results
show the Vice Fund outperforms the S&P 500 in all of the traditional performance measures as well as the
adjusted measures to account for downside risk. The latter measures (SSD) help confirm the fund’s
objectives of being defensive and focusing on dividends and cash flows to minimize losses during market
corrections and recessions. Interestingly enough, none of the articles researched on the topic of sin
investing focused on the elasticities of the products or services included in the investment objectives. Also,
the returns computed do not account for the Vice Fund’s hefty annual gross expense ratio of 1,59%,
whereas the typical expense ratio for a standard S&P 500 Index fund offered at most discount brokerages
averages around 0.25% on an annual basis. This could be topic for further consideration as investors need
to focus on an asset’s real returns (after fees, taxes, inflation, etc.) more so than its nominal returns.
TABLE 3
Fund Sharpe Treynor Jensen’s
Alpha
Sortino
Treynor
(SSD)
Jensen
(SSD)
VICEX 0.801017 0.030307 0.000583 0.21576 0.030304 0.87938
S&P 500 0.249887 0.006598 0.000000 0.000324 0.006595 0.00000
The Business & Management Review, Vol.2 Number 2, July 2012
326

Implications and Conclusions
This paper used the traditional performance measures to analyze the Vice Fund, the only known
mutual fund to have a preponderance of investments in “sin” related industries. Using the Lower Partial
Moment Measure to account of downside risk, I was able to test the defensive industry nature of the Vice
Fund. My results are similar to those of Chong et al. (2006) and Hoepner & Zeume (2009) in terms of sin
funds containing a positive Jensen’s alpha, indicating an abnormal return for the given level of systematic
risk. However, more research needs to be undertaken to examine different types and sizes of beta
coefficients’ effect on sin funds. Hoepner & Zeume’s (2009) as well as Salaber’s (2008) work appear to be
solid candidates for the foundation of a theoretical perspective on sin investing to catch up with that of
Socially Responsible Investing.
In addition, as culture changes and the social, economic, and political climate becomes more politically
correct, we may see more industries added to expand the “Sin Triumvirate.” This would also serve to
reduce the main disadvantage of sin investing—that it possesses a greater amount of risk than a typical
mutual fund because of the lack of diversification.
In conclusion, modern portfolio theory generally considers diversification to occur with about
forty randomly selected securities across all industries. Even though the Vice Fund, and sin investing in
general do not provide enough diversification to provide investors with a complete portfolio strategy,
they deserve to be part of an investor’s portfolio considerations, at least for the abnormal risk-adjusted
historical returns generated.
References
Areal, Nelson, Maria Ceu Cortez and Florinda Silva, “Investing in Mutual Funds: Does it Pay to be a Sinner or
a Saint in Times of Crisis” Working Paper, 2010.
Baillie, R.T. and R.P. DeGenarro, “Stock Returns and Volatility”, Journal of Financial and Quantitative Analysis,
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Chong, James, Monica Her and G. Michael Phillips, “To Sin or not to Sin Now That’s the Question”, Journal of
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Gambling Studies10, 4, 1994, 323-337.
Hoepner, Andreas G.F. and Stefan Zeume, “The Dark Enemy of Responsible Mutual Funds: Does the Vice
Fund Offer More Financial Virtue” (http://ssrn.com/abstract=1485846).
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Journal of Financial and Quantitative Analysis, 7, 1972, 1881-1896.
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1968, 389-416.
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Vol. 47, 2, 1979, 263-292.
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Budgets”, Review of Economics and Statistics, 47, 1965, 13-37.
Markowitz, Harry, “Portfolio Selection”, Journal of Finance, 7, 1, 1952, 77-91.
Salaber, Julie, “Sin Stock Returns over the Business Cycle”, Working Paper, Université Paris-Dauphine, 2007.
Sharpe, William, “Capital Asset Prices: A Theory of Capital Market Equilibrium Under Conditions of Risk”,
Journal of Finance, 19, 1964, 425-442.
