Journal

Volume 6 Number 19 16 May, 2012

ISSN 1993-8233

African Journal of

Business Management

ABOUT AJBM The African Journal of Business Management (AJBM) is published weekly (one volume per year) by Academic Journals. African Journal of Business Management (AJBM) is an open access journal that publish research analysis and inquiry into issues of importance to the business community. Articles in AJBM examine emerging trends and concerns in the areas of general management, business law, public responsibility and ethics, marketing theory and applications, business finance and investment, general business research, business and economics education, production/operations management, organizational behaviour and theory, strategic management policy, social issues and public policy, management organization, statistics and econometrics, personnel and industrial relations, technology and innovation, case studies, and management information systems. The goal of AJBM is to broaden the knowledge of business professionals and academicians by promoting free access and providing valuable insight to business-related information, research and ideas. AJBM is a weekly publication and all articles are peer-reviewed.

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Prof. Wilfred Isioma Ukpere Department of Industrial Psychology and People Management, Faculty of Management, University of Johannesburg, South Africa. Prof. Gazi Mahabubul Alam Department of Educational Management, Planning and Policy, Faculty of Education Building, University of Malaya, 50603 Kuala Lumpur, Malaysia. Dr. Olawale Olufunso Fatoki University of Fort Hare Department of Business Management, University of Fort Hare, x1314, Alice, 5700, Eastern Cape, South Africa Dr. Amran Awang Faculty of Business Management, 02600 Arau, Perlis, Malaysia Dr. Giurca Vasilescu Laura University of Craiova, Romania 13, A.I. Cuza, 200585, Craiova, Dolj, Romania. Prof. Himanshu Tandon VIT Business School, VIT University, Vellore 632014 (India) Dr. Ilse Botha University of Johannesburg APK Campus PO Box 524 Aucklandpark 2006 South Africa. Dr. Howard Qi Michigan Technological University 1400 Townsend Dr., Houghton, MI 49931, U.S.A. Dr. Aktham AlMaghaireh United Arab Emirates University Department of Economics & Finance United Arab Emirates. Dr. Haretsebe Manwa University of Botswana Faculty of Business University of Botswana P.O. Box UB 70478 Gaborone Botswana.

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International Journal of Medicine and Medical Sciences

African Journal of Business Management

Table of Contents: Volume 6 Number 19 16 May, 2012

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ARTICLES Review A review of trends in the global automotive manufacturing industry and implications for developing countries 5895 Nyabwanga Robert Nyamao, Ojera Patrick, Lumumba Martin, Alphonce J. Odondo and Otieno Simeyo Research Articles Effect of privatization on customer satisfaction: Credit Department of Mashhad Saderat Bank of Iran 5906 Mohammad Mosavi, Rasoul Amirzadeh and Mohammad Sadegh Dadmehr Return and volatility spillover across USA and Europe (study of American and EU crisis period) 5916 Martin Surya Mulyadi and Yunita Anwar Inter-organizational culture, trust, knowledge sharing, collaboration and performance in supply chain of maritime industries: Examining the linkages 5921 An-Shuen Nir, Ji-Feng Ding and Chien-Chang Chou Impact of supply chain management practices on innovation and organizational performance in Iranian Companies 5939 Davood Gharakhani, Reza Kiani Mavi and Nasser Hamidi

ARTICLES Evaluation of e-payment systems in Iran using analytic hierarchy process 5950 Hassan Amozad Khalili, Seyed Babak Ebrahimi and Sorosh Nalchigar An examination of the operating efficiency of international tourist hotels in Taiwan and associated factors 5957 Mei-Cheng Wu and Chia-Yon Chen Affective factors contributing to entrepreneurship potential of nanotechnology in agricultural sector of Iran 5969 Mohammad Reza Soleimanpour, Seyed Jamal F. Hosseini, Seyed Mehdi Mirdamadi1 and Alimorad Sarafrazi Small and medium auditing entities: Specific and outlook 5975 Valeria Maria Albert and Mihaela Serban Group rights and the right to protection against human immunodeficiency virus/acquired Immunodeficiency syndrome (HIV/AIDS) infection from an industrial relations and public policy perspective 5980 Jenni Gobind and Wilfred Ukpere

Social capital in Brazilian wine industry networks 5990 Janaina Macke, Denise Genari and Kadígia Faccin Leadership challenges associated with the management of Generation Y employees: A proposed theoretical model 5999 Magda L. M. Hewitt and Wilfred I. Ukpere


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ARTICLES Earnings management and accounting conservatism: The case of Iran 6005 Younes Badavar Nahandi, Saeed Mahmoudzadeh Baghbani and Amin Bolouri A novel financial risk contagion model based on the MGARCH process and its parameter estimation 6014 Wei Zhou and Jian-min He An evaluation of regional difference of fusion between informationization and industrialization in China 6019 Liu Qiang Multi-skilling at a training institute (Western Cape Provincial Training Institute) of the Provincial Government of Western Cape, South Africa: Post training evaluation 6028 T. M. Taryn Florence and A. A. Braam Rust Exploration of the Democratic Republic of Congo (DRC) textile industry survival: Case of La Société Textile de Kisangani (SOTEXKI) 6037 A. Mwamayi, G. Wood, R. Haines and M. Brookes

Study of relation between accounting information with market venture: Case study of Iran Stock Exchange 6052 Iman Zare and Jafar Nekounam Banking reform and SME financing in Ethiopia: Evidence from the manufacturing sector 6057 Ashenafi Beyene Fanta


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ARTICLES Do immigrant-owned businesses grow financially? An empirical study of African immigrant-owned businesses in Cape Town Metropolitan Area of South Africa 6070 Robertson K. Tengeh, Harry Ballard and Andre Slabbert Corporate sustainability in Southern Africa: An ecosystem approach 6082 James Kamwachale Khomba, Ishmael B. M. Kosamu and Ella Cindy Kangaude-Ulaya The effects of relationship marketing on relationship quality in luxury restaurants 6090 Seyed Alireza Mosavi and Mahnoosh Ghaedi The application of European customer satisfaction index (ECSI) model in determining the antecedents of satisfaction, trust and repurchase intention in five-star hotels in Shiraz, Iran 6103 Mojtaba Kaveh, Seyed Alireza Mosavi and Mahnoosh Ghaedi Short Communication The impact of collaborative work climate on knowledge sharing intention 6114 A. Mwamayi, G. Wood, R. Haines and M. Brookes


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African Journal of Business Management Vol.6 (19), pp. 5895-5905, 16 May, 2012 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM12.087 ISSN 1993-8233 ©2012 Academic Journals

Review

A review of trends in the global automotive manufacturing industry and implications for developing

countries

Michael Gastrow

Human Sciences Research Council, South Africa. E-mail: [email protected].

Accepted 21 February, 2012

This review explores the literature investigating recent global trends in the automotive manufacturing sector, particularly in developing countries. The role of globalisation has been an underlying factor in several key trends: The shift from west to east in terms of production and consumption; the concentration of the supply chain, with a handful of firms gaining control of most of the industry; a greater distribution of production activities around the globe, encompassing regional and local markets; and the concentration of innovation activities in the developed countries. Key trends in developing countries include continuing liberalisation and globalisation, increased foreign investment and ownership, and the increasing importance of follow-source and follow-design forces. Large developing countries have attracted greater critical mass for production and local product adaptation. Smaller developing countries increased their production capacity but not their innovation capacity. Developing countries bordering large markets became low-cost production hubs with lower levels of technological upgrading. Technological transfer has increasingly been facilitated through the purchase of knowledge-intensive assets in developed countries. The global financial crisis has had a large impact on the industry, particularly for developed countries. However, developing countries have generally been less affected. For most developing countries, the primary effect was an acceleration of the global market shift, as well as the accelerated consolidation of the supply chain. The trend of developing country firms purchasing knowledge-intensive industry assets from developed countries also accelerated. Key words: Automotive, global trends, developing countries.

INTRODUCTION South Africa is home to a substantial automotive manufacturing sector that is increasingly integrated with the global automotive industry, and hence increasingly affected by changes that are taking place at a global level. To better understand these trends and how they may impact on South Africa, this review explores the literature investigating recent global trends in the sector, particularly in developing countries. Some core sources directly address recent trends in the global automotive sector, for example Sturgeon, Memedovic, Van Biesebroeck, and Gereffi‟s paper, „Globalisation of the automotive industry: main features and trends‟ (2009). Other papers have a global approach, but are focused on one particular aspect of the industry. For example, industry

reports by Powers (2011) and KPMG (2011) are focused on global production market shifts, and the PRTM study by Ostermann and Neal (2009) is focused on global structural changes in the supply base of the industry. The large majority of papers addressing the automotive sector have a regional or national focus. Relatively few papers look specifically at the automotive sector in developing countries as a group. These include Barnes and Morris (2008), Canbolat et al. (2007), Humphrey and Memedovic (2003), Ivarsson and Alvstam (2005), Lall and Teubal (1998), and Noorbakhsh et al. (2001). Another set of papers is specifically concerned with the aftermath of the global economic and financial crisis of 2008/2009, for example Sturgeon and Van Biesebroeck

5896 Afr. J. Bus. Manage.

(2010), Ostermann and Neal (2009) and Wad (2010). The conceptual frameworks and explanatory theories

utilized in this literature vary greatly. Some papers are embedded in the capabilities approach (Lall, 1992, 2003; Lundvall, 1992), with a special interest in relationships between local capabilities, Multinational Corporations (MNCs), technology transfer, technological upgrading, and innovation. Related to this are papers with a focus, either implicit or explicit, on absorptive capacities (Cohen and Levinthal, 1989; Crisculo and Narula, 2008; Girma, 2005; Kneller, 2005; Kneller and Stevens, 2006; and Leahy and Neary, 2007). Examples here include Birchall et al. (2001), Ivarsson and Alvstam (2005), and Lall and Teubal (1998). However, most core readings utilize global value chain (GVC) theory and global production network (GPN) theory (Gereffi, 2005) Examples here include Sturgeon and Van Biesebroeck (2010), Rutherford and Holmes (2008) and Wad (2010). Other papers use different theoretical tools, or use very little theory at all. The review therefore incorporates mostly the empirical aspects of these papers, rather than drawing on their contribution to theory.

This paper is organised as follows: key features and trends in the global automotive manufacturing sector; focus on the trends in developing countries; impact of the financial crisis; reviews of the future prospects for the industry; discussion and conclusions. KEY FEATURES AND TRENDS IN THE GLOBAL AUTOMOTIVE SECTOR Sturgeon et al. (2009) provides a valuable overview of key features and current trends in the global automotive sector. Their starting point is a comparison between the automotive sector and other manufacturing sectors. In some respects, the automotive industry shares several features with other manufacturing sectors. Foreign direct investment (FDI), global production and cross-border trade have increased at an accelerating rate since the late 1980s, facilitated by trade and investment liberalisation through World Trade Organisation (WTO) agreements. Large emerging economies such as India, China and Brazil offer large real and potential markets, and have a large surplus of low cost labour. These factors have encouraged large FDI flows into these countries, with the aim of supplying local markets and also exporting back to developed countries. Another common feature is an increase in outsourcing and an increase in value chain activities within supplier firms. Suppliers from developed countries have increased their levels of FDI and trade, while suppliers from developing countries have increased their capabilities. The largest suppliers have become global suppliers (Sturgeon and Lester, 2004).

Other features of the global automotive industry are distinctive. Firstly, the industry has a highly concentrated firm structure, in which a handful of large leading firms

exercise control over their global supply chains. Eleven assemblers from the United States, European Union and Japan dominate global production. Concentration among assemblers and large first tier suppliers was enhanced by mergers, acquisitions, and equity-based alliances during the 1990s. Final assembly, and to some extent parts production, has been kept close to end markets because of both political and cost factors. The iconic status of the automotive sector means that a political backlash can result when local producers are threatened by imports, and powerful local lead firms and unions often have political sway. In terms of cost factors, many automotive components, such as chassis or seats, are expensive to transport, and there has historically been a tendency for heavyweight subsystems to be built close to assemblers and end markets (Sturgeon and Florida, 2000). Also, the imperatives of lean production and vehicle customization favour geographical proximity to suppliers. Thus, although the industry has globalised rapidly since the early 1990s, a characteristic regional structure to global production has also emerged. This forms a contrast with many other manufacturing sectors, for example apparel and electronics, where integration has primarily been at the global scale.

In the automotive sector, unlike many other industrial sectors, there are few fully generic parts or systems that can be used in a wide array of products without customization: Vehicle design requires customization because of the high level of inter-relationships in the performance characteristics of components that differ for every model. Performance aspects such as noise, vibration and handling are strongly inter-related, and it is difficult to assess how the interactions between components will affect these aspects in advance; as a result customization is usually required in order to achieve performance requirements. The overall result is that there are relatively few standardized parts for the automotive industry (compared to other industries), and specifications are developed for almost every part on every vehicle model. This creates limitations to the design of platforms. The sharing of vehicle platforms is limited to models and brands owned by the same lead firm. Value chain modularity is thus undermined, and suppliers become tied to lead firms. This limits economies of scale (in production) and economies of scope (in design), and has adverse effects on the supply chain. Since suppliers are often the only source of a particular component, there is a need for close collaboration, which in turn raises costs for those suppliers who serve multiple assemblers, and which also leads to a concentration of innovation and design within a few geographic clusters near the headquarters of assemblers and large tier 1 suppliers. Since there is less modularity in the value chain, assemblers exercise greater power over suppliers through relational or captive linkages.

Thus innovation (in the form of vehicle and component design and development) in the automotive sector has

Gastrow 5897

Figure 1. The nested geographic and organizational structure of the automotive industry.

achieved greater global integration than production activities, as firms have sought to leverage their design functions across multiple products and end markets. Components suppliers have taken on a more innovation activities, including the establishment of design centres close to those of their customers to facilitate collaboration. When articulated with drivers for regional production networks, this renders a global organizational structure that distributes innovation and production-centrally designed vehicles are adapted for local markets, and parts are manufactured in multiple regions, and both design and value chain relationships usually cover several production regions. In this manner local, national and regional value chains are „nested‟ within global organisational structures, as illustrated in Sturgeon et al. (2007) (Figure 1).

Against the backdrop of these key features, Sturgeon et al. (2009) map out some of the most important trends to affect the industry up until the financial crisis of late 2008. The first of these was the boom in vehicle production that took place over the last few decades. Global vehicle production more than doubled between 1975 and 2007. A key feature of this growth is that it was largely driven by the opening of new markets in India and China, where low rates of motorization, large populations and growing incomes spurred inflows of FDI and increases in production. Together with growth in other emerging markets such as Korea, Brazil, and Mexico, this has shifted the distribution of global production, primarily

from west to east. Wad (2010) notes that the global market had a steady average annual growth above 3.5% from 2001 to 2007, but that during this time Western Europe and North America experienced negative growth in both demand and production. By contrast, developed Asia (Japan, Australia, New Zealand) grew 5% in terms of sales and 22% in terms of production.

In parallel to the formation of global market structures, key structural features of both production and sales have remained substantially regionalized, with major American and European assemblers still producing and selling most of their vehicles within their own regions (in 2006), although this structure is being eroded by increasingly global markets.

Despite increasing globalisation, regional, national and local market conditions have remained important. Local conditions necessitate local adaptations, which impacts on the knowledge requirements for local models, local production, and local innovation activities. These local conditions include consumer tastes and purchasing power, road and driving conditions, labour market regulations, standards and industry regulations, and public policies such as incentives, taxation, tariffs, and other instruments of industrial policy. Consumers in developed countries are more demanding in terms of specific features; they use roads and fuel of superior quality, and face higher regulatory, legislative and environmental requirements. Specific industrial policies vary among countries, but have been shown to create

5898 Afr. J. Bus. Manage. Table 1. Motor vehicle production in selected countries, 1996 to 2006, in 000 units and in % for growth rate.

Countries 1996 1998 2000 2002 2004 2006 Growth rate (%)a

China 1,240 1,628 2,009 3,251 5,071 7,272 19.3

India 541 535 867 892 1,511 1,876 13.2

Republic of Korea 2,354 1,787 2,858 3,148 3,469 3,840 5.0

France 2,359 2,923 3,352 3,693 3,666 3,164 3.0

Brazil 1,813 1,547 1,671 1,793 2,210 2,597 3.6

Mexico 1,222 1,460 1,923 1,805 1,555 2,043 5.3

Russian Federation 1,029 1,021 1,203 1,220 1,388 1,495 3.8

Germany 4,843 5,727 5,527 5,145 5,570 5,818 1.8

Spain 2,412 2,826 3,033 2,855 3,012 2,776 1.4

Canada 2,397 2,570 2,962 2,629 2,712 2,544 0.6

Japan 10,346 10,050 10,141 10,258 10,512 11,484 1.0

United States 11,832 12,003 12,774 12,280 11,988 11,351 -0.4

United Kingdom 1,924 1,976 1,814 1,821 1,856 1,650 -1.5

Italy 1,545 1,693 1,738 1,427 1,142 1,212 -2.4 a, Compound annual growth rate (CAGR). Source: Ward‟s Automotive Yearbook, quoted in Sturgeon (2009).

Table 2. Production and sales of motor vehicles in home region by company in 1997 and 2006.

Company Region

Region’s share in global production (%)

Region’s share in global production (%)

Regional sales’ share in global sales

Region’s share in global sales (%)

1997a 2006 1997 2006

General motors Americab 69 50 63 54

Ford Americab 67 43 64 55

Daimler Chrysler Americab 58 58

Renault Europe 97 75 93 62

PSA Europe 85 70 84 62

Volkswagen Group Europe 62 66 59 56

Fiat Europe 60 55 66 53

Toyota Japan 73 56 43 26

Nissan Japan 62 41 42 22

Honda Japan 57 37 36 20 a, Compound annual growth rate (CAGR). Source: Ward‟s Automotive Yearbook, quoted in Sturgeon (2009).

demand for specific vehicles (Humphrey and Memedovic, 2003) (Tables 1 and 2).

At the national level, production tends to be clustered within one or a few industrial centres, which sometime serve a particular niche to take advantage of a particular mixture of factors or local assets. Follow sourcing also has an impact on the geography of production at the national level. Reichhart and Holweg (2008) found evidence of increasing levels of co-location of dedicated supplier clusters near assembly plants, where suppliers largely owned by multinational corporations (MNCs) that have global contracts with assemblers cluster around a single customer. Typical components are those with just in time (JIT) or sequential delivery requirements or with high logistical costs.

Researchers employing the GVC framework consider

the re-shaping of global value chains to be the most important trend in the sector over the past two decades – these include Barnes and Morris (2004), Black (2009), Gereffi, (2005), Humphrey and Memedovic (2003), Rutherford and Holmes (2008), Sturgeon (2009) and Wad (2010). In terms of global value chain (GVC) theory, global value chains in the automotive sector are „producer driven‟ insofar as the lead firms original equipment manufacturers (OEMs) take on the bulk of innovation activity, the production of most engines and transmissions, and almost all vehicle assembly functions. They have strong co-ordination capabilities and huge buying power, and the global top-ten automotive groups more or less continue to dominate the global market, particularly in exercising control over production and supply chains.

A key trend in the evolution of automotive GVCs over the last two decades has been the formation of large global suppliers that support several assemblers through global production networks, often through global sourcing contracts. The largest first-tier suppliers, by taking an increasingly large role in innovation, production, and the allocation of investment, have assumed a larger degree of power within the supply chain, but control largely remains in the hands of the assemblers. Within global value-chains, suppliers have increased their proportion of value adding, including their contributions to R and D and innovation activities (Becker, 2006; Birchall et al., 2001; Chanaron and Rennard, 2007; Osterman and Neal, 2010). The concentration of power within a few lead firms creates high barriers to entry and limits prospects for upgrading by smaller firms. Also, the concentration at the top of the GVC makes it possible for assemblers to create unique standards and specifications, which makes the investments of their suppliers more customer specific, and further reduces the scope for innovation among smaller firms.

The analysis of Rutherford and Holmes (2008) conceptually separates „structural‟ from tendential or „actual‟ power within the supply chain, concluding that the de facto power of assemblers exceeds even their substantial structural power because of their financial resources, their strategic position within GPNs, and their relationships with state accumulation projects. Both assemblers and large transnational components producers have had their power positions enhanced by the restructuring that has taken place over the last twenty years. Supply chain consolidation has been rapid: the number of first tier suppliers globally was predicted to fall from 8,000 in 2002 to around 2,000 by 2010. Surviving first tier suppliers now bear greater responsibility for research and development, delivery of modular subsystems and managing the overall supply chain.

Outsourcing also forces suppliers to take on more risk, and favours suppliers who can innovate, provide quality, and access inexpensive capital. Suppliers, who account for 75% of the manufactured cost of a vehicle, represent the assemblers‟ biggest target for cost cutting. This, at least in the aggressive North American market, can lead to „pathological‟ firm behavior across the supply chain, for example assemblers shifting cost and risk to suppliers, sharing supplier proprietary information with competitors, and the unilateral implementation of cost-reduction targets. These pressures have an effect on the innovation strategies of suppliers: stagnating markets and over-capacity lead assemblers to offer new models, increase design intensiveness, and shift more responsibilities for design to suppliers and engineering firms (Schamp et al., 2004: 615). A contrast to the American firms‟ practices may be found in Japan, where firms such as Toyota and Honda have a better record in their treatment of suppliers. Rutherford concludes that the problems facing the Detroit industry lie not only with their financial position

Gastrow 5899 but also in the way in which their management of networks is undermining their own supply base.

In addition to a weak financial position and hostile supplier relations, the problem of low capacity utililisation continued to undermine profitability at the global level in the run-up to the global financial crisis. Idle capital in the north has not been subjected to creative destruction; instead FDI has flowed into developing countries, adding new capacity so that total capacity has remained under the „break-even‟ point of 85% (Sturgeon and Van Biesebroeck, 2010). This has reduced the profitability of OEMs, which in turn has pressurised their supply chains, forcing many first-tier suppliers towards bankruptcy (Barnes and Morris, 2008). In 2007 only three Japanese automakers (Toyota, Honda, and Nissan) achieved profits and growth, while most western automakers experienced falling market capitalisation (Maxton and Womald, 2004: 7). Thus, in the run-up to the financial crisis, automotive manufacturers were already in a precarious position. TRENDS IN THE AUTOMOTIVE SECTOR IN DEVELOPING COUNTRIES A literature that focuses specifically on the automotive sector in developing countries is relatively small. Canbolat et al. (2007) focus on recent changes in value chain dynamics resulting from globalisation. Noorbakhsh et al. (2001) focus on the relationship between local human capital and FDI inflows in developing countries, including in the automotive sector. However, the most comprehensive analyses can be found in Wad (2010), a working paper for United Nations Industrial Development Organization (UNIDO), and Sturgeon and Van Biesebroeck (2010), a World Bank working paper. These reports examine the effects of the global financial crisis on the automotive sector in developing countries, including analyses of pre-crisis trends. Both papers employ a theoretical framework based on GVC theory. Wad (2010) identified four key trends in developing countries, which primarily relate to the impact of globalisation and the re-structuring of GVCs. Firstly, the import substitution industrialisation (ISI) strategies commonly pursued by developing countries changed after the collapse of the Union of Soviet Socialist Republics (USSR) in the early 1990s. The ensuing liberalisation and globalisation shaped the industry until the financial crisis of 2008. Automotive MNCs from developed countries, both assemblers and large suppliers, sought to achieve economies of scale and scope by consolidating into global groups and alliances, and through this process formed global producer-driven global value chains. Joint-venture assembly operations in developing countries commonly became majority owned by MNCs, a process bolstered by follow sourcing by newly globalised suppliers. A third, related, trend was that

5900 Afr. J. Bus. Manage. local (national) suppliers were largely relegated to the second or third tier, or were „denationalised‟ through foreign acquisition (Humphrey et al., 1998; Humphrey and Memedovic, 2003; Barnes and Kaplinsky, 2000; Barnes and Morris, 2008).

Sturgeon and Van Biesebroeck (2010) identify different dynamics in different types of developing countries. Firstly, very large developing countries, such as China, India, and Brazil, offer large and growing markets. It is therefore profitable and strategically desirable for assemblers to either produce cars specifically for these market requirements, or to adapt existing models for use in these markets (Brandt and Van Biesebroeck, 2008). In these countries, therefore, assemblers establish facilities for regional headquarters as well as regional design and innovation centres; this creates pressure for lead suppliers, particularly those linked to assemblers by global follow-sourcing agreements, to also establish local engineering and innovation capabilities. This in turn incentivises global suppliers to source inputs from local second tier suppliers. If the local market is sufficiently large and stable to attract significant investments, it can become possible for local firms to supply assemblers directly, leading to a „virtuous cycle of development‟.

A second dynamic characterises mid-sized advanced developing countries, specifically those with a sufficiently large market to justify local assembly, but not large enough to incentivise local adaptation or market-specific products – examples here include South Africa, Thailand and Turkey. These countries tend to become assembly hubs for their regions. Assembly brings in follow-sourcing FDI, as well as opportunities for local suppliers, particularly for components that are difficult or costly to import. These activities can also open up opportunities for export. For example, South Africa has a mature assembly sector that evolved capabilities from the basic assembly of fully imported kits through to regional supply and global export, and a component sector that uses comparative advantages in leather (for seats), platinum (for catalytic converters), inexpensive labour (for harnesses), and heavy components (for wheel hubs, engine blocks, and other metal-bashing components).

A third dynamic characterises developing countries that are proximate to large developed-country markets and can supply on a JIT basis with a regional trade block. Examples here include Mexico (serving North American Free Trade Agreemen), the Czech Republic (serving the European Union) and Thailand (serving the Association of Southeast Asian Nations market). These countries tend to become hubs for labour-intensive components. If capabilities upgrading occurs, opportunities can arise for the production of capital intensive parts and even assembly. However, the proximity to developed economies can close off such opportunities.

A fourth dynamic, described as „nascent‟, is „for local lead firms to leverage the new, relatively open local and global supply-base to rapidly become more competitive

locally and perhaps on world markets‟ (Sturgeon and Van Biesebroeck, 2010: 11). The example of Chery Automobile is illustrative: Volume production of the Chery brand began in 2001, and by 2007 production had grown to 600,000 units, making it China‟s largest vehicle exporter. This is a remarkable achievement: The innovation activities that go into vehicle design and development are expensive and difficult to master, with a high degree of tacit knowledge (Jung and Lee, 2009). New entrants to the assembly market usually came from related industries (for example Mitsubishi, Subaru, BMW and SAAB) where they had built up related capabilities, or, in the Korean case, emerge from large vertically and horizontally integrated national champions.

Chery achieved production scales in a short period by accessing a wide scope of global suppliers for design, engineering, production processes, and components. For engineering and design the firm worked with Pininfarina, Lotus, MIRA (UK), Porsche Engineering, AVL (Austria), Ricardo (UK), and Heuliez (France). Components were sourced from Bosch, ZF, Johnson Controls, LuK, Valeo, TRW and Siemens VDO. However, even partnership with such experienced firms does not create the tacit and system-integrating experience and capabilities that would allow Chery to produce at developed country standards or keep at the frontier of rapidly changing markets. It has been partially to fill this gap that Chery, along with other emerging assemblers from India and China, have acquired distressed automotive firms from developed countries – a trend that accelerated in the wake of the financial crisis. Other examples of such acquisitions (pre-financial crisis) include the entry of the Shanghai Automotive Industry Corporation (SAIC) into a joint venture partnership to produce former Rover models in China in June 2004; an investment by the SAIC of $500 million to acquire a controlling stake in Ssangyong in October 2004; the purchase by the SAIC of 10% of Daewoo, then controlled by GM (Daewoo later folded); and Nanjing Automobile‟s acquisition of MG Rover in July 2005, followed by the purchase of Nanjing by the SAIC in 2007.

Technology transfer from developed to developing countries is not only achieved through such purchases – it appears that the primary mode of transfer is through joint ventures (JVs). Sadoi (2008) presents an analysis of technology transfer between developed and developing countries based on the Chinese experience, in which JVs with developed-country MNCs are the basis for transfer, which is catalysed by government policy and cascades down the supply chain. The conclusions reached by Sadoi illustrate the powerful effect that government policy can have in the context of a large developing country such as China (or, in principle, India or Brazil). The question of focus is important: Government policy in China focused on the development of technological capabilities in local firms. In other countries, for example Malaysia, the emphasis has been limited largely to

incentives, and has been less successful. The Chinese focus on local capability building – in product and process technology as well as the requisite human resources to drive it – is central in explaining the rapid technology transfer and localization achieved by the automotive industry in China.

Another case study of technology transfer in a developing countries can be found in Ivarsson and Alvstram (2005) which examines internalized innovation networks and technology transfer from a MNC (AB Volvo) to local suppliers in developing countries, in this case truck and bus plants in Brazil, India, China and Mexico. The authors use an evolutionary approach, drawing on the literature on capabilities and absorptive capacities. They find that follow-source suppliers capture large shares of local purchases. However, technology transfers from industrialized to developing economies are also found to be largely based on local interfirm linkages resulting from production activities. For example, Volvo, which provides its domestic suppliers with technological assistance, enhanced supplier capabilities to improve their operations. It was found that relationships, both short term and long term, are important to interfirm learning and technologiocal upgrading in developing countries. THE IMPACT OF THE FINANCIAL CRISIS Understanding the far-reaching impact of the global financial crisis has become an important aspect of research on the global automotive industry, particularly in the wake of massive and controversial bankruptcies and government bail-outs in the developed world. Ostermann and Neal (2009) examine bankruptcies and consolidation in the global supply chain, Sturgeon and Van Biesebroeck (2010) use global value chain theory to examine the impact of the crisis in developing countries, while Wad (2010) looks at a broader range of actors.

At a micro-level, Wad examines the responses of key actors in the automotive sector, namely firms and governments. At the firm level, standard crisis management tactics have been employed. This has included: reductions in production output, internal cost cutting, for example reductions in shifts and overtime, external cost cutting measures, for example exerting pressure on the value chain both upstream and downstream. Structural change responses have included alliances, consolidations, mergers and acquisitions, renegotiations of contracts, loans and credit lines, and ultimately bankruptcy protection or liquidation. Suppliers are in an equally weak position: in the worst-hit market, the USA, suppliers were expected to lose USD 25 billion in 2009, while 200 supplier firms were undergoing „quiet liquidation‟ by selling assets to their competitors and private equity firms (just-auto, 2009-11-15).

The impact of the crisis was particularly severe in the

Gastrow 5901 automotive industry, particularly for firms in developed countries. Sturgeon and Van Beisebroeck (2010) outline several reasons for this: Firstly, the industry was in a weak condition prior to the crisis, and were thus more exposed. Weaknesses included high debt, high fixed capital costs, high labour costs, and large pension and health care commitments. Secondly, vehicles in developed countries are largely debt-financed, and the crisis prompted consumers to postpone vehicle purchases, either because they were unable to access credit or because of other effects of market uncertainty (Tables 1 and 2).

In developing countries, the crisis had quite different results. Primarily, it accelerated the historic shift of production from developed countries to large developing countries. Other previously existing trends that were accelerated were the consolidation of assemblers and the supply base, as well as the internationalisation of automotive manufacturers from developing countries. However, it must be noted that the „post-crisis‟ industry is still transforming, and the final effects will become clearer once global-level liquidations, bankruptcies, restructurings, bail-out effects, closures, and capacity reductions have run their course.

Various quantitative measurements of the movement of production to large developing countries are available. Between 2007 and 2009, developing countries‟ share of global production increased from 1.9 to 7.5%, largely due to growth in China (Figure 1). During this period the Asia-Pacific region was the only area to increase its proportion of global sales by 2% and global production by 7% (Wad, 2009). Table 3 shows the production levels of selected developed and developing countries from before to after the financial crisis. This highlights the „eastward‟ shift in production. The share of large Asian developing countries in global production increased during this period: in 2007 China accounted for 12.12% of the global total and India for 3.08%. After the financial crisis, in 2010, this had changed to 23.46 and 4.54% respectively. However, not all developing countries experienced growth, and production levels vacillated in South Africa, Brazil, and South Korea. Meanwhile, the global market share of key developed countries declined, including the shares of Germany, Japan and the USA. More recently industry analyses report that these trends have continued into 2011 and are likely to continue through the next few years (Power, 2011; KPMG, 2011).

Automotive industries in developing countries have generally been less affected by the financial crisis compared to developed countries, with the exception of the heavily export-based industries of Mexico, Thailand and South Africa. Components suppliers in these countries have also been severely hit by declining OEM sales and production (for example the fall in catalytic converter sales in South Africa). Firms have responded in the classical defensive ways by downsizing capacity, cost-cutting, launching new products and eventually

5902 Afr. J. Bus. Manage. Table 3. Automotive production by selected countries 2007 to 2010.

Countries 2007 Total (%) 2008 Total (%) 2009 Total (%) 2010 Total (%)

Brazil 2,977,150 4.06 3,215,976 4.56 3,182,923 5.15 3,648,358 4.69

China 8,882,456 12.12 9,299,180 13.19 13,790,994 22.32 18,264,667 23.46

India 2,253,729 3.08 2,332,328 3.31 2,641,550 4.27 3,536,783 4.54

South Africa 534,490 0.73 562,965 0.80 373,923 0.61 472,049 0.61

South Korea 4,086,308 5.58 3,826,682 5.43 3,512,926 5.69 4,271,941 5.49

Germany 6,213,460 8.48 6,045,730 8.57 5,209,857 8.43 5,905,985 7.59

Japan 11,596,327 15.83 11,545,644 16.37 7,934,057 12.84 9,625,940 12.36

USA 10,780,729 14.71 8,693,541 12.33 5,731,397 9.28 7,761,443 9.97

Total 73,266,061 100.00 70,520,493 100.00 61,791,868 100.00 77,857,705 100.00

Source: Organization of Motor Vehicle Manufacturers global production statistics (http://oica.net/category/production-statistics/ accessed 8 February 2012).

increasing retail prices. These measures have impacted negatively on the lower tiers of the supply chain.

Wad (2010) also examines the relatively smaller impact felt by developing countries. Firstly, the financial systems of developing countries were on the whole less integrated into the global financial system, and were therefore less exposed to the sophisticated financial instruments that played a key role in triggering the crisis. As a result, consumer credits for automobile purchases were not restricted to the same extent as in developed countries. Also, while in the USA 80% of vehicles are purchased through credit, in China 80% of vehicles are purchased through cash (Osterman and Neal, 2009) (Tables 1 and 2).

Due to the regionalisation of assembly, declining local demand eventually forced assemblers to reduce their local production accordingly. However, production and employment have been reduced proportionally more than downward sales in Western Europe, NAFTA, and Japan. In developing countries, production and employment have fallen less than vehicle sales. This may be because of greater competitiveness or because of South-South trade. The dramatic cuts in production and employment by Northern OEMs may also be due to by the very weak financial condition of many OEMS, and particularly the „Big Three‟ US automakers.

In this dynamic environment, the trend of firms from developing countries purchasing assets from struggling developing-economy firms accelerated. Some examples include China‟s Sichuan Tengzhong Heavy Industrial Machinery Company‟s purchase of Hummer from General Motors in 2009, Geely‟s purchase of Volvo from Ford in August 2010 for $1.8 billion, and Beijing Automotive‟s (BAIC) payment of more than $200 million for the rights to old Saab styling and technology (Table 2).

Wad (2010) also examines the response of governments in developing countries. In general these responses were less drastic than in developed economies, primarily because the impact of the crisis was

smaller, and because developing country states (with some exceptions) had fewer resources to direct at interventions. The main emerging markets (China, India, Merosur, and AFTA) sustained lower, but still positive, growth rates, or faced short and temporary recessions (Figure 1). The Chinese industry was among the least affected by the crisis, helped along by the Chinese government's economic growth package and the stimulus package targeting the automotive sector. Besides the Chinese case, governments in developing countries have not taken drastic or large-scale initiatives to counteract the impact of the crisis on exports. In India a complex and turbulent political landscape exacerbated the impact of the crisis, but some conventional measures were considered and sometimes implemented, including tax reductions on vehicle purchases, and cash-for-clunkers programmes. In South Africa the export-oriented auto component industry has been badly impacted by the global crisis. Export volumes of catalytic converters, South Africa's largest component export, dropped 42% from 2008 to 2009. The drop could have been even more severe without foreign governmental incentive and scrap schemes that influenced the main export markets. However, South African policy did not adapt to the changes brought in by the financial crisis, and the motor industry development plan (MIDP) continues largely unchanged until 2012.

IMPACT OF SUSTAINABILITY ISSUES One important current trend is not strongly related to the financial crisis – that is the trend towards emerging green technologies. Toyota took the lead when it began producing the first commercially available hybrid electric vehicle, the Prius, in 1997. In 2007 one million units of the Prius were sold, and in 2009 this had increased to two million. However, other manufacturers downplayed the importance of hybrid vehicles, and only Honda followed suit with the production of a hybrid vehicle in

1999. While the sales figures are small in relation to Japan‟s total output, they have played a role in sustaining Japan‟s automotive trade surplus despite the country‟s high wage and salary levels. Perhaps more importantly, the key new technologies are related to electrical vehicles with battery-based propulsion and plug-in mechanisms. Hybrid or plug-in electric vehicles are now in production at Toyota, Honda, Nissan, Ford, GM, Chrysler, Tesla (allied with Daimler), and BYD (China), and in development at VW, Audi, Porsche, BMW/Mini, Daimler, Smart, PSA, Renault, Mitsubishi, Subaru, and Tata (Tables 1 and 2).

In developing countries, the promotion of green technologies has considerable history. Brazil has, through a combination of legislation and innovation, become a world leader in ethanol biofuel technologies. China, in 2003, initiated a national environmental programme that included the acquisition of hybrid cars by selected public service agencies, and several large cities have tightened their emission regulations. However, in India the promotion of tighter emissions regulations was hampered by widespread corruption that undermined the quality of the country‟s fuel supply. FUTURE PROSPECTS The automotive sector is particularly sensitive to the business cycle, and the short and medium term prospects of the automotive industry will be shaped by the conditions of the global economy. Although the recession is over in many countries, it remains unclear whether the global economy will return to a period of growth or whether further structural crises lie ahead. What is clear is that growth prospects are greatest in developing countries, and developed countries must adapt to this new path.

The International Motor Vehicle Program, a research network based at MIT, published a position paper in regarding the future prospects of the industry (Osterman and Neal, 2009). Theirs was an optimistic position, foreseeing a global economic recovery which will encompass a recovery of the automotive industry to pre-crisis levels, driven by growth in developing countries. The key points regarding the recovery in developing countries are: 1. demand for new vehicles is mostly from “first car” instead of “replacement” buyers and is thus less easy to postpone, and thus actual demand translates into purchases of new cars rather than used cars; 2. financing institutions are less developed and vehicle debt is not as widespread as in developed countries; and 3. demand is more income-elastic. These factors are contextualised by comparatively low levels of car ownership in developing countries. Income growth in these countries will thus arguably spur higher levels of motorisation.

A forecast by PWC (2009) suggests that the industry will recover in the context of a global economic recovery,

Gastrow 5903 but that global production will increasingly shift to the east, where growth will be highest–the Asia-Pacific region is expected to contribute more than half of all global growth between 2008 and 2013, and by 2013 it is expected that 33.9 million vehicles would be produced in the Asia-Pacific region, and 32.5 million in the EU and US combined–a prognosis that Wad (2010) considers optimistic given high unemployment in the US. The global crisis also leant momentum to certain demand trends in the market. Demand shifted towards smaller and more fuel efficient vehicles and environmental issues have hiked up the political agenda. This has created an opportunity for manufacturing firms from outside the automotive industry to enter the value chain through new technologies–for example the Chinese firm BYD coming from the battery industry to become the first electric vehicle manufacturer in China. CONCLUSION The literature addressing the global automotive manufacturing industry shows that globalisation has had a great effect on the industry in the last two decades, and that the continuing shift from west to east, both in terms of production and consumption, will continue to re-shape the industry. Emerging economies offer large and growing markets and low labour costs, and FDI continues to flow to these destinations. Globalisation also led to the concentration of power within the sector, with a handful of firms gaining control of most of the supply chain. Globalisation has also lead to a greater distribution of production activities around the globe, but this remains structured along the lines of regional and national markets that are „nested‟ within this global framework. Innovation is also highly concentrated within this structure, driven by the lack of industry-wide standards, the technical need for customization in vehicle design, and the strategic location of R and D facilities near corporate headquarters (Figure 1).

Within this context, key trends in developing countries can be identified. The two decades leading up to the financial crisis in 2008 were dominated by a process of liberalisation and globalisation, leading to increased foreign investment in and ownership of automotive manufacturing firms in developing countries. The search for economies of scale lead to consolidation of the supply chain, and industries in developed countries were increasingly structured by follow-source and follow-design imperatives. These dynamics played out differently in different developing countries, depending on market and policy forces. Large developing countries such as India and China attracted greater critical mass for production and local product adaptation. Smaller developing countries, such as South Africa, increased their production capacity but not their innovation capacity. Developing countries bordering large markets, such as

5904 Afr. J. Bus. Manage. Mexico or Turkey, became low-cost production hubs with lower levels of technological upgrading. In several countries, technological transfer was increasingly facilitated through the purchase of knowledge-intensive assets in developed countries.

The global financial crisis has had a large impact on the industry, particularly for developed countries. In the years leading up to the crisis, the sector experienced low capacity utilization and low profit margins, and firms were thus already weakly positioned. The threat of collapse lead to government bailouts in several developed countries. However, developing countries have generally been less affected, with the exception of heavily export-oriented locations such as South Africa or Thailand. However, for most developing countries the primary effect was an acceleration of the shift of production from developed to developing countries, as well as the accelerated consolidation of both assemblers and their component supplier bases. The trend of developing country firms purchasing knowledge-intensive industry assets from developed countries also accelerated. The literature makes it clear that this is a time of opportunity for automotive industries in developed countries, and thus highlights that informed policy debate is as critical and timely as ever.

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Gastrow 5905

African Journal of Business Management Vol. 6(19), pp. 5906-5915, 16 May, 2012 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM11.165 ISSN 1993-8233 ©2012 Academic Journals

Full Length Research Paper

Effect of privatization on customer satisfaction: Credit Department of Mashhad Saderat Bank of Iran

Mohammad Mosavi1, Rasoul Amirzadeh2* and Mohammad Sadegh Dadmehr1

1Department of Management, Payam Noor University, PO Box19395-3697, Tehran, Iran.

2Department of Management, Islamic Azad University, Neyshabur Branch, Neyshabur, Iran.

Accepted 17 August, 2011

With the advent of private banks in the past decade, the Iranian banks that have been established on the state resources felt threatened and made some fundamental changes in their structures. As a result, most of these banks tend to undergo privatization. Certainly, in a highly competitive and monopoly-away market, it is important for private banks and other non-governmental financial institutions to pay special attention to demands and requests of their own customers and try to meet their satisfaction. The present paper taken from application research has been conducted by cross-sectional and survey method in order to study the effect of privatization on customer satisfaction of credit department of Saderat Bank. Based on the findings of the research, privatization affects on improving three latent variables of satisfaction: customers expectation, inferred quality of bank services and value of received service and finally leads to customer satisfaction. Key words: Banking, customer satisfaction, privatization.

INTRODUCTION Establishment of state-owned economic institutions has been one of important tools of public intermediation in economic activities and the main characteristic of 1960's and 1970's as well as rapid development of public sector especially in developing countries. Following revolution and beginning of war in Iran, public intermediation in economy increased. This however, did not result in positive consequences. In Iran, most of public institutions are found to be among the least efficient and non-profitable; this results from using government budget and inexpensive and low interest rate bank facilities, exemption from taxation and custom duties compared to *Corresponding author. E-mail: [email protected].

Abbreviations: ATM, Automated teller machine; POS, point-of-sale; ACSI, American customer satisfaction index; RMSEA, root mean square error of approximation; GFI, goodness of fit index; AGFI, adjusted goodness of fit index.

similar private-sector institutions, lack of adequate incentives to manage these institutions and consequently reluctance to maximize their profit. Unsuccessful results obtained from operations of public institutions led policymakers to attempt in 1980's to limit the role of government; privatization of state-owned institutions are one of its outcomes. Today, privatization due to respect for the presence and appearance of people in economic arenas is considered as a necessity and is a policy employed by governments to free themselves from rigorous and cost-laden responsibilities of public institutions. So far many attempts have been performed as to privatization in different countries and involved more than 80 developing countries even such countries as China, Tanzania and Algeria traditionally being in favor of dominant role of government in economy (Suri, 2009). Among others, public sector banks as an example of public institutions failed to compete with other private financial institutions because of complex structure, public regulations, administrative bureaucracy, etc. and their efficiency and effectiveness have been decreased over time, such that, if this procedure continues they would not

be able to continue their activities and incur serious losses in the near future. So, implementing privatization policies and according to business law, Iran Saderat Bank considered as a private bank with the sale of more than 50% of the shares to the private sector in the last year is on the verge of a massive change by changing management way, structure, regulations, technology and required facilities, market share and more importantly interaction with customers and obtaining their satisfaction which indeed is basis of a financial institution. Therefore, the present work has been performed through survey research aiming at how privatization affects customer satisfaction of credit institution and Saderat Bank privatized in recent years. Some of Iran's state banks that are affected by implementation of article 44 of the constitution are as following: Saderat Bank of Iran, Tejarat Bank, Melat Bank, Post Bank, Refah Bank.