Sharpe, William, “Mutual Fund Performance”, Journal of Business, 39, 1, 1966, 119-138.
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Shleifer, A., and Vishny, R.W., “Corruption”, The Quarterly Journal of Economics, Vol. 108, (3), 1993, 599-617.
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VICE FUND, “Prospectus”, www. Vicefund.com
Mr. Greg Richey is a Lecturer of Finance at California State University, San Bernardino. He teaches accounting,
financial planning, corporate finance, and investments. He is in the Ph.D. program in Global Commerce and Finance
at Claremont Graduate University’s School of Politics and Economics.
The Business & Management Review, Vol.2 Number 2, July 2012
328

Corporate Governance and Business Conference (CGBC)
19-20 th July 2012
List of Authors & Institution Represented
Author’s Name
Institution, Country
Anisa Ari Amunega
Management Sciences for Health, Nigeria
Sandra Osanmor
Management Sciences for Health, Nigeria
Abubakar Kurfi
Management Sciences for Health, Nigeria
Shital Jhunjhunwala
Institute of Public Enterprise, India
R.K Mishra
Institute of Public Enterprise, India
Tomasz Rojek
Cracow University of Economics, Poland
Nousheen Tariq Bhutta
International Islamic University, Islamabad, Pakistan
Syed Zulfiqar Ali Shah
International Islamic University, Islamabad, Pakistan
Mridula Sahay
Amrita School of Business, Amrita Nagar, India
Shiva Kumar
Amrita School of Business, Amrita Nagar, India
N. Ata Atabey Selcuk University, Turkey
Huseyin Cetin
Necmettin Erbakan University, Turkey
Puan Yatim
University of Kebangsaan, Malaysia
Sheikh Abdur Rahim
Daffodil International University, Bangladesh
Sal AmirKhalkhali
Saint Mary`s University, Halifax, Canada
Atul Dar
Saint Mary`s University, Halifax, Canada
David M Chapinski
Rutgers University, Newark, USA
Olawale Ajai
Lagos Business School, Nigeria
Patricia Miller Selvy
Bellarmine University, USA
Rasheed Olajide Alao
Adeyemi College of Education, Ondo, Nigeria
Andrzei Tomasz Jaki
Cracow University of Economics, Poland
Marek Dziura
Cracow University of Economics, Poland
Ryszard Borowiecki
Cracow University of Economics, Poland
Barbara Siuta-Tokarska
Cracow University of Economics, Poland
Jarosaw Kaczmarek
Cracow University of Economics, Poland
Murat Arici
Department of Philosophy, Konya N.E University, Turkey
Ayan Chattopadhya
IISWBM (aafiliated to Calcutta University), Kolkata, India
Arpita Banerjee Chattopadhya Budge-Budge College (affiliated to Calcutta University), India.
M. Ravindar Reddy School of Management, National Institute of Technology, India
Chandrajeet Kumar
School of Management, National Institute of Technology, India
Palto Ranjan Datta
University of Hertfordshire, UK
Weiping Liu
Eastern Connecticut State University, USA
Priyanka Kulkarni
MIT CoE, Centre for Management Studies & Research, Pune, India
Arun Mokashi
MIT CoE, Centre for Management Studies & Research, Pune, India
Nattawadee Korsakul
Feng Chia University, Taiwan
Ruey-FaLIN
Feng Chia University, Taiwan
Nattharuja Korsakul
Feng Chia University, Taiwan
Lindu Zhao
Southeast University, Nanjing, China
Olagunju Adebayo
Redeemer`s University, Nigeria
Olawale Ajai
Lagos Business School, Pan African University, Lagos, Nigeria.
Oluwa Temitope Mariam
Redeemer`s University, Nigeria
Mirza Ashfaq Ahmed
University of Gujrat, Pakistan
Suleman Aziz Lodhi
Lahore Leads University, Pakistan
Ogunbanwo Olabashi
Nigeria
Faridah Ismaila Mohammed UK
The Business & Management Review, Vol.2 Number 2, July 2012
329

Corporate Governance and Business Conference (CGBC)
19-20 th July 2012
Index
Name/Affilication/Country
Anisa Ari Amunega
Management Sciences for Health, Nigeria
Sandra Osammer
Management Sciences for Health, Nigeria
Ochannya Iyaji
Management Sciences for Health, Nigeria
Shital Jhunjhunwala
Institute of Public Enterprise, India
R.K Mishra
Institute of Public Enterprise, India
Tomasz Rojek
Cracow University of Economics, Poland
Nousheen Tariq Bhutta
International Islamic University, Pakistan
Syed Zulfiqar Ali Shah
International Islamic University, Pakistan
Mridula Sahay
Amrita School of Business, India
Shiva Kumar
Amrita School of Business, Amrita Nagar, India
N. Ata Atabey
Selcuk University, Turkey
Huseyin Cetin
Necmettin Erbakan University, Turkey
Puan Yatim
University of Kebangsaan, Malaysia
Sheikh Abdur Rahim
Daffodil International University, Bangladesh
Sal AmirKhalkhali
Saint Mary`s University, Halifax, Canada
Atul Dar
Saint Mary`s University, Halifax, Canada
David M Chapinski
School of Public Affairs and Administration,
Rutgers University, Newark, USA
Olawale Ajai
Lagos Business School, Nigeria
Patricia Miller Selvy
Bellarmine University, USA
Rasheed Olajide Alao
Adeyemi College of Education, Ondo, Nigeria
Andrzei Tomasz Jaki
Cracow University of Economics, Poland
Topic
Board Governance Development: A Strategy for Systems
Strengthening and Sustainability
Board Governance Development: A Strategy for Systems
Strengthening and Sustainability
Board Governance Development: A Strategy for Systems
Strengthening and Sustainability
Are Singapore Boards Global
Are Singapore Boards Global
Corporate Governance in the Value Based management
Concept
Investors` Reaction to the Implementation of Corporate
Governance Mechanisms
Investors` Reaction to the Implementation of Corporate
Governance Mechanisms
Corporate Governance in Public Sector Banks-Tapping
the Bee Hive
Corporate Governance in Public Sector Banks-Tapping
the Bee Hive
Financial Reporting Standards as a Tool in Order to
Ensure Corporate Transparency: The Case of Turkey
Financial Reporting Standards as a Tool in Order to
Ensure Corporate Transparency: The Case of Turkey
Boardroom Pay, Performance and Corporate Governance
in Malaysia
An Analysis of Performance Appraisal Systems of
Merchantile bank Limited
On the Effectiveness of Quality Regulation: Some
Empirical Results
On the Effectiveness of Quality Regulation: Some
Empirical Results
Compliance Versus Volatility of Performance in 2012,
Corporate Influence in Bureaucratic Systems. Where
Should the Focus for America lay Most
Profit Creation, Intra and Inter-generational Equity:
Need for New Company Law
Exposing MBA Students to Corporate Governance
A Panel Cointegration Approach to FDI and Growth in
Africa: Evidences from ECOWAS, ECCAS, UMA, EAC
and SADC Regions
Risk in the Enterprise Value Creation
The Business & Management Review, Vol.2 Number 2, July 2012
330

Marek Dziura
Cracow University of Economics, Poland
Ryszard Borowiecki
Cracow University of Economics, Poland
Jarosxaw Kagzmarek
Cracow University of Economics, Poland
Murat Arici
Konya N.E University, Turkey
Ayan Chattopadhya
IISWBM (aafiliated to Calcutta University),
Kolkata, India
Arpita Banerjee Chattopadhya
Budge-Budge College (affiliated to Calcutta
University), India
Rabindar Reddy
School of Management, National Institute of
Technology, India
Chandrajeet Kumar
School of Management, National Institute of
Technology, India