Among these banks, Saderat Bank and Melat Bank have a very serious competition. In Addition, there are several other banks which have been established privately and whose branches are very limited and low. Saderat Bank was selected in this study due to several reasons: Saderat Bank is considered as the biggest state bank, which is private, in terms of number of branches, human resources and other assets in the country; however, it stand in an appropriate environment for research to assess issues. Saderat Bank of Iran is one of the largest banks in Iran because it has a capital of more than 16 trillion Rails and is consist of the widest network of bank branches which are 3300 branches.

In the fields of electronic banking, the number of automated teller machine (ATM) and point-of-sale (POS) of Saderat Bank are at the highest level in Iranian banking system. Moreover, Saderat Bank is one of the first Iranian state banks which has become private.

Observing economic situation of U.K around 1770 and publishing the book ''The Wealth of Nations'' Adam Smith was the first proposed a theory on which theoretical base of economic policies of capitalism system is formed. According to him, individuals seek their self-interest, however in competitions in market these interests are interacted with each other and finally the society benefits. In such conditions, each producer and supplier utilizes lower price and higher quality for their productions and goods to attract customers and is dominant demander in the market and any producer with higher production cost is convicted to bankruptcy in surplus production (Razaghi, 1997).

Friedrich List published his book '' The national system of political economy'' regarding Germany situation in nineteenth century from 1841 to 1844. His main issue was development in a country afflicted with technical underdevelopment and technology compared to other countries and its private sector failed to compete with foreign productions either in or out of the country. If there is no domestic measures to support, goods manufactured with lower return will fall short in this competition. Thus,

Mosavi et al. 5907 Friedrich list whose theory is the basis of Germany development (as Adam Smith's theory based on which U.K development was realized) found to be in contrast with Adam Smith's theory in view of liberalization and trade exchanges who believed that all countries are developed through them. Friedrich list reformed Adam smith's theory by emphasizing on nation role in economic development and believed that all things are organize by an invisible hand and without any conscious involvement (Razaghi, 1997).

However, according to Oliver's definition (1997) regarding customer satisfaction, satisfaction is realization response and pleasure of consumer. There is a judgment whether a property of a product or service is at pleasurable level of realization and sub-realization (Buttle, 1996). The definition is important in view of several aspects: first it is focused on consumer, second satisfaction is a sense and third satisfaction generally has a threshold (Sharbat and Ekhlasi, 2008). Two Arab researchers, Jamal and Nasser (2002) define customer satisfaction as a sense or attitude toward a product or service after its use. Customer satisfaction is the principal result of a marketer operating as a bridge between different stages of consumer purchase behavior. For example if customers are satisfied with special services, they may repeat buying it. In contrast unsatisfied customers may cut off their relation with the company and influence directly on corporate survival and profitability.

The term of “private” is used against “public” or “state”. This name is usually given to the all operations which take a task from government and transfer it to the people. Therefore, from this viewpoint, “privatization” is “transferring task to the people” and “publicizing the economy” (Sadri, 2009). Privatization is the process of putting priorities in the hands of market mechanism and making them develop in the market fields and it is consist of a wide range of pure privatization on the one hand and renewing the structure of estate governments on the other hand (Armesh, 2009).

According to economic experts, “privatization” is one of the dynamic economic principles and prerequisites of economic expansion in developed countries (Armesh, 2009).

The term of privatization defined at Webster's academic dictionary for the first time in 1983. „„Privatization is defined as changing of ownership or control of public systems to private systems‟‟ (Mirzadeh et al., 2009). Many authors and scholars have defined and interpreted privatization in different ways. The definition of privatization differs from country to country as well as among individuals in the same country.

Some of the most significant definitions of privatization are as follows: Privatization is “a process involving elements of denationalization or selling of state-owned assets, deregulation (liberalization), competitive tendering, together with the introduction of private


Figure 1. Research theoretical model.

ownership and market arrangements” (Hartley and Parker, 1991). A much extended definition of the term is given by Humphrey (1991) and Dunleavy (1986) as “the replacement of government institutions or activities with those of the private sector” (Keller et al., 1994).

More than two years has passed since the beginning of privatization in some domestic Iranian banks such as bank Saderat of Iran, Melat Bank and Tejarat bank there are no records of research that are directly related to privatization of Iranian banks. Studies in this area have been rarely seen, therefore only some of the researches in other countries are mentioned.

Athanassopoulos (1997) measured customer satisfaction level from bank services in Greek public-sector and private banks. The main results obtained, affecting customer satisfaction is ownership situation or whether the bank is private or state-owned. In another research, Mihelis et al. (2001) measured customer satisfaction in privatized banking in Greece. This research is stressed on determining vital aspects of services and segmentation of customers, based on different priorities and expectations. And finally, elements affecting customer satisfaction including availability level, service, image, products and staff behavior are explained. In his researches regarding liberalization of financial sector, bank privatization and efficiency in Pakistan banking, Bonaccorsi and Hardy (2005) concluded that, liberalization and reforms including privatization of principle banks generally led to higher performance of banks during 1992 and 1993. Levesque and Mcdougall (1996) sought to study service quality, service property and gap, and situational factors as factors affecting customer satisfaction and future tendencies of banking system. They concluded that, the properties affecting customer satisfaction are meeting their expectation, superiority of service quality in customers' viewpoint.

Also, study of privatization in the biggest commercial bank in Jamaica national commercial bank group indicates that, liberalization and privatization led to increased number of products, services and developed computer systems resulted in customers' profit

(Perkopenko, 2001). Research hypotheses Theoretical framework of the present research includes dependent and independent variables as shown in Figure 1. Privatization is independent variable and customer satisfaction is dependent variable which includes three latent variables: customer expectations, inferred service quality by customer and value of received service. Theoretical model of the research is derived from American customer satisfaction index (ACSI) model.

To measure customer satisfaction in American customer satisfaction index model, three main factors have been introduced as reasons caused customer satisfaction. The variables are inferred quality by customer, received value and customer expectations. The first variable, inferred quality by customer is of positive and direct affect on satisfaction. Received value is the second factor influencing customer satisfaction. It means the extent to which quality of product or service is perceived by customer with respect to the price paid. The third factor determining customer satisfaction is customer expectation from quality of product or service before using. Customers expectation is the reference point by which quality of received product or service is measured. Customer expectations result from his/her past experiences and involve all his/her knowledge about products or services obtained from different resources such as advertising or other people speaking. As customer expectations from supplier organization increase, it means that he/she predicts to receive higher quality product or service (Kavosi and Saghayi, 2009).

In the present work two primary hypotheses and three secondary hypotheses are proposed. The first primary hypothesis: bank privatization has a positive and significant effect on improved customer satisfaction in credit department of Saderat Bank of Iran. Secondary hypotheses: 1. Bank privatization has a positive and significant effect

Customer satisfaction

Inferred service quality by

customer

Value of received services

Privatization

Satisfaction

on improved customer expectations from bank services incredit department of Saderat Bank of Iran. 2. Bank privatization has a positive and significant effect on improved customer inference from quality of bank services in credit department of Saderat Bank of Iran. 3. Bank privatization has a positive and significant effect on improved value of services offered to customers of credit department of Saderat Bank of Iran. The second primary hypothesis: there is a significant difference between customer expectations, customers' inference from bank services and value of received services. MATERIALS AND METHODS The present research is applicable in view of purpose and descriptive research (non-experimental) and field study regarding data collection. Method of research is survey; its important advantage is generalizability of results to statistical universe. The independent variable is impossible to manipulate, and researcher seeks to investigate, analyze and describe its relevant achievements whether customer satisfaction is affected by bank privatization.

Software package SPSS was used to analyze data and examine hypotheses and LISREL for confirmed factor analysis and path analysis. Statistical universe and sample Statistically, the universe of this research include all customers of credit institution of Saderat Bank, referred to the bank in the privatization period (from June 22, 2009 to March 20, 2009); and they requested for some facilities. Its stages were passed and determined to consist of customers from 21 March 2008. Given that the society is limited, minimum sample size was calculated (132) using Cochrane equation at confidence level of 95% and standard error (0.05). Using simple random sampling, 170 questionnaires were distributed among statistical universe, of which 155 were returned; 8 questionnaires were excluded due to deficiency, and finally 147 filled questionnaires were analyzed.

Questionnaire design

The main tool of data collection is closed-end questionnaire that has been designed based on American customer satisfaction index model using five-scale Likert range consisting 22 items; 7 items for measuring customer expectations, 9 for customer inference from quality of services and 6 for service value received by customers (Appendix).

Performed tests in the research

1. Descriptive statistics including frequency for demography, mean, standard deviation, and average standard error for main questions of questionnaire. 2. Test for data normalizing and research components using Kolmogorov-Smirnov test. 3. T-student test in order to investigate fitness of main questions of the questionnaire. 4. Spearman correlation test to examine relations between questions and research variables with satisfaction components

Mosavi et al. 5909 5. Pearsonian correlation test to examine relations between three components of customer expectations, customer inference from service quality and service value offered. 6. Examining the first primary hypothesis and three secondary hypotheses using average society test. 7. Freedman variance analysis test to examine the second primary hypothesis and prioritize satisfaction components. 8. Confirmed factor analysis of model of privatization effect on improved customer satisfaction of credit department using LISREL software. 9. Path analysis of the components affecting customer satisfaction of credit department.

RESULTS AND DATA ANALYSIS Reliability analysis Cronbach's alpha coefficients calculated for total sample size and also for each component are shown in Table 1 indicating high reliability of the research questionnaire. Descriptive findings of the research The data concerning respondents are shown in Table 2. Inferential findings of the research 1. Investigating statistical sample normalization, Kolmogorov-Smirnov test was used in order to investigate data distribution normalization as well as each component of satisfaction. Since significance level calculated for all responses as well as all three components of satisfaction is more than 0.05; accordingly, questions and each components studied were verified to be normal. 2. T-student test in order to investigate adequacy of the research main questions, the T-student was used in this research in order to examine adequacy or inadequacy of each question regarding privatization effect on improved customer satisfaction of credit institution of Saderat Bank. Given Likert five-scale range of questionnaire, number 3 was selected as cutoff point. Test process is comparison of significance level with test error level (here is equal to 0.05) indicating variable position in underlying society. Considering that significant figure calculated is smaller than significant figure for all variables (0.05), it can be said that, in confidence level 95%, credit institution of Saderat Bank of Iran is in a good position in view of questions studied. 3. Spearman correlation test in order to investigate relations of questions and variables with each of components: considering results indicated in Tables 3, 4 and 5 showing positive correlation and less significance level, calculated error level is less than 0.05 for questions; therefore, the significant and positive relationship between all questions of the first secondary


Table 1. Calculated Cronbach's alpha coefficients.

Factor Cronbach's alpha coefficients

Customer expectation 0.985

Customers' inference 0.986

Received services value 0.936

Total 0.947

Table 2. Data about respondents.

Factor Frequency Percentage

Gender

Male 114 77

Female 33 23

Total 147

Age

20 to 25 7 5

25 to 50 100 68

Over 50 40 27

Level

Diploma 32 22

Bachelor 98 66

Higher degree 17 12

Job status

Employees 53 36

Self-employed 72 49

Other 22 15

Historical relation with credit institution (years)

2 to 3 9 6

3 to 5 31 21

Over 5 107 73

hypothesis and customer expectation, questions of the second secondary hypothesis and customer inference from service quality, questions of the third secondary hypothesis and service value offered to customers are supported. 4. Pearsonian correlation test in order to investigate relationships between three components of customer expectation, customer inference from service quality and service value offered. Given the results shown in Table 6 indicating positive correlation and smaller significance level is less than calculated error level of 0.05 for all components, and so significant and positive relationship between all components of satisfaction including customer expectation, customer inference from service value and service value offered is supported. 5. T-student test was used for investigating the first primary hypothesis and its three secondary hypotheses using average society test regarding review of research

hypotheses. As mentioned in the previously, assuming significance level is smaller than 0.05 and average component is greater than 3; underlying hypothesis is supported and rejected otherwise. Table 7 indicates that the first primary hypothesis and all three secondary hypotheses are supported. Since significance level (sig) of all hypotheses is less than 0.05 and given that upper and lower limits are positive within confidence interval, it is concluded that privatization has a positive and significantly affect all three components of satisfaction, that is, customer expectation, customer inference from service quality and service value offered to them and generally on customer satisfaction. 6. Freedman variance analysis test in order to investigate second primary hypothesis and prioritize components of customer satisfaction. Considering the fact that, significant figure is less than 0.05 and near to zero and less than standard significance level (α= 5%), therefore,

Mosavi et al. 5911 Table 3. Spearman correlation coefficients between customer expectations and its variables.

General expectation

Matching services with

personal needs

Expansion of time and space of

services offered

Secondary duties and

support

Reliable and accurate services

Wait time and

availability

Bank services and

products

Customer expectation

Spearman correlation

0.849 0.773 0.647 0.587 0.623 0.756 0.735 1 Spearman correlation coefficient Customer

expectation 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Significance level

Table 4. Spearman correlation coefficients between customer inference from service quality and its variables.

General quality of services

Inferred quality of facilities offered and

money exchange

Matching services with expectations

Security and

lack of danger

Usage easiness and

simplicity

Technical quality of services

Quality of services in view

of reliability

Quality of services

availability

Customer inference from service quality

Spearman correlation

0.807 0.711 0.714 0.514 0.616 0.503 0.703 0.678 1 Spearman correlation coefficient

Customer inference from service quality 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Significance level

Table 5. Spearman correlation coefficients between service value offered and its variables.

General value of services

offered

Value of side services and

support

Value of service accuracy and

reliability

Value of consultations offered

by bank staff

Services value such as call availability

Service value including such services as drafts and money exchanges

Services value Spearman correlation

0.819 0.723 0.625 0.650 0.663 0.714 1 Spearman correlation coefficient Value of

services 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Significance level

the hypothesis which state that “all three components of satisfaction are prioritizing in the same level” is not supported in confidence level 95%. Thus, it can be said that, factors affecting improved on customer satisfaction of credit institution of Saderat Bank do not have the same rank and the last hypothesis is supported. The results of freedman test are: number 147, Chi-square statistic 92.77, and degree of freedom 2,

and p value = 0.0000. Table 8 depicts that component of service value offered to customers have the highest priority and component of meeting their expectations has the least. 7. Factor analysis of the model of privatization effect on improved customer satisfaction of credit institution using software LISREL was carried out. Validity of the measurement model of privatization effect on improved customer satisfaction was

investigated using structural equations model;

their results are shown in Table 9. If df

2

values are less than 3 and RMSEA is less than 0.08 and goodness of fit index (GFI) and adjusted goodness of fit index (AGFI) are greater than 0.9, conceptual model is of good fitness. Values obtained and shown in Table 9 indicate good validity and fitness of proposed conceptual model. If t-values are more than 2 and less than -2 they


Table 6. Pearsonian correlation coefficients between three components of customer satisfaction.

Number Satisfaction components Correlation coefficient Significance level

1 Customer expectations and inference from quality of services 0.855 0.000

2 Customer expectations and value of services offered 0.793 0.000

3 Inference from quality of services and value of services offered 0.850 0.000

Table 7. Results of society average test regarding the first primary hypothesis and secondary hypotheses.

The first primary hypothesis and secondary hypotheses of the research

Value of cutoff point = 3

Test result

Confidence interval 95%

Lower limit

Upper limit

t df sig Difference

First secondary hypothesis

Customer expectations

0.6923 0.7642 Confirmed

Second secondary hypothesis

Customer inference from bank quality of services

0.9289 0.8551 0.84656 0.000 146 20.309 Confirmed

Third secondary hypothesis

Value of services offered to customers

1.0452 0.7114 0.95011 0.000 146 19.757 Confirmed

First primary hypothesis

Customer satisfaction 0.8835 0.79747 0.000 146 18.322 Confirmed

Table 8. Ranking components of customer satisfaction.

Row Component Rank

1 Value of service offered to customers 2.49

2 Customer inference from quality of services 2.11

3 Customer expectations 1.40

Table 9. Fitness indices of the research conceptual model.

Indices df

P-value RMSEA GFI AGFI

Values 158.48 205 0.77 0.000 0.012 0.94 0.92

will be significant. All t values are significant in confidence level of 99% (Figure 2). Considering Figure 2, it can be inferred that all coefficients obtained are significant because value of significance test for each of them is more than 2 and less than -2. 8. Path analysis of factors affecting customer satisfaction of credit institution. Using software LISREL, path analysis

was used to investigate the relations between factors affecting customer satisfaction and customer satisfaction in privatization space performed in credit institution of Saderat Bank. In this model, there was a positive and significant relationship between customer expectations from bank services (β= 0.94, t= 10.49, P<0.01), customer inference from bank services (β= 0.95, t= 10.93, P<0.01)

2 df

2

Mosavi et al. 5913

Figure 2. Significant figures of primary model of privatization effect on customers‟ satisfaction using factor analysis.

Table 10. The status of all relationships between satisfaction components.

Components Significant figure (t)

Significance level (P)

Standard coefficient

Result

The relationship between customer expectations from bank services and improved customer satisfaction

10.49 0.01 >P 0.94 Confirmed

The relationship between customer inference from bank services in privatization and customer satisfaction

10.93 0.01 >P 0.95 Confirmed

The relationship between value of services received by customers from 9.38 0.01 > P 0.91 Confirmed

and perceived service value by customers (β= 0.91, t= 9.38, P<0.01) with improved customer satisfaction. Significance level (probability) = P Significant figure = t Standard coefficient = β Consequently, it may be inferred that during privatization period in credit institution of Saderat Bank, there is a significant and positive relationship between each of components of customer expectations, customer

inference from service quality and service value offered with customer satisfaction. The results are shown in Table 10. Indicates that all relations have been supported. DISCUSSION The main purpose of the present research is investigating privatization effect on customers‟ satisfaction of banks. The results obtained from analysis based on structural equations model indicate that, in during privatization period, there is a positive and significant relationship

Q1

Q2

Q3

Q4

Q5

Q6

Q7

7.25

7.44

8.32

8.34

8.22

7.47

6.62

Expectation

Expectatio

n

Inferred

quality

Q8

Q9

Q10

Q11

Q12

Q13

Q14

7.87

8.12

8.24

8.35

8.39

8.44

7.91

Q15

Q16

8.05

7.16

Satisfaction

10.26

0.00

10.65

Value of received

service

9.56

Q17

Q18

Q19

Q20

Q21

Q22

7.62

7.07

8.01

8.26

7.72

5.02

9.38

8.91

8.35

6.71

9.39

11.96

10.49

10.56

6.32

6.22

8.06

10.49

11.75

10.92

8.39

7.60

6.50

5.89

5.00

9.38

8.80

10.92

Chi-Square= 158.48, df= 205, P-value= 0.00000, RMSEA= 0.012

5914 Afr. J. Bus. Manage. between each of customer expectations, customer inference from service quality and service value offered to them with customer satisfaction. These relations are direct and have highly effectiveness.

In addition, analysis results of the first primary hypothesis and three secondary hypotheses support privatization effect on improvement of each latent variables of satisfaction that is customer expectations, customer inference from service quality and service value offered to them and finally customer satisfaction of banks.

It can be explained that privatization or marketing leads banks toward customer-oriented as customers are considered as the main axis of a private financial institution. In a freer environment and increased options obtained in the light of privatization space, bank managers develop advanced software and hardware facilities, employ competent labor force, use diverse methods to offer different bank services with special conditions, expand physical space of the branches, increase diversity in offering bank facilities, decrease cost of services through dwindling, reengineer, employ advanced systems of information technology and finally provide superior competencies as competitive advantage leading to improved meet of customer expectations, enhance their inferential level from bank service quality and increase value of services offered and customer satisfaction.

Although privatization led to improved in three latent variables of customer satisfaction, Freedman variance analysis test indicated that three components are not in the same rank and service value offered to customers is of the highest rank and customer expectations in the least rank.

This can be illustrated by the fact that environment is being changed increasingly and customers' demands, requests and needs are changed correspondingly and since humans and their needs are difficult to identify in view of continuous and widespread environmental changes, its full realization is impossible in short term. On the other hand, given that bank privatization process is in its initial years, positive steps have been taken to identify their needs and expectations and led to improved customer satisfaction. It is not adequate to meeting customers‟ satisfaction and totally resulted in component rank of meeting customer expectations being lower than two other components. Also considering measures performed as to decrease costs and increase service quality is reflected more rapid for customers, the rank for two other components have been evaluated higher by customers. So bank managers need more time to increase their knowledge about customers' ever-changing needs and expectations to subsequently be able to meet their expectations in the higher level. Thus bank managers are recommended to continuously review their

services compared with those of other rivals and try to increase their knowledge about customers' needs and demands through training their staff and increasing their knowledge and competency and employing foreign competent consultants and experts and while providing superior competences, response to their customers expectations and by offering higher quality and lower cost services achieve customer satisfaction.

Also the results of correlation test indicated that, there is a positive and significant relationship between each of satisfaction components with related component and between each of three components of satisfaction (expectation, inferred quality and service value) with each other. So as they reinforce each other, managers are recommended to simultaneously supply and strength all three components of satisfaction and corresponding variables because improvement in one of them leads to enhancement in the other two. REFERENCES Armesh H (2009). Banks privatization, Challenges and Strategies. J.

Bank Saderat Iran, 10(48): 32-46. Athanassopoulos DA (1997). Another look in the agenda of customer

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Hartley K, Parker D (1991). Privatization: A Conceptual Framework, in A. F. Ott and K. Hants: Edward Elgar.

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Keller AZ, Dogan Ç, Eroglu Ö (1994). Evaluating privatization policies in Turkey. Int. J. Public Sector Manage., 7(1): 15–24.

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Mihelis G, Grigoroudis E, Siskos Y, Politis Y, Malandrakis Y (2001). Customer satisfaction measurement in the private bank sector. Eur. J. Oper. Res., 130: 347-360.

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APPENDIX

Questionnaire

1) Since the beginning of the privatization of the bank, how much have your expectations about the use of banking services, such as (money transfer, receive various banking facilities) been fulfilled? 2) How much have your expectations about customer service, such as (long waiting time, and easy access) have been fulfilled during the time of privatization? 3) Regarding the privatization of banks, are your expectations regarding service reliability and precision met? 4) Since the privatization, how much have your expectations about the duties provided such as (money transfers via ATM or internet, receiving account, bills and loans payment, support services, etc.) been fulfilled? 5) How much have your expectations about the location and time of development services such as deployment of ATM machines been fulfilled? 6) How much have your expectations in terms of the appropriateness of banking services with personal needs been considered in privatization period? 7) Can your general expectations be fulfilled by the bank in all aspects that you see and at the appropriate time? 8) How can you rate the quality of services provided by bank employees during the period of bank privatization? 9) How do you evaluate the quality of availability of banking services such as (Facilities Operations) during the privatization period? 10) How do you evaluate the quality of banking services such as received accounts and facility information in terms of accuracy and reliability during the privatization? 11) How do you rate the quality of technical services such as safely of electronic transactions?

Mosavi et al. 5915 12) During the period of privatization, how much have your satisfaction in terms of simplicity and ease of use of services been fulfilled? 13) How do you properly evaluate the service items on bank privatization period in terms of security? 14) How much does the quality of services provided by the bank fit with your expectations? 15) How much do you find satisfactory the quality of banking services which you receive such as (Payment of bank facilities, money transfers, money orders and etc.) during the period of privatization? 16) By and large, how much do you find your general satisfaction with the quality of banking services in the period of privatization? 17) How much is worth of electronic bank services in the course of privatization such as (money transfers, money orders, Repayment of bank facilities, the use of integrated banking system) appropriate? 18) How much do you find appropriate the value of services such as (hours of availability, accessibility and communication by telephone) in the period of privatization? 19) How much do you find appropriate the professional consult provided by the bank staff, in terms of having the necessary information for customers? 20) During the period of privatization, how much do you find worthful the banking operations from the point of view of accuracy and reliability? 21) How much valuable are miscellaneous services of bank such as support services and providing needed information on privatization period? 22) How much do you find satisfactory the value of all services that you are receiving during the period of bank privatization?



Return and volatility spillover across USA and Europe (study of American and EU crisis period)

Martin Surya Mulyadi* and Yunita Anwar

Accounting and Finance Department, Economic and Communication Faculty, BINUS University, Indonesia.

Accepted 9 March, 2012

Globalization and advancement in information technology made it possible for investors to invest in either domestic or global stock market. Besides, the information will be spread quickly from one market to another. Fact showing that during the subprime mortgage crisis in USA, their domestic stock market experiencing downturn and also all of global stock market. And then, we have European Union crisis which originated from Greece. Crisis caused of debt-fear from Greece impacted to all over Europe that is, we can see European stock market is in turmoil. The crisis not only impacted in its region (Europe), it is also contagious to all global stock market. This research using data from Dow Jones Industrial Average (USA), FTSE 100 (UK), and Greece stock exchange composite from January 2006 to July 2010. We employ GARCH (1, 1) and GARCH-X model to see return and volatility spillover between three stock markets. Our result shows that during all period, there are return spillover between three stock markets which is all significant in 1%. In terms of volatility spillover, from 2006 to 2010 extracted that no volatility spillover from USA stock market to Greece stock market. In American crisis period, also founded that there are no volatility spillover from USA stock market to Greece stock market and vice versa. Meanwhile, during EU crisis period, there is no volatility spillover from USA stock market to European stock market (UK and Greece). Key words: Return spillover, volatility spillover, generalized autoregressive conditional heteroscedasticity (GARCH), GARCH-X, American crisis, EU crisis.

INTRODUCTION Investment in stock market is one alternative for investor in investing. With globalization and advancement in information technology, now investor has many choices to invest and also many sources of information. An investor can invest in his/her domestic stock market while also has option for investing in global stock market. And also information can obtain quickly, bad/good information mostly responded quickly by investor to take decision in their investment.

We have faced the fact that when there is American crisis during 2008 until 2009 caused by subprime mortgage, its domestic stock market is having very bad period and experiencing a bear run. Not only its domestic stock market, had American crisis responded by investor *Corresponding author. E-mail: [email protected], [email protected].

all over the world by selling its stock and in the end resulting of bear market in global stock market. When many of us believe that there has been a recovery in global economic which in turn responding positively by stock market, EU crisis once again hit the stock market. Debt-fear originated in Greece, and also the same in Portugal, Spain, and many other EU countries once again responded negatively by investor. Global stock market once again in turmoil.

If in the first case that US stock market (American crisis) is affecting global stock market, in the next case European stock market (EU crisis) is affecting global stock market (also affecting US stock market as well). Research by Hamao et al. (1990) found that there is significant spillover effect from USA and UK stock market to Japan stock market. Balasubramanyan and Premaratne (2003) concluded there is small but significant volatility spillover from Singapore stock market to USA, Hong Kong, and Japan. Their result is

interesting because many of previous research tend to conclude spillover effect would be significant from dominant market to the smaller one, and the effect is unidirectional.

Return and volatility spillover research across USA and Europe (we used Dow Jones Industrial Average, FTSE100, and Greece stock exchange composite) is important to know how the spillover between three stock markets is. This research is structured as follows: firstly analyzing the whole data to see how the spillover is without mentioning the crisis; secondly, analysis of 2007 to 2008 data when there was America crisis; thirdly, we analyzed 2009 to 2010 data when we have EU crisis. LITERATURE REVIEW Globalization and its impact to stock market Increasingly regional economic activity and financial market liberalization since 1980s resulting integration of regional economy all over the world. Globalization also allows an enterprise in a country selling its stock in another country as new source for raising its capital needs for its expansion. This expansion showed latest development in communication technology. With very high pace of communication technology development and information making possible of local financial markets became an international scale.

With those conditions, globalization and expansion of financial markets resulting in growth of financial market integration. Integration of financial market, especially in capital market, will make a correlation between return and volatility of every capital market. This could happen because speaking of globalization is not only about trading, but also dealing with investment. So, news about fundamental economy in a country mostly has impact for another country.

Another reason for change of price stock correlation between one and another country is contagion. Contagion is change of stock’s price in a country because of impact from another country that is not caused from fundamental economy of that country. The classic example of this market contagion is downfall of New York stock exchange in October 1987, famously known as Black Monday, causing downturn stock price in the world. Volatility Globalization and multi-directional flow of capital between financial markets increase market interdependency. There are many empirical studies concluding co-movements and interdependency between stock markets in some country. There are two approaches used to research it. First approach is researching many aspects of market interdependency using co-integration and

Mulyadi and Anwar 5917 causality. One research using this first approach is research by Eun and Shim (1989). Second approach is researching interdependency concerning in volatility spillover, (Hamao et al., 1990) using this approach.

According to King and Wadhwani (1990), an investor in capital market used announcement or information that accumulated from last closing of domestic capital market for estimating its impact on opening price. Otherwise, they can use change of price from global capital market which opens early than domestic capital market to estimating its impact probability to domestic capital market.

According to Calvet et al. (2004), the main objective in research of volatility spillover is for understanding how volatility can affect return of portfolio. Return of portfolio has implication on daily risk management, portfolio selection and derivative price. Movement of volatility could help in understanding shock transmission in global financial system. There is effect that affect volatility of financial market and assets, which is volatility spillover.

Price of assets intertwined each other (Rigobon and Sack, 2003). Analyzing a single market without paying attention to another aspect would means ignoring important information of market behaviour. Change of asset’s price in its market not only impacted by volatility shock, but also by its reaction to shock on asset’s price in different country.

In this research there will only be one terminology of volatility, contemporaneous spillover. Contemporaneous spillover is return/volatility spillover that happens in the very same day. Contemporaneous spillover generally happened on stock markets in the same region, but in this case as US and European stock market have no much difference in trading time so we only research the contemporaneous spillover. Previous research Some previous research showed the existence of return and volatility spillover. Eun and Shim (1989) analyzed daily return in Australia, Hong Kong, Japan, France, Canada, Switzerland, Germany, USA, and UK capital market. They found a substantial interdependence between each market with USA capital market the most influential. On innovation in USA, all European and Asia Pacific markets highly responsive with one day lag. Most of this response to the shock will take place within two days.

Hamao et al. (1990) used daily and intraday data from Japan (Nikkei 225), UK (FTSE 100), and USA (S and P 500) for three years (from April 1985 to March 1988). They research price interdependency and volatility between three capital markets. In this research, calculation of return used by comparing closing price with opening price, and opening price with closing price. Their research using GARCH-M (1, 1) model. The result

5918 Afr. J. Bus. Manage. concludes that there is significant spillover effect from USA and UK capital market to Japan, but there is no significant spillover effect from Japan capital market to USA and UK.

Park and Fatemi (1993) research relation between capital market of Basin Pacific countries with USA, UK, and Japan. USA capital market is the most influential compared to UK and Japan. From their research found that Australia is the most sensitive to USA market. Singapore, Hong Kong, and New Zealand are next group showing moderate relation to those markets. Meanwhile, Korea, Taiwan and Thailand showing little impact from those markets. Basin Pacific economy has unique structure that is singular to country that has emerging market and its stock fluctuation mostly affected by domestic factors.

Lin et al. (1994) researching how return and volatility of Japan and USA indices correlated one another. Data used in that research is intraday data from Nikkei 225 and S and P 500. From those data, can be calculated daytime return (opening price to closing price) and overtime return (closing price from previous day to opening price). Research employed GARCH-M model, as Hamao et al. (1990), also used, found that foreign daytime return affected domestic overnight return significantly. Mostly result of research showing USA capital market impacted Japan, not vice versa. Otherwise, in a research by Lin et al. showed that return and volatility market interdependency is bidirectional between Japan and USA.

Janakiramanan and Lamba (1998) research empirically relation between Basin Pacific capital markets. Their result showed USA capital market influent to all capital markets but Indonesia, the isolated one. Markets with similar geographic and economic showing significant impact one another. Overall, impact from USA market to Australia-Asia market decline significantly nowadays, and Indonesia being more integrated to these markets.

Indrawati (2002) used value at risk (VAR) and vector error correction (VEC) model with Granger noncausality (GNC) to testing dynamic relation of macro monetary economic variable and capital market indices. Her research showed Indonesian capital market integrated to USA capital market. 1% increased in USA capital market will affect increase of Indonesian composite index as 0.32%. That research also concluded that there is Granger cause bidirectional relation between Indonesia capital market with Thailand, Taiwan, and South Korea capital market. Besides, all stock markets in her research (Indonesia, Thailand, Taiwan, and South Korea) integrated with USA capital market.

Balasubramanan and Premaratne (2003) doing research by using daily return data from January 1992 to August 2002 to investigate volatility spillover and co movement between Singapore stock market with USA, UK, Hong Kong, and Japan. One interesting result from their research is there is significant volatility spillover from Singapore stock market to Hong Kong, Japan, and USA.

We know in case of influence and market dominance, Hong Kong, Japan, and USA capital markets are far more influential and dominant to Singapore capital market. Many researches tend to conclude that spillover effect will be significant from dominant market to smaller market, in a unidirectional way. This could be interesting noting that from their research there is little but significant volatility spillover from Singapore to Hong Kong, Japan, and USA.

Shamiri and Isa (2009) examined volatility transmission across South East Asia and US stock markets using multivariate GARCH by adopting BEKK representation. Their result shows that influence of US stock market is important in South East Asia in term of return spillover. Meanwhile, comparing to other stock market in South East Asia, Singapore, Korea, and Hong Kong stock market are the most influence stock market in term of volatility spillover as US investor hold 12.76, 15.45, and 5.15% of their market capitalization respectively.

Le and Kakinaka (2010) has investigated transmission of mean return and volatility from US, Japan, and China stock market to Indonesia and Malaysia stock market using daily data from January 2005 to December 2007. By adopting GARCH model, they find that US stock market influence Indonesia and Malaysia stock market. The results also support significant feedback relationship in mean return between Japan and Indonesia, and between Japan and Malaysia. They also found significant level of mean and volatility spillover between China and Indonesia and Malaysia. Hypothesis development From what we have discussed so far, we develop the following hypothesis: 1) First hypothesis: There is return spillover from US and UK capital market to Greece capital market. 2) Second hypothesis: There is volatility spillover from US capital market in time of American crisis period. 3) Third hypothesis: There is volatility spillover from UK and Greece capital market in time of EU crisis period. METHODOLOGY

Data used Data used in this research is closing price of indices. Daily return

data ty calculated using following formula:

)/log(100 1−×= ttt PPR

Data obtained from period January 3, 2006 to July 30, 2010. Usage of daily data because of daily return can capture all possible interaction. Meanwhile, using weekly or monthly data could delete possible interaction that only last for several days. Data used are indices of each country: Dow Jones Industrial Average for USA,

FTSE 100 for UK, and Greece Stock Exchange Composite index for Greece.

Descriptive statistics and return-distribution for Dow Jones Industrial Average (DJIA), FTSE 100 (FTSE), and Greece stock exchange composite index (GREECE) can be view from Graphs 1 to 6. In graph 1, maximum value is 4.5637 in October 13, 2008 while minimum value is -3.5614 also in October (October 15, 2008). This minimum and maximum value happened during 2008, which is in American crisis period. From graph 2, maximum value is 4.1868 (October 10, 2008) and minimum value in October 10, 2008 (-4.0236). Both maximum and minimum value in financial times stock exchange (FTSE) also happened during American crisis period. Same evidence also found in Greece, in graph 3 we can see that the maximum value is 3.9583 (October 29, 2008) and -4.4359 (October 24, 2008).

From the mentioned data we can conclude that in 2008, especially in October where there was a very high volatility since maximum and minimum value from 2006 to 2010 can be found in October 2008. We can see in Graph 4 and graph 5, both markets (US stock markets and UK stock markets) showed a very high range of return movement in 2008. In Greece stock markets (Graph 6), its return also move in a high range in 2008, although it also showed their return movement is quite high in 2010 (EU crisis period, which originated from Greece). Econometric model With objective to obtain information about return and volatility spillover from time series data, we used GARCH (1, 1) model and GARCH-X model to capture volatility in this research. ARCH (autoregressive conditional heteroscedasticity) and GARCH (generalized autoregressive conditional heteroscedasticity) are modeling first difference of financial time series. These first differences often exhibit wide swings, or volatility, suggesting that the variance of financial time series varies over time. The ARCH model was originally developed by Engle (1982) to describe U.K. inflationary uncertainty. The ARCH (1) model can be written as:

2

110

2

−+= tt εαασ

Since founded in 1982, ARCH modeling has become a growth industry, with all kinds of variations on the original model. One that has become popular is GARCH model, originally proposed by Bollerslev (1986). The simplest GARCH model is the GARCH (1, 1) model, which we use in this research, can be written as:

2

12

2

110

2

−− ++= ttt hαεαασ

which says that the conditional variance of at time t depends not only on the squared error term in the previous time period [as in ARCH (1)] but also on its conditional variance in the previous time period.

Firstly, we used basic GARCH model for proxy of volatility (GARCH-X). GARCH-X models replace constant in GARCH models by an extra term: lagged cross-sectional market volatility. Thus, GARCH-X model does not need additional parameters. Note that the cross-sectional market volatility is lagged to make the GARCH-X mode conditional. GARCH-X model is introduced by Hwang and Satchell (2005). From their research, it is concluded that volatility of a stock can be better specified by using GARCH-X rather than GARCH model. GARCH uses past and conditional volatility to explain the current conditional volatility. Usage of GARCH did not lead to a conclusion that market volatility is an important component in volatility, because the exclusion of cross-sectional relationship of

Mulyadi and Anwar 5919 market volatility in GARCH model which is introduced in GARCH-X. Cross-sectional volatility provides more information on the time-varying factors than the time-series volatlity. A different version of GARCH-X introduced by Apergis (1998) to investigate how short-run deviations from the relationship between stock prices and macroeconomic fundamentals affect stock market volatility, while GARCH-X model by Hwang and Satchell (2005) focusing on cross-sectional market volatility as we also used in this research. After that, we use GARCH (1, 1) model estimated using maximum likelihood procedure applying BHHH algorithm.

titjtjtiti hRRR ,,3,21,10, εγγγγ ++++= − (1)

tjtititi hhh ,11,2

2

1,10, δαεαα +++= −− (2)

tjtititjtj hRRR ,,3,21,10, εθθθθ ++++= −

(3)

titjtjtj hhh ,11,2

2

1,10, ϕβεββ +++= −− (4)

Where:

tiR , = return of i-stock market at t period,

1, −tiR = return of i-stock market at t-1 period,

tjR , = return of j-stock market at t period,

tih , = volatility of i-stock market at t period,

1, −tih = volatility of i-stock market at t-1 period,

tjh , = volatility of j-stock market at t period,

ti,ε = error of i-stock market at t period,

tj ,ε = error of j-stock market at t period.

RESULT AND DISCUSSION

Capturing volatility We use GARCH-X model to capture volatility from each variable (DJIA, FTSE, GREECE). We use first lag of each variable, and then we use its GARCH variance series as volatility. Volatility of each variable showed from Graph 7 to graph 9. From Graph 7, we can see that the highest volatility for DJIA is in 2008. As we have discussed earlier, US stock markets have a very high return movement in 2008 which indicated a high volatility. American crisis period happened during this year. FTSE also showed same condition (Graph 8), they have the highest volatility in 2008 as they also have high return movement in the same year. From these graphs, we can see that there is the same evidence of high volatility in 2008 both in US stock markets and UK stock markets.

In Greece stock market, as showed in Graph 9, they have high volatility both in 2008 and 2010. American crisis period happened during 2007 to 2008, while EU


0

40

80

120

160

200

240

280

320

-2.5 0.0 2.5

Series: DJIA

Sample 1/03/2006 7/30/2010

Observations 1103

Mean -0.001410

Median 0.025500

Maximum 4.563717

Minimum -3.561437

Std. Dev. 0.651808

Skewness -0.033235

Kurtosis 10.72942

Jarque-Bera 2745.936

Probability 0.000000

Graph 1. Descriptive statistics of DJIA. (Source: Data processed used Eviews 5).

0

40

80

120

160

200

240

-2.5 0.0 2.5

Series: FTSE

Sample 1/03/2006 7/30/2010

Observations 1103

Mean -0.003050

Median 0.021727

Maximum 4.186793

Minimum -4.023545

Std. Dev. 0.673296

Skewness -0.046999

Kurtosis 10.59731



Graph 2. Descriptive statistics of FTSE. (Source: Data processed used Eviews 5).

0

40

80

120

160

200

-2.5 0.0 2.5

Series: GREECE

Sample 1/03/2006 7/30/2010

Observations 1103

Mean -0.031157

Median 0.027202

Maximum 3.958330

Minimum -4.435901

Std. Dev. 0.847612

Skewness -0.260401

Kurtosis 6.190343



Graph 3. Descriptive statistics of GREECE. (Source: Data processed used Eviews 5).

Mulyadi and Anwar 5921

-4

-3

-2

-1

0

1

2

3

4

5

2006 2007 2008 2009 2010

DJIA

Graph 4. Return-distribution of DJIA. (Source: Data processed used Eviews 5).

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010

FTSE

Graph 5. Return-distribution of FTSE. (Source: Data processed used Eviews 5).

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010

GREECE

Graph 6. Return-distribution of GREECE. (Source:

Data processed used Eviews 5).


0.0

0.4

0.8

1.2

1.6

2.0

2.4

2006 2007 2008 2009 2010

Condi tional standard deviation

Graph 7. Volatility of DJIA. (Source: Data processed used Eviews 5).

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2006 2007 2008 2009 2010

Condi ti onal standard deviation Graph 8. Volatility of FTSE. (Source: Data processed used Eviews 5).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010

Condi tional standard deviation Graph 9. Volatility of GREECE. (Source: Data

processed used Eviews 5).


Table 1. Data processed from equation 1 and 2.

Spillover 0γ 1γ 2γ 3γ 0α

1α 2α 1δ

US–UK 0.0273** -0.2125* 0.5881* -0.0545 0.0019 0.0190 -0.3782*** 0.6620*

Z-Stat 2.1950 -7.3252 30.6879 -1.3569 0.3655 0.6798 -1.7724 5.7410

US–GR 0.0275*** -0.1690* 0.2232* -0.0036 0.0017* 0.0776* 0.9075* 0.0035**

Z-Stat 1.7455 -4.9005 12.9738 -0.1625 2.6696 5.9703 67.7723 2.3179

UK–GR -0.0058 -0.0934* 0.4212* 0.0311 0.0033** 0.1377* 0.8032* 0.0170*

Z-Stat -0.3848 -3.7463 23.9440 1.3477 2.0760 5.9341 23.3115 2.8511

Source: Data processed used Eviews 5. * Significant in 1%, ** Significant in 5%, *** Significant in 10%.


Spillover 0θ 1θ 2θ 3θ 0β

1β 2β 1ϕ

US–UK -0.0016 -0.0048 0.6653* -0.0070 0.0038 0.1789* 0.3946* 0.3085*

Z-Stat -0.1237 -0.1785 26.3446 -0.1362 0.9244 4.0429 3.6718 4.2272

US–GR 0.0380*** 0.0778** 0.4757* -0.0849 0.0055 0.1333* 0.8524* 0.0205

Z-Stat 1.8526 2.4907 15.2074 -1.5335 2.4191 7.3719 41.6588 1.4009

UK–GR 0.0354** 0.1038* 0.7379* -0.1049* 0.0019 0.0928* 0.8931* 0.0137*

Z-Stat 2.0084 4.0762 27.8994 -2.5966 1.4072 6.5127 58.9137 3.0743

Source: Data processed used Eviews 5. * Significant in 1%, ** significant in 5%, *** significant in 10%.

crisis period in 2009 to 2010. They have high volatility in both events, as also showed previously that their return experienced high movement in both years. Interestingly, although UK and Greece are in same region but it did not show that both markets have quite same volatility (in this case: high volatility) as it was in 2008 when UK has same high volatility with US in US crisis period. 2006 to 2010 In this part, we analyzed the whole data from 2006 to 2010. Our finding shows (Tables 1 and 2) that there is return spillover between three stock markets. Not only US and UK stock markets impacted Greece stock market (as first hypothesis), but also Greece stock market impacted US and UK stock markets as well. In addition, there is also return spillover from UK stock market to US stock market and vice versa.

Return spillover, as well as volatility spillover, from small stock market to dominant stock market has been found previously by Balasubramanyan and Premaratne. However, we still have to test whether this return spillover is still existing when we divide the data for American crisis period and EU crisis period.

All return spillover between these three stock markets are significant in 1%, while the highest coefficient is return spillover from UK stock market to Greece stock market, followed by return spillover from US to UK stock

market, and return spillover from UK stock market to US stock market. With this findings, we can conlude that first hypothesis is not rejected as there is return spillover from US and UK stock market to Greece stock market. This findings also support research of Balasubramanyan and Premaratne, because there is significant return spillover (although in smaller coefficient compared to others) from small stock market (Greece) to dominant stock market (US and UK).

Meanwhile, in volatility spillover it is interesting that from our result we found there is no volatility spillover from US stock market to Greece stock market. This is probably because investors in Greece stock market are more concerned on domestic/regional issues than global issues. Another interesting findings that Greece stock market impacted volatility of US stock market, although in very small coefficient but significant in 5%. Volatility spillover from US to UK is significant in 1%, while volatility spillover from UK to US stock market having bigger coefficient and also significant in 1%. Contrast to US stock market which have no volatility influence to Greece stock market, there is little volatility spillover from UK stock market to Greece stock market and vice versa which is significant in 1%.