Palto Ranjan Datta
University of Hertfordshire, UK
Weiping Liu
Eastern Connecticut State University, USA
Priyanka Kulkarni
MIT CoE, Centre for Management Studies and
Research, Pune, India
Arun Mokashi
MIT CoE, Centre for Management Studies and
Research, Pune, India
Lindu Zhao
Southeast University, Nanjing, China
Technology Systems for Sustainable Development in
Poland
Analysis of Causes and Consequences of the Global
Economics Crisis –Poland`s Perspective
The Disharmonies, Dilemmas and Effects of the
Transformation of the Polish Economy
Low Economic Awareness and Its Consequences: The
Case of Turkey
Ranking Indian States on Social Welfare &
developmental Status in Globalisation Era using a
MCDM Approach
Ranking Indian States on Social Welfare &
developmental Status in Globalisation Era using a
MCDM Approach
Creating Consumer Based Brand Equity in Indian Sport
Shoe Market
Creating Consumer Based Brand Equity in Indian Sport
Shoe Market
A Conceptual Framework of Customer Retention
Strategy (CRS)
Reward or Penalty Inter-temporal Pricing of
Decentralized Channel Supply Chain Under
Asymmetric information Condition
Succession Planning in Management Institutes: A
critical Study
Succession Planning in Management Institutes: A
critical Study
Reward or Penalty Inter-temporal Pricing of
Decentralized Channel Supply Chain Under
Asymmetric information Condition
Cultural Intelligence as Core Competency to
Employability
Cultural Intelligence as Core Competency to
Employability
Ruey-FaLIN
FengChia University, Taiwan
Nattawadee Korsakul
FengChia University, Taiwan
Nattharuja Korsakul, FengChia University, Taiwan Cultural Intelligence as Core Competency to
Employability
Olagunju Adebayo
Corporate Governance and Performance of
Redeemer`s University, Nigeria
Commercial Banks in Nigeria
Olawale Ajai
Profit creation, intra and inter-generational Equity:
Pan African University, Lagos, Nigeria,
Need for New Company Law
Oluwa Temitope Mariam
Corporate Governance and Performance of
Redeemer`s University, Nigeria
Commercial Banks in Nigeria
Mirza Ashfaq Ahmed
Opinion-Leading Role of Politically Aware Consumer
University of Gujrat, Pakistan
Suleman Aziz Lodhi
Opinion-Leading Role of Politically Aware Consumer
Lahore Leads University, Pakistan
Ogunbanwo Olabashi
Observer
Faridah Ismaila Mohammed
Observer
The Business & Management Review, Vol.2 Number 2, July 2012
331

International Conference on Business & Economic Development (ICBED)
23-24 th July 2012
List of Authors & Institution Represented
Author’s Name
Yen-Ting Tim Lin
Wen-Hui Mico Yang
Cho-Pu Vincent Lin
Jungki Lee
Wenyu Do
Majed Sultan Abu Ashwan
Bojana Milic
Ljubica Dudjac
Leposava Grubic-Nesic
Palto Ranjan Datta
Ashru Bairagee
Yeong Real Kim
Luke Hsiao
Ming Chi Hsiao
Jen-Ting Sun
Ann Linn
Patience Kwakyewa Asirifi
Mark T Jones
Amina Jone betzuen Alvarez
Jerome V Healy
Teymur Rahmani
Salman Falahi
Marc Anthony Fusaro
Darja Kobal Grum
Bojan Grum
Moges Teshome
Marek Dziura
Ryszard Boroweiecki
Jaroslaw Kaczmarek
Owobu Gladys Ann
Filipo Tokalau
Wen-Hui Mico Yang
Yen-Ting Tim Lin
Cho-Pu Vincent Lin
Tomasz Rojeck
Cho-Pu Vincent Lin
Yen-Ting Lin
Wen-Hui Mico yang
Hoda Abd El hamid Ali
Masatoshi kato
Xiaojun Quan
Wenyin Liu
Institution, Country
Hsiuping University of Science and Technology, Taiwan
Hsiuping University of Science and Technology, Taiwan
St. John` University, Taiwan
Korea University, South Korea
City University of Hong Kong, China
King Saud University, Riyadh, Saudi Arabia
University of Novi Sad, Serbia
University of Novi Sad, Serbia
University of Novi Sad, Serbia
University of Hertfordshire, UK
Academy of Business & Retail Management, UK
Chungbuk national University, South Korea
I-Shou University, Taiwan