With this evidence, we can conclude that there is a high level of significance for volatility spillover between two major stock markets. As we know, US stock market and UK stock market are major stock market in their region. While there is no volatility spillover from US stock market




1α 2α 1δ

US–UK 0.0195 -0.3060* 0.5897* -0.0594 0.0025 0.0481 -0.3153 0.6526*

Z-Stat 0.8958 -6.8699 18.8046 -1.1375 0.2064 0.9186 -1.1922 4.2143

US–GR 0.0019 -0.2792* 0.3667* 0.0020 0.0016 0.0722* 0.9286* 0.0011

Z-Stat 0.0782 -5.8279 12.4540 0.0544 1.0694 3.5823 54.3296 0.1519

UK–GR -0.0087 -0.1173* 0.6029* 0.0229 0.0048 0.1564* 0.7649* 0.0266***

Z-Stat -0.3983 -3.2498 22.0179 0.6097 1.4584 3.5353 11.9551 1.9021




1β 2β 1ϕ

US–UK -0.0086 0.0356 0.6244* -0.0103 -0.0057 0.2177* 0.0857 0.5951*

Z-Stat -0.3703 0.8174 15.0728 -0.1458 -0.5498 2.8660 0.7312 5.0765

US–GR 0.0294 0.0604 0.4142* -0.1156*** 0.0064 0.2084* 0.7793* 0.0191

Z-Stat 1.0322 1.3102 11.0835 -1.8151 1.2875 4.6950 17.9367 0.6125

UK–GR 0.0292 0.1072* 0.6904* -0.1069** 0.0049 0.1206* 0.8286* 0.0196**

Z-Stat 1.2387 2.9701 20.9765 -2.5373 1.5421 4.0377 20.5633 2.4540


to Greece stock market could be caused from investors in Greece stock market would not be affected from condition in US, so it has no significant influence. Meanwhile, there is little volatility spillover from UK stock market to Greece stock market. UK and Greece is still in the same region, as previous research suggested that usually there is spillover for stock market within same region. American crisis period (2007 to 2008) Here, we analyzed data from 2007 to 2008 where American crisis started. Tables 3 to 4 show the result of our research.

We tested second hypothesis during American crisis period, and the result of the second hypothesis was rejected. Greece stock market showing its consistency that there is no volatility spillover from US stock market in the same result when we analyzed the whole data. Meanwhile, there is volatility spillover from US stock market to UK stock market and vice versa which is significant in 1%. Volatility spillover once again happening between two regional stock market (Europe), both stock market influences one another. Small volatility spillover from Greece to UK significant in 10%, while small volatility spillover from UK to Greece significant in 5%.

With this evidence, we can conclude that Greece stock market (investor in Greece stock market) is not impacted

at all from US stock market. Although we know, during the American crisis period almost all stock market in the world having bear period that time. It means that investor in Greece stock market did not have any impact at all from major losses in US stock market. Probably, there is more domestic investor in their stock market. And also, they have no asset in US so they did not impact at all.

Meanwhile there is volatility spillover between US and UK stock market because both stock markets are major stock market in their region, as we have discussed previously. There is also volatility spillover between UK and Greece stock market, as they are still in the same region (Europe).

Testing of return spillover showing the same result as previous one. There are return spillover between all three stock markets, significant in 1%. The biggest return spillover is from UK stock market to Greece stock market, and follow by return spillover from US stock market to UK stock market. EU crisis period (2009 to 2010) Analysis of data from 2009 to 2010 would be discussed in this area from the period of occurance of EU Crisis. Tables 5 and 6 show the result of our research from 2009 to 2010 data.

From Tables 5 and 6, we can conclude that third hypothesis is not rejected. There is volatility spillover from UK stock market and Greece stock market (both significant




1α 2α 1δ

US–UK 0.0368 -0.1277* 0.6614* -0.0714 -0.0218*** 0.0829 0.3890*** 0.3035**

Z-Stat 1.2284 -2.9733 18.4685 -0.7222 -1.7285 1.3450 1.6807 2.1839

US–GR 0.1570** -0.1150*** 0.1844* -0.1144 -0.0042 0.0653* 0.9076* 0.0108**

Z-Stat 1.9730 -1.9441 6.9820 -1.4663 -1.0636 2.7177 31.5344 2.1789

UK–GR 0.1255*** -0.0324 0.3022* -0.0832 -0.0040 0.0593* 0.9100* 0.0114***

Z-Stat 1.6830 -0.6841 12.7480 -1.1241 -0.8577 2.6984 28.4937 1.5997




1β 2β 1ϕ

US–UK -0.0036 -0.0127 0.7464* 0.0142 0.0060 0.1037 0.4846 0.2152

Z-Stat -0.1171 -0.3102 20.5762 0.1425 0.6330 1.2317 1.6191 1.4517

US–GR -0.0286 0.0842 0.6536* 0.1206 0.0353 0.0697** 0.8890* -0.0059

Z-Stat -0.4096 1.6263 9.6306 0.8395 1.1055 2.1781 15.5265 -0.2714

UK–GR -0.0442 0.0878*** 0.8890* 0.1297 0.0176 0.0614** 0.9141* -0.0047

Z-Stat -0.5909 1.8772 18.3588 0.7544 1.2394 2.2288 23.4648 -0.3577


in 5%) to US stock market. While in this period, there is no volatility spillover from US stock market to England and Greece stock market. As an addition, there is also no volatility spillover from England to Greece stock market but there is small and significant (in 10%) volatility spillover from Greece to UK stock market. We can see from this result, that EU crisis caused volatility in its regional stock market which impacted to global stock markets (in this research, US stock market).

If we compare evidence from American crisis period and EU crisis period, there are some major evidence. First: In American crisis period there is no volatility spillover from US stock market to Greece stock market, while in EU crisis period there is volatility spillover from Greece stock market to US stock market. We can conclude that this volatility existed because investor in US stock market influenced with condition in EU crisis (in this case: Greece), or they have assets in EU (Greece). Debt crisis in EU will affect their investment, this is one reason why there is volatility spillover from Greece to US in EU crisis period.

The second major evidence is that there is no volatility spillover from US stock market to UK stock market in EU crisis period, while in American crisis period there is volatility spillover from US stock market to UK stock market and vice versa. This condition show investor in UK stock market put their concern more on their domestic issues, while when American crisis period investors there still take condition from other major stock market as their consideration.

Consistent with two previous researches, all return spillover between three stock markets is still significant in 1%. With the biggest coefficient still return spillover from UK to Greece stock market, followed by return spillover from US to UK, and from UK to US stock market.

Conclusion

In this research we found that either return or volatility spillover is not always from dominant stock market to smaller stock market. In the three areas discussed in this research, all stock markets impacted one another in term of return spillover which is significant in 1%. This finding also supported previous research from Balasubramanyan and Premaratne (2003) who found there is little but significant impact from smaller stock market to dominant stock market.

We also found that there is no volatility spillover from US stock market to Greece stock market in all of three sections. Meanwhile, there is volatility spillover significant in 5% from Greece stock market to US stock market in the area that was first discussed (whole data), and third area discussed (EU crisis period).

It is concluded that there is return spillover from US and UK stock market to Greece stock market (first hypothesis). But, we rejected second hypothesis that there is volatility spillover from US stock market to European stock market during American crisis as Greece stock market was not affected. We do not reject the third hypothesis because based on our research we found

5926 Afr. J. Bus. Manage. there is volatility spillover from European stock market to US stock market which is significant in 5%. REFERENCES Balasubramanyan L, Premaratne G (2003). Volatility spillover and co-

movement: some new evidence from Singapore. National University of Singapore Work. Pap.

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Hamao YR, Masulis RW, Ng VK (1990). Correlations in price changes and volatility across international stock markets. Rev. Financ. Stud., 3: 281-307.

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Janakiramanan S, Lamba AS (1998). An empirical examination of linkages between Pacific-Basin stock markets. J. Int. Financ. Mark., 8: 155-173.

King M, Wadhwani S (1990). Transmission of volatility between stock

markets. Rev. Financ. Stud., 3: 3-33. Le TN, Kakinaka M (2010). International transmission of stock returns:

mean and volatility spillover effects in Indonesia and Malaysia. Int. J. Bus. Financ. Res., 4: 115-131.

Lin WL, Engle RF, Ito T (1994). Do bulls and bears move across borders? International transmission of stock returns and volatility. Rev. Financ. Stud., 7: 507-538.

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Rigobon R, Sack B (2003). Spillovers across US financial markets. MIT Sloan Work. Pap. No. 4304-03.

Shamiri A, Isa Z (2009). The US crisis and the volatility spillover across South East Asia stock markets. Int. Res. J. Financ. Econom., 34: 7-17.

African Journal of Business Management Vol. 6(19), pp. 5927-5938, 16 May, 2012 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM11.467 ISSN 1993-8233©2012 Academic Journals


Inter-organizational culture, trust, knowledge shar ing, collaboration and performance in supply chain of

maritime industries: Examining the linkages

An-Shuen Nir 1, Ji-Feng Ding 2* and Chien-Chang Chou 3

1Department of Shipping and Transportation Management, National Taiwan Ocean University, 2 Pei-Ning Road, Keelung, Taiwan 20224, Republic of China.

2Department of Aviation and Maritime Transportation Management, Chang Jung Christian University, No. 396, Sec. 1, Chang-Rong Rd., Gui-Ren, Tainan County 711, Taiwan.

3Department of Shipping Technology, National Kaohsiung Marine University, No. 482, Chung-Chou 3rd Rd., Chi-Chin, Kaohsiung City 805, Taiwan.

Accepted April 11, 2011

Faced with market environment of high-level changes , the maritime industry is required to generate high sensitivity to external dynamics while develop ing own abilities in response to market demand to achieve performance excellence for businesses. The study consolidated relevant literature and suggested that: “the integration of supply chain re fers to an efficient and effective operation of ind ustry related activities, relying on the background of si milar organizational culture, whereas the shared values and beliefs among partners formed through si milar organizational culture are likely to produce mutual trust, information and knowledge sharing, an d achieve goal of organizational performance through logistics collaboration.” Hence, the main p urpose of the research aims to discuss the linkage between inter-organizational culture, trust, knowle dge sharing, collaboration, and performance in supply chain of maritime industries. The questionna ires are mailed to different firms of maritime industries. This article uses exploratory factor an alysis, reliability and validity analysis for colle cting data. By using structural equation modeling (SEM) a nalysis, the results show that: 1) organizational culture has positive effect to trust and knowledge sharing; 2) trust has positive effect to knowledge sharing and collaboration; 3) knowledge sharing has positive effect to collaboration; and 4) collaboration has positive effect to performance. T he major contribution of this article is linking different maritime industries and research dimensio ns to provide empirical results in supply chain of maritime integration. Key words: Organizational culture, trust, knowledge sharing, collaboration, performance.

INTRODUCTION The global maritime industry has entered an integrated logistics service since the 1990s. The existing logistics service has been integrated with maritime, logistics and distribution process to effectively integrate related functional logistics activities including transportation, warehousing, storage, packaging, distribution process, and information intelligence through management in *Corresponding author. E-mail: [email protected].

planning, implementation and control, in order to provide instant, reliable and low-cost added values.

Logistics is part of the supply chain which focuses on the products, service and related information from the point of origin to the point of consumption; it is also the process of effective communication, storage planning, and implementation and control, for meeting customers needs (Lambert and Cooper, 2000). Supply chain management integrates these activities to obtain sustainable competitive advantages (SCA) through supply chain improvement (Handfield and Nichols, 1999).

5928 Afr. J. Bus. Manage. Globalization has driven the industry to be faced with increasing competition while the maritime industry is no exception (Haralambides, 2002; Song et al., 2005). The existing industry competition has evolved from ‘company vs. company’ to ‘supply chain versus supply chain’ (Cetindamar et al., 2005; Dong et al., 2005). Hence, issues related to supply chain of maritime industry have become important issues of discussion (Bichou and Gray, 2004, 2005; Panayides and So, 2005; Panayides, 2006; Zailani and Rajagopal, 2005).

Facing with market environment of high-level changes, the maritime industry is required to generate high sensitivity to external dynamics while developing own abilities in response to market demand to achieve performance excellence for businesses. The study consolidated relevant literature (Cheah et al., 2009; Chong and Ooi, 2008; Chong et al., 2009; Holmberg, 2000; Khang et al., 2010; Kwon and Suh, 2005; Lee, 2001; Mentzer et al., 2001; Robbins and Coulter, 2005; Rousseau et al., 1998; Schrage, 1990; Spekman et al., 1998) and suggested that: “The integration of supply chain refers to an efficient and effective operation of industry related activities that relies on the background of similar organizational culture, whereas the shared values and beliefs among partners formed through similar organizational culture are likely to produce mutual trust, information and knowledge sharing, and achieve goal of organizational performance through logistics collaboration.” Nonetheless, few studies in the past have conducted integrated research on supply chain of maritime industry, not to mention the lack of in-depth discussion and confirmatory analysis. The paper expects to get insight to the contribution of organizational culture, trust, knowledge sharing, and collaboration to the integration of supply chain of maritime industries based on research of maritime industries, and to discuss whether if the various business organizational cultures involving maritime operations facilitate the enhancement of inter-organizational trust and knowledge sharing with even implementation of collaboration in supply chain of maritime industries as well as the overall performance evaluation. Hence, the purpose of the study aims to discuss the linkage between inter-organizational culture, trust, knowledge sharing, collaboration, and performance in supply chain of maritime industries. LITERATURE REVIEW AND HYPOTHESES Schein’s (1985) model of organizational culture can be used to understand the assumption and values of basis of corporate culture. After conceptualizing the foregoing views, Min et al. (2007) argued that the behavior model comes from supply-chain oriented culture, which causes showing attitudes of trust to voluntarily share risks, rewards and information with other companies within the supply chain. Trust is the key to supply-chain oriented

culture because it determines the collaboration and relationship commitment, as well as the basic conditions for overcoming intercompany issues (Mentzer et al., 2001; Min et al., 2007). McAfee et al. (2002) claimed the successful strategies to long-term relationship based supply chain partners require high degree of consistency in organizational culture. A relationship-based cultural development causes mutual interdependence in members of supply chain and only when the two parties depend on each other can they achieve their objectives.

Mentzer et al. (2001) argued that the purpose of effective supply chain aims to perform information sharing, risks, and rewards sharing, similar service goals, integration of key process, and long-term relationship and cross-functional collaboration. Mello and Stank (2005) suggested that supply chain partners with stronger supply-chain oriented culture will lead to stronger capability in establishing information, risks and rewards sharing, long-term relationship and service goal with partners, as well as integrating cross-functional collaboration and key process. The most important concept of integration in supply chain of maritime industries lies on compatible culture of organizations participating in the supply chain; whereas stronger cultural compatibility results in better effect of integration. Organizational culture is the common belief system in members of the organization, which represents the spirit of organization and the common understanding among the members. A higher common understanding results in higher degree of trust for participating members. Higher cultural values such as trust, commitment, collaboration rules, organizational compatibility, and top management support, facilitate the enhancement of trusts between partners of supply chain. For this reason, the paper proposes the following two inferences with emphasis on the impact of organizational culture on inter-organizational trust and inter-organizational knowledge sharing:

H1: Organizational culture has positive influence on inter-organizational trust. H2: Organizational culture has positive influence on inter-organizational knowledge sharing. Cullen et al. (2000) proposed that the relationship of mutual trust and commitment between organizations is essential for organizations to voluntarily share confidential information and knowledge hidden inside the organizations. Grewal and Haugstetter (2007) argued that the implicit knowledge attributed to individuals or companies must contain basis of mutual trust before conducting knowledge sharing. Dayer et al. (1987) claimed that knowledge and value sharing promotes the development of trust and commitment.

Trust is the key factor in a successful collaboration and lack of trust is often perceived even under the state of collaboration (Vangen and Huxham, 2003). Hence they

Nir et al. 5929

Figure 1. Research framework.

proposed the requirement of continuing involvement from partners in ambiguous, complex, and dynamic collaboration framework. Strong and Webber (1988) and Kanter (1994) argued that the establishment of successful collaborative relationship relies on trust, as it leads to success and profits in collaborations (Macoby, 1997).

Laycock (2005) suggested knowledge sharing highly depends on effective and continuous collaboration within knowledge-focused organization. Inter-organizational collaboration not only helps increase the value but also creates new values. The most common and easily implemented type of collaborations is operational information-sharing; simply put corporate collaboration, contract formulation and outsourcing all start with information sharing (Bowersox et al., 2003). The basic trust of daily performance capability helps knowledge sharing and collaboration to run more smoothly through characteristics, basic trust and operational behaviors of cultural strategy partnership. Both internal and external organizations and even inter-organizational knowledge sharing, facilitate collaboration. The paper proposes the following three hypotheses: H3: Inter-organizational trust has positive influence on inter-organizational knowledge sharing. H4: Inter-organizational trust has positive influence on collaboration. H5: Inter-organizational knowledge sharing has positive influence on collaboration. Kahn (1996) suggested collaboration as the key factor in integrating and promoting performance improvement. Brewer and Speh (2000) and Shin et al. (2000) all pointed out that the effective management of supply chain may minimize operational costs, reduce cycle time of cash flow and improve facilities utilization in collaboration between partners. Panayides and So (2005) claimed the purpose of close and mutual understanding and collaboration between partners of supply chain is to understand their business and facilitate process improvement in supply chain. Meanwhile the close relationship based on partnership will lead to improvement in supply chain performance. Participating industries in maritime supply chain voluntarily provide

sophisticated and flexible services through cultural fit, relationship of mutual trust, collaboration, and knowledge sharing. Hence, the following assumption is proposed for the influence of collaboration on performance: H6: Inter-organizational collaboration has positive influence on performance. Research framework The research framework of the article (Figure 1) refers to the influence of organizational culture produced in supply chain suggested by Robbins and Coulter (2005) with in-depth discussion. First, the elements constituting organizational culture (OC) are comprehended and combined with the views on trust (TR) and collaboration (CL) by Mentzer et al. (2001), and views on knowledge sharing (KS) and performance (PE) by Bechtel and Jayaram (1997). To discuss the contribution of organizational culture in supply chain on trust and knowledge sharing, the overall performance through ongoing collaboration between supply chains of maritime industries can be improved.

In the foregoing research framework, knowledge sharing within the organization and inter-organization is the prerequisite to corporate collaborations (Laycock, 2005), while trust allows the knowledge sharing and collaboration between partners of supply chain to run more smoothly (Bowersox et al., 2003; Laycock, 2005). The management of supply chain must balance customization and efficiency to meet supplier and customer demands (Zailani and Rajagopal, 2005). Therefore, trust, knowledge sharing, and collaboration, become relatively important among partners of supply chain, and become the key factor in affecting performance. EMPIRICAL STUDY Empirical results and findings are studied in further discussion. Questionnaire and data collection The following data were collected via questionnaires, which were

H1

H2

H3

H4

H5

H6

TR

OC

KS

CL PE


Table 1. Data of the sample covered.

Measure Option Frequency Percentage (%) Accumulated percentage (%)

Age (years old)

21-30 44 17.5 17.5 31-40 39 15.4 32.9 41-50 77 31.0 63.9 Over 50 92 36.1 100.0

Education level

Master degree or higher

64

25.4

25.4 Bachelor or associate degree 168 66.7 92.1 High school or lower 20 7.9 100.0

Staff numbers of company (person)

Over 101

147

58.3

58.3 51-100 10 4.0 62.3 21-50 21 8.3 70.6 Lower 20 74 29.4 100.0

Work experience (years)

Lower 5

60

23.8

23.8 6-10 36 14.3 38.1 11-20 69 27.4 65.5 Over 21 87 34.5 100.0

Position

Top manager

64

25.4

25.4 Middle manager 55 21.8 47.2 First-line manager 52 20.6 67.8 Administration executive 32 12.7 80.5 Administrator 31 12.4 92.9 others 18 7.1 100.0

The company is founded (years)

Lower 5 8

3.1

3.1

6-10 35 13.9 17.0 11-20 37 14.7 31.7 Over 21 172 68.3 100.0

Department Shipping 153 60.8 60.8 Port 99 39.2 100.0

divided into two parts. Part I is related to the basic data; while the Part II recounts all the characteristics data. The questionnaire of this study was based on a Likert 5-point scale, ranging from 1 for ‘strongly dissatisfied’ to 5 for ‘strongly satisfied.’

The questionnaire survey was completed by managers and senior directors of various maritime companies, as well as the section chief of port authority in Taiwan. In order to increase the return rate and representativeness of the questionnaire, the assistance and co-operation of many companies were made. A total of 252 valid samples were collected from the 800 questionnaires, which represents 31.5% of the total questionnaires. The detail information about the returned sample is tabulated, as shown in Table 1.

RESULTS AND DISCUSSION Exploratory factor, reliability and validity analys es The paper selects factors with eigenvalue greater than 1

in principles for selecting the number of factors, which undergoes orthogonal axis using maximum variance method to clearly classify various factor loadings of evaluation indicators to each factor. Due to each variance, loading inside each factor must be greater than 0.5 to be selected, and the measured variables within the factor must contain at least two items, the factory analysis for each variable has thereby been listed with results listed thus: 1. Three factors, called pursuit of stability, teamwork, and achievement orientation respectively, are embedded in the variable of organizational culture; the results are shown in Table 2. They accounted 3.16, 5.51, and 1.95, respectively of eigenvalues, as well as 18.57, 32.39, and 11.46%, respectively of the total variance. Besides, the accumulated total variance of three factors is 62.42%.

Nir et al. 5931

Table 2. Factor analysis of organizational culture.

Factor name Items of organizational culture Factor

loadings Eigen values

Variance (%)

Accumulated variance (%)

Pursuit of stability

My company contains characteristics in stability. 0.71 3.16 18.57 18.57 My company contains characteristics of rules orientation.

0.78

My company emphasize on safety. 0.86 My company emphasizes on quality. 0.75

Teamwork

My company contains characteristics of fairness. 0.61 5.51 32.39 50.96 My company contains characteristics of showing respect for others.

0.65

My company contains characteristics of giving employees support.

0.72

My company emphasizes on result orientation. 0.66 My company contains characteristics of steadiness.

0.67

My company contains characteristics of self-reflection.

0.78

My company contains characteristics of low conflicts.

0.72

My company emphasizes on team orientation. 0.73 My company contains characteristics of collaboration.

0.80

Achievement orientation

My company contains characteristics of long-working hours.

0.75 1.95 11.46 62.42

My company emphasizes on action orientation. 0.58 My company contains characteristics of achievement orientation.

0.51

My company contains characteristics of easygoing.

0.71

2. Two factors, called characteristic-based trust and capacity-based trust respectively, are embedded in the variable of trust; the results are shown in Table 3. Two factors accounted 5.06 and 4.29, respectively of eigenvalues, as well as 33.73 and 28.59%, respectively of the total variance. Besides, the accumulated total variance of three factors is 62.32%. 3. Three factors, called knowledge sharing of internal organizations, knowledge sharing across organizations, and knowledge sharing of external organizations, respectively, are embedded in the variable of knowledge sharing; the results are shown in Table 4. Three factors accounted 3.49, 4.36, and 2.50, respectively of eigenvalues, as well as 24.94, 31.14, and 17.82%, respectively of the total variance. Besides, the accumulated total variance of three factors is 73.90%. 4. One factor, called collaboration, is embedded in the variable of collaboration; the result is shown in Table 5. The factor accounted 4.88 of eigenvalue, as well as 69.66% of the total variance. Besides, the accumulated total variance of the factor is 69.66%.

5. Two factors, called operational performance and service quality, respectively, are embedded in the variable of performance; the results are shown in Table 6. Two factors accounted 2.60 and 2.39, respectively of eigenvalues, as well as 34.10 and 37.19%, respectively of the total variance. Besides, the accumulated total variance of three factors is 71.29%. 6. The reliability of the article applies Cronbach’s α to measure the consistency of all items covered in each variable. If the coefficient of Cronbach’s α falls between 0.7 and 0.98, it is a high value of reliability; and if the value falls lower than 0.35, it must be deleted. After conducting reliability analysis, the average value for each variable can reach over 0.8, and it is therefore a high reliability value. Table 7 shows the results of reliability for each variable and factor. 7. The questionnaire of the paper introduces questionnaires with theoretical foundation or practical verifications that are developed by foreign scholars conducting researches. The paper modifies the questionnaires in consideration of the paper purpose, and


Table 3. Factor analysis of trust.

Factor name Items of trust Factor loadings

Eigen values

Variance (%)


Characteristic-based trust

My company departments are upright. 0.72 5.06 33.73 33.73 My company departments have predictable behaviors.

0.70

My company departments contain characteristics of high ethics.

0.71

Each department of my company is willing to communicate.

0.72

My company departments keep promises. 0.76 My company departments are open to each other.

0.76

My company departments are honest. 0.79 My company departments are willing to discuss on new problems.

0.57

Capacity-based trust

My company can maintain confidentiality. 0.61 4.29 28.59 62.32 Other departments of my company are capable.

0.71

My company possesses excellent business philosophy.

0.54

Employees of my company departments possess excellent interpersonal skills.

0.75

My company departments handle problems with methods of problem-solving orientation.

0.62

Employees of my company departments maintain level of knowledge.

0.76

Each department of my company possess understanding of basic concepts.

0.80

hence, the paper contains reasonable content validity. Table 8 shows that the paper contains convergent validity (Steenkamp and van Trijp, 1991) and convergent and discriminate validity. 8. The paper utilizes LISREL 8.72 software to conduct model calibration. Table 9 shows the calibration result after measuring model coefficients, where standardized factor loadings of all factor aspects were greater than 0.5, the model contained considerably high construct validity. Upon passing the overall test, the model of this paper undergoes validity test of individual variables. Bollen (1989) addressed this coefficient as standardized validity coefficients. In summary: 1) the teamwork factor (OC2) in the variable of organizational culture has the highest standardized validity coefficients, that means this factor can be the most index to reflect organizational culture; 2) the capacity-based trust factor (TR2) in the variable of trust has the highest standardized validity coefficients, that means this factor can be the most index to reflect trust; 3) the factor of knowledge sharing within organizations (KS1) in the variable of knowledge sharing has the highest standardized validity coefficients, that means this

factor can be the most index to reflect knowledge sharing; 4) the factor of service quality (PE2) in the variable of performance has the highest standardized validity coefficients, that means this factor can be the most index to reflect performance. Using the structural equation modeling to analyse t he hypotheses Upon conducting tests for fit index, the model showed good fit and underwent subsequent statistical tests. We use the structural equation modeling (SEM) to analysis the hypotheses, the verification results for assumptions proposed by the paper are interpreted with the standardized path of structural model, as shown in Figure 2.

According to the SEM results shown in Figure 2, we can obtain the following findings: (1) Regarding the effects of organizational culture on inter-organizational trust and knowledge sharing, the effect of organizational culture on inter-organizational trust is 0.84 (t = 10.40, p < 0.001), implying that organizational culture has significant effect on

Nir et al. 5933

Table 4. Factor analysis of knowledge sharing.

Factor name Items of knowledge sharing Factor loadings

Eigen values

Variance (%)


Knowledge sharing of internal organizations

My company encourages employees to share work experience (such as experience of interaction with customers).

0.84 3.49 24.94 24.94

My company supervisors support activities related to knowledge sharing.

0.78

My company regards employees’ work experience as usable resources for other employees.

0.82

My company encourages employees to collaborate and share knowledge mutually.

0.82

Knowledge sharing across organizations

My company provides occupational training, seminars, internal consultation, and other opportunities for conveyance and knowledge sharing.

0.53 4.36 31.14 56.07

My company often exchanges knowledge sharing and learning with partners of maritime industries.

0.77

My company often leads communication and knowledge sharing between partners of maritime industries.

0.8

My company creates social networking groups with partners of maritime industries for knowledge sharing and creation.

0.91

My company conducts knowledge creation and sharing with partners of maritime industries in order to develop more competitive products or services.

0.84

My company develops excellent knowledge collection methods.

0.57

My company creates technologies based on the collection and sharing of knowledge between customers and partners of maritime industries.

0.73

Knowledge sharing of external organizations

My company creates procedures based on management of customer information and converts them into knowledge.

0.72 2.50 17.82 73.90

My company focuses on major customers and collects knowledge via interaction with major customers.

0.79

My company offers a customer-oriented work environment and culture.

0.74

inter-organizational trust. The effect of organizational culture on inter-organizations knowledge sharing is 0.50 (t = 4.22, p < 0.001), implying that organizational culture has significant effect on inter-organizational knowledge sharing. Hence, the paper believes that: Result 1: Organizational culture has positive effect on inter-organizational trust. Result 2: Organizational culture has positive effect on inter-organizational knowledge sharing. (2) Regarding the effects among inter-organizational trust, knowledge sharing, and collaboration, the effect of

inter-organizational trust on knowledge sharing is 0.48 (t = 4.25, p < 0.001), implying that inter-organizational trust has significant effect on knowledge sharing. The effect of inter-organizational trust on collaboration is 0.54 (t = 2.36, p < 0.05), implying that inter-organizational trust has significant effect on collaboration. The effect of knowledge sharing on collaboration is 0.61 (t = 2.53, p < 0.05), implying that knowledge sharing has significant effect on collaboration. Hence, the paper believes that: Result 3: Inter-organizational trust has positive effect on knowledge sharing.


Table 5. Factor analysis of collaboration.

Factor name Items of collaboration Factor loadings

Eigen value

Variance (%)


Collaboration

My company can effectively collaborate with supplier and customers to complete the work.

0.75

4.88 69.66 69.66

My company can effectively improve operational process with supplier and customers.

0.82

My company can effectively share operational information with supplier and customers.

0.88

My company develop performance measurement of inter relationship of supply chain.

0.87

My company improves performance through integration with partners of supply chain.

0.83

My company undergoes collaboration with suppliers and customers based on principles of rewards sharing and risks.

0.81

My company increases operational flexibility through collaboration in supply chain.

0.87

Table 6. Factor analysis of performance.

Factor name Items of performance Factor loadings

Eigen values

Variance (%)


Operational performance

My company contains capability to lower costs. 0.86

2.60 34.10 34.10 My company is capable of improving efficiency of facilities utilization.

0.83

My company can increase profitability. 0.77 My company increases market share. 0.66

Service quality

My company performs promises made to customers.

0.83

2.39 37.19 71.29 My company customer satisfaction enhances. 0.87 My company can rapidly respond to requirement from important customers.

0.77

My performance at the company combines customer expectation.

0.65

Result 4: Inter-organizational trust has positive effect on collaboration. Result 5: Knowledge sharing has positive effect on collaboration. (3) Regarding the effect of collaboration on performance, the effect is 0.95 (t = 7.99, p < 0.001), implying that collaboration has significant effect on performance. Hence, the paper believes that: Result 6: Collaboration has positive effect on performance Conclusion The paper is purported to discuss if the organizational

culture of industry members affect the inter-organizational trust and knowledge sharing in the supply chain of maritime industries, and to enhance supply chain performance using collaborations. The paper finally summaries the major conclusions from the overall research through exploratory factor analysis and hypothesis testing of SEM models in the follows: 1. The organizational culture within the company plays one important role in the establishment and cultivation of inter-organizational trust in the supply chain of maritime industries. The paper infers organizational culture as the common belief in all organizational members while the organizational culture in the supply chain of maritime industries requires more emphasis on the consistency between the internal culture of cooperation and external

Nir et al. 5935

Table 7. Results of reliability for each variable and factor.

Variable Cronbach’s α Factors Question items Cronbach’s α Results of

reliability

Organizational culture 0.92

OC1: Pursuit of stability 3 0.86 High OC2: Teamwork 9 0.90 High OC3: Achievement orientation 3 0.74 High

Trust 0.94 TR1: Characteristic-based trust 8 0.91 High TR2: Capacity-based trust 7 0.89 High

Knowledge sharing

0.92 KS1: Knowledge sharing of internal organizations 4 0.91 High KS2: Knowledge sharing across organizations 4 0.92 High KS3: Knowledge sharing of external organizations 3 0.81 High

Collaboration 0.93 CL1: Collaboration 7 0.93 High

Performance 0.86 PE1: Operational performance 3 0.81 High PE2: Service quality 4 0.84 High

Table 8. Results of exploratory factor analysis.

Variable factors Organizational culture Trust Knowl edge sharing Collaboration Performance OC1 0.69 (12.20) OC2 0.88 (17.12) OC3 0.67 (11.70) TR1 0.87 (16.84) TR2 0.88 (17.26) KS1 0.78 (14.44) KS2 0.71 (12.59) KS3 0.76 (13.84) CL1 0.69 (12.21) CL2 0.78 (14.52) CL3 0.87 (17.21) CL4 0.85 (16.54) CL5 0.79 (14.78) CL6 0.78 (14.59) CL7 0.84 (16.17) PE1 0.67 (11.19) PE2 0.77 (13.02) Cronbach’s α 0.92 0.94 0.92 0.93 0.86

1. N=252, χ²=318.86, df =109, GFI=0.87, CFI=0.98, NFI=0.96, RMSEA=0.08; 2. All factors loadings are greater than 0.6; 3. Numbers in parentheses are t-value, all the values indicate significance (p-value < 0.01).

culture of supply chain, in order to more efficiently implement supply chain of maritime industries on the management strategies of trust. For example, whether if behaviors and characteristics comply with requirement from corporate culture and whether if the operational performance and related capacities of members meet

target for supply chain of maritime industries. The study results showed that there is significant correlation between organizational culture and trust. 2. The organizational culture in supply chain of maritime industries lies on performing information sharing, risks and rewards sharing, and even with extension to


Table 9. Results of measuring model.

Variable Factors Factor loadings Standard deviation t-value Standardization of factor loadings

Organizational culture OC1 1.00 -- -- 0.69 OC2 3.53 0.29 12.29** 0.87 OC3 0.93 0.09 10.24** 0.70

Trust T1 1.00 -- -- 0.81 T2 0.95 0.06 15.69** 0.94

Knowledge sharing KS1 1.00 -- -- 0.81 KS2 0.88 0.08 11.29** 0.67 KS3 0.60 0.06 9.80** 0.61

Collaboration CL1 1.00 -- -- 0.58

Performance PE1 1.00 -- -- 0.67 PE2 1.27 0.12 10.50** 0.77

1. ‘--’ indicates the setting value is 1 and no standard deviation in the LIRSEL model; 2. *, and ** indicate significance, where p-value < 0.05, and p-value < 0.01.

Figure 2. Path of structural equation model.

operational models of collaboration. To effectively put experiences into practices and knowledge sharing, a comprehensive organizational structure must be built to assist members of supply chain of maritime industries with mutual connection, sharing and creation of knowledge. The study results showed that there is significant correlation between organizational culture and knowledge sharing. 3. After establishing trust basis between partner in supply chain of maritime industries, members may share

confidential information and resources with investment of human and financial resources, to understand the operational situation and concurrently attempts to improve efficiency of supply chain. For this reason, the establishment and maintenance of trust facilitate promotion of knowledge sharing in supply chain of maritime industries. The study results showed that there is significant correlation between trust and knowledge sharing. 4. The framework of collaboration contains cooperation of

0.84*** 0.69

0.95***

0.61*

0.54*

0.48***

0.51***

0.81 0.67

0.61

0.67

0.77

0.94 0.81

0.7 0.94

TR1 TR2

OC1

OC2

OC3

KS1

KS2 KS3

KS

TR

OC CL PE

PE1

PE2

practical operations and linage of social networks. Hence the establishment of trust helps achievement of collaboration in the supply chain of maritime industries while trust also brings more frequent interactions for companies in the supply chain of maritime industries, thereby satisfying the complex and dynamic collaboration models. The study results showed that there is significant correlation between organizational trust and collaboration. 5. Collaboration not only brings philosophy of knowledge management into full play but also accomplishes overall objectives through experience sharing, common operation and process improvement. Partners in supply chain of maritime industries may continue information transmission and technical exchanged on knowledge-intensive basis to display and bring into full play of their strengths from partners of collaboration, in order to smooth out each node and relevant operations for supply chain of maritime industries. The study results showed that there is significant correlation between knowledge sharing and collaboration. 6. A closer collaboration between supply chains of maritime industries facilitates more the enhancement of overall performance. The preparations before collaboration are quite complicated, including cooperation of software and hardware, information and knowledge sharing and process improvement, and even gradual achievement of high-level integration. Collaboration focuses on the elaboration of core competency and inter-organizational added-value activities through risk and rewards sharing, to thereby enhance the overall performance and efficiency in the supply chain of maritime industries. The study results showed that there is significant correlation between collaboration and performance.

Although the research framework of the paper is based on supply chain of maritime industries as the research background, the following points were discovered upon reading and arrangement of theories and literature from relevant research scholars, with the proposal of relevant recommendations to be used as the thinking directions for future development of maritime industries: 1. In addition to emphasizing the interactive mode of collaboration, the supply chain of maritime industries must also contains network organizational relationship or application through software and hardware to implement concepts of collaboration, and to create physical sharing and management platform for knowledge. 2. The organizational culture in supply chain of maritime industries is inclined toward team work and achievement orientation. It contains relative degree of preference in the operation mode of low risks. For this reason, members of organizations are likely to lack adaptability to uncertainty and reforms, which also tests the leadership strategies of high-level mangers. In addition to innovative thinking, sales extension and internal integration of

Nir et al. 5937 services, the management methods of team and empowerment are required to link the internal and external organization and thereby enhance customer satisfaction and loyalty. 3. Organizational culture displays different context based on different basic assumptions. Each organization contains a culture however not all cultures result in the same influence on employees. Therefore strong or weak organizational culture refers to the profound and widely accepted degree for the core value of organizational culture (Robbins and Coulter, 2005); whereas weak culture does not indicate which is important or not but lacks certainty. Under a strong organizational culture, employees have higher degree of acceptance and support to the organizational core values, with greater influence on employees and more investment on them. 4. Limited to research purposes, the paper only makes a general discussion on this aspect without emphasizing on the difference between strong and weak organizational cultures or to conduct in-depth and detailed analysis. Future researchers are recommended to conduct in-depth discussion on the influence of different culture on trust and knowledge sharing from different organizational cultures in the follow-up studies. REFERENCES Bechtel C, Jayaram J (1997). Supply chain management: A strategic

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Impact of supply chain management practices on innovation and organizational performance in Iranian

Companies

Davood Gharakhani*, Reza Kiani Mavi and Nasser Hamidi

Department of Industrial Management, Islamic Azad University (IAU), Qazvin Branch, Qazvin, Iran.

Accepted 16 August, 2011

Supply chain management (SCM) is effective way to improve innovation and organizational performance. This research conceptualizes and develops five dimensions of SCM practice (strategic supplier partnership, customer relationship, information technology, information sharing, and Supply chain integration) and tests the relationships between SCM practices, innovation and organizational performance. A survey is conducted on 186 Iranian managers. Data are analyzed using principal components analysis and relationships are tested using linear regression. Results show the importance of supply chain management practices adoption. It reveals their positive impacts on innovation and organizational performance. Key words: Supply chain management, innovation performance, organizational performance.

INTRODUCTION Over the past two decades, supply chain management (SCM), emphasizing the interdependence of buyer and supplier firms working collaboratively to improve the performance of the entire supply, has generated extensive interest in both academic and practitioner communities (Shin et al., 2000; Narasimhan and Kim, 2007).

Supply chain management is an integrated approach beginning with planning and control of materials, logistics, services, and information stream from suppliers to manufacturers or service providers to the end client; it represents a most important change in business management practices (Fantazy et al., 2010). It is one of the most effective ways for firms to improve their performance (Ou et al., 2010).

In supply chain management, the emphasis is on how well a chain or group of companies performs in these terms, in order to create value for the final customer (Brewer and Speh, 2001). Carter and Narasimhan (1996) *Corresponding author. E-mail: [email protected].

saw SCM as a primary future trend important for purchasing and supply management professionals in the 21st century.

SCM often refers either to a process-oriented management approach to sourcing, producing and delivering goods and services to end consumers or, in a broader meaning, to the co-ordination of the various actors belonging to the same supply chain (Harland, 1996). SCM includes a set of approaches and practices to effectively integrate suppliers, manufacturers, distributors and customers for improving the long-term performance of the individual firms and the supply chain as a whole in a cohesive and high-performing business model (Chopra and Meindl, 2001).

A successful SCM implementation is expected to enhance the relationship between upstream suppliers and downstream customers, and thereby increase customer satisfaction and firm performance. Prior research has indicated SCM as a key driver of firm performance (Kannan and Tan, 2005).

Everyone agrees that effective supply chain management can provide a major source of competitive advantage. The goal of a supply chain manager must therefore be to link the end customers, the channels of

5940 Afr. J. Bus. Manage. distribution, the production processes and the procurement activity in such a way that customers’ service expectations are exceeded and yet at a lower total cost than the competition.

Organizations seek competitive capabilities that enable them to exceed customers’ expectations and enhance market and financial performance (Hayes and Pisano, 1994; Lado et al., 1992). Effective and efficient supply chain management has become a key component of corporate strategy, competitive advantage, and success (Narasimhan and Talluri, 2009). SCM is critical to organizational performance (Vanichchinchai and Igel, 2009).

Despite the importance of certain supply chain activities (e.g. transportation and warehousing) in cost containment, supply chain management was long overlooked as a potential area for achieving sustainable competitive advantage (Coyle, 1990; Fawcett and Clinton, 1997; van Amstel and Starreveld, 1993).

Studies on supply chain management practices in different industrial sectors allow their special features to be distinguished to the applied practices, and improvement of SCM theories. These studies have been very valuable. To date, studied industrial sectors are, for example, pharmaceutical (Lurquin, 1996), automobile (Helper, 1991; Choi and Hong, 2002), apparel (Christopher and Peck, 1997), chemical (Vlasimsky, 2003), computer (Magretta, 1998), telecommunication (Catalan and Kotzab, 2003), toy (Chee et al., 2005) and grocery (Fernie, 1995; Zairi, 1998).

Many SCM studies were conducted in developed countries. SCM in many developing countries is different from SCM in developed countries. This study focuses on Iranian companies. The purpose of this study is therefore to empirically test a framework identifying the relationships among SCM practices, innovation and organizational performance in Iranian companies.

SCM practices are defined as the set of activities undertaken by an organization to promote effective management of its supply chain. The practices of SCM are proposed to be a multi-dimensional concept, including the downstream and upstream sides of the supply chain. The remainder of the paper is organized as follows: Subsequently the study provides a literature review that helps develop the research model and sets out the study’s hypotheses. Research methodology is then discussed next, followed by results and discussions and lastly the study presented conclusions and Implications. LITERATURE REVIEW AND HYPOTHESES The SCM framework developed in this study is shown in Figure 1. The model proposes that SCM practices implemented by organizations in Iran will improve their organizational and innovation performance. The SCM

practices and organizational and innovation performance constructs are discussed subsequently. SCM practices SCM practices are defined as the set of activities undertaken by an organization to promote effective management of its supply chain (Koh et al., 2007). Donlon (1996) describes the evolution of SCM practices, which include supplier partnership, outsourcing, and cycle time compression, continuous process flow, and information technology sharing.

Alvarado and Kotzab (2001) include in their list of SCM practices concentration on core competencies, use of inter-organizational systems such as electronic data interchange (EDI), and elimination of excess inventory levels by postponing customization toward the end of the supply chain. Bayraktar’s et al. (2009) studies identify a set of 12 SCM practices: close partnership with suppliers, close partnership with customers, just in time supply, strategic planning, supply chain benchmarking, few suppliers, holding safety stock, e-procurement, outsourcing, subcontracting, 3PL, many suppliers.

Tan et al. (2002) identify six aspects of SCM practice through factor analysis: supply chain integration, information sharing, supply chain characteristics, customer service management, geographical proximity and Just-in-time (JIT) capability.

Sahay and Mohan (2003) proposed that SCM practices to be measured in four dimensions, and they are: alignment between supply chain strategies with business strategies, supply chain integration, partnerships and information technologies. Chen and Paulraj (2004) use supplier base reduction, long-term relationship, communication, cross-functional teams and supplier involvement to measure buyer–supplier relationships.

Min and Mentzer (2004) identified SCM practices as agreed vision and goals, information sharing, risks and awards sharing, cooperation, integration of process, long term relationship and agreed supply chain leadership. Li et al. (2006) identify five aspects of SCM practice through factor analysis: strategic supplier partnership, customer Relationship, level of Information sharing, Quality of information sharing and postponement.

Burgess et al. (2006) stated that SCM practices should include leadership, intra-organizational relationships, inter organizational relationships, logistics, process improvement orientation, business results and outcomes, and Information systems. Koh et al. (2007) proposed SCM practices from the following perspectives: close partnership with suppliers, close partnerships with customers, just in time supply, strategic planning, supply chain benchmarking, few suppliers, holding safety stock and sub-contracting, e-procurement, outsourcing and many suppliers.

Based on the previous literature, SCM practices are

portrayed from different perspectives with a common aim of improving organizational performance. In reviewing and consolidating the literature mentioned five dimensions of SCM practices emerge, namely strategic supplier partnership, customer relationship, information technology, information sharing and supply chain integration. A more detailed discussion of these dimensions is provided subsequently. Strategic supplier partnership Strategic supplier partnership represents the long-term relationship between the organization and suppliers. An effective supplier partnership can be a critical component of a leading edge supply chain (Noble, 1997). Through strategic supplier partnerships, organizations can work closely with suppliers who can share responsibility for the success of the products (Li et al., 2005).

Survey conducted by Radas and Bozˇic´ (2009) on Crotian companies from manufacturing and service sectors showed that collaboration with other firms or organizations, also include suppliers, has positive significant impact on process innovation and incremental product innovation. Such strategic supplier partnerships should enable successful SCM. Customer relationship Organizations depend on their customers and therefore should understand current and future customer needs, meet customer requirements, and strive to exceed customer expectations (ISO, 2010). Customer relationship management (CRM) is an important component of SCM (Noble, 1997; Tan et al., 1999).

Kalakota and Robinson (1999) considered that customer relationship management can be seen as the consistent organizational activity under usage of integrated selling, marketing and service strategy. That is, trying to define the real need of the customer, by the enterprise integrating various process and technology, in asking internal product and service improvement, in order to dawn effort of enhancing customer satisfaction and loyalty.