I-Shou University, Taiwan
I-Shou University, Taiwan
Chang Gung Institute of Technology
Koforidua Polytechnic, Koforidua, Ghana
Park Royal College, London, UK
University of Basque, Spain
University of Hull Business School, UK
University Tehran, Iran
University Tehran, Iran
Arkansas Tech University, USA
University of Ljublijana, Slovenia
European Law faculty in Nova Gorcia, Slovenia
Addis Ababa, Ethiopia
Cracow University of Economics, Poland
Cracow University of Economics, Poland
Cracow University of Economics, Poland
Department of Urban and Regional Planning, Nigeria
University of South Pacific, Fiji island
Hsiuping University of Science and Technology, Taiwan
Hsiuping University of Science and Technology, Taiwan
St. John` University, Taiwan
Cracow University of Economics, Poland
St. John` University, Taiwan
Hsiuping University of Science and Technology, Taiwan
Hsiuping University of Science and Technology, Taiwan
Helwan University, Cairo, Egypt
School of Economics, Kwansei Gakuin University, Japan
City University of Hong Kong, China
City University of Hong Kong, China
The Business & Management Review, Vol.2 Number 2, July 2012
332

A. Gregoriou University of Hull Business School, UK
Barbara Siuta-Tokarska
Cracow University of Economics, Poland
Francis Atsu
Ghana Institute of Management and Public Administration
(GIMPA), ACCRA, Ghana
Samuel Adams
Ghana Institute of Management and Public Administration
(GIMPA), ACCRA, Ghana
Hassan Mounir El-Sady
Gulf University for Science and Technology, Kuwait
Vasilya Sultanova
Australian College of Kuwait, Kuwait
Greg M. Richey
California State University, San Bernardino, USA
Patricia J. Cirillo
Cypress Research Group, USA
Andrzei Jaki
Cracow University of Economics, Poland
Hiroyuki Okamuro
Hitotsubashi University, Japan
Yuji Honjo
Chuo University, Japan
Abayomi Nafisatu Bosede
Baby and You Store, Nigeria
Kevin Griffin
University College Dublin, Ireland
Khan Penn Ackuog
School of Business and Law, London, UK
Mohammed Rehab Al Nomani USA
The Business & Management Review, Vol.2 Number 2, July 2012
333

International Conference on Business & Economic Development (ICBED)
23-24 th July 2012
Index
Name/Affilication/Country
Yen-Ting Tim Lin
Hsiuping University of Science and
Technology, Taiwan
Wen-Hui Mico Yang
Hsiuping University of Science and
Technology, Taiwan
Cho-Pu Vincent Lin
St. John` University, Taiwan
Jungki Lee
Korea University, South Korea
Wenyu Do
City University of Hong Kong, China
Majed Sultan Abu Ashwan
King Saud University, Riyadh, Saudi Arabia
Bojana Milic
University of Novi Sad, Serbia
Ljubica Dudjac
University of Novi Sad, Serbia
Leposava Grubic-Nesic
University of Novi Sad, Serbia
Palto Ranjan Datta
University of Hertfordshire, UK
Ashru Bairagee
Academy of Business & Retail Management,
UK
Yeong Real Kim
Chungbuk national University, South Korea
Luke Hsiao
I-Shou University, Taiwan
Ming Chi Hsiao
I-Shou University, Taiwan
Jen-Ting Sun
I-Shou University, Taiwan
Ann Linn
Chang Gung Institute of Technology
Patience Kwakyewa Asirifi
Koforidua Polytechnic, Koforidua, Ghana
Mark T Jones
Topic
How Does Employee satisfaction Impact Information Flow
during order fulfillment process
How Does Employee satisfaction Impact Information Flow
during order fulfillment process
How Does Employee satisfaction Impact Information Flow
during order fulfillment process
An Exploration of Consumer Misbehaviours and their
influences on Retail stores: An Application of the theory of
Justice
How Do Online Consumer Review Sentiments affect E-
commerce sales A Text Mining Analysis
Geographic Distribution of Population and Labor Force in
Saudi Arabia
The Relationship Between Leadership and Learning
Organisation: A Review of the Literature and Research
Proposal
The Relationship Between Leadership and Learning
Organisation: A Review of the Literature and Research
Proposal
The Relationship Between Leadership and Learning
Organisation: A Review of the Literature and Research
Proposal
Relationship Marketing: Towards a Definition
Relationship Marketing: Towards a Definition
ERP System Implementation CSFs for Korean Organisations:
A Delphi study
The Effects of Extrinsic Cues on the Relationship Between
Brand Image and Purchasing Intention-Evidences from Chinese
Exchabge Students` Perspective
The Effects of Extrinsic Cues on the Relationship Between
Brand Image and Purchasing Intention-Evidences from Chinese
Exchabge Students` Perspective
The Effects of Extrinsic Cues on the Relationship Between
Brand Image and Purchasing Intention-Evidences from Chinese
Exchabge Students` Perspective
Employee Stock ownership and Employee Psychological
ownership: The Moderating Role of Individual
Characteristics
Adoption of Job Rotation as a Component of Staff Development
in Polytechnics In Ghana
Water – The missing ingredient in real and sustained
The Business & Management Review, Vol.2 Number 2, July 2012
334

Park Royal College, London, UK
Amina Jone betzuen Alvarez
University of Basque, Spain
Jerome V Healy
University of Hull Business School, UK
Teymur Rahmani
University Tehran, Iran
Salman Falahi
University Tehran, Iran
Marc Anthony Fusaro
Arkansas Tech University, USA
Darja Kobal Grum
University of Ljublijana, Slovenia
Bojan Grum
European Law faculty in Nova Gorcia,
Slovenia
Moges Teshome
Marek Dziura
Cracow University of Economics, Poland
Ryszard Boroweiecki
Cracow University of Economics, Poland
Jaroslaw Kaczmarek
Cracow University of Economics, Poland
Owobu Gladys Ann
Department of Urban and Regional Planning,
Nigeria
Filipo Tokalau
University of South Pacific, Fiji island
Wen-Hui Mico Yang
Hsiuping University of Science and
Technology, Taiwan
Yen-Ting Tim Lin
Hsiuping University of Science and
Technology, Taiwan
Cho-Pu Vincent Lin
St. John` University, Taiwan
Tomasz Rojeck
Cracow University of Economics, Poland
Cho-Pu Vincent Lin
St. John` University, Taiwan
economic development
Markets in Financial Instruments Europe Directive (MIFID):
A method of controlling Ethical Banking
Efficiency of EC Greenhouse Gas Abatement Measures
and Firms in the European Union: Evidence from plant
level allocations and surrendered permits
Corruption, Democracy and Tax Compliance: Cross-country
Evidence
Corruption, Democracy and Tax Compliance: Cross-country
Evidence
Are High Interest Loans a Debt Trap or Access to Credit
Evidence from a Field Experiement of Payday Borrowers
The Expectations of Potential Acquirers of Real estate rights
and decisions to Purchase property in times of Recesion
The Expectations of Potential Acquirers of Real estate rights
and decisions to Purchase property in times of Recesion
The Role of Micro and Small Enterprise in Employment
Opportunity and Poverty reduction in addis Ababa, Ethiopia:
The Case of Addis ketema Sub City
Innovation Policy in Poland – Challenge for Intensive Growth
Innovation, Knowledge Creation and Technology Policy in the
European Union
Innovation, Knowledge Creation and Technology Policy in the
European Union
Challenges of Sustainability and Urban Development in
Nigeria: Reviewing the Millenium Development Goals
Incentives to Encourage Social Environmental Responsible
Corporate Actions: Willingness to pay for non-use value of
Land-Case of Backpackers in Fiji
How to Transfer Knowledge to your work
How to Transfer Knowledge to your work
How to Transfer Knowledge to your work
Corporate Governance in the value based management Concept
Research of Influencing Factors for Usage of Facebook