In 2001, they also offered the concept of CRM system to synthesize with functions of sales, customer service, and marketing activity, all based on customer orientation. Customer loyalty and customer satisfaction are the main goals of SCM. Information technology Information technology (IT) is an essential enabler of effective supply chain management (Gunasekaran and

Gharakhani et al. 5941 Chung, 2004), and global competition success (Ngai et al., 2008). Information technology is a tool that facilitates information management and enhances information flow, thereby making the supply chain more robust and resilient without undermining its efficiency (Pereira, 2009). Organizations increasingly rely on information technology (IT) to improve the supply chain process. Manufacturers are increasingly dependent on the benefits brought about by IT to: improve supply chain agility, reduce cycle time, achieve higher efficiency, and deliver products to customers in a timely manner (Radjou, 2003).

IT technologies, such as the electronic data interchange (EDI), enterprise resource planning (ERP), and customer relationship management (CRM) systems can improve supply chain performance. Information sharing Information sharing is a key ingredient for any SCM system (Moberg et al., 2002). Information sharing means the information communicated between partners where the accuracy, adequacy, and timeliness refer to the quality of information.

Li et al. (2006) defined information sharing in the supply chain as the extent to which vital and proprietary information is communicated to the company’s supply chain partner. The advantage of information sharing in SCM has been intensively discussed (Cachon and Fisher, 2000).

Information sharing improves coordination between supply chain processes to enable the material flow and reduces inventory costs. Information sharing impacts the supply chain performance in terms of both total cost and service level (Zhao et al., 2002). Supply chain integration Supply chain integration is an important component of SCM. Supply chain integration has been regarded as one of the most important competencies in supply chain management (Pearcy and Giunipero, 2008). It aims to achieve effective and efficient flows of information, products and services, resources, and cash to provide maximum value to the customer at low cost and high speed (Flynn et al., 2010).

Supply chain integration has been approached in the literature from different perspectives. For example, Narasimhan and Das (2001) distinguish between customer integration, information integration, logistics and distribution integration and supplier integration.

Differences have been also highlighted on the basis of the type of process involved: for example, De Toni and Nassimbeni (1999) classify supply chain integration mechanisms into design links, quality links and logistic links. Romano (2003), in his review, identifies four

5942 Afr. J. Bus. Manage. streams of literature, focusing, respectively, on functional integration, logistic integration, information integration and process integration. Integration is frequently taken as a standard requirement of successful management of the supply chain, that integration will take place (Stank et al., 1999; Frohlich and Westbrook, 2001). Innovation performance Organizational innovativeness is examined in many disciplines, such as management/strategy, entrepreneurship, political science and marketing. Vigoda-Gadot et al. (2005) view innovativeness as a multi-dimensional organizational trait. They define organizational innovativeness as including five dimensions: creativity, risk-taking, openness to change, future orientation, and pro-activeness. Existing literature presents different classifications of organizational innovativeness.

For example, Subramanian and Nilakanta (1996) classify organizational innovation into two categories: (1) technological innovation, including product, services and processes, as well as (2) administrative innovation, including organizational structure, administrative process and programs.

Similarly, Pacharn and Zhang (2006) propose two types of innovation, namely organizational innovation and technological innovation. Popadiuk and Choo (2006) classify organizational innovation into three categories: technological innovation, market innovation, and administrative innovation.

Subramaniam (2005) identifies four classifications of organizational innovation, including organizational innovation, innovation climate, team innovation and individual innovation. Based on the above literature and characteristics of the research context, the present study adopts two dimensions of innovation performance including administrative and technical innovation performance. Organizational performance Organizational performance is an indicator which measures how well an enterprise achieves their objectives (Hamon, 2003). (Ho, 2008) defined organizational performance in terms of how well an organization accomplishes its objectives. Schermerhorn et al. (2002) point out that performance refers to the quality and quantity of individual or group work achievement. Delaney and Huselid (1996) suggest two ways to assess OP: organizational performance and market performance. Koh et al. (2007) and Petrovic-Lazareric et al. (2007) however, look at organizational performance from the perspective of SCM organizational performance.

Koh et al. (2007) rightly pointed out that although organizational performance is measured by both financial and market criteria, the short-term objectives of SCM are to enhance productivity and reduce inventory and lead time. Tippins and Sohi (2003) propose organizational performance measures on four dimensions: relative profitability, return on investment, customer retention, and total sales growth. Based on the above literature, we focus on five dimensions of organizational performance including sales growth, lead time, cost reduction, quality improvement and return on investment. Research hypotheses SCM practice is expected to increase an organization’s market share, return on investment. (Shin et al., 2000). Koh et al. (2007) in their study on Turkish SMEs found that SCM practices have a direct and significant impact on operational performance. For example, strategic supplier partnership has been reported to yield organization-specific benefits in terms of financial performance (Stuart, 1997).

Therefore the following hypothesis is proposed: H1: SCM practices have a positive impact on organizational performance: It is important to determine if SCM practices have a positive influence on the innovation performance of organizations. Such information might promote product innovation among supply chain partners. Soosay et al. (2008) in their study also found that collaboration through information sharing can have a positive impact on innovation in the supply chain. Thus it is hypothesized that: H2: SCM practices have a positive impact on innovation performance: There is an extant of literature on the impact of innovation on organization performance. Innovation is a key element of entrepreneurial style or posture and numerous studies have linked entrepreneurial style to performance (Covin et al., 2002).Gopalakrishnan (2000) showed that there is a relationship between the different dimensions of innovation – speed and magnitude and the organizational performance of firms. Camis َn and L َpez (2010) conclude that organizations that pursue manufacturing flexibility should develop innovation capabilities to obtain an improvement in organizational performance. Cheng et al. (2010) discover that while process innovation has a greater influence on conflict resolution among employees, product innovation has greater impact on OP. Therefore the following resolution among employees, product innovation has greater impact on OP. Consequently, the following hypothesis is proposed: H3: Innovation performance has a positive impact on

Gharakhani et al. 5943

Table 1. Scale reliability.

Scales Factors Alpha score

SCM practices

Strategic supplier partnership 0.769 Customer relationship 0.731 Information technology 0.823 Information sharing 0.812 Supply chain integration 0.705

Innovation performance Administrative innovation 0.754 Technical innovation 0.782

Organizational performance scales

Sales growth 0.867 Lead time 0.758 Cost reduction 0.806 Quality improvement 0.774 Return on investment 0.741

organizational performance. RESEARCH METHODOLOGY A survey instrument was developed in order to test the research model. Although the items and questions in the proposed questionnaire were adopted from existing studies, the questionnaire was pre-tested with several managers from a manufacturing and service firm to ensure that the wording and format of the questions were appropriate.

Respondents were chosen according to their knowledge about SCM. One hundred and eighty six respondents were involved; they were either executive managers or managers of different services: financial team, logistics, production, marketing, human resources, and sales. Questions involved measures of SCM practices, innovation performance and organizational performance using a 5 point Likert scale (from 1: disagree very strongly to 5: agree very strongly). Assessing reliability The reliability of the measurements in the survey was tested using Cronbach’s alpha (α). Hair et al. (1998) stated that a value of 0.70 and higher is often “considered the criterion for internally consistent established factors. Scales reliability is presented in Table 1. The Cronbach's alpha coefficients indicating the internal consistency reliability of the measures in the twelve factors are all above the suggested value of 0.70 (Hair et al., 1998). Exploratory factor analysis Exploratory factor analysis with Varimax rotation was performed on SCM practices, innovation performance and organizational performance. For SCM practices, a factor analysis was conducted using the 24 items that measure the five dimensions. The results support five factors of SCM practices that have eigenvalues greater than 1 and explain 57.66% of the cumulative variance, as shown in Appendix 1. For the Innovation performance, a factor analysis was conducted using the 9 items that measure the two dimensions. The

results support two factors with eigenvalues greater than 1 and explain 68.89% of the cumulative variance, as shown in Appendix 2. As for the Organizational performance, the five items used, that the results, as shown in Appendix 3. ANALYSIS AND RESULTS This study attempts to understand the relationships among SCM practices, innovation performance and organizational performance. Table 2 displays the means, standard deviations, and correlations of all variables. Table 3 presents the results of regression analysis regarding the effects of SCM practices on organizational performance.

Coefficients of strategic supplier partnership, customer relationship, information technology and supply chain integration are positive and significant for sales growth (p<0.05). Strategic supplier partnership, customer relationship, information technology and information sharing have positive and significant effects on lead time (p<0.05).

Coefficients of strategic supplier partnership, information sharing and supply chain integration are positive and significant for cost reduction (p<0.05). Strategic supplier partnership and information sharing have positive and significant effects on quality improvement (p<0.05). Similarly, customer relationship and information technology have positive and significant effects on return on investment (p<0.05). These findings indicate that firms would achieve a higher level of organizational performance if they have well-developed strategic supplier partnership, customer relationship, information technology, information sharing and supply chain integration.

Accordingly, the results moderately support Hypothesis 1, which states that SCM practice has a positive impact


Table 2. Means, standard deviations, and correlations.

Variables Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 1.Strategic supplier partnership 4.48 1.93 1.00 2.Customer relationship 5.35 2.06 0.21 1.00 3.Information technology 5.21 1.08 0.31 0.42 1.00 4.Information sharing 5.18 1.04 0.28 0.38 0.42 1.00 5.Supply chain integration 5.26 0.72 0.36 0.27 0.28 1.00 6.Administrative innovation 5.98 0.93 0.12 0.09 0.39 0.41 0.40 1.00 7.Technical innovation 5.35 0.86 0.07 0.34 0.38 0.52 0.06 0.31 1.00 8.Sales growth 5.04 1.2 0.32 0.58 0.43 0.11 0.36 0.34 0.46 1.00 9.Lead time 5.33 1.14 0.45 0.43 0.38 0.37 0.42 0.43 0.36 0.28 1.00 10.Cost reduction 5.56 1.72 0.44 0.14 0.37 0.36 0.39 0.45 0.54 0.48 0.28 1.00 11.Qauality improvement 4.48 0.83 0.37 0.14 0.13 0.38 0.11 0.29 0.66 0.43 0.31 0.12 1.00 12.Return on investment 5.35 0.86 0.10 0.40 0.12 0.15 0.14 0.38 0.43 0.39 0.35 0.36 0.32 1.00

Two-tailed test. Correlations with absolute value greater than 0.16 are significant at p<0.05, and those greater than 0.21 are significant at p < 0.01.

Table 3. Results of regression analyses of organizational performance.

Variable Organizational performance

Sales growth Lead time Cost reduction Quality improvement Return on investment SCM practices Strategic supplier partnership 0.141** **0.176 0.182** 0.152** 0.059 Customer relationship 0.296** 0.167** 0.093 0.09 0.17** Information technology 0.158** 0.145** 0.082 0.076 0.13** Information sharing 0.054 0.146** 0.148** 0.157** 0.114 Supply chain integration 0.152** 0.165** 0.163** 0.057 0.106 R2 0.156 0.16 0.112 0.071 0.083 F 6.655** 6.832** 4.536** 2.76** 3.275**

Two-tailed test; Standardized coefficients are reported; ** p<0.05.

on organizational performance. The results support the previous studies from Li et al. (2006) and Koh et al. (2007).

Table 4 shows the results of regression analyses of the effects of SCM practices on innovation performance. Coefficients of information technology and information sharing are positive and significant for administrative and technical innovation (p<0.05). Similarly, supply chain integration has positive and significant effects on administrative innovation (p<0.05) and customer relationship has positive and significant effects on technical innovation (p<0.05). These findings indicate that firms would achieve a higher level of innovation performance if they have well-developed customer relationship, information technology, information sharing and supply chain integration. Accordingly, the results moderately support Hypothesis 2, which states that SCM practice has a positive impact on innovation performance.

Next, we examine how innovation performance affects organizational performance. Table 5 presents the results

of regression analysis regarding the effects of innovation performance on organizational performance. In summary, both administrative and technical innovation have positive and significant effects on all the organizational performance dimensions (p<0.05). These findings indicate that firms would achieve a higher level of organizational performance if they have well-developed administrative and technical innovation performance.

Accordingly, the results support Hypothesis 3, which states that innovation performance has a positive impact on organizational performance. The results support the previous studies from Gopalakrishnan (2000), Aragَn-Correa et al. (2007) and Guan et al. (2006). DISCUSSION This study examines the relationships among SCM practices, innovation performance and organizational performance. Our results indicate that SCM practice has


Table 4. Results of regression analyses of innovation performance.

Variable Innovation performance

Administrative innovation Technical innovation SCM practices Strategic supplier partnership 0.114 0.03 Customer relationship 0.06 0.149** Information technology 0.146** 0.171** Information sharing 0.158** 0.254** Supply chain integration 0.154** 0.021 R2 0.085 0.121 F 3.333** 4.953**

Two-tailed test; Standardized coefficients are reported; ** p<0.05. Table 5. Results of regression analyses of organizational performance.

Variable Organizational performance

Sales growth Lead time Cost reduction Quality improvement Return on investment Innovation performance Administrative innovation 0.148** 0.166** 0.185** 0.132** 0.162** Technical innovation 0.189** 0.147** 0.208** 0.459** 0.206** R2 0.062 0.055 0.083 0.246 0.071 F 6.095** 5.281** 8.288** 29.796** 7.033**

Two-tailed test; Standardized coefficients are reported; ** p<0.05.

positive and significant effects on innovation and organizational performance. Also results show that innovation performance has positive and significant effects on organizational performance. These findings highlight the critical roles of SCM practice in the process of innovation and improve organizational performance.

The findings of this study contribute to the theoretical development of a conceptual model for explaining the relationships among SCM practices, innovation performance and organizational performance. The second contribution of this study is the derivation of empirical support for the model's prediction using data from actual cases.

This study contributes to the literature by empirically examining the relationships among SCM practices, innovation performance and organizational performance. The study shows that the validated SCM practices are applicable to developing countries such as Iran.

Although past studies from Prajogo and Sohal (2001, 2004) have suggested that innovation performance can be improved via TQM, this study has shown that SCM practices also have positive and significant relationships with innovation performance.

The study shows that the most important SCM practices in terms of affecting innovation and organizational performance are Information sharing and Information technology. This supports the previous work

from Chong and Ooi (2008) and Chong et al. (2009) in which they focused on information sharing among supply chain partners and forming a collaborative supply chain. Combining the use of IT and strategic sharing of information, firms are therefore able to provide more innovative Administrative and Technical. The study also found that firms with higher levels of innovation performance lead to high level of organizational performance. CONCLUSIONS AND IMPLICATIONS This study integrates all the activities of the supply chain management in an overall structure and links these activities to the innovation and organizational performance. It examines empirically the relationship between the various variables studied within the framework of the Iranian company and examines the consequences of SCM on the innovation and organizational performance companies. The empirical results suggest that SCM practices can improve firms’ innovation and organizational performance. Also, the results suggest that innovation performance can improve firms’ organizational performance.

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5946 Afr. J. Bus. Manage. know the importance of SCM and how SCM practices influence innovation performance.

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Appendix 1. Results of factor analysis for “SCM practice”.

Items Factors

1 2 3 4 5 Strategic supplier partnership Our suppliers support us to development of our products, services, or processes and provide technical support

0.87

We have long-term relationship with suppliers 0.76 We consider quality as our number one criterion in selecting suppliers 0.85 We regularly solve problems jointly With our suppliers. 0.72 we choose reliable suppliers based on their quality 0.78 Customer relationship We frequently interact with customers to set reliability, responsiveness, and other standards for us.

0.81

We frequently determine future customer expectations. 0.83 We frequently measure and evaluate customer satisfaction. 0.85 We periodically evaluate the importance of our relationship with our customers. 0.78 Information technology Our IT facilitates acquisition of supply chain knowledge 0.64 Our IT facilitates processing of supply chain knowledge 0.66 Our information technology throughout the supply chain is up-to-date 0.55 In our company Information exchange with suppliers through IT 0.61 The IT system throughout the supply chain are adequate 0.72 Information sharing We and our trading partners exchange information that helps establishment of business planning.

0.54

Our trading partners share business knowledge of core business processes with us. 0.76 Our trading partners share proprietary information with us. 0.65 We and our trading partners keep each other informed about events or changes that may affect the other partners.

0.54

Supply chain integration Our company has capability to control sales/distribution network 0.54 We Establish more frequent contact with supply chain members 0.76 We try Enhance integration in new product development 0.75 Our Supply chain integration reduces uncertainties of knowledge loss

0.64

We have Data integration among internal functions through network 0.76 Our company has On-time delivery capability 0.51 Eigenvalue 3.56 3.27 2.92 2.35 1.75 Percentage of variance 14.86 13.61 12.15 9.76 7.28 Cumulative percentage of variance 14.86 28.47 40.62 50.38 57.66


Appendix 2. Results of factor analysis for “innovation performance”.

Items Factors

1 2 Administrative innovation We have Innovative administration in planning procedures 0.84 We have Innovative administration in process control systems 0.76 We have Innovative administration in integrated mechanisms 0.85 Our company seeks new ways of doing things 0.91 Technical innovation The company has continuously used innovative technology to improve the quality and speed of production and services to our customers

0.74

we make an effort to anticipate the potential of new manufacturing practices and technologies 0.76 We describe ourselves as a firm focusing on process innovation 0.85 We use up-to-date/new technology in the process 0.81 We are able to produce products with novelty features 0.74 Eigenvalue 3.35 2.85 Percent of variance 37.25 31.64 Cumulative Percent of variance 37.25 68.89

Appendix 3. Results of factor analysis for “Organizational performance”.

Items Factor Organizational performance Sales growth 0.91 Lead time 0.86 Cost reduction 0.95 Quality improvement 0.81 Return on investment 0.84 Eigenvalue 3.48 Percent of variance 69.60 Cumulative Percent of variance 69.60



Evaluation of e-payment systems in Iran using analytic hierarchy process

Hassan Amozad Khalili1, Seyed Babak Ebrahimi2* and Sorosh Nalchigar3

1 Bank Keshavarzi (Agricultural Bank), P. O. Box 14155-6395, Tehran, Iran.

2Department of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran.

3Department of Management and Economy, Tehran University, Tehran, Iran.


Parties conducting electronic business have usually never seen each other face-to-face, nor do they exchange currency or hard copies of documents hand-to-hand. When companies enter electronic commerce, choosing an electronic payment (e-payment) system that will work well with the way they run their business, which is both popular and safe, is a major concern. In this paper, after examining different e-payment systems in Iran, we identify assessment criteria based on previous researches and interview with experts. Then, using analytic hierarchy process (AHP) we prioritize e-payment systems in Iran based on experts opinions. Results show that debit card is the most preferred e-payment system, followed by credit card and electronic check. The findings of this research are intended to be useful for both academic researchers and companies planning to adopt or to improve an electronic payment system. Key words: Electronic payment system, internet, e-commerce.

INTRODUCTION The worldwide proliferation of the Internet led to the birth of electronic commerce, a business environment that allows the electronic transfer of transactional information. Electronic commerce (EC) flourished because of the openness, speed, anonymity, digitization and global accessibility characteristics of the Internet, which facilitated real-time business activities, including advertising, querying, sourcing, negotiation, auction, ordering and paying for merchandise (Yu et al., 2002). According to Tsiakis and Sthephanides (2005) the critical factor of success for every commercial entity to implement and operate an electronic business mechanism is money flow, material flow and information flow in commerce process.

In this era, payment systems play a major part in the conduct of a country's monetary policy, financial sector and economic development (Johnson, 1998; World Bank, *Corresponding author. E-mail: [email protected]. Tel: +989126231135.

1990). They improve macroeconomic management, release funds from the clearing and settlement functions for more productive use, and reduce float levels, improving the control of monetary aggregates. Moreover, firms in different economic sectors use the payment system to transfer funds and to provide competitive financial services (Khiaonarong, 2000).

According to Yu et al. (2002) when companies enter electronic commerce market, choosing an electronic payment system that will work well with the way they run their business that is both popular and safe is a major concern. Therefore, this research paper aims to identify and analyze different kinds of electronic payment systems in Iran. This paper addresses the following research questions: 1. What are common e-payment methods in Iran? 2. Which criteria exist for evaluation of e-payment systems? 3. What is the ranking of e-payment systems? The rest of this paper is organized as follows. Previous

related works are reviewed in the literature review, followed by the research methodology. Then Common e-payment systems in Iran are described after which assessment criteria for evaluation of E-payment systems was described. The research results are presented and finally some concluding remarks were stated.

LITERATURE REVIEW

Khiaonarong (2000) examined the creation of modern electronic payment systems in Thailand and concluded that this creation has helped facilitate the turnover of funds in the economy, while the use of information technology in current payment arrangements helped reduce human intervention and default cheques and has also helped strengthen the country's capabilities and competitiveness in providing financial services.

Yu et al. (2002) explored the advantages and limitations of several different electronic payment systems include online credit card payment, electronic cash, electronic checks and small payments. After analyzing and comparing these types of payment systems, they concluded that in the future, the use of virtual credit cards will escalate.

Furthermore, smart cards will replace traditional electronic cash in the market. They also proposed that electronic checks are suitable for corporations and governments because their direct cost is high. In addition, they concluded that pay-per-click and per-fee-links will definitely become online trends for transactions.

Tsiakis and sthephanides (2005) studied concept of security and trust and their issues in electronic payment. Their study implicated that these issues are essential for every electronic payment mechanism in order to be accepted and established as a common medium of financial transactions.

Hung et al. (2006) identified the factors that determine the publics’ acceptance of online tax filing and payment system (OTFPS) in Taiwan. Investigating relevant previous studies, they identified the determinants for acceptance of the OTFPS. Then, they examined the casual relationship among the variables of acceptance behavior for the OTFPS. Using data collected from 1099 usable responses, they indicated that the proposed model explained up to 72% of the variance in behavioral intention. In addition, the important determinants of user acceptance of the OTFPS are perceived usefulness, ease of use, perceived risk, trust, compatibility, external influences, interpersonal influence, self-efficacy and facilitating condition.

Review of literature shows that e-payment systems in Iran has not gained attention by researchers. The main contribution of this study is to identify available e-payment systems in Iran and evaluate them based on experts’ opinion. Findings of this research are intended to be useful for both academic researchers and companies

Khalili et al. 5951 planning to adopt or to improve an electronic payment system. RESEARCH METHODOLOGY

Data for this study was made available via a combination of interviews and questionnaires. We first interviewed 8 experts in the field of electronic commerce and electronic banking. These experts were four IT managers (or a representative, for example assistant manager, if the manager was not available at the time of the interview) in four Iranian banks which proposing electronic banking services to their customers and four IT managers in four Iranian e-retailers.

During the interviews we sought general information from the managers about e-payment systems in Iran and asked them to discuss about customers’ criteria’s for selection from available e-payment systems in Iran.

Examining previous related work and using data gathered by interviews, evaluation criteria for e-payment systems obtained the hierarchy of problem constructed. Consequently, using a questionnaire, we asked 36 experts (include 8 IT managers introduced above, 14 specialists in the field of EC and 14 specialists who were employed by e-retailers) to compare the elements of a particular level with respect to a specific element in the immediate upper level. Using data collected by questionnaires, we made pair-wise comparisons and obtaining judgment matrix. Results are presented subsequently in this paper.

E-PAYMENT SYSTEMS IN IRAN Here E-payment systems in Iran (according to interviews) are described and some statistics are presented. There are 5 types of e-payment in Iran as follows: Electronic money There is still no comprehensive definition of e-money but surveying in current definitions, e-money could be defined as follow: “Money that is moving as electronic currency and can be saved or represents as smart cards or electronic wallets. It can also be used in sale terminals, or person to person, or be flowed or expend to banks or other distributors of e-money through phone lines.” From the forgoing, it can be concluded that e-money is a pay mechanism for reserved or prepaid value, which is saved in an electronic instrument and is possessed by consumer. Electronic worth is bought by consumer and each time the consumer connects to terminals or internet to buy, the value reduces. E-money is the most important tool to employ digital technology in economic context and can be used as bank cards, transferring money in internet, salary and wage systems and other concepts in e-commerce. Credit card Credit card is a plastic card which contains name and identity of the owner in front. There exists a magnetic


Table 1. Situation till end of March 2008.

Name of bank ATM POS

Exploited Under construction Buy phase pos market Magnetic + Smart cards

Saderat 1474 32 500 18150 4000000

Mellat 1195 19 7 8400 1400000

Sepah 1100 130 0 23 4000000

Melli 1076 1412 500 421 4897000

Keshavarzi 729 426 0 10600 2234000

Tejarat 731 269 600 200 2474000

Refah 511 5 0 76 81000

Eghtesad e Novin 184 20 300 42000 881000

Maskan 122 250 250 16 213000

Saman 106 12 0 28369 206000

Parsian 98 2 50 59000 2642000

Post Bank 55 0 6 0 19000

Pasargad 54 6 35 475 41000

Sanat o Maadan 41 0 0 2200 15000

Karafarin 22 10 0 0 29000

Sarmayeh 17 3 0 0 210

Tosee Saderat 13 0 15 140 13000

Total 7645 2599 2263 170000 23500000

Source: Http://novinbank.blogfa.com/post-77.aspx.

tape which contains identity and owner address, in the back. Computerized financial systems like ATM employ this information to obtain identity of card holder when taking money. Bank or issuing institute confirms the credit to almost 50000$. Even if the owners have no money in their account, to a distinguished level they can buy or get money, but they have to liquidate to a certain time. Commonly customers have to pay a rate near 2% in month for used credit. Samin card which is not popular yet, is a kind in Iran.

Credit cards are rarely used and not more than 3% of active bank network cards. Regarding to importance of credit cards in developing small facilities for all citizens and the affect on expanding sale terminals in malls, Islamic Republic of Iran Centeral Bank, cooperating with bank network is willing to develop issuing and strategy plans of credit cards. By the way referring to expand e-pay and substituting it to cash pay, Central Bank of Islamic Republic Iran has enacted rules. Debit card Debit card is the commonest way to pay in Iran. In this way, you should settle money to account and then use it. The account will be indebtedness after off taking and lets he/she to pay or take till there still exist money in account. In fact it is like a currency account. Using Debit cards goes to year 1370 and the early use of Sepah ATMs which were the first machine to take money from.

In recent years almost all the banks are equipped with this. The aim is to develop electronic machines instead of branch box-offices and give cash to customers. Card bank networks in Islamic Republic of Iran launched in year 1381 to transfer information among banks as an integrated system in the whole country terminals named as Shetab.

Official statistics shows there are 6438936 issued cards in Tehran and 10683892 issued cards in other provinces. Surveying of bank and insurance service of Economic Abrar statistics shows there would be a great increase in number of cards comparing to last month, till the end of September 2008 and it would be 17122828 cards which are 2534445 cards for private banks and 14 588383 cards for public banks. The developing situation of e-banking in Iran is presented in Table 1. Charging card Credits are paid in the beginning of each period and the owner should pay back the money at the end of that period. These kinds of cards have a charging fixed cost. Electronic check Electronic check is a developed format of paper check. In general, way paper checks are transferable when there are name, date and the price written on them. In

electronic format, one just has to write the price and the rest is done by related devices and even and there is no need for any papers. Now, payment system LML is a terminal to converse paper check to electronically ones the method is as follow: Costumer gives the paper check, then the reading check device information of his/her account and electronic signature are conversed to electronic actions. Using e-check reduces the costs because of no need to papers and post. In Iran this method is rarely used.

ASSESSMENT CRITERIA FOR EVALUATION OF E-PAYMENT SYSTEMS

Examining previous related researches and experts opinions, we identified criteria for e-payment systems’ evaluation. On account of the importance of security in e-payment systems, we divide criteria into two main categories: The socioeconomic criteria, and the security criteria. The assessment criteria are described subsequently.

Security criteria

Authority (C1): Also referred to as validity. This is one of the most important things to take into consideration. The purpose is to verify the claimed identities of all parties involved and to prevent third parties from sabotaging information or making unauthorized transfers (Yu et al., 2002). Privacy (C2): The purpose is to protect information that is sent via the Internet, and to prevent unauthorized personnel or company employees from accessing confidential information (Yu et al., 2002). Integrity (C3): This includes the prevention of tampered transactions, making mistakes when sending information and avoids accidentally sending a transaction twice, or accidentally sending of a transaction with false information, to prevent consumers and producers from denying their involvement in a transaction or from changing information in the transaction (Yu et al., 2002). Not be faked (C4): One of the security problems are faked monies and signs (Hassler, 2001). Non-repudiation (C5): The electronic payment system must be designed in such a way that consumers and companies will be unable to deny their participation in a transaction if they were involved. Therefore, records of details, such as the time of the transaction, the information involved in the transaction, etc., must be kept in a secure database (Yu et al., 2002). Anonymity (C6): A condition in which an individual's true identity is unknown (Tsiakis and Sthephanides, 2005).

Socioeconomic criteria The cost of transactions (C7): This refers to the cost paid by the seller and buyer involved in the transaction.

Khalili et al. 5953 This can be divided into direct cost and indirect cost. In choosing the electronic payment system for small payments, the cost of the transaction will be a deciding factor (Yu et al., 2002). Reliability (C8): According to Wikipedia, the ability of a system performs its required functions under stated conditions for a specified period of time. Degree of acceptability (C9): The electronic payment system should be simple and user-friendly. The degree of user friendliness is a factor when consumers decide which system to use, especially for small payments (Yu et al., 2002). User range (C10): This refers to the range of users to which an electronic payment system is accessible. This includes whether the system is accessible in all countries of the world, to all ages (Yu et al., 2002). EVALUATION BY USING ANALYTIC HIERARCHY PROCESS (AHP) AHP is one of the most popular Multiple-criteria decision-making (MCDM) tools for formulating and analyzing decisions. The technique is employed for ranking a set of alternatives or for the selection of the best in a set of alternatives. The ranking/selection is done with respect to an overall goal, which is broken down into a set of criteria. A brief discussion of AHP is provided here. More detailed description of AHP and application issues can be found in Saaty (1980). AHP has been applied to numerous practical problems in the last few decades (Shim, 1989). Step 1: Structuring of the decision problem into a hierarchical model It includes decomposition of the decision problem into elements according to their common characteristics and the formation of a hierarchical model having different levels. A simple AHP model has three levels (goal, criteria and alternatives). It is notable that criteria can be divided further into sub-criteria and sub-sub-criteria. Using the criteria mentioned in assessment criteria for evaluation of e-payment systems, the hierarchical model is shown Figure 1. Step 2: Making pair-wise comparisons, obtaining the judgment matrix and calculating local weights In this step, the elements of a particular level are compared with respect to a specific element in the immediate upper level. The resulting weights of the elements may be called the local weights (to be contrasted with final weights, discussed in Step 4). The opinion of a decision-maker (DM) is elicited for comparing the elements. Elements are compared pair-wise and


Figure 1. Hierarchical model of problem.

judgments on comparative attractiveness of elements are captured using a rating scale (1 to 9 scales in traditional AHP). Usually, an element receiving higher rating is viewed as superior (or more attractive) compared to another one that receives a lower rating. The comparisons are used to form a matrix of pair-wise comparisons called the judgment matrix. It is notable that based on specialists’ opinions, local weight of security with regard to goal is equal to 0.6. This value is equal to 0.4 for the socioeconomic. Table 2 shows first judgment matrix which estimates the local weights of criteria related to security. Table 3 indicate second judgment matrix which estimates the local weights of criteria related to socioeconomic. Table 4 Illustrates comparison of alternatives (e-payment systems) with respect to C6.

From judgment matrixes, local weights easily can be calculated. It should be noted that in this step, local weights of the elements are calculated using the eigenvector method (EVM). The normalized eigenvector corresponding to the principal eigenvalue of the judgment

matrix provides the weights of the corresponding elements. Though EVM is followed widely in traditional AHP computations, other methods are also suggested for calculating weights, including the logarithmic least-square technique (LLST) (Crawford and Williams, 1985; Lootsma, 1999) and goal programming (Bryson and Joseph, 1999). Finally, Table 5 shows local weights of alternatives with respect to criteria. Step 3: Aggregation of weights across various levels to obtain the final weights of alternatives Once the local weights of elements of different levels are obtained as outlined in Step 2, they are aggregated to obtain final weights of the decision alternatives (elements at the lowest level). For example, the final weight of

alternative i

A is computed using the following

hierarchical (arithmetic) aggregation rule in traditional AHP:

( ) ( ) ( )[ ]( ) ( ) ( )[ ]

2079915.013785800.0155265.0...44491782.0230945.04.0

1055090.0288427.0...2019130.0169339.06.0A of weight Final

so

)1(. Ccriterion

of weight Local

Ccriterion ofrespect

with A of weight LocalA of weight Final

1

10

1 jj

i

i

=

×++××+

×++××=

×

=∑

=j

Khalili et al. 5955

Table 2. Comparison of criteria with respect to security.

Criteria C1 C2 C3 C4 C5 C6 Local weight

C1 1.000 0.500 1.000 2.000 2.000 2.500 0.2019130

C2 2.000 1.000 2.000 3.000 1.500 3.000 0.2913110

C3 1.000 0.500 1.000 1.000 0.500 1.500 0.1309112

C4 0.500 0.333 1.000 1.000 1.000 0.500 0.1040740

C5 0.500 0.666 2.000 1.000 1.000 2.000 0.1662810

C6 0.400 0.333 0.666 2.000 0.500 1.000 0.1055090

Table 3. Comparison of criteria with respect to socioeconomic.

Criteria C7 C8 C9 C10 Local weight

C7 1.000 2.000 3.000 3.000 0.44491782

C8 0.500 1.000 2.000 3.000 0.28789220

C9 0.333 0.500 1.000 0.750 0.12933240

C10 0.333 0.333 1.333 1.000 0.13785800

Table 4. Comparison of e-payment systems with respect to C6.

Alternatives A1 A2 A3 A4 A5 Local weight

A1 1.000 0.750 2.000 2.500 3.000 0.288427128

A2 1.333 1.000 2.000 2.750 3.000 0.330016746

A3 0.500 0.500 1.000 1.500 2.000 0.168164521

A4 0.400 0.363 0.666 1.000 1.500 0.121015707

A5 0.333 0.333 0.5 0.666 1.000 0.092375898

Table 5. Local weights of alternatives with respect to criteria.

Criteria A1 A2 A3 A4 A5

C1 0.169339 0.201365 0.144586 0.322071 0.162640

C2 0.182874 0.201963 0.259570 0.210229 0.145365

C3 0.141270 0.141270 0.249206 0.326984 0.141270

C4 0.265834 0.261011 0.181437 0.112917 0.178802

C5 0.163194 0.147405 0.188390 0.346369 0.154641

C6 0.288427 0.330016 0.168164 0.121015 0.092375

C7 0.230945 0.225633 0.103999 0.103999 0.335400

C8 0.267164 0.288859 0.141465 0.110553 0.191980

C9 0.248393 0.236628 0.147726 0.118860 0.248393

C10 0.155265 0.148813 0.308595 0.262542 0.126480

The final weights computed using (1) for the illustration is shown in Table 6. According to final weights, alternative A2 is the most preferred alternative, followed by A1, A4, A5

and then A3. CONCLUSION When companies enter electronic commerce market,

choosing an electronic payment system that will work well with the way they run their business that is both popular and safe is a major concern. This research identified major criteria and current situation of e-payment systems in Iran. Then, using questionnaire we compared these systems and by using AHP we ranked these systems. Results indicate that debit card is the most preferred e-payment system, followed by credit card and electronic check.


Table 6. Final weights of alternatives.

Criteria A1 A2 A3 A4 A5

C1 0.0205150 0.024394927 0.017517276 0.039018193 0.01970347

C2 0.0319639 0.035300426 0.45369358 0.036745212 0.02540785

C3 0.0110962 0.011096295 0.019574314 0.025683521 0.01109629

C4 0.0165998 0.016298675 0.011329725 0.007251034 0.01116518

C5 0.0162816 0.01470639 0.018795407 0.03455675 0.01542831

C6 0.0182565 0.020088995 0.010644297 0.007664005 0.00585043

C7 0.0411006 0.040155257 0.18506802 0.018508403 0.05969462 C8 0.0307657 0.033264106 0.01629067 0.01273094 0.02210747

C9 0.0212851 0.012241471 0.007642306 0.006148982 0.01285010

C10 0.0085617 0.008205995 0.017016854 0l.014477354 0.00697432

Sum 0.2079915 0.216553501 0.182686007 0.202584394 0.19027808

REFERENCES Bryson N, Joseph A (1999). Generating consensus priority point

vectors: A logarithmic goal programming approach. Comput. Oper. Res., 26: 637-643.

Crawford G, Williams C (1985). A note on the analysis of subjective judgment matrices. J. Math. Psychol., 29: 387-405.

Hung SY, Chang CM, Yu TJ (2006). Determinants of user acceptance of the e-Government services: The case of online tax filing and payment system. Gov. Inf. Q., 23: 97-122.

Johnson OEG (1998). Payment systems, monetary policy, and the role of the Central Bank, Washington DC. International Monetary Fund.

Khiaonarong T (2000). Electronic payment systems development in Thailand. Int. J. Inf. Manage., 20: 59-72.

Lootsma FA (1999). Multi-criteria decision analysis via ratio and difference judgement. Soc. Econ. Plan. Sci., 42: 192-197.

Saaty TL (1980). The analytic hierarchy process: Planning, priority setting and resource allocation. New York: McGraw-Hill.

Shim JP (1989). Bibliographical research on the analytic hierarchy process (AHP). Soc. Econ. Plan. Sci., 23: 161-167.

Tsiakis T, Sthephanides G (2005). The concept of security and trust in electronic payments. Comput. Secur., 24: 10-15.

World Bank (1990). Financial systems and development. World Bank Policy and Research Series, Washington D.C.

Yu HC, His KH, Kou PJ (2002). Electronic Payment Systems: An analysis and comparison of types. Technol. Soc., 24: 331-347.



An examination of the operating efficiency of international tourist hotels in Taiwan and associated

factors

Mei-Cheng Wu1,2* and Chia-Yon Chen1

1Department of Resources Engineering, National Cheng Kung University, Taiwan. 2Department of International Business, Chungyu Institute of Technology, Taiwan.

Accepted 17 October, 2011

This study examines the operating efficiency of international tourist hotels in Taiwan. Data envelopment analysis (DEA) is used to evaluate the relative efficiency management of chain and independent tourist hotels based on data from 2006 and 2007, allowing for the comparison of competitiveness between the different categories of international tourist hotels. Tobit regression analysis is used to assess whether factors such as the operating model and guest nationality have a significant impact on the operating efficiency, providing a basis for true improvement. Research results show that chain and independent international tourist hotels have exhibited significant improvements in terms of scale efficiency. While independently operated tourist hotels did improve significantly in overall efficiency and pure management efficiency, chain tourist hotels did not show significant improvements in these measures. In terms of the impact of environmental variables on efficiency, the hotel-operating model and guest nationality did have a significant positive impact on the overall efficiency. Key words: Efficiency, data envelopment analysis, Tobit regression analysis.

INTRODUCTION Barriers to travel have gradually diminished as the global economy has developed rapidly, resulting in an increase of international tourism. The tourism industry has become a primary source of foreign income for many countries. In response to globalization, Taiwan launched the “Doubling Tourist Arrivals Plan” in 2002. This plan facilitated the growth of the number of tourists visiting Taiwan from 2,977,692 in 2002 to 3,845,187 in 2008 and an increase in foreign income from $4,584 million USD to $5,936 million USD over the same period. Following the tourism trend in Taiwan, domestic and foreign hotel groups have seized on the business opportunities, investing in tourist hotels and establishing operations associated with international hotel chains.

Beginning in 1989, domestic tourist hotels became increasingly oriented towards cooperation and joint *Corresponding author. E-mail: [email protected].

operations with internationally known hotel chains. For example, the Grand Hyatt Taipei, the Westin Taipei, Gloria Prince Hotel, and Caesar Park Hotel Kenting introduced management techniques and talent from Western hotels, improving the operation management capabilities of domestic tourist hotels. The number of tourists visiting Taiwan exceeded 3 million in 2005, bringing room occupancy rates in Taiwan to 73.54%; room prices approached $3,000 TWD/night, marking a high point compared to the previous several years.

However, due to the slowing growth of tourism among Taiwanese nationals and foreign citizens, room occupancy rates in international tourist hotels dropped to 70.21% in 2006, a drop of 3.33% compared to 2005 figures. In response to the business opportunities of catering to tourists from mainland China, the number of international tourist hotels in Taiwan expanded to 60 locations by 2007, with a total of 17,733 rooms. Nonetheless, overall room occupancy rates in international tourist hotels have continued to decline over

5958 Afr. J. Bus. Manage. the past few years, decreasing from 72% in 2005 to 67.16% in 2007. These figures show that overall supply is growing very rapidly. Relying solely on domestic demand will likely lead to oversupply, causing fierce competition in the hotel market. Therefore, measuring operating efficiency to increase competitive advantage and establish benchmarks is an important issue that operators of international tourist hotels must confront.

Topics related to the measurement of efficiency have been an important focus in various fields for some time now. Data envelopment analysis (DEA), one approach to measuring efficiency, uses linear planning techniques to estimate technological efficiency. The greatest advantage of this approach is its ability to process problems under multiple

output conditions. Morey and Dittman (1995) were the first to use DEA to examine the operating efficiency of the hotel market. They found that the average operating efficiency of a hotel general manager was 89%; the general manager with the lowest efficiency had an efficiency of 64%.

Anderson et al. (2000) utilized DEA to measure the operating efficiency of 48 hotels in the United States. Their results showed that overall efficiency (OE) reached only 42%, primarily because of deficiencies in technical efficiency (TE) and allocative efficiency (AE). In other words, more efficient units allocated additional resources to other operations in the food service industry; therefore, managers should pay greater attention to the allocation of resources rather than the management of resources.

Hwang and Chang (2003) utilized the DEA model developed by Charnes et al. (1978) and the Malmquist productivity index by Farrell (1957) to assess the operating efficiency of 45 international tourist hotels in Taiwan during 1998 as well as changes in efficiency from 1994 to 1998. Sun (2004) utilized an output-oriented window analysis to assess the operating efficiency of 47 international tourist hotels in Taiwan from 1997 to 2001.

Barros (2005) conducted production capacity analysis of the operating efficiency of 42 hotels in Portugal. Firstly, the Malmquist index was used to differentiate between changes in technological efficiency (TE) and changes in efficiency caused by technological reasons. Changes in technological efficiency can be divided into pure technological changes and changes in scalar efficiency. Secondly, a Tobit regression model was used to examine the variables that may influence operating efficiency in hotels.

Chen (2006) utilized cost efficiency to assess the operating efficiency of 55 tourist hotels in 2002. This study yielded empirical results that suggested average efficiency was approximately 80%. Botti et al. (2007) utilized DEA to assess the operating efficiency of chain hotels based on 16 French plural form hotels, determining that the operating efficiency of plural form hotels was superior to that of hotel chain systems that open franchises or operate direct chain subsidiaries.

Barros and Dieke (2008) utilized DEA to assess the TE of 12 hotels in Luanda, Angola from 2000 to 2006,

determining that efficiency increased during the research period but the rate of change slowed. In addition, the efficiency of hotels that joined member chains tended to increase. Efficiency gains were particularly pronounced when globalized strategies were adopted.

In summarizing the literature described previously, it can be determined that DEA has substantial reliability and validity in efficiency assessment. However, previous literature has rarely examined the impact of operating environment variables on the operating efficiency of international tourist hotels. As hotel chains become increasingly globalized and personal consumption awareness increases, the comparison between chain and independent hotels becomes important to assess the efficiency measure of hotel competitiveness, but existing literature is somewhat sparse.

Accordingly, this study attempts to use international tourist hotels in Taiwan as a subject to perform a comparison between chain and independent hotels for 2006 and 2007. DEA is used to measure relative efficiency to perform a comparison of competitive strength among international tourist hotels. Tobit regression is used to examine the influence of factors such as operating form, locality, scale, target customer segment, and guest nationality on operating efficiency increases. The results of this study should provide a basis for making genuine improvements, creating new opportunities for international tourist hotels in Taiwan. RESEARCH METHODS

This study utilizes two-stage DEA to perform analysis. The first stage utilizes DEA to measure the management efficiency of different hotels types and then uses Wilcoxon signed-rank test to determine whether the average efficiency is increasing or declining. The second stage utilizes a Tobit regression empirical model to assess whether the hotel operating form, locality, scale category, target customer segment, and guest nationality significantly influence efficiency improvements and to reflect the impact of environmental variables on efficiency. Examination of data envelopment analysis (DEA) efficiency assessment model Theories related to the measurement of efficiency originated with Farrell, who introduced production frontiers as a basis for measuring efficiency in 1957 and used efficient frontier to assess the TE and AE of decision-making units (DMU). Production frontiers are measured using the two following methods: (1) the stochastic frontier approach (SFA), which is an application of the parameter method; this approach defines the target function of a DMU and the distribution of random interference terms to perform an efficiency assessment; (2) DEA, a non-parameter method application, has the advantage of not requiring preset input-output function relationships or preset factor weighting, making it more suitable for measuring the efficiency of organizations with multiple inputs and outputs.

DEA can be divided into the CCR and BCC models. The CCR model, introduced by Charnes et al. (1978) expands the “two inputs, one output” concept of Farrell to the “multiple inputs, multiple outputs” analysis model and produces a measurement of efficiency based on an assumption of constant returns

to scale (CRS) in the production process. The measurement of efficiency is performed using the following formula: CCR model

In this model, λj is the factor weighting; Si

－and Sr

+ are the slack

variables for the inputs and outputs. In addition, θ is the TECRS

of the k

th DMU under CRS for the input side; the efficiency value ranges

from 0 to 1. If θ = 1, Si－

= 0, and Sr+ = 0, then the DMU is located on

the efficiency frontier and has achieved TE; if θ is close to 0, then the DMU is inefficient.

1 1

k

1

Subject to

pm

k i r

i r

n

ik j ij i

j

s s

X X s

θ

θ

− +

= =

−

=

= − −

− =

∑ ∑

∑

kMin E ε

λ

1

n

j rj rk r

j

Y Y s+

=

− =∑λ

λj , Si

-, Sr

+ ≥ 0, j = 1,…., n, i = 1,…., m, r = 1,…., p

Xij: the number of ith inputs for the j

th DMU;

Yrj: the number of rth outputs of the j

th DMU.

BCC model

The BCC model was introduced by Banker et al. (1984) and applies to the distance function concept developed by Shephard (1970). The assumption of CRS in the CCR model is changed to an assumption of variable returns to scale (VRS). TE is divided into pure technical efficiency (PTE) and scale efficiency (SE) to determine the sources of inefficiency. The BCC model is expressed using the following model:

1 1

k

1

Subject to

pm

k i r

i r

n

ik j ij i

j

s s

X X s

θ

θ

− +

= =

−

=

= − −

− =

∑ ∑

∑

kMin E ε

λ

1

n

j rj rk r

j

Y Y s+

=

− =∑λ

1

1n

j

j=

=∑λ

λj , Si, Sr

+ ≥ 0, j = 1,…., n, i = 1,…., m, r = 1,…., p

The BCC model includes an additional convexity constraint ∑λj = 1 compared to CCR. The BCC model measures pure TE, whereas the CCR model measures overall TE; the two measures of TE differ in scale efficiency. Banker (1984) demonstrated that TE is the product of pure TE and SE. In other words, technological inefficiency may result from inefficiency in the impact of production technology and

Wu and Chen 5959 inefficiency resulting from the impact of the DMU not being positioned at the optimal scale. Tobit regression empirical model This study aims to examine whether the factors of the hotel operating form, locality, scale, target customer segment, or guest nationality significantly influence increases in operating efficiency. Results should provide a basis for true improvements in operating efficiency. Therefore, Tobit regression analysis, as introduced by Tobit (1958) is used for the second stage.

Two-stage DEA methodology typically involves the use of DEA to measure efficiency in the first stage and uses a Tobit regression empirical model in the second stage to analyze efficiency as a dependent (explained) variable with environmental variables and as an independent variable. Whether the environmental variables significantly influence efficiency increases is assessed, reflecting the influence direction of environmental variables on efficiency.

In selecting environmental variables, this study primarily considered the operating characteristics of domestic hotels and, based on the methods of Barros (2005) with regard to the hotel industry, selected the factors of operating form, locality, scale, target customer segment, and guest nationality as regression variables to be assessed for whether they significantly influence increases in operating efficiency. The model used in this study is as follows:

Ek＝β0＋βi Z i＋εk (i = 1,…., 5)

Ek: the overall TE of the k

th DMU, Z1: operating form, Z2: locality, Z3:

scale, Z4: target customer segment, Z5: guest nationality, εk: regression error.

Therefore, the operating form was divided into chain and independent international tourist hotels based on operations in Taiwan. If a hotel is a member of an international hotel chain group, then Z1 = 1; conversely, Z1 = 0 for independent hotels. International tourist hotels were divided by locality into the regions of Taipei, Kaohsiung, Taichung, Hualien, and Hsinchu/Taoyuan/Miaoli. If the hotel was located in the Taipei region, then Z2 = 1; if the hotel was located in the Kaohsiung region, then Z2 = 2; if the hotel was located in the Taichung region, then Z2 = 3; if the hotel was located in the Hualien region, then Z2 = 4; if the hotel was located in the Hsinchu/Taoyuan/Miaoli region, then Z2 = 5; if the hotel was located in another region, then Z2 = 6.

The scale of a hotel was determined based on the number of rooms. For a hotel with over 400 rooms, Z3 = 1; for a hotel with 250 to 399 rooms, Z3 = 2; for a hotel with less than 249 rooms, Z3 = 3. The primary customer segments for international tourist hotels in Taiwan were tourists and business travelers. If a hotel’s primary customer segment was business travelers, then Z4 = 1; if a hotel’s primary customer segment was tourists, then Z4 = 0. For guest nationality, if over 50% of a hotel’s guests were foreign citizens, then Z5=1; if not, then Z5 = 0.

EMPIRICAL ANALYSIS AND RESULTS

This study used international tourist hotels in 2006 and 2007 as the research subjects; the subjects were divided into the two categories of chain and independently-operated hotels for analysis. Since data was incomplete for some tourist hotels, this study was limited to 56 international tourist hotels. The source of the data for this study was the annual “Operating Report of International Tourist Hotels in Taiwan” issued by the Tourism Bureau, Ministry of Transportation and

5960 Afr. J. Bus. Manage. Communication in 2006 and 2007. Variable selection and explanation This study considered the operating characteristics of domestic hotels and consulted literature relevant to the hotel industry in selecting the following four input variables and one output variable, as explained subsequently:

Input variables 1. Number of rooms (unit: room): Refers to the amount of guest rooms of a given hotel; the number of rooms in a hotel determines the income from hotel guest rooms; guest rooms are also a fixed asset. The number of rooms in a hotel was included as an input variable. 2. Total floor area of the food services department (unit: pyeong): Refers to the total floor area occupied by restaurants, banquet halls, and cafés in a hotel. In recent years, income from food and beverage services has exceeded income from guest rooms; the total area of floor space allocated to food services determines the income from food and beverage services, and so must be included as an input. 3. Number of Employees (unit: person): Refers to the number of individuals employed in the guest room department, food and beverage department, and management. The hotel industry is a labor-intensive industry and is characterized by a strong demand for labor. Therefore, this study includes the number of employees as an input. 4. Total operating expenditure (unit: New Taiwan Dollar/Yuan): Total operating expenditures can be viewed the total costs; the amount of total costs has a decisive impact on operating income. Total operating expenditures can be divided primarily into the categories of salaries and related fees, food and beverage costs, utilities fees, depreciation, maintenance costs, and laundry costs.

Output variables

Total operating income (unit: New Taiwan Dollar/Yuan): The production value of hotel operations is measured primarily using total operating income. Total operating income can be divided into guest room income, food and beverage income, laundry income, storefront rental income, auxiliary operations income, services income, and other income.

Environmental variables

Ek＝β0＋βi Z I + εk (i = 1,…., 5)

Ek: Overall technical efficiency of the kth DMU, Z1: The

operating form, a dummy variable indicating whether a hotel is a member of an international hotel chain group, if so, then Z1=1; if the hotel is an independently operated hotel, then Z1 = 0. Z2: The geographical location, if the hotel was located in the Taipei region, then Z2=1; if the hotel was located in the Kaohsiung region, then Z2 = 2; if the hotel was located in the Taichung region, then Z2 = 3; if the hotel was located in the Hualien region, then Z2 = 4; if the hotel was located in the Hsinchu/Taoyuan/Miaoli region, then Z2 = 5; if the hotel was located in another region, then Z2 = 6. Z3: The scale, for a hotel with over 400 rooms, Z3 = 1; for a hotel with 250 to 399 rooms, Z3 = 2; for a hotel with less than 249 rooms, Z3 = 3. For guest nationality, if over 50% of a hotel’s guests were foreign citizens, then Z5 = 1; if not, then Z5 = 0. Z4: The target customer segment, a dummy variable; if a hotel’s primary customer segment was business travelers, then Z4 = 1; if a hotel’s primary customer segment was tourists, then Z4

= 0. Z5: The guest nationality, a dummy variable; if over 50 % of a hotel’s guests were foreign nationals, then Z5 = 1; if not, then Z5 = 0.

Pearson correlation coefficient test

This study divided international tourist hotels into the two categories of chain hotels and independent hotels. The Pearson correlation coefficient was first used to test whether the relationships between the inputs and outputs of the two hotel categories were consistent with the assumption of isotonicity, or the assumption that an increase in input would not lead to a decrease in output. The results of the Pearson correlation test analysis of annual input and output data are shown in Table 1.

It can be seen from Table 1 that the relationships between the input variables and the output variable are both positive and pass the two-tailed test of significance at the 1% level for chain as well as independent hotels, indicating a significant correlation between the variables. Therefore, it can be inferred that the input and output variables selected for this study are reasonable and appropriate for the DEA model.

Efficiency analysis

This study examines the operating efficiency of chain and independent international tourist hotels in 2006 and 2007, measuring the overall efficiency, pure management efficiency, and scale efficiency and comparing rankings between the two years to assess the competitive strength of the hotels. The Wilcoxon signed-rank test was also conducted to determine whether the various average efficiency levels exhibited positive or negative trends.

Overall efficiency analysis

Chain hotels

As shown in Table 2, the Caesar Park Hotel Taipei, Grand

Wu and Chen 5961

Table 1. Pearson correlation test.

Rooms Floor space Employee Costs

Revenues Chain hotels 0.869** 0.455** 0.939** 0.958**

Independent hotels 0.583** 0.748** 0.959** 0.990**

** indicates significant correlation at the 0.01 level (two-tailed).

Table 2. Efficiency and ranks of chain tourist hotels.

DMU 2006 2007

TE Rank TE Rank

The Ambassador Hotel 0.840 9 0.826 10

Gloria Prince Hotel 1.000 1 0.992 7

Caesar Park Hotel Taipei 1.000 1 1.000 1

The Landis Taipei Hotel 0.780 13 0.757 16

Sheraton Taipei Hotel 0.782 12 0.848 9

Hotel Royal Taipei 0.823 11 0.783 15

Howard Plaza Hotel 0.826 10 0.800 12

Grand Hyatt Taipei 1.000 1 1.000 1

Grand Formosa Regent Taipei 1.000 1 1.000 1

The Sherwood Hotel Taipei 1.000 1 1.000 1

Far Eastern Plaza Hotel (Taipei) 0.912 7 1.000 1

The Westin Taipei 1.000 1 0.950 8

The Ambassador Hotel Kaohsiung 0.589 24 0.608 23

Howard Plaza Hotel Kaohsiung 0.612 23 0.651 19

The Splendor, Kaohsiung 0.554 26 0.537 25

Howard Plaza Hotel Taichung 0.694 17 0.690 18

The Splendor Hotel 0.641 22 0.515 26

Chinatrust Hotel (Hualien) 0.577 25 0.599 24

Hotel Landis China Yangmingshan 0.749 16 0.786 13

Caesar Park Hotel Kenting 0.881 8 1.000 1

Howard Beach Resort Kenting 0.688 18 0.637 21

Hotel Royal Chihpen Spa 0.776 14 0.740 17

Grand Formosa Hotel, Taroko 0.538 27 0.507 27

Hotel Royal Chiao-his 0.753 15 0.785 14

Hotel Royal Hsinchu 0.660 19 0.648 20

The Ambassador Hotel Hsinchu 0.646 21 0.804 11

Tayih Landis Tainan 0.654 20 0.627 22

Hyatt Taipei, Grand Formosa Regent Taipei, and The Sherwood Hotel Taipei were ranked first in both years. The rankings of the Far Eastern Plaza Hotel (Taipei) and Sheraton Taipei Hotel also improved substantially. Conversely, the rankings of Gloria Prince Hotel, and The Westin Taipei dropped significantly. The Ambassador Hotel Kaohsiung was ranked last in both years. Independently-operated hotels As shown in Table 3, The Lalu Sun Moon Lake and

Evergreen Laurel Hotel (Taichung) ranked in the top three both years. The rankings of the Astar Hotel, Evergreen Plaza Hotel (Tainan), and Hotel Kingdom rose substantially. The Hotel National and Plaza International Hotel dropped significantly in the rankings. The Hibiscus Resort and The Grand Hotel Kaohsiung were ranked at the bottom in both years. Wilcoxon signed-rank test This study utilized the Wilcoxon signed-rank test to


Table 3. Efficiency and rankings of independently-operated hotels.

DMU 2006 2007

TE Rank TE Rank

The Grand Hotel 0.720 17 0.801 12

Imperial Hotel Taipei 0.690 22 0.694 26

Emperor Hotel 0.710 19 0.718 23

Hotel Riverview Taipei 0.845 5 0.920 6

Golden China Hotel 0.805 9 0.828 10

San Want Hotel 0.773 13 0.844 8

Brother Hotel 0.727 16 0.776 18

Santos Hotel 0.815 8 0.807 11

United Hotel 0.898 3 0.948 4

Hotel Kingdom 0.709 21 0.800 13

Hotel Holiday Garden Kaohsiung 0.774 12 0.748 19

Grand Hi-Lai Hotel 0.829 7 0.942 5

Han-Hsien International Hotel 0.682 24 0.728 22

Royal Lees Hotel 0.744 15 0.790 14

Hotel National 0.836 6 0.738 21

Plaza International Hotel 0.803 10 0.781 16

Evergreen Laurel Hotel (Taichung) 1.000 1 0.970 3

Astar Hotel 0.631 27 1.000 1

Marshal Hotel 0.710 20 0.709 25

Parkview Hotel 0.713 18 0.742 20

Farglory Hotel, Hualien 0.772 14 0.840 9

The Lalu Sun Moon Lake 1.000 1 1.000 1

The Hibiscus Resort 0.569 28 0.557 29

The Grand Hotel Kaohsiung 0.559 29 0.574 28

Taoyuan Hotel 0.876 4 0.881 7

Ta Shee Resort Hotel 0.661 25 0.679 27

Hotel Tainan 0.801 11 0.777 17

Evergreen Plaza Hotel (Tainan) 0.657 26 0.783 15

Formosa Naruwan Hotel and Resort Taitung 0.687 23 0.710 24

determine whether the average overall efficiency (TE ) exhibited significant improvement; therefore, the null hypothesis (H0) and the alternative hypothesis (H1) are expressed as described subsequently (Table 4):

H0: TE2007 ≤TE

2006

H1: TE

2007 ＞TE2006

Based on a significance level of α = 1%, it can be determined that there were significant changes in the average overall efficiency of independently-operated hotels, so the test results lead to the rejection of H0; as such, there was a trend of improvement. However, H0 was

accepted for chain hotels, so TE did not exhibit a significant trend of improvement.

Pure management efficiency analysis

Chain hotels

It can be seen in Table 5 that the Caesar Park Hotel Taipei, Grand Hyatt Taipei, Grand Formosa Regent Taipei, The Sherwood Hotel Taipei, Gloria Prince Hotel, and Hotel Landis China Yangmingshan were ranked first in both years. The Ambassador Hotel Hsinchu, Far Eastern Plaza Hotel (Taipei), Sheraton Taipei Hotel, and Caesar Park Hotel Kenting had their rankings improve significantly; the rank of The Westin Taipei dropped substantially. The Splendor, Kaohsiung was ranked last in both years.

Independently-operated hotels Table 6 shows that the Emperor Hotel, San Want Hotel, Grand Hi-Lai Hotel, Astar Hotel, and The Lalu Sun Moon

Wu and Chen 5963

Table 4. Wilcoxon test for TE of different hotel categories.

Variable Chain hotels Independent hotels

Z test (Wilcoxon score) -0.030 -2.676**

P-value 0.488 0.0035

** indicates test results at the significance level of α = 1%.

Table 5. Pure technical efficiency and rankings of chain hotels.

DMU 2006 2007

PTE Rank PTE Rank

The Ambassador Hotel 0.847 12 0.832 14

Gloria Prince Hotel 1.000 1 1.000 1

Caesar Park Hotel Taipei 1.000 1 1.000 1

The Landis Taipei Hotel 0.817 14 0.791 17

Sheraton Taipei Hotel 0.783 17 0.849 10

Hotel Royal Taipei 0.887 10 0.837 13

Howard Plaza Hotel 0.840 13 0.811 15

Grand Hyatt Taipei 1.000 1 1.000 1

Grand Formosa Regent Taipei 1.000 1 1.000 1

The Sherwood Hotel Taipei 1.000 1 1.000 1

Far Eastern Plaza Hotel (Taipei) 0.953 9 1.000 1

The Westin Taipei 1.000 1 0.994 9

The Ambassador Hotel Kaohsiung 0.624 26 0.636 24

Howard Plaza Hotel Kaohsiung 0.661 25 0.697 20

The Splendor, Kaohsiung 0.580 27 0.562 27

Howard Plaza Hotel Taichung 0.793 16 0.784 18

The Splendor Hotel 0.701 22 0.611 26

Chinatrust Hotel (Hualien) 0.746 19 0.690 21

Hotel Landis China Yangmingshan 1.000 1 1.000 1

Caesar Park Hotel Kenting 0.972 8 1.000 1

Howard Beach Resort Kenting 0.754 18 0.667 22

Hotel Royal Chihpen Spa 0.885 11 0.792 16

Grand Formosa Hotel, Taroko 0.666 24 0.615 25

Hotel Royal Chiao-his 0.814 15 0.848 11

Hotel Royal Hsinchu 0.743 20 0.722 19

The Ambassador Hotel Hsinchu 0.703 21 0.846 12

Tayih Landis Tainan 0.688 23 0.660 23

Lake were ranked first in both years. The rankings of the Evergreen Plaza Hotel (Tainan), Hotel Kingdom, and the Farglory Hotel, Hualien improved significantly. The rank of the Hotel National dropped substantially. The Hibiscus Resort was ranked last in both years. Wilcoxon signed-rank testing This paper also utilized Wilcoxon signed-rank testing to

determine the average level of PTE (TE with the influence

of SE removed) over two years ( PTE ), or whether the various hotels exhibited improvement trends. Therefore, H0 and H1 were described as follows (Table 7):

H0: PTE2007 ≤ PTE

2006

H1: PTE2007 ＞ PTE

2006


Table 6. Pure technical efficiency and rankings of independently-operated hotels.

DMU 2006 2007

PTE Rank PTE Rank

The Grand Hotel 0.846 13 0.898 12

Imperial Hotel Taipei 0.703 26 0.699 28

Emperor Hotel 1.000 1 1.000 1

Hotel Riverview Taipei 0.914 9 0.981 8

Golden China Hotel 0.840 15 0.857 14

San Want Hotel 1.000 1 1.000 1

Brother Hotel 0.890 11 0.930 9

Santos Hotel 0.838 16 0.826 16

United Hotel 0.949 7 0.993 6

Hotel Kingdom 0.751 22 0.836 15

Hotel Holiday Garden Kaohsiung 0.845 14 0.809 20

Grand Hi-Lai Hotel 1.000 1 1.000 1

Han-Hsien International Hotel 0.686 28 0.729 26

Royal Lees Hotel 0.781 19 0.814 17

Hotel National 0.858 12 0.748 24

Plaza International Hotel 0.825 18 0.810 19

Evergreen Laurel Hotel (Taichung) 1.000 1 0.982 7

Astar Hotel 1.000 1 1.000 1

Marshal Hotel 0.755 21 0.754 22

Parkview Hotel 0.723 23 0.753 23

Farglory Hotel, Hualien 0.777 20 0.874 13

The Lalu Sun Moon Lake 1.000 1 1.000 1

The Hibiscus Resort 0.641 29 0.630 29

The Grand Hotel Kaohsiung 0.903 10 0.903 11

Taoyuan Hotel 0.915 8 0.919 10

Ta Shee Resort Hotel 0.704 25 0.722 27

Hotel Tainan 0.827 17 0.804 21

Evergreen Plaza Hotel (Tainan) 0.694 27 0.811 18

Formosa Naruwan Hotel and Resort Taitung

0.712 24

0.731 25

Table 7. Wilcoxon testing for the PTE of various hotels.


Z test (Wilcoxon score) -1.043 -1.947*

P-value 0.1485 0.026

*indicates test results at the significance level of α = 5%.

In terms of the α = 5% significance level, it can be seen that H0 is rejected based on changes in the average overall efficiency of independently-operated hotels, indicating that there was a trend of improvement. However, H0 was accepted for chain hotels, indicating that

PTE did not exhibit a trend of improvement.

Scale efficiency analysis

Chain hotels

It can be seen from Table 8 that the scale efficiency of the Caesar Park Hotel Taipei, Grand Hyatt Taipei, Grand Formosa Regent Taipei, and The Sherwood Hotel Taipei was equal to 1 in both years, indicating fixed returns to

Wu and Chen 5965

Table 8. Scale efficiency and returns to scale for chain hotels.

DMU 2006 2007

SE RTS SE RTS

The Ambassador Hotel 0.992 IRS 0.992 IRS

Gloria Prince Hotel 1.000 CRS 0.992 IRS

Caesar Park Hotel Taipei 1.000 CRS 1.000 CRS

The Landis Taipei Hotel 0.955 IRS 0.956 IRS

Sheraton Taipei Hotel 0.999 DRS 0.998 IRS

Hotel Royal Taipei 0.928 IRS 0.936 IRS

Howard Plaza Hotel 0.983 DRS 0.987 DRS

Grand Hyatt Taipei 1.000 CRS 1.000 CRS

Grand Formosa Regent Taipei 1.000 CRS 1.000 CRS

The Sherwood Hotel Taipei 1.000 CRS 1.000 CRS

Far Eastern Plaza Hotel (Taipei) 0.957 DRS 1.000 CRS

The Westin Taipei 1.000 CRS 0.955 IRS

The Ambassador Hotel Kaohsiung 0.943 IRS 0.955 IRS

Howard Plaza Hotel Kaohsiung 0.925 IRS 0.935 IRS

The Splendor, Kaohsiung 0.954 IRS 0.954 IRS

Howard Plaza Hotel Taichung 0.875 IRS 0.879 IRS

The Splendor Hotel 0.913 IRS 0.843 IRS

Chinatrust Hotel (Hualien) 0.774 IRS 0.868 IRS

Hotel Landis China Yangmingshan 0.749 IRS 0.786 IRS

Caesar Park Hotel Kenting 0.907 IRS 1.000 CRS

Howard Beach Resort Kenting 0.913 IRS 0.955 IRS

Hotel Royal Chihpen Spa 0.877 IRS 0.934 IRS

Grand Formosa Hotel, Taroko 0.808 IRS 0.823 IRS

Hotel Royal Chiao-hsi 0.925 IRS 0.926 IRS

Hotel Royal Hsinchu 0.888 IRS 0.898 IRS

The Ambassador Hotel Hsinchu 0.919 IRS 0.950 IRS

Tayih Landis Tainan 0.950 IRS 0.951 IRS

scale. Only the Caesar Park Hotel Kenting experienced a movement from increasing returns to scale (IRS) to 1; the Far Eastern Plaza Hotel (Taipei) experienced an improvement from decreasing returns to scale to 1. In addition, the scale efficiency of the Howard Plaza Hotel was characterized by decreasing returns to scale in both years. The Gloria Prince Hotel and The Westin Taipei adjusted from fixed returns to scale to decreasing returns to scale (SE＜1).

Independently-operated hotels

It can be seen from Table 9 that only The Lalu Sun Moon Lake had a scale efficiency of 1 in both years, indicating fixed returns to scale. Only the Astar Hotel experienced a movement from increasing returns to scale to 1. In addition, The Grand Hotel, San Want Hotel, Brother Hotel, Grand Hi-Lai Hotel, and the Farglory Hotel, Hualien were characterized by decreasing returns to scale in both years. The Evergreen Laurel Hotel (Taichung) regressed from

fixed returns to scale to decreasing returns to scale (SE＜1).

Wilcoxon signed-rank test

This study also utilized Wilcoxon signed-rank testing to

determine the average level of SE in both years ( SE ) and whether the different hotel categories exhibited trends of improvement. Therefore, H0 and H1 were explained as follows (Table 10):

H0: SE

2007 ≤ SE2006

H1: SE

2007 ＞ SE2006

In terms of level of significance α = 1%, H0 was rejected for both chain hotels and independently-operated hotels.

Therefore, SE exhibited a significant trend of improvement.


Table 9. Scale efficiency and returns to scale for independently-operated hotels.

DMU 2006 2007

SE RTS SE RTS

The Grand Hotel 0.851 DRS 0.892 DRS

Imperial Hotel Taipei 0.980 IRS 0.993 IRS

Emperor Hotel 0.710 IRS 0.718 IRS

Hotel Riverview Taipei 0.925 IRS 0.938 IRS

Golden China Hotel 0.958 IRS 0.967 IRS

San Want Hotel 0.773 DRS 0.844 DRS

Brother Hotel 0.817 DRS 0.834 DRS

Santos Hotel 0.972 IRS 0.976 IRS

United Hotel 0.946 IRS 0.955 IRS

Hotel Kingdom 0.944 IRS 0.957 IRS

Hotel Holiday Garden Kaohsiung 0.916 IRS 0.924 IRS

Grand Hi-Lai Hotel 0.829 DRS 0.942 DRS

Han-Hsien International Hotel 0.995 IRS 0.998 IRS

Royal Lees Hotel 0.953 IRS 0.970 IRS

Hotel National 0.974 IRS 0.986 IRS

Plaza International Hotel 0.974 IRS 0.965 IRS

Evergreen Laurel Hotel (Taichung) 1.000 CRS 0.987 DRS

Astar Hotel 0.631 IRS 1.000 CRS

Marshal Hotel 0.941 IRS 0.940 IRS

Parkview Hotel 0.987 IRS 0.986 IRS

Farglory Hotel, Hualien 0.994 DRS 0.961 DRS

The Lalu Sun Moon Lake 1.000 CRS 1.000 CRS

The Hibiscus Resort 0.888 IRS 0.885 IRS

The Grand Hotel Kaohsiung 0.619 IRS 0.635 IRS

Taoyuan Hotel 0.957 IRS 0.959 IRS

Ta Shee Resort Hotel 0.939 IRS 0.940 IRS

Hotel Tainan 0.969 IRS 0.967 IRS

Evergreen Plaza Hotel (Tainan) 0.947 IRS 0.964 IRS

Formosa Naruwan Hotel and Resort Taitung 0.966 IRS 0.971 IRS

Analysis of the influence of environmental variables on efficiency

This study utilized efficiency scores obtained using first-order DEA as a dependent variable (explained variable) and, taking into account the operating characteristics of domestic hotels and the methodology of other literature related to hotels, selected operating form, locality, scale, target customer segment, and guest nationality as independent variables (explanatory variables) to perform Tobit regression analysis. The analysis was conducted allowing for the assessment of whether explanatory variables such as the hotel operating form significantly influence the improvement of operating efficiency and to determine the influence direction of environmental variables on efficiency. The results are shown in Table 11.It can be seen from Table 11 that the

hotel operating form and guest nationality have a significant positive impact on the average TE at the 1% level of significance; while locality and target customer segment have a significant negative impact on TE at the 5% level of significance; scale was not a significant factor.

In summary, joining a chain system can help to introduce management techniques and talent from foreign hotels, increasing the hotel operating efficiency. In addition, due to the slowing of growth among domestic and foreign travelers, the introduction of new sources of customers facilitates the improvement of hotel operating efficiency. From the perspective of locality, hotels in the Taipei region enjoy the highest occupancy ratios due to convenience and quality guarantees. In addition, due to the impact of the sub-prime mortgage crisis in the United States and increases in gasoline prices, growth has slowed in the number of foreign tourists visiting Taiwan.

Wu and Chen 5967

Table 10. Wilcoxon test for the SE of different categories of hotels.


Z testing (Wilcoxon score) -2.418** -3.030** P-value 0.008 0.001

**indicates test results at the 1 % levels of significance.

Table 11. Tobit regression estimation results.

Variable Coefficient z-Statistic Prob.

Constant 0.766759 10.52331 0.0000

Hotel operating form 0.098656 3.298892 0.0010**

Locality -0.019371 -2.024408 0.0429*

Scale -0.012571 -0.624963 0.5320

Target customer segment -0.108853 -2.319585 0.0204*

Guest nationality 0.124371 3.522774 0.0004**

* and **respectively indicate test results at the α=5 % and 1 % levels of significance.

The proportion of foreign guests and businessmen staying in Taiwanese hotels has dropped slightly, impacting the hotel operating efficiency increases.

Conclusions

This study used the DEA methodology to measure the relative efficiency of chain and independent hotels in 2006 and 2007. The Tobit regression method was used to examine whether environmental variables have a significant impact on increases in efficiency. The findings of this study will provide a reference for improving operating efficiency. The results are explained subsequently:

1. In terms of overall efficiency: Among the chain hotels, well-known hotels performed the best. These hotels include the Caesar Park Hotel Taipei, Grand Hyatt Taipei, Grand Formosa Regent Taipei, and The Sherwood Hotel Taipei, which ranked first in both years. Among the independently-operating hotels, The Lalu Sun Moon Lake and Evergreen Laurel Hotel (Taichung) were ranked in the top three both years.

The Wilcoxon signed-rank testing indicated that independently-operated hotels exhibited trends in improving overall efficiency, but chain hotels did not exhibit improvements. 2. Pure management efficiency: Among the chain hotels, the Caesar Park Hotel Taipei, Grand Hyatt Taipei, Grand Formosa Regent Taipei, and The Sherwood Hotel Taipei performed the best. Among the independently-operating hotels, the Emperor Hotel, San Want Hotel, Grand Hi-Lai

Hotel, Astar Hotel, and The Lalu Sun Moon Lake ranked near the top in both years.

The Wilcoxon signed-rank testing indicated that independently-operated hotels exhibited improving trends, but chain hotels did not show signs of improvement. 3. Scale efficiency: The SE of the Caesar Park Hotel Taipei, Grand Hyatt Taipei, Grand Formosa Regent Taipei, and The Sherwood Hotel Taipei was 1 in both years, indicating that these hotels were experiencing constant returns to scale. Among the independently-operated hotels, only The Lalu Sun Moon Lake had an SE of 1 in both years, indicating constant returns to scale. The Wilcoxon signed-rank testing indicated that chain hotels and independently-operated hotels exhibited improving trends. 4. Impact of environmental variables on efficiency: The hotel operating form and guest nationality had a significant positive impact on average overall efficiency. The geographical location and target customer segment had a significant negative impact on overall efficiency. Overall, in the face of a highly competitive operating environment, hotel operators should create multiple brands and operate using market segmentation strategies to satisfy the demand from domestic and international travelers. Hotel operators must pursue internationalization in order to prosper.

In addition, to gain the favor of consumers, tourist hotel operators should continue to strengthen the “software” and “hardware” of their hotels and cooperate with partners in other industries to introduce discount packages to stimulate returning customers, allowing them to strengthen existing market shares and develop new sources of customers, thereby maintaining operating performance.

5968 Afr. J. Bus. Manage. REFERENCES Anderson RI, Fok R, Scott J (2000). Hotel industry efficiency: an

advanced linear programming examination. Am. Bus. Rev., 18(1): 40-48.

Banker RD, Charnes A, Cooper WW (1984). Some models for estimating technology and scale inefficiencies in data envelopment analysis. Manag. Sci., 30(9): 1078-1092.

Barros CP (2005). Measuring efficiency in the hotel sector. Ann. Tour. Res., 32(2): 456-477.

Barros CP, Dieke UC (2008). Technical efficiency of African hotels. Int. J. Hospitality Manag., 27: 438-447.

Botti L, Briec W, Cliquet G (2007). Plural forms versus franchise and company-owned systems: A DEA approach of hotel chain performance. Int. J. Manag. Sci., 37: 566 578.

Charnes A, Cooper WW, Rhodes E (1978). Measuring the efficiency of decision making units. Eur. J. Oper. Res., 2(6): 429-44.

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Farrell MJ (1957). The measurement of productive efficiency. J. Royal Stat. Soc. Series A,120(3): 253–290.

Hwang SN, Chang TY (2003). Using data envelopment analysis to

measure hotel managerial efficiency change in Taiwan. Tour. Manag., 24: 357-369.

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Shephard RW (1970). Theory of Cost and Production Functions.

Princeton University Press, Princeton. Sun S (2004). Performance measurement in hotel service provision: the

case of international tourist hotels in Taiwan. Paper presented at APPC2004 Conference Program, Centre for Efficiency and Productivity Analysis School of Economics, University of Queensland, Brisbane, Australia, July pp. 14-16.

Taiwan Tourism Bureau (2006–2007). The operating report of international tourist hotels in Taiwan. Taipei, Republic of China Press.

Tobit J (1958). Estimation of Relation of Relationships for Limited Dependent Variables. Econometrica, 26: 24-36.



Affective factors contributing to entrepreneurship potential of nanotechnology in agricultural sector of

Iran

Mohammad Reza Soleimanpour1, Seyed Jamal F. Hosseini1*, Seyed Mehdi Mirdamadi1 and Alimorad Sarafrazi2

1Department of Agricultural Extension and Education, Science and Research Branch, Islamic Azad University, Tehran,

Iran. 2Department of Insect Taxonomy, Iranian Research Institute of Plant Protection, Tehran, Iran.

Accepted 5 January 2012

Full potential of nanotechnologies especially in creating new jobs and providing opportunities for entrepreneurs in agriculture sector has not yet been realized. In this regard, examining the factors that promote the entrepreneurial potential of nanotechnology should be considered as a major step toward creating opportunities for new businesses venture. The major purpose of this study is factors contributing to entrepreneurial potential of nanotechnology in agriculture sector of Iran. The total population for this study was 1226 researchers in 25 research institutes of the Ministry of Agriculture that were involved in the nanotechnology research and development. By using stratified random sampling procedure 180 respondents was selected as sample population of the study. The results of regression analysis showed, 48% of the variance in the perception of agricultural researchers could be explained by four variables of entrepreneurship spirit, job experience, familiarity with applications of nanotechnology in agriculture and training Courses about nanotechnology. It is important to point out that only less than 50 percent of variance was explained by this study and the findings revealed that there is need for more research about other factors that affect entrepreneurship. Key words: Nanotechnology, potential, agriculture researcher, entrepreneurship.

INTRODUCTION New technologies provide opportunities for their applications, and these applications are the sources of creation of new businesses. This has been the case throughout history, from the invention of the wheel to nanotechnology. Without useful applications, a technology will remain an abstract curiosity, largely unknown except to a few interested people. But when applications begin to appear, there is a need for a business, or its equivalent, to fully exploit it (Burke, 2009).

Modern technology such as nanotechnology has the potential to revolutionize agriculture and food systems. Agricultural and food systems security, disease treatment

*Corresponding author. E-mail: [email protected].

delivery system, new tools for molecular and cellular biology, new material for pathogen detection, protection of environment and education of public and future workforce are examples of important inks of nanotechnology to science and engineering of agriculture and food systems (Scott and Chen, 2003).

Nanotechnology as the latest innovation has the potential to bring about changes as big as the European industrial revolution n the late 18

th and 19

th century.

Today, nanotechnology is forecast to underpin the next industrial revolution, leading to far reaching changes in social, economic and ecological relations (Miller and Senjan, 2006).

The potential for this industry is huge. By one estimate, the worldwide market for nanotechnology-based products will reach $25.2 billion in 2011 and over $1 trillion by

5970 Afr. J. Bus. Manage. 2015. The United States in expected to account for at least 25 percent of the market. China, Russia, and Saudi Arabia are vying for the leading role in this nascent industry and are investing billions in nanotechnology (Moore, 2009).

One strategy that has helped many developed and developing countries to overcome the problem of unemployment, has been the development of entrepreneurship. Oversupply of graduate manpower, unemployment growth in their community, lack of response or positive feedbacks to the efforts made in recent decade to find a solution for unemployment problem of graduates on one side and on the other hand the necessity to move to competitive market based economy created an important ground for paying more attention to entrepreneurship (Hosseini and Ahmadi, 2011).

Entrepreneurship can be defined as the process of using private initiatives to transform a business concept into a new venture or to grow and diversify an existing venture or enterprise with high growth potential (UNDP, 1999).

The promotion of entrepreneurship, its role in society and the opportunities it present for personal gain, appears to be critical for facilitating economic growth (Center for Rural Entrepreneurship, 2005).

Entrepreneurship has a tremendous potential to help promoting employment and providing opportunities for unemployed members of society in particular recently graduated from universities.

Proposing new ideas based on the role of entrepreneurship in increasing job opportunities, competitiveness, improvement in manpower productivity, technology development, wealth generating and social welfare level and also existence of strong relation between entrepreneurial development and economic growth of the countries have all resulted in a serious consideration of entrepreneurship in new economic theories and have been regarded as a provocative engine in economical social growth and development of countries (Audretsch, 2002; Zoltan, 2006).

Full potential of nanotechnologies especially in creating new jobs and providing opportunities for entrepreneurs in agriculture sector has not yet been realized. In this regard examining the factors that promote the entrepreneurial potential of nanotechnology should be considered as a major step toward creating opportunities for new businesses venture. This would enable nanotechnology to be a comprehensive development strategy for creating employment in agriculture sector (Hosseini et al., 2010).

Nanotechnology is an emerging technology in Iran. In recent years, particularly since the beginning of this decade, this technology has attracted the attention of many scientists, policymakers, planners, economists and even politicians in many universities and some governmental organizations involved in various areas and disciplines. Undoubtedly, engaging the various present

and the potential beneficiaries of agricultural sector using the benefits of nanotechnology in the process of technology development can be considered as one of the most important national research and development priorities (Hosseini and Rezaei, 2009).

Iran has adopted its own nanotechnology programs with specific focus on agricultural applications. The Iranian Agricultural Ministry is supporting a consortium of 35 laboratories working on a project to expand the use of nanotechnology in agro sector (Joseph and Morrison, 2006).

In the year 2001, the Iran presidential technology cooperation office initiated a smart move in the field of nanotechnology. Through these efforts, nanotechnology gained national priority in the country and in 2003 the Iranian Nanotechnology Initiative was set up with the aim of pursuing the development of nanotechnology in Iran (Hosseini and Dehyouri, 2011).

On the other hand considering the importance of entrepreneurship in Iran, and with regard to nanotechnology as one of the modern technologies, using nanotechnology is very important to entrepreneurial activities. Therefore, understanding the factors strengthening the entrepreneurial potential of nanotechnology will help in this regard. So the central research question then is very simple. What are the affective factors contributing to entrepreneurial potential of nanotechnology in agriculture sector of Iran? The purpose of this study is twofold. First, it determines the key factors that influence entrepreneurial potential of nanotechnology in agriculture sector of Iran. Secondly, it provides suggestions for policy recommendations. MATERIALS AND METHODS The methodology used in this study involved applied type research and descriptive/correlative methods were used.

The total population for this study was 1226 researchers in 25 research institutes of the Ministry of Agriculture that were involved in the nanotechnology research and development. The sample size was calculated using Cochran formula to be 180 (as follows) that by using stratified random sampling procedure 180 respondents was selected as sample population of the study.

22

2

).(

).(

stNd

stNn

+=

,

1226*(1.96*1.11)

2

n = (1226*.15

2)+(1.96*1.11)

2 ≈ 180

From review of literature, the researchers of the study developed a questionnaire to collect data. Content and face validity of questionnaire were established by a panel of experts consisting of faculty members at Islamic Azad University, Science and Research Branch and some nanotechnology experts in the Ministry of Agriculture. Minor wording and structuring of the instrument were made based on the recommendation of the panel of experts.

A pilot study was conducted with 30 researchers who had not been interviewed before the earlier exercise of determining the reliability of the questionnaire for the study. Computed Cronbach’s Alpha score was 81.4%, which indicated that the questionnaire was highly reliable.

Soleimanpour et al. 5971

Table 1. Personal characteristics.

Characteristics Value

Sex

Male (%) 87.2

Female (%) 12.8

Mean Age/year 39.8

Degree

Master (%) 45.6

PhD (%) 54.4

Mean work experience (years) 12.4

Table 2. Level of familiarity of agricultural researchers with applications of nanotechnology in agriculture.

Level of familiarity with nanotechnology

Frequency Percent Cumulative percent

Very low 0 0 0

Low 19 10.6 10.6

Moderate 58 32.2 42.8

High 63 35.0 77.8

Very high 40 22.2 100

Total 180 100

Key dependent variable in the study included attitudes about entrepreneurial potential of nanotechnology which were measured by perception of respondents and it was measured by using Likert scale questions in the questionnaire.

A series of in-depth interviews were conducted with senior experts in the field of nanotechnology to provide a context. A questionnaire was developed based on these interviews and relevant literature. The questionnaire included fixed-choice questions. A five-point Likert scale ranging from 1 (strongly disagree) to 5 (strongly agree) was used as a quantitative measure.

Measuring respondents’ attitudes towards factors influencing the entrepreneurial potential of nanotechnology has been achieved largely though structured questionnaire surveys. The final questionnaire was divided into two sections. The first section was designed to gather information about personal characteristics of respondents. The second section dealt with questions about perception of respondents about entrepreneurial potential of nanotechnology in agriculture. The respondents were asked to indicate their agreements by marking their response on a five point Likert-type scale. Data were collected through interview schedules.

For measurement of correlation between the independent variables and the dependent variable correlation coefficients have been utilized and include Pearson test of independence.

RESULTS

Table 1 summarizes the demographic profile and descriptive statistics. The results of descriptive statistics indicated that majority of respondents were male with a mean age of 39 years old. More than half of respondents

had earned a PhD degree and less than half of respondents had earned a master degree.

As shown in Table 2, the rate of familiarity with nanotechnology for more than half of respondents was high (57.2%). In addition, 32.2% of respondents indicated their familiarity with applications of nanotechnology in agriculture was at moderate level, while, 10.6% of respondents were familiar with applications of nanotechnology at low rate.

Response numbers for the 12 perception statements are displayed in Table 3. Approximately majority of respondents agreed that nanotechnology has many potential and unpredictable capacities for agriculture sector. More than two-third agreed that nanotechnology provides unique opportunity for business development in agriculture sectors. Nearly one-third of respondents some what agreed that benefits and capabilities of nanotechnology is more than its hazard and risks.

Table 3 also shows the means of respondents' views about attitudes of researchers regarding nanotechnology. As can be seen from this table, the highest mean refers to nanotechnology has many potential and unpredictable capacities for agriculture sector (mean=4.48) and the lowest mean to benefits and capabilities of nanotechnology is more than its hazard and risks (mean=3.55).

Table 4 shows the result for regression analysis by stepwise method. The result indicates that 48% of the

5972 Afr. J. Bus. Manage. Table 3. Attitudes of agricultural researchers regarding nanotechnology.

Statements N Mean S.D

Perception (%)

Strongly disagree

Disagree Somewhat

agree Agree

Strongly agree

Nanotechnology provides unique opportunity for business development in the 21st century.

180 4.07 0.83 1.7 5.0 5.6 60.0 27.8

Investment in the field of nanotechnology will have valuable results.

180 4.16 0.63 ___ 0.6 11.1 60.0 28.3

Nanotechnology initiative and innovation is more than other technologies.

178 3.80 1.04 1.7 12.4 19.1 38.2 28.7

Nanotechnology development leads to launch new businesses and jobs.

180 3.86 0.92 2.2 8.9 10.0 58.3 20.6

Research and development in the field of nanotechnology in the long run will lead to the generation of wealth.

180 4.28 0.61 ___ ___ 8.3 55.6 36.1

Nanotechnology can offer new products and services to the market.

180 4.40 0.62 ___ 1.7 2.2 50.6 45.6

Nanotechnology has many potential and unpredictable capacities.

179 4.48 0.56 ___ ___ 3.4 45.8 50.8

Benefits and capabilities of nanotechnology is more than its risks and hazards.

180 3.55 0.96 0.6 12.8 37.2 30.0 19.4

Revealing the specific characteristics and capabilities of nanotechnology requires innovative researchers.

177 4.16 0.76 ___ 2.3 15.3 46.3 36.2

Nanotechnology could lead to increase in GDP of countries.

180 4.06 0.74 1.7 ___ 14.4 58.3 25.6

Nanotechnology development expands into products and services market.

180 4.13 0.72 1.1 2.2 7.2 61.7 27.8

Nanotechnology is not a substitute for other technologies, but it is a complementary technology...

180 4.16 0.88 1.7 3.9 10.6 45.0 38.9

Means were calculated based on the following scale: 1=strongly disagree; 2=disagree; 3=somewhat agree; 4=agree; 5=strongly agree.

variance in the perception of agricultural researchers could be explained by four variables of entrepreneurship

spirit, job experience, familiarity with applications of nanotechnology in agriculture and training Courses about

Soleimanpour et al. 5973

Table 4. Determination coefficients of variables in regression analysis.

Steps of regression R R2

R2Ad.

Step 1 0.561 0.315 0.310

Step 2 0.597 0.356 0.347

Step 3 0.642 0.412 0.399

Step 4 0.708 0.501 0.486

Table 5. Multivariate regression analysis.

Variables B Beta T Sig.

Entrepreneurship spirit 0.272 0.312 3.970 0.000

Job experience 0.646 0.745 7.919 0.000

Familiarity with applications of nanotechnology in agriculture

0.467 0.567 5.964 0.000

Training Courses about nanotechnology 0.380 0.465 5.953 0.000

nanotechnology. In the first step, the variable entrepreneurship spirit was

entered and result shows that 31% of variance for perception of agricultural researchers about factors contributing to entrepreneurial potential of nanotechnology is accounted by entrepreneurship spirit. In the second step, the variable job experience was entered and along with entrepreneurship spirit, these two variables accounted for 35% of variance for respondents’ perception. In the third step, the variable familiarity with applications of nanotechnology in agriculture was entered and along with the above two mentioned variables accounted for 40% of variances on dependent variable. In the fourth step, the variable training Courses about nanotechnology was entered and along with the above three mentioned variables accounted for 49% of variance for respondents’ perception.