Willingness-A case Study on College Students in the Tamsui
Area
The Business & Management Review, Vol.2 Number 2, July 2012
335

Yen-Ting Lin
Hsiuping University of Science and
Technology, Taiwan
Wen-Hui Mico yang
Hsiuping University of Science and
Technology, Taiwan
Hoda Abd El hamid Ali
Helwan University, Cairo, Egypt
Masatoshi kato
School of Economics, Kwansei Gakuin
University, Japan
Xiaojun Quan
City University of Hong Kong, China
Wenyin Liu
City University of Hong Kong, China
A. Gregoriou
University of Hull Business School, UK
Barbara Siuta-Tokarska
Cracow University of Economics, Poland
Hiroyuki Okamuro
Hitotsubashi University, Japan
Yuji Honjo
Chuo University, Japan
Francis Atsu
Ghana Institute of Management and Public
Administration (GIMPA), ACCRA, Ghana
Samuel Adams
Ghana Institute of Management and Public
Administration (GIMPA), ACCRA, Ghana
Hassan Mounir El-Sady
Gulf University for Science and Technology,
Kuwait
Vasilya Sultanova
Australian College of Kuwait, Kuwait
Greg M. Richey
California State University, San Bernardino,
USA
Patricia J. Cirillo
Cypress Research Group, USA
Andrzei Jaki
Cracow University of Economics, Poland
Abayomi Nafisatu Bosede
Baby and You Store, Nigeria
Research of Influencing Factors for Usage of Facebook
Willingness-A case Study on College Students in the Tamsui
Area
Research of Influencing Factors for Usage of Facebook
Willingness-A case Study on College Students in the Tamsui
Area
Scientific Advance and Perceptions about the Effectiveness of
Democracy in MENA
What Explains Innovative Outcomes at the Start Up Stage
How Do Online Consumer Review Sentiments affect E-
commerce sales A Text Mining Analysis
How Do Online Consumer Review Sentiments affect E-
commerce sales A Text Mining Analysis
Efficiency of EC Greenhouse Gas Abatement Measures
and Firms in the European Union: Evidence from plant
level allocations and surrendered permits
Structural Changes and Development of the SME Sector in
Poland after EU Membership
What Explains Innovative Outcomes at the Start Up Stage
What Explains Innovative Outcomes at the Start Up Stage
Testing the Export-led Growth Hypothesis for Sub Saharan
Africa Countries(SSA). A Panel Data Analysis
Testing the Export-led Growth Hypothesis for Sub Saharan
Africa Countries(SSA). A Panel Data Analysis
Cross Country Analysis of GCC Economic Risk
Cross Country Analysis of GCC Economic Risk
Does Vice Pay A Traditional Investigation of “Irresponsible”
Investing
Are High Interest Loans a Debt Trap or Access to Credit
Evidence from a Field Experiement of Payday Borrowers
Enterprise Development under Globalisation and the New
Economy Conditions
Observer
The Business & Management Review, Vol.2 Number 2, July 2012
336

Kevin Griffin
University College Dublin, Ireland
Khan Penn Ackuog
School of Business and Law, London, UK
Mohammed Rehab Al Nomani
USA
Angela Clare Ferdinandy
Angela Ferdinandy, Australia
Margaret Jane Randell-Smith
Angela Ferdinandy, Australia
Observer
Observer
Observer
Observer
Observer
The Business & Management Review, Vol.2 Number 2, July 2012
337

Call for Paper
Journal of Business & Retail Management Research
ISSN (Print) 1751-8202
The JBRMR, a scholarly and refereed journal, provides an authoritative source of information for
scholars, academicians, and professionals in the fields of business and retail management and is
publicised twice a year. The journal promotes the advancement, understanding, and practice of
business & retail management. It is peer reviewed and is the main research platform of The
Academy of Business & Retail Management (ABRM). Scholars across borders are encouraged in
advancing the frontiers of management education, particularly in the area of retail trade.