Among all variables, "job experience" (Beta coefficient: 0.745, sig.: 0.000), "familiarity with applications of nanotechnology in agriculture" (Beta coefficient: 0.567, sig.: 0.000), "training courses about nanotechnology" (Beta coefficient: 0.465, sig.:0.000) and "entrepreneurship spirit" (Beta coefficient: 0.312, sig.:0.000) affect the entrepreneurial potential of nanotechnology in agriculture sector of Iran.

Where R2=. 48 Taking the results shown in Table 5, the

linear equation resulting from regression analysis is as follows: Y=0.312(X1) +0.745(X2) +0.567(X3) + 0.465 (X4) The components of the equation include: Y = Entrepreneurship potential of nanotechnology, X1 = Entrepreneurship spirit, X2 = Job experience,

X3 = Familiarity with applications of nanotechnology in agriculture, X4 = Training courses about nanotechnology. According to the results shown in Table 5, the variable “Job experience” had the greatest influence on entrepreneurship potential of nanotechnology in agriculture sector. DISCUSSION As the regression analysis showed, 48% of the variance in the perception of agricultural researchers could be explained by four variables of entrepreneurship spirit, job experience, familiarity with applications of nanotechnology in agriculture and training Courses about nanotechnology. So these four factors are the answer of research question. Also, considering that the two variables “job experience” and “familiarity with applications of nanotechnology” were the most effective factors in the potential of entrepreneurship potential of nanotechnology, therefore holding training courses for agricultural researchers to know more about the capabilities of nanotechnology can be very helpful in this regard. The results are in accordance with findings of research by Macoubrie (2006) and Hosseini and Rezaei (2009).

Most of the respondents indicated that they were familiar at the moderate level with nanotechnology applications in agriculture. Results related to attitudes of agricultural researchers towards entrepreneurship potential of nanotechnology revealed that more than 80% of respondents were in agreement with most of statements about entrepreneurship potential of nanotechnology. These findings are in accordance with

5974 Afr. J. Bus. Manage. studies of Besley et al. (2007) and Hosseini and Rezaei (2009).

The results of study also show that uncertainties and lack of knowledge of potential effects and impacts of new technologies, or the lack of a clear communication of risks and benefits can raise concern amongst public (Chaudhry et al., 2008). Conclusion This study indicated that providing information about entrepreneurship and also training beneficiaries would certainly affect the entrepreneurship in nanotechnology and eventually this would create more opportunities for job seekers in this field.

There is need for more training and education to change the attitude of stakeholders about entrepreneurship potential of nanotechnology in agriculture. Based upon the results of this study, it is apparent that there is still need to further research about other factors that could enhance the potential of nanotechnology in agriculture sector of Iran. REFERENCES Audretsch DB (2002). Entrepreneurship: A survey of the literature.

Institute for Development Strategies. Indiana University and Centre for Economic Policy Research London.

Besley J, Kramer V, Priest S (2007). Expert opinion on nanotechnology: Risks, benefits and regulation. J. Nanopart Res., 3: 549-555.

Center for Rural Entrepreneurship (2005). Energizing the entrepreneurial economy. Policy Brief, RUPRI.

Burke MT (2009). Nanotechnology: The Business. CRC Press: Taylor

& Francis Group. Chaudhry Q, Scotter M, Blackburn J, Ross B, Boxall A, Castle L, Aitken

R, Watkins R (2008). Applications and implications of nanotechnologies for the food sector. Food. Addi. Contam., 3: 241-258.

Hosseini SJ, Ansari B, Esmaeeli S (2010). Factors influencing commercialization of nano and biotechnologies in agriculture sector of Iran. J. Am. Sci., 4: 225-228.

Hosseini SJ Ahmadi H (2011). Affective factors contributing the entrepeneruial attitudes of university students in Iran. Ann. Bio. Res., 2: 366-371.

Hosseini SJ, Dehyouri S (2011). Factors influencing the diffusion of nanotechnology in agricultural sector of Iran. Int. J. NanoSc. Nanotechnol., 1: 33-42.

Hosseini SM, Rezaei R (2009). Factors affecting the attitudes of Iranian agricultural faculty members towards nanotechnology. World Appl. Sci. J., 2: 197-202.

Joseph T, Morrison M (2006). Nanotechnology in Agriculture and Food. Institute of Nanotechnology, Nanoforum Organization. Available: http://www.nanoforum.org.

Macoubrie J (2006). Nanotechnology: Public concerns, reasoning and trust in government. Pub. Underst. Sci., 2: 221-241.

Miller G, Senjan R (2006). The disruptive social impacts of nanotechnology. Available: http://nano.foe.org.au.

Moore V (2009). Nano Entrepreneurship. J. Mech. Eng., 4: 27-29. Scott N, Chen H (2003). Nanoscale Science and Engineering for

Agriculture and Food Systems. A report submitted to Cooperative State Research, Education and Extension Service, USDA, National Planning Workshop, Washington.

UNDP (1999). Entrepeneurship development. Essential No 2. Evaluation Office, New York.

Zoltan AC (2006). How is entrepreneurship good for economic growth? Available: http://mitpress.mit.edu/journal/pdf/INNOV0101_p o97-107_02-23-06.pdf.



Small and medium auditing entities: Specific and outlook

Valeria Maria Albert and Mihaela Serban*

Department of Accounting, Faculty of Accounting and Management Information Systems, Academy of Economic Studies, 6, Piata Romana, 010374, Bucharest, Romania.

Accepted 4 November, 2011

In this article, we intend to examine the importance of external audit on the reliability of financial statements issued by small and medium-sized entities. We study the impact of auditor size on the procedures of the entity, the different types of risks they may face, an additive in the exercise of engagement and expression of his responsibilities after the audit opinion. The article is structured in three parts: the first part we performed an econometric analysis to study the evolution of GDP and the number of small and medium sized entities in Romania, for example, we chose the period 2000 to 2007 to define a univariate regression model. In the second part, we present some aspects of the environment in which small and medium-sized entities operating in Romania, supplemented by results of investigations. Then, we analyzed the general risks related entity specific risks, related to the nature of operations, the materiality, the continuity of the operation-specific factors that impact SMEs and scope of an audit. In the last part of the article, we present findings on the usefulness of the external auditor's report, especially regarding the decision to grant bank loans of small and medium enterprises. Key words: Small and medium-sized entities, audit risk, materiality, going concern.

INTRODUCTION Methodological norms based on 1005 International Auditing "special considerations for auditing small entities" will analyze how these provisions apply to small entities in Romania features. The first finding is the fact that the International Standards on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) are applicable to auditing small entities, how the application of certain requirements of ISA is influenced by the size of the audited entity subject to the Methodological Norms 1005.

Need to develop separate recommendations for small entities deriving their just large share of all economic entities in both numbers and in terms of their contribution to GDP. According to official data, the average density of SMEs in services is approx. 70 SMEs per 1,000 inhabitants in EU countries (according to "Annual Report

*Corresponding author. E-mail: [email protected]. Tel: +40727790311.

2008 Small and Medium Enterprises") with a total of 23 million active registered SMEs in EU countries. They are approx. 99% of all enterprises (European Commission-European portal for SMEs, www.ec.europa.eu).

Also, using data published by the Ministry of Small and Medium Enterprises, Commerce, Tourism and Liberal Professions and "SME Report 2008" (Table 1) we will customize the analysis taking into account existing national regulations.

Although, you can see the increase SMEs in Romania during 2000 to 2007 and an increasing trend of GDP, the correlation between the two variables indicates a direct linear dependence between the two sizes. Graphical representation of the evolution of GDP and the number of small and medium sized entities in Romania during 2000 to 2007 (Figure 1) is instructive in this regard.

In other words, you can define a linear regression model between the explanatory variable "number of Small and Medium Enterprises" and explained GDP variable on which to determine GDP created by SMEs, and possibly to predict the size of GDP based on small


Table 1. Evolution of GDP – number of small and medium enterprises (SMEs) in Romania during 2000 to 2007.

Year GDP (million RON) Number SMEs

2000 80.377 412.429

2001 116.769 412.332

2002 151.475 415.491

2003 190.335 459.369

2004 246.469 404.300

2005 288.176 434.847

2006 344.536 463.504

2007 404.769 487.628

Data source: National Bank, Monthly Bulletin December 2007, Statistics section: nominal data, current prices.

Year

Number SMEs

Linear (PIB)

Linear

(Number SMEs)

PIB

SM

Es

Figure 1. Evolution of GDP – The proportion of small and medium enterprises (SMEs) in Romania during 2000 to 2007.

numbers active (according to data from the Register of Commerce) with the following form: Yi = Ti + Xi + µ, Where: Yi – GDP is created in him; Ti – You are free time and quantify the influence of regression model non-simple (univariate) of GDP; µ – This is the residual variable.

Furthermore, period, characterized by strong influences of other factors, especially the negative effects of financial crisis on business in a vulnerable economy like Romania, is inconclusive any forecast of GDP by the number of active SMEs.

It can be noted that while GDP registered an upward trend in Romania during 2000 to 2007 (Figure 2), the number of Romanian SMEs active in the same period an increase until 2003 (that is, 459,369 active SMEs), then the number drops to a the minimum period in 2004 (that

is, 404.300 SMEs), registering what is called a break of slope.

CHARACTERISTICS OF SMALL ENTITIES

1005 Methodological attributes in the normal sense of "small entities" are given a set of quantitative characteristics such as turnover, balance sheet total number of employees and qualitative elements such as:

1. Concentration of ownership and management and 2. Few sources of income, the accounting simple, limiting internal controls.

Restoring global economy is also important for improving social protection policies, increasing social dialogue and collaborating with non-profit organizations to raise awareness through social marketing programs (Serban, 2011; Serban et al., 2011).

Albert and Mihaela 5977

Year

Number SMEs

PIB

SM

Es

Figure 2. GDP and the number SMEs in Romania during 2000 to 2007.

Establishment of small entities in Romania is regulated by Law no. 346/14 July 2004 to stimulate the creation and operation of SMEs by updating the law 346/2004 (Law 175/2007) was done to align national legislation with the requirements of EC Recommendation 2003/361/EC concerning the definition of the SME unit, as follows: the criteria for classification of an entity in SME are given by the cumulative fulfillment of the conditions on the annual average number of employees under 250 and achieve a net annual turnover of up to 50 million equivalent in lei or holding assets totaling to 43 million euros according to the latest approved financial statements. Depending on the annual average number of employees, SMEs can be classified as: micro (fewer than 10 employees), small (with fewer than 50 employees) and medium-sized enterprises.

Audit approach small entities based on risk assessment involves the application stage to accept the mission and formalization of relations with the client, the provisions of International Standard on Auditing ISA 315, "Understanding the entity and its environment and assessing the risks of material misstatement."

The risk of significant misrepresentation in the account balances, classes of transactions, disclosures and the financial statements of an entity identified by the auditor than in the subsequent background design procedures (tests and tests of details substantive operations balances). The reason the client wants an audit of financial statements, is the starting point in identifying risks. Business risk, a major risk of small entities in Romania in 2010, may be an indication of the environment in which they operate their activity.

According to the source "SME Annual Report 2008", a survey among SME owner-managers, the major problems that they face are:

1. Lack of resources (69.8%) 2. Limited access to credit (39.5%) 3. Lack of clients (38.2%) 4. Competition (75%) 5. Promotion-company market failure (54%).

Unfortunately, in Romania, the situation has continued for years to come. In this case, ISA 315, mentioned previously, paragraph 12, present procedures for awareness of the entity and its environment, the audit evidence obtained preliminary assessment of underlying risks of material misstatement.

The issue of Romanian entrepreneurs, as evidenced in the results of that survey is similar to running their business entrepreneurs and other meridians, for example, Italy (Sarno, 2005), United Kingdom, Poland (Watkins and Road, 2000) and Croatia (Pejic-Bach, 2003).

Cash requirements may be considered as a reason for a small entity requests a financial audit (as the documentation to bank loans). The high level of credit risk assumed by banks financing of SMEs and the impact of risk on the interest charged by them, was also an object of study (Castaneda and Luna, 2008).

A comparative analysis between commercial credit and bank credit, as sources of finance for SMEs, has revealed the need to adopt a mix of operational and financial policies to reduce the cost of financing (Rodriguez, 2005).

5978 Afr. J. Bus. Manage. AUDITING ENTITIES SMEs: PARTICULARITIES Accounting information as a raw material external financial audit has been analyzed in terms of its quality and the role of accounting information in decision-making by the entrepreneur. Although, many studies have highlighted that the financial statements produced by SMEs are intended mainly tax authorities (Bajan-Banaszak, 1993; Lavigne, 1999), not least regarding management accounting practices are applied (Raymond, 1995; Nobre, 2001; Van Caillat; 2002; Chapellier, 1994) especially by entrepreneurs who have a high level of training, in particular, economic (Chapellier, 1994).

Applicability of international-referential Audit Standards, for small and medium entities of state attention of filmmakers survey Direction Générale du Marché intérieur et des Services Commission. Synthesis of survey results, published in March 2010 (portal ec.europa.eu) and attended by 89 respondents belonging to a wide range of stakeholders is revealing: ''a clear majority of respondents in favor of enforcement in carrying out statutory audit ISA of all companies, including small entities for which audit is required.''

The auditor's decision to take over as a new customer or contractual relationship with existing customers, formalized by letter of engagement (according to ISA 210 "Terms of the engagement") will be taken only in compliance with the Code of Ethics of IFAC. Auditor independence, both in relation to client and related party (as ISA 550 "Related Parties"), the risk of self-revision is the most common situations in which the auditor may find a small entity (often services for filing statements outsourced financial expertise and audit firms) and measures applicable safety related auditor's reasoning.

Risk assessment procedures provided in ISA 315 include visits to locations held by the client, observation, inspection, request for information on reliability, customer reputation, lifestyle of the owner (according to IAPS 1005). Particularly important at this stage consider the auditor's information on owner-manager's reputation (according to the terminology of IAPS 1005) because "each organizational unit is a direct reflection of its management" ("Principles of Leadership" - Peter Drucker).

Internal control mechanisms of a small entity may not include, for example, segregation of duties, but this deficiency can be corrected by daily surveillance conducted directly by the owner-manager. In this case, the audit procedure is applicable for assessment of internal control established in observing the control entity.

ISSUES TO THE APPLICATION OF ISA 320 "MATERIALITY OF AUDIT”

Reducing audit risk can be done by establishing an acceptable materiality level appropriate to require the use

of judgment greater for small entities. "Flair" auditor has a wider field of development when the client is in the small category.

Thus, entities, statistical sampling methods, the extrapolation of results from the sample to the population are less applicable (not based on law of large numbers), consider preparing a more effective audit plan that test items are set by selecting and testing samples for small values of 100% of items exceeding a certain amount considered meaningful to the auditee.

Significant risk of distortion of financial statements, the risk of overvaluation of assets auditor may "respond" by defining procedures to obtain adequate evidence on which they could formulate an opinion based on the fair value of assets used as collateral bank (possibly using the services of an expert appraiser, according to ISA 620 "Using the activities of an expert"). It is also absolutely necessary to identify all related parties in the case of stocks that are available to third parties as collateral, whose use is restricted for various reasons, or to identify risks of "siphoning" of income between the parties affiliated.

In situations mentioned previously, to reduce the risk of audit requires full testing of the elements without taking into account the materiality level determined by procedures implemented by the audit firm. Although the auditor's responsibility is limited to material misstatements due to fraud and / or error (according to ISA 240 "The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements") qualitative aspects of materiality are no less important, for small entities reduced volume of transactions makes it possible, when used licensed software for data processing, reduction or elimination of distortions in the financial statements.

For many small entities, is more profitable to use service organizations instead of financial ones. The auditor statements have, in this case, the obligation to apply the procedures under ISA 402, "Audit Considerations related entities working with service organizations".

Auditor statements are relevant to the nature of client relationships and professional accounting firm of the service can become very significant internal control implemented by the service, especially if the auditor intends to use accounting data for the application of analytical procedures to test the completeness, accuracy of records.

Limiting the scope of the audit will be avoided by stating the auditor's unlimited access to all the records in the letter of accounting firms misiune. Information about it is accessible to the auditor by professional bodies in rural economists, legal practitioners, and in press.

BUSINESS CONTINUITY

Economic risk of the auditor if the continuity of a small entity for at least 12 months of each financial year cannot

be observed can be reduced by implementing the procedures provided by ISA 570 "Going Concern".

Problems identified by the "SME Annual Report 2008" impact on business continuity are a small entity in Romania might add, specifically the current period, reduced purchasing power of population, level of training (positive correlation between experience frameworks management and survival of small entities mentioned in the report quoted) state of infrastructure, excessive taxation (flat tax) and financial blockage.

Analysis of cash flows (even if the entity is not required to prepare such a situation, according to updated OMF 3055/2009) and net flow originating separately from the operation and financing of investments can provide important clues on the activities of consumer / generator of cash. For longer periods of time, a comparative analysis and cash flow statement of profit and loss may be relevant in identifying fraudulent financial reporting risks if significant differences (given the calculated costs charged to the profit and loss and have no impact on cash depreciation and adjustments for impairment of value) and systematic data exist between the two documents. CONCLUSIONS Owner-manager's direct interest in the smooth running of business in conjunction with the auditor's interest to minimize audit risk and the result can converge to materialize the cooperation between the parties as recurring audits, though the auditor may render some pieces of advice. Even in these circumstances, the auditor's attitude of professional skepticism is necessary.

Financial communication between small and medium entities and external users is a key function of enterprise (business), even a means of promoting goods and market entity. The credibility of financial statements, issued by an entity, is viewed as informational support for external accounting reality. For auditors, preserve owners are small or medium sized entities, analyzing leverage of external funding to attract resources (increasing efficiency invested equity due to the difference between internal rate of return of capital and bank interest rate).

Albert and Mihaela 5979 This is a decisive preliminary step in the decision to call the financing credit. Mostly, widespread in Romania are small entities through grant funding, at least for now. REFERENCES Bajan-Banaszak L (1993). L'expert comptable et le Conseil de gestion

en PME. Revue Française de Comptabilité. 249(Octobre): 95-101. Castaneda F, Luna L (2008). Pequenas Empresas y Medianas: One

breve revision. Trend Management. 10(3): 101-125. Chapellier P (1994). Comptabilité et Systemes. Tissue doctoral

Sciences de Gestion. Paris: Université de Montpellier II. Lavigne B (1999). Contribution des États financiers from des PME

genes. PhD tissue en Science de Gestion. Paris: Université ParisIX-Dauphine.

Nobre T (2001). Méthodes et outils gestion du Controle de les PME dance. Financ. Contrôle Strat., 4(2): 119-148.

Pejic-Bach M (2003). Surviving the Financial year environment of indiscipline: A case study of the transition from country. System Dynamics Review 19(1).

Raymond L (1995). Les systems d'informatiom in les PME: balance et Perspectives. Paris: Economica.

Rodriguez OM (2005). El credito en las shopping pymes Canaris desde a multivariate perspective. Econ. Estudios Aplicada., 23(3).

Sarno D (2005). Liquidity constraint on the production of Firms in Southern Italy. Small Bus. Econ., 25(2).

Serban C (2011). Partnership in social marketing programs. Socially responsible companies and nonprofit organizations engagement in solving society’s problems. Amfit. Econ., 13(29): 104-116.

Serban C, Perju A, Macovei OI (2011). Using the online environment as a strategic tool in social communication campaigns: A case study regarding school dropout prevention programs in Romania. Afr. J. Bus. Manage., 5 (22): 9623-9634.

Van Caillat D (2002). Enquěte sur les besoins en mati practiques et les controller Gestion PME les Wallonnes dance. Cahier de recherché. Liège: Collection du Département de Gestion de L'Université de Liège.

Watkins R., Road P. (2000). Small and Medium Size Entreprises: Innovation and Growth in the UK and Poland.



Group rights and the right to protection against human immunodeficiency virus/acquired Immunodeficiency

syndrome (HIV/AIDS) infection from an industrial relations and public policy perspective

Jenni Gobind and Wilfred Ukpere*

Department of Industrial Psychology and people Management, Faculty of Management,

University of Johannesburg, South Africa.


This paper reflects on the right of protection against HIV infection versus group rights. Various pieces of legislation that recognise group rights are discussed throughout the paper. In so doing the authors have attempted to illustrate that although South African legislation may not clearly demarcate group rights to specific groups, legislators have inadvertently made countless reference to specific groups or grouping of individuals, which suggest that group rights may exist. It is postulated that if individual rights exist, group rights may correspondently co-exist. The aim of this paper is to explore the feasibility of individuals relying on group rights as a means of seeking protection against HIV/AIDS infection. Key words: Constitution, designated groups, group rights, third-generation right.

INTRODUCTION The present emancipatory recognition of group rights differ from the oppressive recognition of these rights under apartheid (Oomen, 1999). Such a comparison makes possible an assessment of the differences between the legal recognition of group rights as part of a policy of indirect rule and as a result of the present need for continued democracy.

The right to protection against HIV/AIDS may plead a similar comparison. How does this right differ in post-apartheid South Africa? This right may pose a challenge to individuals seeking to understand the proposal of such a right. Therefore the need to fully appreciate the *Corresponding author. E-mail: [email protected].

necessity for such a right may result in further enquiry. Does the right to protection against HIV/AIDS, apply to

HIV positive individuals seeking medical help as a means of protection against HIV/AIDS? Alternatively, does the right apply to HIV negative individuals seeking protection against individuals infected by HIV?

The question that follows is: are individuals entitled to such protection? If so, does South African legislation recognise the so called group right? The current South African law does not outwardly identify group rights as a classification. However, a limited number of specific legislations make a direct reference to groups of individuals with definite rights. This paper reflects on the right to protection against HIV infection versus group rights and the various pieces of legislation that indirectly recognises group rights.

Statement of problem Post-apartheid South Africa and the introduction of the constitution of the Republic of South Africa have encouraged individuals to rely on their legal rights as a means to protection against malpractice, abuse or discrimination. However, when a group of individuals instinctively choose to rely on their right collectively they are often questioned as to the motivation for their need for protection. The problem results in individuals not testing the need for such a right. Research questions The following research questions will be considered: 1) Can a group of individuals seeking protection against HIV infection rely on group rights? 2) Does South African law recognise group rights? 3) Should group rights be of equal standing to individual rights? 4) Should individuals seeking legal protection as a group be heard? Aims and objectives The paper aims to investigate: 1) Various sections of South African legislation that recognises group rights. 2) The position of group rights in South Africa. 3) The various categories of group rights in South Africa. 4) The feasibility of individuals relying on group rights as a means of seeking protection against HIV infection. DESIGN/METHODOLOGY/APPROACH The paper is a meta-analysis, which relied on secondary sources of information. It is a qualitative study that is based on conceptual analysis. It considers group rights from an “emic” perspective (author’s viewpoint). The analysis has included a comparative review of literature relating to HIV/AIDS, the constitution of the Republic of South Africa Act 108 of 1996 and various other significant South African legislations. The right to protection against HIV infection versus group rights has been discussed by examining various pieces of legislation that indirectly or directly recognise group rights. Relevant legislation would be examined as a means of establishing the practicality for seeking such protection. Employment Equity Act No. 55 of 1998 The Employment Equity Act No. 55 of 1998 (EEA) is

Gobind and Ukpere 5981 ordinarily known to make a direct reference to designated group rights. The intended purpose of the EEA is to promote equal opportunity and fair treatment in employment through the elimination of unfair discrimination, and the implementation of affirmative action measures to redress the disadvantages in employment experienced by designated groups, in order to ensure their equitable representation in all occupational categories and levels in the workforce (Van Niekerk, 2005). The Act obliges employers to take steps to increase the representation of members of so called designated groups in their workforce. The designated groups are black people, women, coloured people and people with disabilities (South African Labour Court, 2004; Jordaan and Ukpere, 2011).

The EE Act in its purpose and application is designed to safeguard the rights of designated group. Non-compliance with the EEA will result in the Department of Labour issuing compliance orders. Should non-compliance persist; the Labour Court will be approached to enforce such compliance orders. The Labour Court is further entitled to issue financial penalties for such non-compliance, ranging from R100, 000 up to R900, 000 for repeated non-compliance (Du Plessis, 2011). The need to enforce rights stipulated in the EEA indirectly emphasises the protection that is awarded to designated groups. This protection reinforces the argument that group rights do exist and therefore the need to test the right to protection against HIV/AIDS can as well be argued as valid. Labour Relation Act No. 66 of 1995 The Labour Relations Act No. 66 of 1995 (LRA) is often regarded as the centerpiece of labour law; all other labour laws are generally seen as subordinate to the LRA. The purpose according to the LRA is to advance economic development, social justice, labour peace and democratisation of the workplace by fulfilling the primary objectives of the LRA. Primary objectives of the LRA are to realise and regulate the fundamental rights of employees and employers. These rights are entrenched within the following rights as set out within the LRA namely, every employee has the right to fair labour practices; every employee has the right to form and join a trade union and to participate in the activities and programmes of a trade union including strike action; every employer has the right to form and join an employers’ organisation and to participate in the activities and programmers of an employers’ organisation; every trade union and every employers’ organisation has the right to determine its own administration, programmes and activities such as to organise and to form and join

5982 Afr. J. Bus. Manage. a federation; and every trade union, employers’ organisation and employer has the right to engage in collective bargaining (Republic of South Africa,1996a).

The LRA applies to employment relationships between employers and employees. However, South African National Defence Force, the National Intelligence Agency, and the South African Secret Services are excluded. It is interesting to note that the LRA in its comprehensiveness selects and excludes certain groups (Republic of South Africa, 1999). The LRA in this instance is specific in the exclusion of this group in preference to others. Centralised collective bargaining according to the LRA allows groups of employees in the same industry or sector to bargain with the employers in that industry or sector. There would appear to be some merit to the formation of groups in this instance, as it would make little sense for employees in unlike sectors to bargain with one another. The argument to be noted is that the LRA allows for the demarcation of individuals into groups, of which rights are being accorded.

In addition to previous examples the LRA protects HIV positive individuals from discrimination, which includes not being coerced to reveal their HIV status, no forcible medical testing or dismissal based on their HIV status. The dismissal of an HIV positive employee/group has to be carefully considered by the employer. An employee’s dismissal cannot be based on the employee’s HIV status or ill health due to the infection. These types of employees or group of employees are clearly protected by the act. They form a specific group based on their HIV status. Pregnant women share similar privileges under the LRA.

This group of women cannot be dismissed due to their prenatal status. Dismissal of a pregnant women amounts to an automatically unfair dismissal (Mundi, 2008). In addition to the LRA the Basic Conditions of Employment Act No. 35 of 2003 (BCEA) allows this group of employees’ additional benefits. The LRA unlike the EEA appears to demarcate individuals into several groups, and this could be supported by the argument that the LRA is comprehensive and applies to different categories of employees and employers organisation. The thread that emerges is that group rights are prevalent and supported by legislation. The Sexual Offences Amendment Act No. 32 of 2007 The Sexual Offences Amendment Act No. 32 of 2007 grants victims of sexual offences the right to know the HIV status of the perpetrators (Republic of South Africa, 2007). In a macabre sense, this can be seen as a group right exclusive to victims of a crime of a sexual nature. This right excludes victims of other types of crime.

For example, in the case of assault, which resulted in grievous bodily harm, there may be possibility of the exchange of the assailants’ blood yet victims in these instances are excluded from the privilege of knowing the HIV status of their assailant (South African Government Project 85, 2000).

The Sexual Offences Amendment Act is an example of recent legislation that is progressive. The Act speaks directly of a group of individuals that are protected by the Act. Legislators have allowed victims of a sexual crime the right to be informed as to the HIV status of the perpetrator. Individuals are generally against the disclosure of their HIV status. However, this is an instance that compels individuals to reveal their HIV status.

The progressive nature of the protection and the right awarded to this group opens the flood gates to include other individuals seeking protection against HIV infection. Certain groups are more vulnerable to contracting the HIV virus for the reasons that they are unable to realize their civil, political, economic, social, cultural and employment rights. For example, such individuals who are denied the right to freedom of association and access to information may be precluded from discussing issues related to HIV, participating in AIDS service organizations and self-help groups, and taking other preventive measures to protect themselves from HIV infection (UNHR, 2011).

These individuals, particularly young women, are more vulnerable to infection if they lack access to information, education and services necessary to ensure sexual and reproductive health, and prevention of infection. The unequal status of women in the community also means that their capacity to negotiate in the context of sexual activity is severely undermined. People living in poverty often are unable to access HIV care and treatment, including antiretrovirals and other medications for opportunistic infections (United Nations High Commissioner for Refugees, 2011). The proposition for the awarding of such protection proves increasingly necessary. The current treatise subsequently looks at various other pieces of legislation that inadvertently recognise group rights. Broad Based Black Empowerment Act No. 53 of 2003 The Broad-Based Black Economic Empowerment Act No. 53 of 2003 (BEE) aims to address inequalities resulting from the systematic exclusion of the majority of South Africans from meaningful participation in the economy. One of the defining features of Apartheid was the use of race to control and severely restrict black people from the access to economic opportunities and resources

(Republic of South Africa, 2004a). BEE is an integrated socio-economic process that contributes to the economic transformation of South Africa and brings about significant increases in the number of black people that manage, own and control the country’s economy, as well as significant decreases in income inequalities. Broad-based black economic empowerment (Broad-Based BEE) according to BEE Draft for Comment (cited in Republic of South Africa, 2004a) suggests the economic empowerment of all black people including women, workers, youth, people with disabilities and people living in rural areas, through diverse but integrated socioeconomic strategies, that include, but are not limited to: increasing the number of black people that manage, own and control enterprises and productive assets; facilitating ownership and management of enterprises and productive assets by communities, workers, co-operatives and other collective enterprises; human resource and skills development; achieving equitable representation in all occupational categories and levels in the workforce; preferential procurement and investment in enterprises that are owned or managed by black people (Republic of South Africa, 2004a). The above definition expands on the nature of broad-based beneficiaries and must be interpreted in conjunction with the definition of black people. This effectively means that broad-based beneficiaries shall be black people, who would encompass the following: black women; black workers; black youth; black people with disabilities and black people living in rural areas. The detailed explanation as to the definition and application of the BEE is intentional.

The BEE Act categorises certain groups of individuals’ according to preferences in organisations. This BEE Act as we have noted, is aimed to rebalance the countries racially-skewed divisions of economic power by promoting the economic empowerment of all black people, while excluding others (Currie and de Waal, 2005). The BEE Act clearly demarcates these individuals as a separate group.

In support of the previous arguments it would appear that group rights are apparent upon scrutiny. However, it becomes apparent that groups seeking protection against HIV should be considered. Promotion of Equality and Prevention of Unfair Discrimination Act No. 4 of 2000 According to the Preamble of Promotion of Equality and Prevention of Unfair Discrimination Act No. 4 of 2000 Section 9 of the constitution provides for the enactment of national legislation to prevent or prohibit unfair discrimination and to promote the achievement of

Gobind and Ukpere 5983 equality (Republic of South Africa, 2000; Republic of South Africa, 2004b). This implies the advancement, by special legal and other measures, of historically disadvantaged individuals, communities and social groups who were dispossessed of their land and resources were deprived of their human dignity and continue to endure these consequences. This Act as stated in the preamble, endeavours to facilitate the transition to a democratic society, united in its diversity, marked by human relations that are caring and compassionate and guided by the principles of equality, fairness, equity, social progress, justice, human dignity and freedom (Republic of South Africa, 2000).

Currie and de Waal (2005) suggest that this is an extremely ambitious piece of legislation arriving at nothing less than the eradication of social and economic inequalities especially those that are systematic in nature, which was generated in our history by colonialism, apartheid and patriarchy and which brought pain and suffering to the great majority of people. The great majority are a group as opposed to the minority that are currently excluded.

Section 14 (1) of the Promotion of Equality and Prevention of Unfair Discrimination Act No. 4 of 2000 states that it is fair discrimination to take measures designed to protect or advance persons or categories of persons disadvantaged by unfair discrimination or the members of such groups or categories of persons. Affirmative Action (Employment Equity Act No. 55 of 1998) Affirmative action refers to preferential treatment of designated groups of people. Typically, an affirmative action programme will require a member of a designated group to be preferred for the distribution of some benefit over another who may not be a member of that group. The grounds of preference are usually based on race or gender. Affirmative action clearly classifies individuals as ‘designated group’. In the South African High Court case of Motala v University of Natal 1995 (3) BCLR 374D, Motala an Indian student with five distinctions in matric was refused admission into medical school. The court held that the admission policy was a measure designed to achieve the adequate protection and advancement of a group disadvantaged by unfair discrimination. Presiding Judge Hurt concluded, while there is no doubt whatsoever that the Indian group was decidedly disadvantaged by the apartheid system, the evidence establishes clearly that the degree of disadvantage to which the African pupils were subjected under the "four tier" system of education was significantly greater than that suffered by their Indian counterparts. The Judge did

5984 Afr. J. Bus. Manage. not consider that a selection system which compensates for this discrepancy runs counter to the constitution. The apartheid society had a distinct hierarchy of races. Whites were at the top and Africans firmly rooted at the bottom. The coloured and Indian communities were situated in between. It is perfectly legitimate, therefore that in order to achieve genuine equality, the affirmative action programme in proportion to the measure of disadvantage suffered under apartheid should apply as observed by Judge Hurt.

Judge Hurt who clearly based his decision on the interpretation of the statute balanced his decision on the category of the group most disadvantaged. Apartheid being the obvious catalyst allowed for the formation of these groups. However it has taken the courts to acknowledge the group right that emanated from the classification. Had such classification not pre-existed such a group would not have had the opportunity to justify their right to the University quota. The Extension of Security of Tenure Act No. 62 of 1997 (ESTA) and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act No. 19 of 1998 (PIE Act) The socio-cultural aspects of possession of land include how rights to land connect within wider social and cultural relationships, the impact of the structure of land rights on gender inequality and power relations.

The aim of the Extension of Security of Tenure Act No. 62 of 1997 (ESTA) is to provide for measures with state assistance to facilitate long-term security of land tenure; to regulate the conditions of residence on certain land; to regulate the conditions on and circumstances under which the right of persons to reside on land may be terminated; and to regulate the conditions and circumstances under which persons, whose right of residence has been terminated, may be evicted from land; and to provide for matters connected with such eviction (Republic of South Africa, 1997). The Extension of Security of Tenure Act No. 62 of 1997 (ESTA) and the Prevention of Illegal Eviction (PIE) from and Unlawful Occupation of Land Act No. 19 of 1998 (PIE Act). The ESTA attempts to pursue efficiency and effectiveness in the protection mechanism for the vulnerable groups of occupants (tenants, farmworkers and farm dwellers) on agricultural undertakings; and to monitor unlawful land owner eviction. Many South Africans unfortunately do not have secure tenure of their homes and the land which they use and are therefore vulnerable to unfair eviction. The PIE Act in the same token protects unlawful occupiers of rural or urban land from eviction (PIE Act). Unlawful occupiers according to the PIE Act is a person

who occupies land without the express or tacit consent of the owner or person in charge, or without any other right in law to occupy such land, excluding a person who is an occupier in terms of the ESTA, and excluding a person whose informal right to land, but for the provisions of this Act, would be protected by the provisions of the Interim Protection of Informal Land Rights Act, 1996 (Act 31 of 1996), and excluding any person who having initially occupied with such consent thereafter continues to occupy once such consent has been withdrawn (Republic of South Africa, 1996b).

The purpose of the PIE Act is to provide for the prohibition of unlawful eviction of unlawful occupiers; and to repeal the Prevention of Illegal Squatting Act, 1951, and other obsolete laws; and to provide for matters incidental thereto. The Preamble of the PIE Act concisely states that no person may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property; and no person may be evicted from their home, or have their home demolished without an order of court made after considering all the relevant circumstances. The Act further emphasizes that it is desirable that the law should regulate the eviction of unlawful occupiers from land in a fair manner, while recognising the right of land owners to apply to a court for an eviction order in appropriate circumstances.

A special consideration should be given to the rights of the elderly, children, disabled persons and particularly households headed by women, and it should be recognised that the needs of those groups should be considered (Republic of South Africa, 1998a).

The Extension of Security of Tenure Act No. 62 of 1997 (ESTA) and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act No.19 of 1998 (PIE Act) are example of legislation that unmistakeably classify individuals into select groups with unique group rights. These classifications are by no means, incidental. Legislators have defined them in relation to their vulnerability and need for protection. It is of no surprise that South Africa, with its specific history of group-based discrimination has chosen to include them in its legislation. For the purpose of this paper it is apparent historical conditioning does have a positive influence in restoring the negative into the positive. Section 24 of the Constitution of the Republic of South Africa Section 24 of the Constitution of the Republic of South Africa 1996 states that, “everyone shall have the right to a healthy environment”. The right to environmental integrity is traditionally seen as falling within the category

of ‘third-generation’ rights. Often argued that such rights are collective rather than individual in nature, and therefore they cannot be exercised by individuals but rather by a group (Republic of South Africa, 1998b). Section 24 of the Constitution of the Republic of South Africa encompasses individuals, justiciable right to a healthy environment. However, what is important to note for the purpose of the argument is that harmful environmental conditions are often not restricted to individuals but may profoundly affect groups of people individually who may exercise the right collectively.

The National Environmental Management Act No. 107 of 1998 broadens the narrow locus standi provisions of the common law in the area of environmental law. Section 32(1) of the National Environmental Management Act, states that, “any person or group of persons may seek appropriate relief in respect of any breach or threatened breach of any provision of this Act”. Section 32 (1) (a) makes reference that a person or group of persons on behalf of a group or class of persons whose interest are affected. The National Environmental Management Act No. 107 of 1998 clearly recognises group rights and allows for groups to be recognised as a class of person with an interest that may be affected. The Refugees Act No. 130 of 1998 When entering into South Africa (whether by land, sea or air), one has to have valid documents (a passport and a permit or visa) to prove that one is legally allowed to be in the country. However, there is a growing category of people often called refugees or asylum seekers. This group of people may not have the required legal documents to enter South Africa and can, therefore, apply for refugee status to give them legal standing in the country (Republic of South Africa,1998c). Usually, refugees or asylum seekers are people who have been forced to leave their country of origin for various reasons (for example; war, violent political unrest or genocide). Having a refugee status means that the person has the protection of the South African government and cannot be forced to return home until it is deemed safe to do so. People who have refugee status can access most of the same rights as South African citizens except the right to vote (South African Department of Home Affairs, 2012).

South Africa did not recognise refugees until 1993. Subsequently the country became a signatory to the United Nations (UN) and African Union (AU), and implemented a new Refugees Act in 1998. South Africa does not have any refugee camps, so asylum seekers and refugees live mainly in urban regions and survive largely without assistance (South African Department of Home Affairs, 2012). The Refugees Act No. 130 of

Gobind and Ukpere 5985 1998 provides for the rights of refugees and asylum seekers. The Act recognises members of a particular ‘social group’ who are victims of persecution as eligible to apply for refugee status. In a 2003 case brought by the Legal Resources Centre in Cape Town on behalf of Dabone and others versus the Minister of Home Affairs and another (Cape Provisional Division, 2003) an order of Court was issued by the Cape Provisional Division (2003) (High Court) ordering the Minister of Home Affairs to allow asylum seeker permit holders and refugees to apply for temporary and/or permanent residence in terms of the Immigration Act No. 13 of 2002. It was a further term of the Court order that such asylum seeker permit holders and refugees are no longer required to give up their asylum seeking or refugee status in order to do this.

Refugee and asylum seekers are a category of individuals who have temporarily forfeited their rights in their country of origin often to secure protection of the South African government. Their circumstances unfortunately group them into either category of refugee or asylum seeker which nevertheless for the purpose of the argument drives the point that a wide number of groups exist within South African legislation. CLASSIFICATION OF GROUP RIGHTS It is generally accepted that group rights can be divided into two categories: 1) Firstly, the right of the group to share in primary societal relations. For example, same race groups, and, 2) Secondly, the spontaneous participation of the individual in the other looser societal relations. For example, individuals that shares like interest or experiences (Fredricks, 1990). Groenewald quoted by Fredricks (1990) states that the inevitability of group formation is a spontaneous phenomenon in a society. One determining factor for group formation is the naturalness and un-stressful way in which intra-group communication takes place. A shared language, custom, tradition, shared values, norms and views of reality, together with compatible aspirations to promote group membership and develop towards identifiable cultural groups (Fredricks, 1990). Group rights in South Africa are far from black and white groups as previously made obvious during apartheid. The type of group right as described by Fredricks (1990) is that of secondary societal relations. It is a group that forms or joins alliances not because of colour/race but rather ‘shared language, custom, tradition, shared values norms and views of reality together with compatible aspirations’ (Fredricks, 1990).

5986 Afr. J. Bus. Manage. Unconventional classification The following are examples of an unconventional classification of a group. The case of Van Biljon versus Minister of Correctional Services 1997 (4) SA 441 (C) for instance is a case in point. In this case the applicants were HIV infected prisoners who applied for a declaratory order that their right to adequate medical treatment entitled them to the provision of expensive anti-viral medication. Although the applicants were unsuccessful in their application but what they inadvertently presented was a group right class action against the Minister of Correctional Services. Class action suits are seldom used as a vehicle in South African courts. However, the Van Biljon case is an example of a group of prisoners with the same interest, same concerns against the Minister of Correctional Services (AIDS Legal Network, 2004; South African High Court, 1997).and similar needs, acting as a group. Nursing mothers are another example of an unconventional classification. Activists of mother to child transmission are reputably a group of individuals that have acquired rights for a group that seek protection against HIV/AIDS. The intention is to prevent the transmission of the virus to the unborn child. This is group right that was successful in acquiring a judgement in their favour and the favour of many more in 2002. Minister of Health versus Treatment Action Campaign (2) 2002 (5) SA 721 (CC) dealt with the violation of section 27 (2) of the 1996 Constitution of the Republic of South Africa (Constitution), failure to develop a comprehensive programme to combat mother-to-child transmission of HIV. Pregnant women were classified as a special group entitled to ARV’s in order to avoid transmission to unborn babies (South African Constitutional Court, 2002).

An unlikely classification of group rights although mentioned in the EEA and the BECA are disability rights. These rights are an example of a type of group right exclusive to certain individuals with disabilities. The same right would apply to pensioners, Chinese nationals who are included as previously disadvantaged group under the Broad Based Black Empowerment Act No. 53 of 2003 and patients infected with multiple-drug resistant tuberculosis (MPR-TB), who are placed in isolation due to the infectious nature of the disease. Patients infected with MPR-TB as suggested in the case of Minister of Health versus Cedric Goliath and another (South African Cape High Court, 2008), could have succeeded in a class action suit against the Minister of Health had their papers been in acceptable order.

The various group rights isolated in the earlier stated examples in case law or written legislation are examples of individuals that have, migrated towards identifiable cultural groupings (Fredricks, 1990) as a consequence of life experiences, shared values or past experiences that

have joined them into groups.

The question postulated is; does such a classification exist? These groups are silent in their association. They may not belong to club houses or fraternity. However, their shared experiences have classified them as such. For example, pregnant women, pensioners, previously disadvantaged individuals, gay and lesbian people belong to their respective groups. Legislation has carefully identified these individuals when placed together in larger numbers to form groups that share similar rights or enjoy special rights independent of other individuals or groups (Isaack, 2003).

It is therefore, important to note that groups cannot be classified in a predictable manner as black or white, male or female. This stereotypical classification can easily elude one into believing that groups and group rights are non-existent. Literature on the other hand suggests that group rights originate from individual rights. It is important to consider that individuals with similar rights and reason for dispute may gradually form a group due to like circumstance or experience. The inevitable formation of groups cannot be prevented. Section 18 of the Constitution speaks of freedom of association. The section as set out in one line leaves the section open to interpretation. Does the public have a right to be protected against HIV/AIDS as a group right? Why not! If the constitution is compatible with the rights that are sought this right could in fact be recognised by legislators (Republic of South Africa, 2006). Should a group of individuals seeking protection against HIV/AIDS infection request statutory protection? Legislators and policymakers would be forced to analyse the impact of such protection. At the outset this type of protection appears prejudicial whilst limiting significant Constitutional rights such as equality, expression, life, privacy, freedom and security of the person. Section 36 of the Constitution of the Republic of South Africa 108 of 1996 In order for such protection to come into effect legislators would have to consider Section 36 of the Constitution of the Republic of South Africa which instructs that the rights as set out in the Bill of Rights maybe limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account the nature of the right and the purpose of the limitation. Therefore, the relation between the limitation and its purpose and the least restrictive means to achieve the purpose has to be weighed before a limitation can be imposed.

Limitation according to Currie and de Waal (2005) is a

synonym for the infringement or perhaps justifiable infringement. One needs to carefully consider the impact of the limitation as a law that limits a right infringes the right. However, such infringement will not be seen as unconstitutional if it takes place for a reason that is accepted as a justification for infringing rights in an open and democratic society based on human dignity, equality and freedom. Where an infringement can be justified in accordance with the criteria set out in Section 36 it will be seen as constitutionally valid. The limitation of rights can not be seen as justification whenever legislators seek to secure a right that may elude to personal or political gain. It must be emphasised that the existence of a general limitation does not mean that the rights in the Bill of rights can be limited for any reason. The reason for limiting a right needs to be exceptionally necessary.

The South African Constitution permits the limitation of rights by law but requires the limitation to be justifiable. This means that the limitation must serve a purpose that most people regard as compellingly important (Section 18 Constitution of the Republic of South Africa). A very important purpose of the limitation, the restricting of the right will not be justified unless there is a good reason for thinking that the restitution would achieve the purpose it is designed to achieve and there are no other options in achieving the right without restricting it.

In order for groups seeking protection against HIV/AIDS to be granted protection, this right has to be measured against Section 36 of the Constitution of the Republic of South Africa in order to determine whether the right requesting protection would be upheld and in compliance with the section. A court can not determine in the abstract whether the limitation of a right is reasonable or justifiable in an open and democratic society based on human dignity, equality and freedom. This determination often requires evidence (such as sociological or statistical data) as to the possible impact that the legislative restrictions would have on society (Section 36 Constitution of the Republic of South Africa).

In State versus Makwanyane 1995 (3) SA 391 (CC) presiding Judge, Chaskalson P, recognises that a general limitation clause does not translate into a standard limitation test (South African Constitutional Court, 1995). This means that the limitation test and not merely the application of the test depend on the circumstances. Should the right to protection against HIV/AIDS be tested, one has to consider proportionately the purpose for which the right is limited and the importance of that purpose to such a group. At this point of reflection, it is important to consider that should this right be requested by a group of nurses based in an emergency facility or paramedics on duty, the proportionality would be different had the request been made by a group of house wives whose possible

Gobind and Ukpere 5987 exposure to HIV/AIDS would be quite remote. The protection of nurses against HIV/AIDS can be regarded as significantly important when requesting such protection.

The nature of the right may weigh more heavily than others example if such a right was allowed. However, the debate worth reflecting on is, would legislators encourage a new form of discrimination. Alternatively, should such a right not be granted would a greater number of individuals not be susceptible to the virus due to the lack of protection provided for by legislators? Importance and purpose of the limitation therefore ‘requires the limitation of a right to serve some purpose’ (Section 36 of the Constitution of the Republic of South Africa). Would this right help reduce HIV/AIDS in South Africa? What would its purpose be? Well the right if in place could protect vulnerable groups like children affected by HIV/AIDS, the elderly people, nurses, paramedics, sex workers etc. These individuals would be entitled to seek protection against HIV/AIDS infection from their society.

In terms of the nature and extent of the limitation, ‘this factor requires the court to assess the way in which the limitation affects the right concerned’ (Section 36 of the Constitution of the Republic of South Africa). This means that the limitation should not be given to a separate province or district or to be confined to one particular group. For example, whites seeking protection against HIV/AIDS but rather through secondary societal relations. Where an individual fall under a group defined as vulnerable group, such protection should be afforded.

The relation between the limitation and purpose for the limitation in the interest of the rights of the individual or groups of individuals must be reasonable and justifiably weighed. There has to be a link between the law and the objective it intends to reach. This group could address the HIV prevalence in South Africa and equate that with the rate at which crime is on the increase especially rape assault and murder. This type of protection would help reduce HIV prevalence and crime simultaneously. Perpetrators found responsible for the transmission of the virus would be severely dealt with and in a greater extent than that explained in the Sexual Offences Amendment Act No. 32 of 2007.

Less restrictive means to achieve the purpose; ‘the limitation of a fundamental right must achieve benefits that are in proportion to the cost of the limitation’ (Section 36 of the Constitution of the Republic of South Africa). This would be difficult to achieve as the protection requested is either protection or not. There are no middle grounds to the protection requested.

Limitations of rights by other provisions of the Constitution of the Republic of South Africa, is that the demarcation of rights are unsupported in the literature as it is difficult to determine if the protection sought, which

5988 Afr. J. Bus. Manage. may limit any right entrenched in the Bill of Rights, for instance, the right to life whose scope is unqualified (Section 11 Constitution of the Republic of South Africa). The right to life can be addressed by the group as reason for the protection against HIV transmission.

On completion of the limitation test one could argue that the group is entitled to protection against HIV/AIDS as each subsection of Section 36 of the Constitution of the Republic of South Africa has been satisfied. This type of right would be like the many others identified in legislation. However, one has to heed the advice given by presiding Judge Chaskalson P that the limitations test and not the mere application of the test depends on the circumstances surrounding the need for such protection. Conclusions In Hoffmann versus South African Airways 2001 (1) SA 1 (CC) the presiding Judge had to consider the right of Hoffmann against the safety of the passengers of South African Airways (SAA) after careful consideration, the learned Judge had to determine the value of the right of one individual against the rights of a larger group (South African Constitutional Court, 2001). The presiding judge argued that the right of an individual can not be compromised at the cost of a group. Simultaneously, the presiding Judge did not say that group rights did not exist. It is clear from South African legislation that both individual and group rights are recognised provided the means of acquiring these rights are both procedurally and substantively in line with the South African Constitution.

The question in the research question is whether a group of individuals seeking protection against HIV infection may rely on group rights. Literature suggests that such rights are available to individuals that seek protection as a group. The paper has outlined examples in South African law that confirm such rights. Literature has provided no indication as to whether group rights are of a lesser standing than individual rights nor does the literature suggest that individuals seeking legal protection as a group cannot be heard?

What does appear to come through the literature in the choice is clearly upon the individual to decide whether he/she chooses to rely on these rights as an individual or as a group. The common adage ‘strength in numbers’ may appear attractive. However, for the purposes of seeking protection against HIV/AIDS, the nature of the infection and the stigma that the disease attracts are factors to consider. It is however, recommended that protection should be awarded to groups that are most vulnerable to exposure to the disease. Mandatory testing of patients should be considered as a form of protection afforded to nurses, doctors, paramedics and other groups

of individuals that find themselves susceptible to the disease. This article does not propose radical exclusion of HIV infected individuals but suggests the protection of ‘vulnerable’ groups. The South African Constitution does not preclude such protection. In fact, one could argue that the South African Constitution provides a legislative framework that could assist in the implementation of such protection. The challenge now lies with legislators. Are they willing to take on the challenge or opt out for the fear of being controversial? REFERENCES AIDS Legal Network (2004). Rights of Prisoners. Cape Town. [online]

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African Journal of Business Management Vol.6 (19), pp. 5990-5998, 16 May, 2012 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM12.031 ISSN 1993-8233 ©2012 Academic Journals


Social capital in Brazilian wine industry networks

Janaina Macke 1*, Denise Genari 2 and Kadígia Faccin 3

1Graduate Program in Business Administration, University of Caxias do Sul (UCS), Caxias do Sul, Brazil. 2Faculty Cenecista of Bento Gonçalves (FACEBG), Brazil.

3Faculty of Serra Gaúcha (FSG) and Faculty Cenecista of Bento Gonçalves (FACEBG), Brazil.


The aim of this study is to analyze the role of soc ial capital in the conversion of collaboration in a productive force and, consequently, the improvement of competitiveness of two Brazilian wine industry networks: Aprovale and Aprobelo. In a previous stud y, we concluded that there were statistical significant differences between social capital and competitiveness dimensions. In other words, this means that both levels of social capital and compet itiveness differ significantly from one network to another. In this paper, we sought to analyze the re sults found in the quantitative phase in a qualitat ive-descriptive way. The main results pointed out that, despite economic, human and intellectual difficulties, a network can raise significant level s of social capital, since the network has shared g oals and values. Key words: Social capital, competitiveness, survey, wine industry networks, Brazil.

INTRODUCTION The collaboration process represents a strategy that can assist in the survival and enhancement of business competitiveness, enabling the leverage of expertise and internal resources. This means that the heterogeneous characteristics of one firm relative to competitors may form the basis of competitive advantage for a company (Andrews, 1971; Thompson and Strickland, 1990). So what causes the difference in a firm performance is the quality of its resources (Collis and Montgomery, 1995). Operating through a collective strategy allows companies to increase the access to new opportunities, which would not be possible by working alone and could compromise their survival (Balestrin and Verschoore, 2008; Camarinha-Matos and Afsarmanesh, 2005; Lipnack and Stamps, 1994; Schermerhorn, 1975).

The networks appear in different forms, in different contexts, and from multiple cultural expressions. For this reason, there are many concepts for the term (Castells, 2000; Balestrin and Verschoore, 2008). The main factors that lead to the maintenance of this synergy are: The *Corresponding author. E-mail: [email protected]. Tel: + 55 54 3218 2152, + 55 54 8135 0241.

trust between network members, the shared norms, the hybrid values, the collective identity, the culture and the historical conditions – which can be summarized through the social capital stock.

The concept of social capital has become popular in the 70s and has had a great development since the 1990 decade, primarily through the works of Putnam et al. (1993; Putnam, 2000), Coleman (1988), Fukuyama (1995; 1999), Nahapiet and Ghoshal (1998) and Onyx and Bullen (2000).

We argue that the social capital can influence some aspects related to the welfare and sustainability in a society (Fukuyama, 1995, 1999) or communities (Onyx and Bullen, 2000), and the performance of an organi-zation or an individual (Watson and Papamarcos, 2002; Leana and Buren, 1999), as well as, the aspects related to sustainability and maintenance of competitive advantages of a network of (Wu, 2008; Beugelsdijk et al., 2009; Su et al., 2005), in which social capital can be considered as a strategic resource. Regarding to strategic resources, the resource based view (RBV) emphasizes that a strongly competitive resource is characterized by leading to greater profita-bility, by imposing barriers to new entrants in the market, by leading to the balance between exploitation of current

resources and developing new ones, and also increasing the opportunity to acquire resources that allow higher returns (Wernerfelt, 1984).

This statement seems to answer the forgoing questions, allowing therefore, to say that social capital is a resource that leads to remarkably competitive collaboration and allows the remaining collective synergy to maintain the competitive advantages of a collaborative network.

The aim of this study is to analyze the role of social capital in the conversion of collaboration in a productive force and, consequently, the improvement of the enterprise network competitiveness. The research used the comparative case study method and qualitative analysis, conducted in two collaborative networks in the Serra Gaúcha Wine Cluster (southern Brazil): a Aprovale (Associação dos Produtores de Vinhos Finos do Vale dos Vinhedos) and Aprobelo (Associação dos Vitivinicultores de Monte Belo do Sul).

Both networks represent typical cases of change process that is happening in the Brazilian wine industry due to competitive pressure to which it is submitted. We believe that the lessons from this cluster can provide great information for other collaborative networks. This research can contribute to alternatives in the processes of endogenous formation and networks management, especially in regarding to the evolution and maintenance of networks competitiveness. A BRIEF REVIEW ON SOCIAL CAPITAL IN NETWORK RELATIONS CONTEXT The law, the contracts and the economic rationality provide a necessary basis, but insufficient, both for stability and prosperity. They need to be fostered with reciprocity, moral obligations and, trust, which are based more on habits, than on rational calculation (Fukuyama, 1999).

In the way of understanding the difference in organizational performance, in a context where all firms have access to almost the same types of resources, Putnam et al. (1993) argues that the civic and political culture represent important conditions to the social capital level, which in turn, generates collective power.

The importance of social capital can be understood mainly by three reasons: (i) The social capital stock presupposes many social ties which can transfer information (Coleman, 1988; Haezewindt, 2003) and as relevant information is often expensive, those who have easier access can obtain decisive advantages, (ii) the existence of trust and loyalty allows a reduction of transaction costs (Morgan, 2000; Skidmore, 2001; Fukuyama, 1999; Haezewindt, 2003); and, finally, (iii) the social relationships facilitate the collective action and help to increase production and innovation (Morgan, 2000; Skidmore, 2001). So, why it is possible to call this a capital?

Macke et al. 5991 Narayan et al. (1997) define “capital” as something accumulated that contributes to a higher performance or best results. Despite this definition, some social scientists have argued that social capital lacks the properties of a capital and should be called something other than capital.

In a workshop about social capital, sponsored by the World Bank, in 1999, some economists defended the inadequacy of the word “capital” in the social capital concept, because, for them, the social capital would not involve sacrifices of acquisition or opportunity costs (Robison et al., 2002).

Notwithstanding, there is another group of researchers who argue that social capital, indeed, involves sacrifice and provides income over time (by strengthening social ties), generating opportunity costs. For example, a research of Robison et al. (2002) compared the social capital to other forms of capital, and showed that it possesses the same properties as a physical capital, including: Processing capacity, capacity of creating another form of capital (Nahapiet and Ghoshal, 1998), capacity of enabling new investments and, also, capacity to be depreciated.

In our research, social capital is a form of capital. This way represents a strategic resource in organizations. Palda et al. (1999) consider the social capital as a factor in the production function. In general terms, the production function would have the four factors: production capital (K), labor (L), human capital (H) and social capital (Q): Y = f (K, L, H, Q).

Therefore, like other forms of capital, social capital is also productive (Putnam et al., 1993) and may facilitate the coordinated and collaborative actions, which can increase economic results. Social capital generates positive externalities (Saguaro Group, 2010) as it enables the achievement of certain goals that would be unattainable (or, at least, would be difficult) without (Callois and Aubert, 2007; Skidmore, 2001). The social capital is effective and its absence represents almost an insurmountable obstacle to organizational performance (Putnam et al., 1993).

When there is trust, there is an expansion of horizontal relations (Fukuyama, 1999). In an environment where there is a higher stock of social capital it is possible to take better advantage of growth opportunities (Putnam, 2000), mainly by the accumulation of information flows that facilitate collective action (Andrevski et al., 2007; Coleman, 1988).

Therefore, we defende that trust, stability, durability of relationships and the closure of the network are key elements in pursuit of high levels of trust and norms of cooperation. These qualities also influence the transparency and visibility of mutual obligations (Putnam, 2000; Nahapiet and Ghoshal, 1998; Coleman, 1988).

The decision to participate in a cooperation agreement is coated with social interaction. The interactions between agents are the key element of a collaborative mechanism; whatever the business continuance and objective; a good business partner has become a major business

5992 Afr. J. Bus. Manage. asset, that is, an advantage from the collaboration (Kanter, 1994). The network's success is closely related to the quality of the relationships among its members, in other words, to the level of social capital.

As some of the major advantages and goals for creating or linking a company to a collaborative network we can highlight (Balestrin and Verschoore, 2008): (a) Generation of economies of scale and market power, that is, gains due to the expansion of individual strength through growth in the number of affiliates to the network; (b) Access to solutions to the difficulties of businesses, through services, products and infrastructure provided by the network for the development of its members; (c) Provides conditions for learning and innovation by sharing ideas and experiences among members through innovative actions, developed jointly by the participants; (d) Reduction by sharing costs and risks of certain actions and investments that is common to the participants; (e) Generation and maintenance of social relations: Approaching agents, increasing trust and social capital and leading the group relations beyond its main economic reasons. In this sense, social capital becomes a resource remarkably competitive, acting as an enabler of individual and collective capacities, through collaborative practices. In the organizational context, social capital can be defined as one of the resources that reflect the character of social relations within organizations - at various levels of the company - through collective orientation and shared trust (Leana and Buren, 1999).

One way to investigate social capital is to access its structural, cognitive, and relational dimension (Nahapiet and Ghoshal, 1998). In this approach, social capital is understood as the “sum of the actual and potential resources embedded within, available through and derived from the network of relationship possessed by an individual or social unit” (Nahapiet and Ghoshal, 1998). The interaction among the agents of the network is what gives shape to the relationships.

The structural dimension considers the pattern of connections among the actors and includes connections and network settings in terms of density, connectivity, hierarchy, and organizational adequacy. The relational dimension refers to assets that are created and leveraged through the relationships and include attributes such as identification, trust, norms, sanctions, obligations and expectations.

Finally, the cognitive dimension refers to resources that represent shared views, interpretations and systems of meanings, such as language, codes and narratives (Nahapiet and Ghoshal, 1998).

The social capital produces socio-emotional assets, expressed through emotions, feelings and relationships (Robison and Flora, 2003). The interaction between the agents in the network gives shape to the relationships. A

lot of ties form a dense network (Granovetter, 1973), with singular relational characteristics (Nahapiet and Ghoshal, 1998), which benefits business results, and consequently, competitive advantages (Sequeira and Rasheed, 2006; Watson and Papamarcos, 2002; Wu, 2008). RESEARCH METHOD AND CONTEXT This study is a continuation of a quantitative research, which aimed to measure levels of social capital, according to three dimensions, through a survey of owners of the wineries of the Brazilian Wine Industry Cluster. In this paper, we analize qualitatively the results found in the quantitative phase. Thus, we aim to conclude about the role of social capital in the conversion of collaboration in a productive force and, consequently, the improvement of enterprise network competitiveness. The cluster's production of Serra Gaúcha is responsible for 80% of the national production of wine. The production of grapes in the cluster of the Serra Gaúcha is a typical rural activity of family properties, thus, the impacts generated by the market of wine are economic, as well as social. Today, the chain of grape and wine production goes from 16 to 18 thousand families in the state of Rio Grande do Sul (Emprapa Uva e Vinho, 2010).

Recently, viticulture institutions were created in Brazil, with the aim to increase the collaborative process among different agents in the wine chain: (i) in 2000, IBRAVIN started its operation with the unique purpose of promoting and institutionally organizing the whole chain – grape, wine and juice producers, (ii) in 2002, an Export Consortium, called "Wines of Brazil" was created in order to facilitate the entry of fine wines in the international market, and to participate in fairs and events and exchange information among the various actors of the viticulture sector, (iii) in 2004, the launching of the National Chamber of Viticulture, Wine and Derivatives, a public agency, put many entities together throughout the supply chain in Brazil with the objective to promote the junction of the private and public sector, and the discussion to regulate the sector and support the most important strategies for the production chain (Fensterseifer and Alievi, 2005).

There are two important collaborative networks in the cluster: The Aprovale (Association of Producers of Fine Wines of the Valley of Vinhedos) and the Aprobelo (Association of Producers of Fine Wines of Monte Belo) (Table 1). The Aprovale network is composed of 31 wineries, which have 77 member-owners, while the Aprobelo network is formed by 12 wineries, in a total of 32 owners. In this research, the comparative case study method was used (Yin, 1994). Documents, direct observation during meetings of the networks, visits to companies and interviews with the partner-owners were used as data collection frameworks. Additionally, we took advantage of the results of the quantitative phase. Social capital measuring In the quantitative phase of research, we concluded that there were statistical significant differences between the means for the social capital and competitiveness dimensions. In other words, this means that both levels of social capital as the competitiveness differ significantly from one network to another (Table 2).

Despite the significant differences identified by research, it is clear that both Aprovale and Aprobelo have high stocks of social capital. However, according to the practices, culture, values, and common goals, each of these associations have developed a different dimension that stands on the other. Thus, in Aprovale, the most present is the cognitive dimension of social capital, while in Aprobelo is the structural dimension.

In general, the result seems to indicate that relations between

Macke et al. 5993 Table 1. Main aspects of the two networks compared.

Item Aprovale network Aprobelo network

Year of foundation 1995 2003 Number of wineries 31 12

Production

1. Red wines: 3,993,904 L 1. Red wines: 44,000 L 2. White wines: 4,936,990 L (white sparkling wines included)

2. White wines: 7,000 L

3. Rosé wines: 209,971 L (rosé sparkling wines included) 3. Sparkling wines: 75,000 L

4. Grape juice: 66,750 L 4. Grape juice: 20,000 L

Average of hectares cultivated by winery 88 hectares / member 10 hectares / member

Exportation Yes No

Indication of origin Acquired in 2002. This is the first Brazilian region to get the Indication of Origin of their products.

In March 2008, the Ministry of Agriculture (MAPA) published a document that ensures the regional identity of Monte Belo do Sul. This is the starting point for the process of indication of origin at the INPI (National Institute of Industrial Property). It is expected that the project be completed in 2012.

Denomination of origin

The Valley of Vineyards will be the first region, in Brazil, with Denomination of Origin (DO) for its wines. The process is in the final stage.

{Waiting for Indication of Origin.}.

Wine tourism

Route is internationally recognized and commercialized by the largest national tourism companies. In addition, the route is available on the web. The network has its own headquarters, where tourists can request information.

With little structure for tourism, without a route set. The network counts with the support of municipal government to develop the project “Monte Belo mais Belo {Monte Belo more beautiful}”, which aims to calls attention for the landscape, the conservation of the central square and the portico of the city. There are experience exchange projects with Italian cities (Gemellagio)

Cities covered Bento Gonçalves, Garibali e Monte Belo do Sul Monte Belo do Sul

Aims

The association was founded to meet the legal requirements of the geographical indication.

To develop and to encourage the improvement of wine products produced in the family wineries, and to preserve the physical spaces of Monte Belo do Sul, in order to empower local tourism.

Size of the wineries members

1. 3 big producers (over 500,000 L / year)

All wineries are micro producers

2. 9 medium producers (between 50,001 to 500,000 L / year)

3. 19 micro producers (up to 50,000 L/ year)

Titles Aprovale is situated in the rural municipality of Bento Gonçalves, that holds the title of “the Brazilian capital of grape and wine”

Monte Belo do Sul is the largest producer of grapes for sparkling wines in Latin America and the largest city of wine producing per capita in Brazil

5994 Afr. J. Bus. Manage. Table 1. Contd.

Social networking sites www.Aprovale.com.br Facebook and Orkut

None

Awards

In addition to national awards, Aprovale has several international awards. Among them, the most important are:

1. Les Citadelles du Vin Bordeaux (France): 3 medals 2. Sélections Mondiales des Vins 2011 (Quebec-Canada): 1 medal 3. Concurso Internacional de Vinos y Espirituosos (Miami – EUA): 3 medals 4. International Wine Challenge (London-England): 9 medals.

Aprobelo participates only in national competitions. Some of them are:

1. Avaliação Nacional de Espumantes held in Garibaldi city(National Evaluation of Sparkling Wines): 3 medals 2. Avaliação Nacional de Vinhos held in Bento Gonçalves city (National Evaluation of Wines): 1 medal.

Table 2. Social capital results for each network.

Parameter Aprovale Aprobelo

Mean S.D. Mean S.D.

Social capital dimension

Relational* 3.1446 0.6719 4.0399 0.5816 Estructural* 2.9981 0.7353 4.0972 0.4478 Cognitive* 3.1598 0.6139 3.8710 0.5140

*, p<0.010. groups are much more crisp and defined with respect to trust, norms of reciprocity, participation, bonds and sense of belonging in Aprobelo, whereas the goals and shared experiences are most prominent in Aprovale. The biggest difference found is in the structural dimension, indicating higher combination of information and problem-solving situations in Aprobelo. The reasons for these and other differences are discussed subsequently. Comparing relational social capital in Aprovale and Aprobelo networks The relational capital is responsible for the expectations, public spirit, social identification, helpfulness and collaboration network. It is known that the main positive externality evidenced by the presence of such elements is the generation of collective solutions guided by the collaboration. This corroborates Camarinha-Matos et al. (2006) study, stressing that collaboration implies mutual engagement and synergy between the network actors.

The main factors that lead to the maintenance of this synergy and facilitate the exchange of information and ideas are the generation of trust between the companies, their shared norms and values, collective identity and common purpose (Birkinshaw et al., 2008; Mol and Birkinshaw, 2009; Hamel, 1998). All these features represent elements of relational social capital.

It is possible to cite the case of the Aprobelo’s collective unity of sparkling, which is configured in a collective solution. The deployment of the unit is part of the medium-term strategic plan of the association. The investment is about US$ 622,096.00 (R$ 1,119,772.00). The construction would reduce costs for wineries

and aims to meet the future rules of indication of source. So with a lower cost, thanks to the collaboration and sharing of values, such as belonging and social identification, all the participating wineries will benefit from this collective achievement, allowing all cooperated to produce their sparkling wines, using a single structure.

Another example of collective spirit is the creation of Aprovale store, which is also an important structure for the marketing of wines of all its members, since not all the wineries have space for tourists to do visitations and shopping. This infrastructure comprises the collective involvement of businesses, strengthening their linkages and linking them more closely to the network.

Despite these examples of the presence of social capital, the primary motivation that led the companies of both networks to conduct collaborative action was economic: the participation of these enterprises in networks provides them a new order of competition. For instance, the Aprobelo was founded by 12 winemakers who produced wines for their private use or sold it in bulk (4.5 L bottle). Many of them were settlers, and since the founding of the association they legally constituted the companies and started producing wines and sparkling wines together, using the brand “Vineyards of Monte Bello”. This action enabled to add value to their products and also to estabilish higher profits.

Despite each winery produces and bottles its proper wine, labeling it with its brand, members of Aprobelo decided to use a common packing that would allow identifying the origin of the product, as belonging to the same social group. The box, front and rear, refers to the association and brings on one side of the entification of the winery and on the other side, the name of all twelve participants. This is an example of joint strategy and joint action (Macke et al., 2010), which allows us to affirm that there is

an identification feeling between network members.

Such joint strategy shows a sense of belonging and social identification and determines the ability of networks to generate recognized brands, reaching greater public (Lorenzoni and Baden-Fuller, 1995; Von Ende, 2004; Balestrin and Verschoore 2008).

In the same sense, one can highlight the conquest of the indication of origin by Aprovale. The wineries of this network founded a group with common goals and this group had to strengthen ties of cooperation in order to achieve these goals. Today, every company that produces in that territory in accordance with the rules of IPVV acquires the right to label their products. This guarantees a distinction in the global wine market.

In addition, regading this spirit of collaboration, the Aprobelo held monthly meetings with its members, and each time, a different member offers its head office and is responsible for organizing the meeting (including the dinner afterwards). Actions such as this one create reciprocity and helpfulness intra-group. These gatherings that occur between businesses, employees and family members involved in the network are important to solidify the relationship of trust and also to provide informal conversations about the opportunities, challenges and future of the network.

It is also import to highlight that both Aprovale and Aprobelo have strategic tools for managing their networks such as participatory planning and action plan, which are true forms of prioritizing joint actions, respecting the views and aspirations of the members. These actions demonstrate the existence of collective spirit, helpfulness, respect for individuals and especially the existence of social identification and ties, in other words, relational social capital. Comparing structural social capital in Aprovale and Aprobelo networks This dimension of social capital is closely related to combinations of information and knowledge that allow the network to generate a positive externality of reducing costs and risks. Therefore, the motivation to maintain connectivity between the actors is the access of information. The more information you have, the more ideas are produced and to facilitate such exchange of information, there must be synergy between the actors in organizations (Birkinshaw et al., 2008).

Visits to national and international business fairs are the most common action used by the networks to exchange information and knowledge. Most of the time, not all members can participate. In this case, some of them are chosen through voting to represent the group at the event. This alternative allows the reduction of costs to access new information.

The business fairs allow entrepreneurs the opportunity to know other experiences and think collectively on the trends and challenges they are facing (Balestrin and Verschoore, 2008). The creation of such forum can become a competitive advantage when developing strategies for the network. One example of these connections that enhance the formation of weak ties is that Aprobelo network sought, an alternative for industrialization of their grapes to produce sparkling and white wines (through a partnership with Embrapa Grape and Wine), in 2005. This action not only allowed to overcome a technological barrier (because the wineries did not have the equipments for producing sparkling wines), but allowed the achievement of the economic results that have never been achieved before now. Besides the partnership with Embrapa, the Aprobelo joined the project “Together to Compete”, a partnership with regional government agencies for development.

The Aprobelo network also participates in the project “qualification of small farmers to create a center of excellence in the production of fine wines”, through the public call of the Ministry of Science and Technology, The Brazilian Service of Support for Micro and Small Enterprises (SEBRAE) and the Research and Project Financing (FINEP). The Brazilian Agricultural Research Corporation,

Macke et al. 5995 Corporation, Grape and Wine Division (Embrapa Uva e Vinho) is the manager and Sebrae and Finep are funders.

In addition, Aprobelo is part of a pilot project, which aims to serve as a basis for formatting the vineyards national register through the georeferencing of the vineyards of Monte Belo do Sul. This project is coordinated by Embrapa Grape and Wine. The funds will be provided by the Ministry of Agriculture (MAPA) and the project still has the support of the Brazilian Institute of Wine (IBRAVIN) and the Municipality of Monte Belo do Sul. Besides this pilot project, the search for information to the process of geographical indication of origin “Vineyards of Monte Belo” has the support of the University of Caxias do Sul (UCS), the Federal University of Rio Grande do Sul (UFRGS), Embrapa and Sebrae.

Despite of presenting a lower average of structural social capital (in comparison to Aprobelo network), which suggests fewer opportunities to exchange information, Aprovale network also has links with other organizations in the cluster that enables this network to increase its connectivity. Thus, we can mention the work carried out jointly with the University of Caxias do Sul (UCS), Embrapa and the Federal University of Rio Grande do Sul (UFRGS), in the geographical boundaries project, carried out for the process of Denomiation of Origin “Vale dos Vinhedos”.

The Aprovale network also has its own projects, derived from strategic planning. These projects seek to achieve the objectives of: (i) strengthen the management of Aprovale, (ii) to consolidate the market position, (iii) strengthen the culture of cooperation, (iv) enhance relations with the community, the government and the tourist trade; (v) encourage the ongoing search for excellence of products and services and (vi) to protect and to preserve the natural landscape and cultural identity. The main partners in these projects are: Embrapa, Sebrae, Ibravin, governments of Bento Gonçalves, Garibaldi and Monte Belo do Sul, UCS, Department of Rural Development, Fishing and Cooperatives (EMATER), UFRGS, FINEP and Foundation for Research Support of Rio Grande do Sul (FAPERGS).

All these actions promote the exchange of experiences, information sharing and greater integration of the group. Thus, the group's engagement in the search for information, the friendship and the reciprocity are increasing the stock of structural social capital. This provides overall cost savings to the pursuit of information, conflict resolution and solutions to management problems.

The collaboration involves sharing risks, resources, responsibilities and rewards precisely, based on the mutual engagement between participants (Camarinha-Matos and Afsarmanesh, 2006). In this perspective, it is possible to emphasize that the risks in the implementation of certain actions are reduced. Comparing cognitive social capital in Aprovale and Aprobelo networks This dimension refers mainly to the advantages shared by the socialization of tacit knowledge built through spontaneous exchanges related to culture, language and shared habits. Analyzing the performance of the two networks under study, it is possible to see a good use of the interactions between the actors. In fact, both Aprovale and Aprobelo networks have formal and informal meetings that contribute to the collective learning of these groups.

An exploratory research conducted by Wolf et al. (2008) showed that investment in social capital, through improved links and relationships between the agents, is the factor that shapes the “operational environment”, which guarantees the maximum commitment of all stakeholders. A new action will only be effective when all stakeholders are engaged in a collaborative relationship and nurturing the same values. Thus, the transformation of ideas into practice rooted in the organization requires a general and

5996 Afr. J. Bus. Manage. sustained effort. Therefore, this effort requires coordinated and collaborative actions, shared values and common culture, which only the cognitive social capital of the group is able to provide.

Interorganizational knowledge, created by the interactionbetween companies in a network, is one of the larger dimensions of knowledge generation (Balestrin and Verschoore, 2008). Moreover, Lorenzoni and Baden-Fuller (1995) noted that to have a collective learning is necessary in an environment of synergy and stimulation in which the experiences, feelings and mental images can be shared. Considering the great difficulty of decoupling, the dimensions of social capital, some of the examples cited in the foregoing can contribute also to this cognitive dimension. Among these, it is possible to mention the learning from participation in fairs, the generation of joint solutions, the courses and lectures attendance, as well as, the collective strategic planning of the network, which are ways of providing exchange of information, which become collective learning. This way, the collective learning is the result of shared experiences and goals.

Balestrin and Verschoore (2006) define the factor of “learning and innovation” as the sharing of ideas and experiences among members and the innovative nature of the actions carried out jointly by these members. Among the joint activities, it is possible to highlight the concern of Aprobelo and Aprovale with the cultural and educational activities to provide a higher quality product, which, in turn, generates competitiveness. An example is the project named “Qualification of Small Producers to Create a Center of Excellence in the Production of Fine Wines in specific regions”. The project aims to generate knowledge and technologies to improve the quality of the wines produced, making the wine more competitive and endowed with greater added value.

In addition, the project aims to transfer knowledge and technology to winery members and to other new partners that may be included in the group, in an effort of enabling economic and social development in the region. Activities of this nature provide knowledge and information to the network, necessary for each member, through a process of collective learning. This demonstrates that alliances can be a natural complement to strategies for enhancement of scientific and technical knowledge of a group of companies. In the design of arrangements and local systems of production, the innovation process is based on interactive learning, arose from the skills and tacit knowledge that allow the development of a given technology (Lundvall, 1992) and a certain savoir faire, essential to the process of designation of origin of the two networks. It is necessary to understand the nature and dynamics of learning. The user-producer interaction in the development of a given technology means that the resulting learning processes are interactive, require trust and involve cultural contexts that go beyond the contractual relations of the market. At this point, the institutions of a particular local production arrangement become important to establish the game rules, and the policies, such as the case of the studied networks (Lundvall, 1992).

The proximity among the agents favors fluidity of relations of cooperation and innovation tend to be more intense in these local spaces (Fensterseifer, 2007; Fensterseifer and Alievi, 2005). As we observed in this study, the geographical proximity offers important insights for better understanding of how knowledge, particularly tacit knowledge, brings gains in competitiveness for companies. Conclusions In summary, the results state that the Aprobelo network has better conditions to leverage the competitiveness of its members, based on organizational assets, use of endogenous resources and networking. The major source for improving the competitiveness of the

Aprobelo is located on its organizational assets. In other words, the resources present in each of its members have allowed the Aprobelo a good use and applicability of organizational best practices to improve network competitiveness. In the case of Aprovale, the main source of competitiveness comes from its own networking which is significantly larger than Aprobelo.

Thus, Aprobelo – the smallest network and which has more economic, human and intellectual difficulties - showed higher stocks of social capital. In other words, companies into this network have a greater ability (or need) to develop relationships based on elements such as cooperation and reciprocity (structural social capital dimension), trust and participation (relational social capital dimension).

It is possible to see that this combination of features and elements is unique for each network, which can also generate a single result. For Williamson (1975, 1985) this reflects the idea that the transactions within each company and among diferent companies results in something “idiosyncratic”, that is, the path dependence of each individual firm is, in general, extremely difficult to identify and to replicate (Barney, 1991; Collis and Montgomery, 1995; Dierickx and Cool, 1989). Thus, the combinations among social capital elements present in Aprovale and Aprobelo networks can generate unique externalities to each group, regardless of the stock of social capital in each dimension. Table 3 describes the actions that have been developed by the networks surveyed, according to the elements that characterize collaborative networks, described by Balestrin and Verschoore (2008). Besides the features described in Table 3, it is important to compare some goals that differentiate the associations described. The Aprovale was created with the objective to meet the goal of constant pursuit of technological issues in wine production. Moreover, a major initial objective of the association was to obtain the seal of geographical indication for the wines produced in the region, which requires, mandatorily, the creation of an association. It is important to note that, although the vineyards have made improvements in the production process, the technical and operational conditions demanded to achieve this certification existed previously.

Although Aprobelo also aims to conquest the geographical indication, it has some elements that differ, primarily in structural terms, in comparison to Aprovale. Since they are smaller wineries, companies associated to Aprobelo need to work together, even in structural terms. The creation of an effluent treatment plant used by all winery members is an example of this need. Moreover, the joint use of equipments, the adoption of packaging and other materials together (with the aim of reducing costs) and the project of building a headquarter for the association, including a complete structure for the manufacture of sparkling wines in cooperative, reinforce this finding. These characteristics present in the Aprobelo networkmay explain the significative presence of social

Macke et al. 5997 Table 3. Collaborative network elements and actions performed by Aprovale and Aprobelo networks.

Element Conceptual definition Aprovale Aprobelo

Market power

Generation of economies of scale and market power (extension of individual power through the growing number of companies associated with the network).

Growth in the number of members (31 wineries and 39 organizations of various sectors)

Association of small producers; some of them had no formal business before the creation of the association

Access to solutions

Access solutions to the difficulties of companies, through services, products and infrastructure developed and provided by the network.

1. Obtaining the geographical indication 2. Construction of headquarters for the association 3. Creation of marketing retail for the products of members

1. Implementation of an effluent treatment station 2. Project for the construction of headquarters for the association

Learning and innovation

Conditions for learning and innovation by sharing ideas and experiences among members.

1. Technical visits and trips, with the purpose to leverange learning into the network 2. Partnership with universities and research institutes

1. Technical visits and trips, with the purpose to leverange learning into the network 2. Partnership with universities and research institutes

Reducing costs and risks

Reducing costs and risks, by sharing them through actions and investments that are common to the participants.

The process of obtaining the designation of origin

1. Process for obtaining the geographical indication 2. Project of the collective plant for production of sparkling wine

Social relationship

Consolidation of social relationship among individuals, bringing them closer and increasing the trust and social capital, bringing the group relationships beyond economic aims.

Formal meetings Monthly meetings and informal dinners.

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Leadership challenges associated with the management of Generation Y employees:

A proposed theoretical model

Magda L. M. Hewitt and Wilfred I. Ukpere*

Department of Industrial Psychology and People Management, Faculty of Management, University of Johannesburg, South Africa.

Accepted 8 March, 2012

This paper acknowledges that Generation Y (Gen-Yers), who have grown up in a world of convenience and easy access to information, are more complex to lead and to understand than generations before them. Gen-Yers have entered the labour market at a time when the current labour force is aging in the world and in South Africa. Gen-Yers are working with forty to sixty-year-olds and in some cases supervising employees old enough to be their parents. If unhappy with work circumstances Gen-Yers change careers fast, thus creating frustration for employers struggling to retain and recruit talented high-performers. According to the report for the Future of Small Business Management (2007) issued by the Institute for the Future (IFTF) based in California which has forecasted emerging trends affecting the global marketplace for 40 years, Gen-Yers, will emerge as the most entrepreneurial generation ever in the next decade. These highly independent individuals will rather be small business owners or freelancers and will choose not to work for large corporations. What are the leadership challenges facing South African companies when they engage with Gen-Yers? Firstly, this paper explores the concept Gen-Yers, as discussed in the theory. Secondly the paper further explores possible conflicting areas between current leadership practices and Gen-Yers. The paper concludes by supporting the value that Gen-Yers can bring to companies and suggests some practices that can be adopted by leadership to engage and motivate them and at the same time ensure that their companies stay ahead of competitors by keeping Gen-Yers motivated to stay in their employment. A theoretical model is suggested for testing Gen-Yers tenure of employment relationship. Key words: Management, Generation Y, Gen-Yers, leadership challenges, motivation, entrepreneurial orientation.

INTRODUCTION The term generation is based more on theory and observation than on empirical evidence. Rhode and Platteel (1999) as cited in Plotz (1999) suggest that it has nothing to do with age, but rather, that they share the same formative experiences. These formative experiences come via the media and it is further suggested that brain patterns of various generations may be different. People born during various times have been given names such as Baby Boomers, Generation X and Y also known as the millennium generation. The term *Corresponding author. E-mail: [email protected].

Generation Z is also more widely heard. The Baby Boomers were born during and after the 2nd World War (1940 to 1960). This generation was known for knowing what to do, and making sure that it is done. The Generation X, (Gen-Xers) born from about 1960 to 1980 respected human values more and felt that their upbringing was too strict. Generation Y is a term used to describe the demographic cohort following Generation X. They are also known as “The Millennial Generation”. They were born from the mid 1980’s to the mid 1990’s. The term was simply generated because it came after Generation X (Grobler et al., 2006). This generation has entered the workforce and brought with them an unexpected change to the labour market. They accept

6000 Afr. J. Bus. Manage. technological change with ease, showed little respect and loyalty for their co-workers and employers (Howe and Straus, 2000).

Howe and Strauss (1991) postulated that the Gen-Yers themselves used the term “Millennials” in place of Generation Y so as not to be associated with Generation X. A decade later they followed up their research and use the start year as 1982 and the end year as 2001. Motivating it, they believe that the graduates of the year 2000 high school sharply contrasts with those born before and after them due to the attention they received from the media and what influenced them politically. Communication technology caused the major difference between the pre-Boomers, the Boomers, Gen-Xers and Gen-Yers. The relevancy lies in the difference in pace and complexity that the media changed. Children watched cartoons and movies in their formative years up to five years and again in their teenage years. Today Gen-Yers find the old Walt Disney films slow and boring if compared with images and action of today’s movies and cartoons (Restak, 2003).

A recent article (Generation Y, 2009) cited by Prof Kaplan an associate managerial science professor at Long Island University-Brooklyn in New York where he stated that Gen-Yers is not likely to respond to traditional command –and control type of management which is still practiced in many firms. They question everything and do not know when to keep their opinions to themselves. This inevitable will leads to conflict in the workplace. Objectives of the study Against the afore-mentioned background, Gen-Yers as a concept and the associated variables with the term are explored. Antecedents of leadership practices that may impact on a Gen-Yers motivation to stay with a firm are identified and unpacked. The purpose of this theoretical study is to suggest a theoretical model that can be explored for future scientific research. It is further motivated that this theoretical study is significant in providing thinking ground for existing companies if they want to employ and retain Gen-Yers. It is further suggested that new or existing companies cannot afford to ignore the possible impact that Gen-Yers may have on their Entrepreneurial Orientation - Firm Performance relationship. RESEARCH METHODOLOGY

Secondary data has been used. Peer-reviewed journal articles, conference proceedings, internet sources, textbooks, media and newspaper publications were utilised in this study. The accuracy of some of the data may be difficult to verify and to overcome this problem and the biased factor, cross checks of data from multiple sources, where possible, were done. It was then possible to rework the data as it applied to the topic of interest in order to suggest a theoretical model for future research (Zikmund, 2003).

LITERATURE REVIEW South Africa’s Generation Y (SA Gen-Yers) has been growing up in times of major transition: a political transition with deep social impacts, accelerating urbanization, and widening and deepening globalisation. Although this presents opportunities, also brings new challenges. The SA Gen-Yers is the group that has to build a unified, non-racial society bridging the prejudices and mistrust of previous generations. They also have to develop and maintain their own cultures and customs while being integrated with a global society. Thus, while globalisation affords this generation with more opportunities, they need to be more competitive and more adaptable as a consequence of international competition (Visser, 2009). The environment and challenges are different and this generation will without doubt have to do things in a different way. Much of their inheritance in terms of the economy, environment and global stability is not looking good. Gen-Yers are custom to the attention of their parents, they have had less financial strain and received high doses of external praise from authority figures to validate their accomplishments. No one loses and everybody is acknowledged for participating. Gen-Yers accept the “latest new thing” with ease in their lives and have a positive self-esteem (Fogarty, 2008; Wierzycka, 2009).

The brain changes its organization and functioning to accommodate the abundance of stimulation forced on it by the modern world. One consequence of this change is that we face constant challenges to our ability to focus our attention. The brain further responds, for better or worse to the technology all around us: cell phones, television, e-mail, laptop movies, computers and the World Wide Web (www) and thereby the brain changes how it functions (Restak, 2003). Gen-Yers have been brought up in a world of instant access to information as they have been exposed to advanced technology and social networking (Wierzycka, 2009).

Management of communication technology

Robinson (2008) as cited in Seopa (2008) said that South Africa's first multicultural generation - Generation Y - has far more opportunities than previous generations; they have been freed of dependence on conventional media, and are more interested in making a success and expressing themselves. Until fairly recent times SA tended to be about ten years behind America in terms of developments in many fields. For example, by 1949 United States of America (USA) had 10 million monochrome Television (TV) sets and had an operational full colour TV by 1961. In 1971 South Africans could view a very good quality colour PAL TV, far better than the average American was familiar with. With the efficiency of current electronic messaging and the global market the

ten year gap has now narrowed to about a year and in some fields, like catching an Internet virus South Africa (SA) is on real time with the rest of the world.

Research conducted amongst 7500 student by Junco and Mastrodicasa (2007) as cited in Wierzycka (2009) revealed that a typical profile of a Gen-Yers comprises of the fact that 40% obtain their information via television, 94% do own a cell phone and they use text messaging; 28% have a blog and 44% of them read other people blocks; 34% obtain instant information via websites, 49% download music using peer to peer file sharing and 16% download software. Gen Y’s have been brought up in a world of convenience and fast tracking information and technology, which shapes their way of thinking. This is supported by several of the other authors cited in this work. These technology advances which created many additional ways to communicate are considered by older generation management as a waste of time if not understood (Arnold, 1997). It is suggested that management must use the social networks and the knowhow of the Gen-Yers to position themselves in groups and networks (Wordon, 2009).

The instant communication framework Gen-Yers developed through extensive computer usage has led to a need for more professional feedback than that of past generations. Communication platforms such as short message service (SMS), e-mail, video chat, and blogging have engendered a mindset that necessitates constant communication with others. That mind-set has been brought into the workplace (Sachs, 2009). They will also seek regular reinforcement, constant feedback, lofty goals and significant rewards (Naidoo, 2005). Based on the literature and discussions, the following research hypothesis is formulated: H1: There is a relationship between the management of communication technology in the workplace (independent variable) and Gen-Yers tenure of employment (dependent variable). If we apply generation factors to SA we will find out that the influences were initially much watered down and focused on white youths. However, over the last 15 years wealthy blacks and most whites have started catching up. As electrification and housing has spread, so has access to TV spread to many black households. Many non-wealthy blacks and whites have access to a compact disk (CD) player. It is suggested that most of the students in high school today have not had the same relentless visual exposure that the USA youth has had over the last forty years. It is estimated that while only about 5% of teenagers in SA have access to the Internet at home and the numbers who have Internet access at school is increasing daily as international and local benefactors make this possible. This in turn will increase access and exposure to the global village (Visser, 2009). Based on the literature and discussions, the following research

Hewitt and Ukpere 6001 hypothesis is formulated: H2: There is a relationship between access to the internet at place of work (independent variable) and Gen-Yers tenure of employment (dependent variable). Work place challenges For the first time in South Africa four different generations are working side-by-side in the workplace. Older workers were the mangers and the younger workers did what was asked of them, without any questions being asked. Definite rules existed as to how the manager was treated and how older workers treated younger workers. Generational differences affect everything from recruitment, team-building, change, and motivation, maintaining and increasing productivity. Gen Y’s are presenting new challenges to those who manage them (Naidoo, 2005).