Contributions should therefore be of interest to scholars, practitioners and researchers in
management in both developed and developing countries targeting a worldwide readership
through both print and electronic medium.
Although broad in coverage, the following areas are indicative and nurture the interests of the
Academy with a “retail” underpinning:
» Business Ethics and Legal Issues
» Business Environment
» Business Policies, Strategies, and Performance
» Business and Retail Research
» Business Security and Privacy Issues
» Consumer Behaviour
» Emerging Advances in Business and its Applications
» Innovation and Product Development
» International Business Issues
» Management and Retail Marketing
» Marketing Management and Strategies
» Relationship Management
» Risk Management
» Retail Management and Communication
» New Venture Start-up
» Retail Buying
» MIS and Retail Management
» Demographics and Retail Business
» HRM and Retail Business
» Innovation in Retail Management
» Law and Management
Preference will be given to papers which are conceptually and analytically strong and have
empirical relevance. All papers will be reviewed according to the Journal’s criterion. The
Journal’s website is www.jbrmr.com. For further information please call: Dr P.R. Datta on
+44(0)20 3620 6524 or write to him (editor@abrmr.com).
The Business & Management Review, Vol.2 Number 2, July 2012
338

COMING SOON!
International Journal of Business and Economic Development (IJBED)
Aim & Objectives
IJBED is a peer reviewed journal and is a research publication platform for international
scholars. Their research can be in any aspect of business and economic development covering
the interests of developed and emerging countries alike. The Journal seeks to reach a worldwide
readership through both print and electronic media. The main aims of the Journal will be to:
Publish high quality and scholarly empirical based research papers, case studies,
reviews in all aspect of business, management and commerce with theoretical
underpinnings.
Offer academics, practitioners and researchers the possibility of having in depth
knowledge and understanding of the nature of business and management practices and.
Create a forum for the advancement of business and economic development research.
Target audience: Academics, practitioners and researchers the possibility of having in depth
knowledge and understanding of the nature of business and management practices, and
students of management, Doctoral students in particular wishing to publish their research.
Coverage:
‣General marketing, retailing
‣E-commerce
‣Management information
‣Development economics
‣Micro finance
‣Industrial economics
‣International business
‣Globalisation and corporate governance
‣Human resource management
‣Competitive strategy
‣Information system
‣Knowledge management and it`s practice
‣Organisational behaviour
‣Corporate finance and management accounting
‣Entrepreneurship and small business, infrastructure studies, etc.
Registration: One author: £295, Two Authors: £345 and Three authors: £375
Upon acceptance of a paper the publication fees must be paid in full within 2 weeks
IJBED will be published in February and June/July annually.
For further detail please visit: http://abrmr.com/
The Business & Management Review, Vol.2 Number 2, July 2012
339

Call for Papers for the forthcoming conferences:
ITARC-London, 2012
5-6 th November 2012
3 rd International Trade and Academic Research Conferences
ICIRM – Dubai 2013
February 2013
2 nd International Conference on Investment & Retail Management
ROGE – Paris 2013
April 2013
3 rd International Conference on the Restructuring
of the Global Economy
CGBC – London 2013
June 2013
3 rd Corporate Governance and Business Conference
ICBED – Las Vegas 2013
August 2013
2 nd International Conference on Business and Economic Development
Authors are invited to submit original research papers, case studies, review, work in progress
reports, abstracts, students’ papers or research propels within the broad scope of each
conference. All papers should be professionally proofread prior to submission.
These conferences will be jointly organised by the Academy of Business & Retail
Management, and Journal of Business & Retail Management Research.
For further detail please visit: www.abrmr.com
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