Robinson (2008) as cited in Seopa (2008) said that Generation Y is more interested in making their mark and expressing themselves than being in “paternalistic conversations” that pushes information to them. They want to belong to a niche as well as stand out as individuals within a group. This generation wants to express itself. Information must be facilitated to them to stimulate conversation in order for them to participate. It is reported that Gen-Yers do not have a good reputation in the workplace. Some managers report them as having no work ethics, lack of respect, distraction with social networking and they show little if any loyalty to the company they are employed in. It is however believed that if Gen-Yers are constantly challenged in the work place to engage in new things their tenure of employment is longer (Wordon, 2009). Based on the literature and discussions, the following research hypothesis is formulated: H3: There is a relationship between workplace challenges (independent variable) and Gen-Yers tenure of employment (dependent variable).

The afore-mentioned were supported by famous South

African radio reporter Cliff (2008) who supported Robinson's (2008) sentiments in his presentation. Cliff (2008) emphasised authenticity in adverts because young people are in charge of their mediums, do not subscribe to mediums, and they can move at any time. According to Cliff (2008), young adults do not want to be patronized. They just want honesty. Positive brand experiences will be shared with friends but so will bad experiences quickly be heard by all on the social network. Cook (2008) cited in Seopa (2008) said “Most companies are not young and learner friendly” young people are often showed away due to a lack of experience and that prevents them from entering the workplace. She further

6002 Afr. J. Bus. Manage. emphasised that firms can learn from young people.

Over the past decade much time and effort has been spent on understanding and integrating Gen-Yers into the workplace. In effect, employers have had to change their expectations and management style when dealing with Gen-Yers as employees. Performance management is more difficult and riddled with pitfalls. Patience, self-control and determination are key requirements. Tenure of employment is much shorter (Wierzycka, 2009). Gen-Yers in SA have grown during South Africa’s first fifteen years of democracy; therefore they are well-informed about their human rights as stated in the constitution. It has been reported that this is an issue in corporate environments. Some employers are concerned that Gen-Yers have too great expectations from the workplace and desire to shape their jobs to fit their lives rather than adapt their lives to the workplace (Gorgarty, 2008). To better understand this mindset, many large companies are currently studying this conflict and are trying to devise new programs to help older employees understand Gen-Yers, while at the same time making them more comfortable in the workplace. The divide between work and life is continually growing narrower as more people shift from the office to a home based workplace (Sasch, 2009). The rate of home-based office workers has increased significantly in the past two years. Gen-Yers do not want to repeat the mistakes their parents have made, working long hours, neglecting family, friends and personal pursuits (Naidoo, 2005). Based on the literature and discussions, the following research hypothesis is formulated:

H4: There is a relationship between Gen-Yers desire to fit work to lifestyle (independent variable) and Gen-Yers tenure of employment (dependent variable).

Leadership support

Having low inherent expectations of corporate loyalty, Gen-Yers will deal with the emotional trauma of being unemployed better and will adjust rapidly to changing work conditions. Gen-Yers carry little financial responsibility in terms of property ownership or investments, and thus are better able to survive a crisis. They are also highly educated, skilled at multi-tasking and cheaper to employ. Although spoilt, they are not ignorant. Gen-Yers will lower their demands and expectations to meet their needs. It is thus likely that, in the short term, all that knowledge, higher education and creativity can be harnessed by employers with a minimum of effort. The question that arises is “how does today’s leadership deal with the challenges Generation Y brings to the workplace (Naidoo, 2005; Wordon, 2009).

When leading and motivating Gen-Yers, honesty is valued by them; it is suggested that managers must communicate on their terms; make the workplace fun; do

not expect something from them if you cannot do it yourself; explain the “why factor” and what is in it for them; let them know what they do, matters. Leaders need to make work challenging to take advantage of their high-achievement mentality. Part of that is to build relationships with them and to get to know them. Customised benefits and tailored career paths is something managers should be considering. Generation Y want to be part of an organisation that is on the cutting edge of technology. They should be challenged to find technological solutions to everyday issues(Veldsman, 2002). This generation is used to making and spending money. “Show me the money,” is part of Y’s everyday language. They are extremely good at negotiating and will seek compensation packages that allow them to maintain their lifestyles. Money is important to them, but so is having work-life balance (Nadioo, 2005).

Attaining that balance is what will drive them and when the time comes they will want to spend more time with their children. Unlike the Boomers and Generation X, Generation Y will see family as being first (Wardon, 2009).Leaders will have to find a balance between providing a work environment that will leverage the genius of Generation Y and not alienating the rest of the workforce. By knowing more about Gen-Yers a leader can change behaviour to reverse their perceptions. They do spend more time on Face book than on the details of their jobs but managers can use this knowledge to create their own groups and networks and blogs. As long as a challenge is provided Gen-Yers have proven to stay long after hours they do believe that loyalty works both ways and that respect is a two way street (Wordon, 2009). The leadership challenges associated with future-fit organisations will require better and different leadership challenges. Gen – Yers will stay within a firm if they can identify with their leadership personal stance (Veldsman, 2002). Based on the literature and discussions, the following research hypothesis is formulated:

H5: There is a relationship between leadership support (independent variable) and Gen-Yers tenure of employment (dependent variable). Tolerance for creativity and innovation

Gen-Yers are demanding, outspoken, ambitious, demand high rewards, they want fast track career progression, active mentorship’s, and they want to be acknowledge, most of them want time to peruse their own interest. They struggle to deal with failure or criticism and because they have been raised to be team players, with a great deal of oversight, they tend to flounder if left unmanaged or unsupervised (Amar, 2004).They resent hierarchical leadership structures. If their demands are not met, they are quick to resign, often without another job to go to,safe in the knowledge that their parents will look after them (Wierzycka, 2009).

Figure 1. Proposed Theoretical Model for Gen-Yers Tenure of Employment

Diversities and history generate creativity in the workplace. The more diversity one has in the workplace the more creativity one can expect. The workplace needs to appreciate that, Gen-Yers do not want to sit and cannot sit in one place. In a new financial reality, many companies will look to Gen-Yers to come up with cheaper, more technology-oriented solutions. The headspace of young people is indeed a company's greatest asset (Wordon, 2009). Based on the literature and discussions, the following research hypothesis is formulated:

H6: There is a relationship between the level of tolerance for creativity and innovation in the workplace (independent variable) and Gen-Yers tenure of employment (dependent variable). Entrepreneurial orientation (EO) The term EO refers to processes, decision-making and practices within an existing organisation that may lead to a new activity, venture, product, process, activity. The core of EO lies in the fact to act alone, to take risks, to be innovative, to be competitively aggressive and to be proactive (Dess and Lumpkin, 2005). At the centre of entrepreneurship is innovativeness. It is the fundamental basis of an entrepreneurial organisation for developing new products or designing new processes (Drucker, 1985; Schumpeter, 1934). Innovativeness describes an organisations willingness to add newness with added value. Risk-taking is associated with the willingness of the entrepreneur to take calculated business related risks

Hewitt and Ukpere 6003 (Aloulou and Fayolle, 2005). The concept pro-activeness has two attributes added to it namely autonomy and competitive aggressiveness, where autonomy refers to the actions undertaken by individuals or teams intended to establish a new business concept. Competitive aggressiveness refers to a response to threads that already exists in the market place (Dess and Lumpkin, 2005). Knight (1997) found empirically, that risk taking and competitive aggressiveness should be included in the same dimensions with pro-activeness. Based on the literature and discussions, the following research hypothesis is formulated: H7: There is a relationship between Gen-Yers tenure of employment (independent variable) and firm entrepreneurial orientation- firm performance (dependent variable).

Conclusions

Generations are shaped by the events around them. In theory the economic chaos should act to modify outlook on life. In practice it is more likely to merely change their short-term behaviour. Gen-Yers may feel that their comfortable existence is being threatened by current events; the global crisis may well be the best thing that has happened to its members. Without a doubt, and annoyingly for most of Generation X managers, Gen-Yers will come forward as a more powerful force in the workplace (Morton, 2002).

Given the financial turmoil one may well ask what the future holds for Gen-Yers. For the first time they are facing real complications which test their ability to make demands on others. Widespread unemployment and financial trouble will challenge any feelings of entitlement. Where Gen-Yers have always relied on parents for financial support, the position may well overturn. Faced with the decimation of their savings the same parents may well have to turn to their Gen Yer children for financial support. Although not brought up to be responsible and accountable, they are extremely adaptable (Martin, 2005).

FUTURE RESEARCH

There are many arguments as to what impacts on a firm’s EO (Dess and Lumpkin, 2005). Future research should consider the impact of Gen-Yers tenure of employment on existing firm’s EO. The antecedent’s communication technology; workplace environment and management with their respective variables as identified in this study represent only a few possibilities. The following theoretical model (Figure 1) suggested therefore for future research.

Although it is argued that Gen-Yers tenure of employment and its antecedents has a relationship with

Tolerance for creativity and innovation in the workplace

H6

Management of communication

H1

Gen-Yers tenure of

employment

H7

Access to the internet at place of work

H2

Workplace challenges

H3

Desire to fit work to lifestyle

H4

Leadership support

H5

Entrepreneurial orientation

-firm performance

6004 Afr. J. Bus. Manage. firm entrepreneurial orientation, it is postulated that other key constructs be explored. If these are combined otherwise maybe stronger relationships can be identified. The theory leaves itself wide open for speculation about the real impact and behaviour of Gen-Yers in the workplace. Few well researched academic articles exist. Most of the secondary data used stem from e-articles, hearsay and speeches made by public figures and or company chief executive officer(s) (CEO’s). The model suggested, based on the collection of this secondary data is a starting point for future empirical research to see if indeed a new wind is blowing for the scientific teachings of management. REFERENCES Aloulou W, Fayolle A (2005). A conceptual approach of entrepreneurial

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Earnings management and accounting conservatism: The case of Iran

Younes Badavar Nahandi, Saeed Mahmoudzadeh Baghbani* and Amin Bolouri

Department of Accounting, Islamic Azad University, Tabriz Branch, Tabriz, Iran.

Accepted 23 December, 2011

This paper investigates the relationship between earnings management and accounting conservatism in Iranian firms. In this paper, conservatism is measured by Basu (1997) and Roychowdhury and Watts (2007) models, and earnings management is measured by modified Jones model (1996). The statistical population studied at this research includes firms accepted in Tehran Stock Exchange, and the period of research is the years since 2001 to 2008. The systematic omission method has been used in this research in order to achieve the sample and 480 firm-year observations were chosen as the sample for research. This paper empirically tests the relationship between earnings management and the asymmetric timeliness of earnings using ordinary least squares (OLS) regressions. Results show a negative relationship between earnings management and accounting conservatism. The results suggest that firms with lower levels of earnings management appear to have greater asymmetric timeliness coefficients than firms with higher levels of earnings management. The results are robust to various control variables that include the market-to-book ratio, leverage and firm size. Key words: Earnings management, accounting conservatism, Tehran stock exchange.

INTRODUCTION An organization is a nexus of contracts (Jensen and Meckling, 1976). These contracts exist to mitigate agency problems associated with the separation of ownership and control within the firm. One of the most important contracts is the contract between shareholders and managers of the firm. Managers are the agents of shareholders. They are employed to manage the firm on shareholders’ behalf. For the reason that managers may act on maximizing their own wealth rather than shareholders’ wealth, mechanisms are put in place to mitigate these problems. One of these mechanisms is accounting. Accounting has been used for many centuries by organizations to facilitate contracting (Watts and Zimmerman, 1986). The key attribute of accounting in contracting is its role in measuring the performance and wealth of the organization. Accounting numbers are the main variables used in the compensation for management (Jensen and Murphy, 1990; Sloan, 1993; *Corresponding author. E-mail: [email protected]. Tel: +989144052660.

Ittner et al., 1997; Murphy, 1999); hence, managers have a proclivity to manage the firm’s earnings (that is, earnings management) because accounting numbers affect their wealth (Lim, 2009).

Watts (2003) argue that accounting information needs to be timely, verifiable and conservative to be useful in contracting. Timeliness is important in contracting to avoid moral hazards associated with managers’ limited tenure and the limited liability nature of the firm. Timely information allows shareholders to reward managers effectively and enables debt-holders to ensure the firm does not breach the debt covenants. Verifiability is important so that the contract can be enforced. A higher degree of verification is required for gains than losses because contracting parties have asymmetric payoffs from the contracts. This asymmetric verification leads to timelier recognition of losses than gains (conservatism) and as discussed earlier, timely loss recognition is important in contracting. Managers have the tendency to manipulate earnings in an upward direction by choosing aggressive accounting (the opposite of conservative accounting), which is why conservative accounting practices are required to prevent overcompensation and

6006 Afr. J. Bus. Manage. the breaching of debt covenants by managers (Watts, 2003). Additionally, timely loss recognition reduces managers’ incentives to invest in negative NPV projects if they know in advance that the losses will be recognized earlier, and that they will be more likely to occur during their tenure (Ball, 2001; Ball and Shivakumar, 2005). Finally, in theory, the relation between earnings management and accounting conservatism is that opportunistic financial reporting is counterbalanced by accounting conservatism (Watts, 2003). Therefore, this paper examines the relationship between earnings management and accounting conservatism in the Iranian firms. Earnings management Information asymmetry between managers and shareholders empower the managers to use discretionary behavior while reporting earnings of a company to increase their own utility function. Theoretically, a present value of future cash flows is considered as the value of the company. Thus, any increase in earnings depicts the increase in overall value of company and vice versa (Lev, 1989). Especially in case of losses to company, earnings are managed to show a favorable situation (Hayn, 1995). This presents the idea of earnings management that is the use of accounting choices to amend reported earnings for the sake of managers’ benefits. Alternatively, earnings management can be defined as reasonable as well as legal decision-making and reporting of financial results, by managers, with the intention to achieve stability in earnings.

Earnings can be managed using real transactions such as asset sales and/or accelerating or deferring revenue and expenses using accounting methods and estimates (Peasnell et al., 2005). The effect of the latter method accumulates in accruals. One advantage of using accruals to manage earnings is that it is difficult and costly for the users to unravel accounting numbers in order to make economic decisions. Therefore, accruals are more likely to be used by managers to manage earnings rather than structuring actual transactions. We follow recent research studies in earnings management by focusing on accruals manipulation (Klein, 2002; Xie et al., 2003). We use the definition by Healy and Wahlen (1999) throughout the paper that earnings management reflects an opportunistic behavior of the management. Nevertheless, we acknowledge that some accounting choices and estimates may be used to signal private information. Accounting conservatism Accounting conservatism has definitions of two types, specifically, conditional and unconditional accounting

conservatism. Unconditional conservatism is defined as an accounting bias toward reporting low book values of stockholder’s equity. Under this definition, a firm’s accounting is conservative if it delays revenue recognition by one period, or subtracts a constant amount from earnings every period independently of current economic gains and losses. Conditional conservatism, on the other hand, stresses the timeliness of loss recognition. Under conditional conservatism, the reduction in accounting earnings reflects a contemporaneous economic loss. It is not caused by an earlier expense recognition, deferring revenue, or under-reporting income or book value on a regulated basis. Under unconditional conservatism, when the downward bias is known and is adjustable, the conservatism should have a very little impact on contracting. However, when the bias is hard to assess due to arbitrary discretion, the accounting conservatism is likely to reduce contracting efficiency. Under conditional conservatism, accounting conservatism can increase efficiency of debt contracting, compensation contracting and corporate governance. Therefore, only conditional conservatism should be used as an indicator of a high-quality financial report. In this paper, we define conservatism to be conditional conservatism based on the treatment by Basu (1997). Accounting conservatism and earnings management Earnings management and conservatism can be regarded as the two earnings characteristics that have been most intensely studied in empirical accounting research, since they are presumed to capture effects of managerial incentives on reported earnings (Christensen et al., 2008). Earnings management refers to the judgment used by managers to alter financial reports to either mislead some stakeholders about the economic performance of the firm or to influence contractual outcomes that are contingent on accounting numbers (Healy and Wahlen, 1999). Conservatism corresponds to an accountant’s tendency to require a higher degree of verification for ‘good news’ as compared to ‘bad news’. This implies that ‘bad news’ tends to be incorporated in earnings in a timelier manner as compared to ‘good news’ (Basu, 1997).

According to Watts (2003), opportunistic financial reporting is counterbalanced by accounting conservatism. Regarding information asymmetry, there is a need for verifiable accounting reports. Given the asymmetric information and payoffs between several parties involved, conservatism should, in theory, aid in efficient contracting between the firm and its stakeholders. Pae (2007) explains that due to higher litigation costs, managers have incentives to understate earnings by expediting the recognition of bad news rather than good news. Management’s discretion over accruals in that situation leads to an increase in the level of accounting

conservatism. On the other hand, the bonus incentive for managers leads to postponing or hiding bad news to achieve their bonus-plan goals. This will decrease the level of earnings conservatism. Consequently, in theory, the relation between earnings management and accounting conservatism is that opportunistic financial reporting is counterbalanced by accounting conservatism.

Lara et al. (2005) investigates the effects of earnings management on accounting conservatism directly. This relation is measured using the Basu (1997) model to measure conservatism and the Jones (1991) model to measure earnings management by partitioning total accruals in discretionary and non-discretionary accruals. The study finds differences in incentives for earnings management in different countries. They investigate the differences in the relation between conservatism and earnings management for code-law based countries and common-law based countries. This different constitutional context significantly drives conservatism. They conclude that managers operating in code-law countries have incentives to reduce earnings. Their results show that, if you remove manager’s discretion, in common-law countries, there is no change in the practice of conservatism while in code-law countries, the practice of conservatism is reduced. This means that managers in code-law countries have incentives to manage earning downward, toward conservatism, which managers in common-law countries do not have.

Ball and Shivakumar (2005) study the relation between conditional accounting conservatism and earnings management also by investigating the role of accruals on the asymmetric timeliness of the recognition of gains and losses. They concluded that there is a major role for accounting accruals in recognizing gains and losses more timely, so before actual cash flow is realized and that, consistent with Basu (1997), accrued loss recognition is more prevalent than accrued gain recognition.

Katz (2006) explores the change in earnings management and conservatism as firm’s transition between private and public ownership. He concluded that during the public phase, firms engage in greater upward earnings management to avoid small earnings decreases and recognizes losses in a timelier manner.

Dunbar et al. (2007) examines the relation between earnings management to meet or barely beat analyst forecasts and the cross-sectional variation in contemporaneous and past accounting conservatism. They first estimate a modified version of the Basu (1997) model and find a negative relation between contemporaneous conditional conservatism and earnings management to avoid a negative earnings surprise. In contrast, they find a positive relation between past unconditional conservatism and earnings management to avoid a negative earnings surprise. Taken together, they result to suggest that unconditional conservative accounting generates slack that, in the presence of bad

Nahandi et al. 6007 news, allows managers to avoid writing down net asset values and thus increases firms’ likelihood of meeting or beating analyst forecasts.

Pae (2007) examines the impact of management discretion over accruals on conditional accounting conservatism, and finds that: 1) conditional accounting conservatism reflected in accruals is mainly due to unexpected accruals; 2) the negative association between unconditional and conditional accounting conservatism is mainly attributable to unexpected accruals.

Dimitropoulos (2008) examines the impact of conservatism on accrual measures and drivers, in the Greek capital market between 1998 and 2004. Results indicated that conservatism has a significant impact on accrual measures (total and non-discretionary accruals) but not on accrual drivers (earnings, sales, change in sales and property, plant and equipment).

Li and Zhang (2010) with using a sample of 106, 141 firm-year observations from 1968 to 2006, found that reliable accruals exhibit greater asymmetric timeliness, compared to unreliable accruals, suggesting that managers are slower at recognizing losses relative to gains in unreliable accruals than they do in reliable accruals. In addition, they find conservatism affects accrual persistence only to the extent that it reduces the persistence of reliable accruals, but not that of unreliable accruals, suggesting managers do not incorporate greater portions of transitory losses in unreliable accruals than they do in reliable accruals. Therefore:

Hypothesis: There is a negative relationship between earnings management and accounting conservatism. MATERIALS AND METHODS Statistical population and sample The statistical population studied at this research is the firms accepted in Tehran Stock Exchange, and the period of research is the years since 2001 to 2008. The systematic omission method has been used in this research in order to achieve the sample, and the criteria used for selecting the sample are as follows: 1. Firms selected must be accepted since the year 2001 in Tehran Stock Exchange. 2. Firms should not be changed the financial period in the study period. 3. Firms should not be members of any financial investment and mediators. 4. Book value of equity at the beginning of the fiscal year of firms should not be negative. In this way and by applying the aforementioned criteria, 480 firm-year observations remained, which all were chosen as the sample for research. Measurement of earnings management

Although, there is no perfect proxy for earnings management, most

6008 Afr. J. Bus. Manage. current studies focus on manager’s use of discretionary accruals. Consistent with previous literature, we estimated discretionary accruals using cross-sectional version of modified Jones model (Dechow et al., 1996).

First, total accruals (TA) are defined in this study as the difference between net income before extraordinary items (NI) and cash flow from operating activities (OCF): TA = NI – OCF. Then regress to total accruals on the change in sales and property, plant and equipment.

ti,ε

1ti,A

ti,PPE

3α

1ti,A

ti,∆REV

2α

1ti,A

1

1α

1ti,A

ti,TA

+

−

+

−

+

−

=

−

where: TA i, t = Total accruals of the firm i in the year t, A i, t-1 = Total assets of the firm i at the end of the year t-1, ∆REV i, t = Revenues of the firm i in the year t less revenues in the year t-1, PPE i, t = Gross property, plant and equipment of the firm i at the end of the year t, α1, α2, α3 = Firm specific parameters, ε = the residuals. The second step is to use these firm-specific parameter estimates from the previous equation (that is, α1, α2, α3) to divide the total accruals into a discretionary part (DA) and a non-discretionary part (NDA). Non-discretionary accruals (NDA) are the predicted part of total accruals and discretionary accruals (DA) are the residual resulting from this regression.

1ti,A

ti,PPE

3α

1ti,A

ti,∆REC

ti,∆REV

2α

1ti,A

1

1α

ti,NDA

−

+

−

−+

−

=

ti,NDA

1ti,A

ti,TA

ti,DA −

−

=

where: NDA i, t = Non discretionary accruals of the firm i in the year t, ∆REC i, t = Net receivables of the firm i in the year t less net receivables in the year t-1, DA i, t = The discretionary component of accruals of the firm i in the year t. Measurement of accounting conservatism To measure conservatism, we employ the following model based on Basu’s (1997) specification:

ti,ε

ti,R

ti,D

3β

ti,R

2β

ti,D

1β

0α

1ti,P

ti,E

+×+++=

− E i, t = Earnings for the firm i in the year t, P i, t-1 = Stock market price for the firm i in the end of year t-1, R i, t = Stock market return for the firm i in the year t, D i, t = Dummy variable that is equal to 1 if the stock market return for the firm i in the year t is negative, and equal to 0 if the stock market return for the firm i in the year t is non-negative. The coefficient on R measures the timeliness of earnings with respect to positive return (that is, good news). The coefficient on D× R measures the incremental timeliness of earnings with respect to negative return (that is, bad news) and indicates the difference in the sensitivity of earnings to good news and bad news, that is, the asymmetric timeliness of earnings. Our primary concern in this analysis is the coefficient on D × R, which measures the degree of accounting conservatism.

Estimation model

While the Basu (1997) measure on accounting conservatism is a dominant model in current research, it is sometimes argued that Basu’s (1997) model has some problems. The problem is that the beginning composition of equity value affects asymmetric timeliness measured over a short horizon, and that past timeliness of earnings with respect to returns affects future earnings timeliness (Roychowdhury and Watts, 2007; LaFond and Roychowdhury, 2008). To address this problem, we use Roychowdhury and Watts (2007) modification of the Basu (1997) measure. Based on their model, we examine the association between earnings management and asymmetric timeliness by using cumulative earnings and returns over a one-year, two-year and three-year period. We employ the following model:

tε

tSIZE

tj,tR

tj,tD

11β

tLEV

tj,tR

tj,tD

10β

tMB

tj,tR

tj,tD

9β

tDA

tj,tR

tj,tD

8β

tj,tR

tj,tD

7β

tSIZE

tj,tR

6β

tLEV

tj,tR

5β

tMB

tj,tR

4β

tDA

tj,tR

3β

tj,tR

2β

tj,tD

1β

0α

t1,jtP

tj,tE

++++××××−−−−

××××−−−−

++++××××−−−−

××××−−−−

++++

××××−−−−

××××−−−−

++++××××−−−−

××××−−−−

++++−−−−

××××−−−−

++++××××−−−−

++++

××××−−−−

++++××××−−−−

++++××××−−−−

++++−−−−

++++−−−−

++++====

−−−−−−−−

−−−−

where: E t-j, t = Cumulative income before extraordinary items during the years t-j to t, where j varies from 0 to 2. The special case of j = 0 represents earnings for the year t, with no cummulation (that is, one-year period). The case of j = 1 represents cumulative earnings for the year t and t-1 (that is, two-year period). The case of j = 2 represents cumulative earnings for the year t, t-1 and t-2 (that is, three-year period), P t-j-1, t = Market value of equity at the end of the year t-j-1, R t-j, t = Cumulative returns during the years t-j to t, where j varies from 0 to 2, D t-j, t = A zero/one indicator variable set equal to 1 if R t-j, t < 0, MB t = Market to book ratio: The capital market value divided by the capital book value at the end of the fiscal year, LEV t

= (Leverage ratio): The debt at the end of the fiscal period divided by the capital market value at the beginning of the fiscal year, SIZE t

= The natural logarithm of the capital market value at the end of the fiscal year.

In the preceding regression model, the coefficients on R×DA (β3) measure the relationship between earnings timeliness with regard to good news and DA.

The coefficients on D×R×DA (β8) measure the relationship between asymmetric timeliness with respect to bad news and DA. If the relationship between earnings management and accounting conservatism is similar to the prediction of our hypothesis, the relationship would be expected to be negative. Therefore, the signs of the coefficients in the regression model are expected to be β8 < 0. We control for several additional factors that have been found to be related to the demand for accounting conservatism. These include the market-to-book ratio (MB), leverage (LEV) and firm size (SIZE). The market-to-book ratio is expected to control for the effect of beginning composition of equity value on future asymmetric timeliness since the beginning composition of equity value is determined by the cumulative effect of past asymmetric timeliness (Roychowdhury and Watts, 2007; LaFond and Roychowdhury, 2008). We also use financial leverage to control for debt holders’ demand for accounting conservatism. Firms with high leverage tend to have the greater conflict between bondholders and shareholders and are likely to demand for conservative accounting because prior studies indicate that accounting conservatism mitigates bondholder and shareholder conflict and reduces agency costs (Ahmed et al., 2002; Frankel and Roychowdhury, 2005; Zhang, 2006; Qiang, 2007; Beatty et al., 2008). Finally, prior studies provide evidence that firm size is negatively related to the asymmetric timeliness of earnings (Givoly et al., 2007; LaFond and Watts, 2008; Shuto and Takada, 2009).

RESULTS

The descriptive statistics

In order to test the data, we checked the data type by descriptive statistics, results of which are presented in Tables 1. The descriptive statistics (Table 1) show the mean values, median, and standard deviation values of the data.

Correlation analyzes

After descriptive statistics, correlation analysis has been performed to examine the relationship between independent and dependent variables. The association between two continuous variables is assessed using Pearson correlation.

The correlation analysis helps to ascertain whether there is any multicollinearity problem among the independent variables. Table 2 presents the correlations matrix among the variables used in estimating the models used in this study. Based on standard criteria, the correlation value of less than 0.7 would not pose any serious multicollinearity problems and affect the validity of the findings. Table 2 shows that none of the correlation values exceed 0.7. Hence, there was no serious multicollinearity problem among the independent variables.

The correlations reveal that E/P is positively correlated with R and negatively correlated with D in the J = 0 and J = 1. This indicates that reported earnings reflect at least a portion of the information reflected in return and are consistent with those in prior studies (Basu, 1997; Ball et al., 2000; LaFond and Roychowdhury, 2008).

Main results

Before testing the hypothesis, as a preliminary analysis, we examine whether there exists the accounting practice of financial reporting conservatism in Iran, as measured by the asymmetric timeliness of earnings. We find that the coefficient on D × R, which measures the difference in the sensitivity of earnings to good news and bad news, is significantly positive in Basu’s model (that is, j = 0) and Roychowdhury and Watts model (that is, j = 1, 2). These results suggest that the practice of accounting conservatism is observed in Iran, which is consistent with the findings of Ball et al. (2000).

To test the hypothesis, we use a multiple regression framework to examine the relationship between earnings management and the asymmetric timeliness of earnings. The estimated results using ordinary least squares (OLS) regression are summarized in Tables 3 and 4.

In the model j = 2 (that is, three-year period), as expected, the coefficient on D×R×DA is significantly negative on less than the 0.01 level. Therefore, in the case j = 2, there is a significantly negative relationship

Nahandi et al. 6009 between earnings management and accounting conservatism. These results suggest that firms with lower levels of earnings management appear to have greater asymmetric timeliness coefficients than firms with higher levels of earnings management. This result is consistent with the argument by Watts (2003) that opportunistic financial reporting is counterbalanced by accounting conservatism.

With respect to the control variables, the coefficient on D×R×SIZE is significantly negative as expected in all models, which accordance with the larger firms tends to report fewer conservative earnings. The coefficient on D×R×LEV is significantly negative in the case j = 0, which indicates that firms with higher leverage are less asymmetrically timely in recognizing bad news. This result is opposite with our prediction. Finally, we found evidence that the market-to-book ratio has a positive significant effect on the asymmetric timeliness of earnings. Consequently, our results hold after controlling the market-to-book ratio, leverage and firm size.

Conclusion

In this study, we examine whether earnings manage-ment, are associated with accounting conservatism. We consider the discretionary accruals of a firm to represent the extent of earnings management. Our estimate of discretionary accruals is based on the modified Jones (1996) model. Accounting conservatism as measured by the asymmetric timeliness of earnings is based on the Basu (1997) and Roychowdhury and Watts (2007) model. The conflict of interest between the managers of commercial section and other beneficiaries results from the fact that the managers of the firm effectively control the firm’s assets while they do not have the ownership of major shares of that firm. As a result, it is expected that they impose an opportunistic treatment in the financial reporting, including earlier identification of the earnings. Opportunistic financial reporting is counter-balanced by accounting conservatism. Regarding information asymmetry, there is a need for verifiable accounting reports. Given the asymmetric information and payoffs between several parties involved, conservatism should, in theory, aid in efficient contracting between the firm and its stakeholders. Therefore, we hypothesize that the relationship between earnings management and accounting conservatism is significantly negative.

We empirically test the relationship between earnings management and the asymmetric timeliness of earnings using ordinary least squares (OLS) regressions. The empirical results are generally consistent with the prediction of our hypothesis. We find a significant negative relationship between earnings management and accounting conservatism. The results suggest that firms with lower levels of earnings management appear to have greater asymmetric timeliness coefficients than firms with higher levels of earnings management.


Table 1. Descriptive statistics on variables.

Variable j = 0; N = 480

j = 1; N = 420

j = 2; N = 360

Mean Median Std. D Mean Median Std. D Mean Median Std. D

E/P 0.2025 0.1845 0.1597 0.3765 0.3488 0.2376 0.5211 0.4759 0.2965

D 0.3542 0 0.4788 0.2810 0 0.45 0.2389 0 0.427

R 0.3163 0.13 0.7312 0.617 0.34 1.087 0.8863 0.5650 1.308

DA 0.0014 -0.0071 0.1692 0.0077 -0.0026 0.1739 -0.0848 0 1.458

MB 4.3127 2.5345 6.1646 4.187 2.444 6.159 3.843 2.283 5.91

LEV 1.5817 0.9646 1.8553 1.6 0.9817 1.897 1.642 1.079 1.95

SIZE 11.535 11.485 0.6559 11.563 11.503 0.665 11.585 11.512 0.6748

Table 2. Correlation analysis for variables.

E/P D R DA MB LEV SIZE

j = 0; N = 480

E/P 1 -0.193** (0.000) 0.474** (0.000) 0.072 (0.113) -0.080 (0.078) 0.168** (0.000) 0.176** (0.000)

D 1 -0.528** (0.000) 0.040 (0.388) -0.158** (0.001) -0.060 (0.189) -0.051 (0.268)

R 1 0.034 (0.456) 0.240** (0.000) 0.106* (0.020) 0.174** (0.000)

DA 1 -0.060 (0.188) -0.174 (0.000) 0.054 (0.237)

MB 1 -0.214 (0.000) 0.276 (0.000)

LEV 1 -0.136 (0.003)

SIZE 1

j = 1;

N = 420

E/P 1 -0.035 (0.471) 0.231** (0.000) 0.058 (0.238) -0.136** (0.005) 0.128** (0.009) 0.205** (0.000)

D 1 -0.521** (0.000) -0.065 (0.181) -0.168** (0.001) 0.121* (0.013) -0.078 (0.112)

R 1 0.087 (0.076) 0.315** (0.000) -0.047 (0.336) 0.281** (0.000

DA 1 -0.044 (0.367) -0.180** (0.000) 0.044 (0.368)

MB 1 -0.213** (0.000) 0.282** (0.000)

LEV 1 -0.163** (0.001)

SIZE 1

j = 2; N = 360

E/P 1 0.147** (0.000) -0.008 (0.885) 0.216** (0.000) -0.215** (0.000) 0.202** (0.000) 0.170** (0.001)

D 1 -0.514** (0.000) -0.200** (0.000) -0.197** (0.000) 0.189** (0.000) -0.142** (0.007) R 1 0.216** (0.000) 0.318** (0.000) -0.094 (0.076) 0.378** (0.000)

Nahandi et al. 6011

Table 2. Contd.

DA 1 0.104* (0.049) 0.097 (0.067) 0.099 (0.093) MB 1 -0.196** (0.000) 0.276** (0.000) LEV 1 -0.190** (0.000) SIZE 1

*Correlation is significant at the 0.05 level (2-tailed); **. Correlation is significant at the 0.01 level (2-tailed).

Table 3. Regression results on the relationship earnings management and accounting conservatism (Basu model).

Independent variable j = 0

Coefficient T statistics Prob.

INTERCEPT 0.169 15.883 0.000

D 0.021 1.045 0.296

R -0.069 -0.434 0.665

R×DA 0.101 2.497 0.013

R×MB -0.002 -1.437 0.151

R×LEV 0.017 3.317 0.001

R×SIZE 0.012 0.878 0.380

D×R 2.102 2.635 0.009

D×R×DA -0.115 -0.537 0.592

D×R×MB 0.020 1.679 0.094

D×R×LEV -0.089 -3.003 0.003

D×R×SIZE -0.174 -2.476 0.014

F Statistics = 17.277 Prob. (F-Statistic) = 0.000

R-squared = 0.289 Adjusted R-squared = 0.272

N = 480 Durbin-Watson Stat. = 1.764

This findings show that opportunistic financial reporting is counterbalanced by accounting conservatism.

Our results are robust to various control variables that include the market-to-book ratio, leverage and firm size. In conclusion, our results suggest that accounting conservatism is expected to resolve the agency problem between managers

and shareholders and to reduce the agency costs of firms. ACKNOWLEDGEMENT The authors would like to acknowledge Islamic Azad University, Tabriz Branch, Iran, for financial

support of this research. REFERENCES

Ahmed AS, Billings BK, Morton MR, Stanford M (2002). The

Role of Accounting Conservatism in Mitigating Bondholder- Shareholder Conflicts over Dividend Policy and in Reducing Debt Costs. Account. Rev., 77(4): 867-890.


Table 4. Regression results on the relationship earnings management and accounting conservatism (Roychowdhury and Watts model).

Independent variable j = 1

j = 2

Coefficient T Statistics Prob. Coefficient T Statistics Prob.

INTERCEPT 0.335 18.085 0.000 0.490 19.457 0.000

D 0.054 1.393 0.164 0.005 0.083 0.934

R -0.045 -0.277 0.782 -0.251 -1.497 0.135

R×DA 0.066 1.454 0.147 0.254 3.113 0.002

R×MB -0.001 -1.024 0.306 -0.002 -2.236 0.026

R×LEV 0.023 4.142 0.000 0.022 4.180 0.000

R×SIZE 0.005 0.404 0.687 0.021 1.582 0.115

D×R 4.751 4.293 0.000 6.774 4.509 0.000

D×R×DA -0.215 -1.182 0.238 -1.468 -5.070 0.000

D×R×MB 0.046 2.430 0.016 0.117 2.472 0.014

D×R×LEV -0.023 -1.057 0.291 -0.063 -1.915 0.056

D×R×SIZE -0.420 -4.278 0.000 -0.657 -4.934 0.000

F Statistics 6.944 9.295

Prob. (F-Statistic) 0.000 0.000

R-squared 0.158 0.227

Adjusted R-squared 0.135 0.203

Durbin-Watson Stat 1.703 1.760

N 420 360

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Dunbar AE, He H, Phillips JD, Teitel K (2007). Accounting Conservatism and Income-Increasing Earnings Management. Working Paper, University of Connecticut.

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Katz SP (2006). Earnings Management and Conservatism in the Transition between Private and Public Ownership: The Role of Private Equity Sponsors. Working Paper, Columbia University.

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LaFond R, Roychowdhury S (2008). Managerial Ownership and Accounting Conservatism. J. Account. Res., 46(1): 1-36.

LaFond R, Watts RL (2008). The Information Role of Conservatism. Account. Rev., 83(2): 447-478.

Lev B (1989). On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two Decades of Empirical Research. J. Account. Res., 27: 153-201.

Li Y, Zhang J (2010). Conditional Conservatism and Accrual Persistence. Working Paper, University of Waterloo.

Lim R (2009). The Relationship between Corporate Governance and Accounting Conservatism. The University of New South Wales.

Murphy KJ (1999). Executive Compensation. In Handbook of Labor Economics, Orley Ashenfelter and David Card eds. Amsterdam: North Holland Elsevier.

Pae J (2007). Unexpected Accruals and Conditional Accounting Conservatism. J. Bus. Financ. Account., (Forthcoming).

Peasnell KV, Pope PF, Young S (2005). Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?. J. Bus. Financ. Account., 32(7-8): 1311-1346.

Qiang X (2007). The Effects of Contracting, Litigation, Regulation, and Tax Costs on Conditional and Unconditional Conservatism: Cross-Sectional Evidence at the Firm Level. Account. Rev., 82(3): 759-796.

Shuto A, Takada T (2009). Managerial Ownership and Accounting Conservatism: Empirical Evidence from Japan. Working Paper, Kobe University.

Sloan R (1993). Accounting Earnings and Top Executive

Compensation. J. Account. Econ., 16(1-3): 55-100. Watts RL (2003a). Conservatism in Accounting Part I: Explanations and

Implications. Account. Horiz., 17(3): 207-221. Watts RL (2003b). Conservatism in Accounting Part II: Evidence and

Research Opportunities. Account. Horiz., 17(4): 287-301. Watts RL, Zimmerman JL (1986). Positive Accounting Theory,

Englewood Cliffs NJ: Prentice-Hall.

Nahandi et al. 6013 Xie B, Davidson WN, Dadalt PJ (2003). Earnings Management and

Corporate Governance: The Roles of the Board and the Audit Committee. J. Corp. Financ., 9(3): 295-316.

Zhang J (2006). Efficiency Gains from Accounting Conservatism: Benefits to Lenders and Borrowers. Working Paper, University of Southern California.



A novel financial risk contagion model based on the MGARCH process and its parameter estimation

Wei Zhou* and Jian-min He

School of Economics and Management, Southeast University, 2 Dongnan Street, Nanjing, Jiangsu Province 211189,

China.

Accepted 11 January, 2012

This paper proposes a new financial risk contagion model; the contagion-MGARCH model which is based on the multivariate GARCH process. Our measure of risk contagion could characterize the causality of the financial risk contagion, its economic significance, and its determinants by using the contagion equation containing latent variables. Markov Chain Monte Carlo (MCMC) estimation of the parameters in the new contagion model context is also covered. Key words: Financial risk contagion, MGARCH, latent variable.

INTRODUCTION It has been frequently observed that financial crises and price volatility simultaneously or successively appear in different financial markets and even in different countries, which is a general financial risk contagion or volatility contagion phenomenon. There exists now a large body of literatures that attempt to theoretically model or empirically study this phenomenon, based on the static or time-varying risk contagion models. Lin and Tamvakis (2001), Forbes and Roberto (2002) and Yang et al. (2004) empirically researched the risk contagion in different financial markets using static models which include the univariate GARCH model, the correlation theory, the VAR model and the impulse response function. Boyer et al. (2006), Cappiello et al. (2006), and Beirne et al. (2010) researched the risk contagion using the AR-DCC-MVGARCH model, the asymmetric dynamics MGARCH model and the multivariate GARCH-in-mean model, respectively, which are time-varying risk contagion models. Of course, there are other methods to model the financial risk contagion, which are different from the above econometric methods. In these models, the time-varying contagion models, based on the

*Corresponding author. E-mail: [email protected]. Tel: +86 25 83795327.

MGARCH process, are common methods, and they calculate the financial risk contagion by its time-varying covariance. But, there are still two puzzles, such as the symmetrical covariance in the MGARCH models, which is the same risk contagion values that is inconsistent with the real situation, and equivocal contagion causality about the covariance equation. To deal with these puzzles, this paper proposes a novel and developed time-varying contagion model, that is, the contagion-GARCH model.

THE MGARCH MODELS AND ITS RISK CONTAGION CONNOTATION

The multivariate GARCH models allow the variances and covariances to depend on the information set in a vector ARMA manner and are particularly useful to model multimarket or multivariate financial phenomenon, which includes the financial risk contagion, the market volatility spillover and so on. As the first MGARCH model, the VEC-MGARCH model was introduced by Bollerslev et al. (1988), and it has large number of parameters needed to estimate and the positive definite condition in the covariance matrix, which are two defects. To deal with these two issues, some MGARCH models were developed, such as the BEKK model (Engle and Kroner, 1995), the CCC-MGARCH model (Tse, 2000) and so on.

These MGARCH models have the same conditional

mean equation for output , which can be expressed as follows:

, (1)

where is a multivariate normal

vector with zero mean and a covariance matrix . The

parameterization for as a function of the information

set chosen here allows each element of to

depend on lagged values of the squares and cross-

products of , as well as lagged values of the

elements of , and a vector of weakly

exogenous variables . The main difference is between various MGARCH models. In the following, we respectively give the covariance matrix vector equations (Equations 2 and 3) of the VEC-GARCH model and the BEKK model, which are two basic MGARCH models.

(2)

(3)

where is the vector operator that stacks the

columns of the matrix, follows a vector ARMAX process in squares and cross-products of the residuals,

and are lag operators, is a

parameter vector, is a parameter matrix,

and are parameter matrices, in Equation 2.

, and are parameter matrices, and

is also a triangular matrix, is a parameter matrix, in Equation 3.

It is clear that of the BEKK model will be positive definite under very weak conditions and the number of

parameters is just the second power of less than the

fourth power of in the VEC-GARCH model. However, the equivocal economic significance of Equation 3 and the variables of the BEKK model is an obvious defect to model the financial risk contagion. Following Tse (2000), we consider the CCC-MGARCH model, in which the

Zhou and He 6015

covariance matrix with a constant correlation .

Then, we can get . The parameters number of the CCC-MGARCH model will be the second

power of by this setting. We denote as a diagonal

matrix with diagonal element , and as a

correlation matrix. Furthermore, we let be

, then we could meet the positive definite

condition only if the matrix is a positive definite matrix. Therefore, the CCC-MGARCH model may be a more convenient MGARCH model under the condition of the constant correlation.

The time-varying covariances, as a volatility relation between different financial markets, can reflect a dynamics risk contagion phenomenon. Thus, the risk contagion models based on the MGARCH process could be better than the static models and other risk contagion models. However, as mentioned above, there are still two puzzles to model financial risk contagion using the MGARCH models, such as the symmetrical covariance means the same risk contagion values between different financial markets, and equivocal risk contagion causality

in formed by all variances and covariances.

THE CONTAGION-MGARCH MODEL

The model formulation

Here, we propose a new time-varying financial risk contagion model, named contagion-MGARCH model, which consists of three parts including the condition mean equation, the volatility equation, and the unique contagion equation.

Let Equation 1 be the condition mean equation of the new financial risk contagion model, which is similar to the MGARCH models. The parameterization for the volatility equation in the contagion-MGARCH model is a function

of the information set chosen here allows the

volatility to follow the GARCH process like the

MGARCH models, and depend on lagged values of

the risk contagion factor calculated by the contagion equation (Equation 4). It is worth noting that

is not the conditional covariance. Then, the volatility equation can be expressed as Equation 5.

(4)

1, 2, ,[ , , , ]T

t t n ty y y

tY = L

et t t

Y = M +1

(0, )t

Ne x-t t

H:

11, 22, ,[ , , , ]T

t t nn te e e e=

tL

tH

tH

1tx

- tH

q

et p

tH 1J ´

tx

tH

1 ' ' 1

0 1) ( ) ( ) )

t t t tvec C C vec x x A L vec B L vece e= + + +

t tH H

2 * ' * * ' ' * * ' ' * * ' 2 *

0 0 1 11 1 1 1 1

q pK K K

k t t k ik t i t i ik jk j jkk k i k j

C C C x x C A A B Be e- - -

= = = = =

= + + +å å å å åt tH H

)vec ×

1)vect

H

( )La ( )Lb 0C 2 1n ´

1C 2 2n J´ i

A

iB 2 2n n´

*

0C *

ikA

*

jkB

n n´*

0C *

1kC n J´

2

tH

nn

3

tH ij

r

, , ,ij t ij ii t jj th h hr=

n tD

,ii th { }

ijr=

tG

3

tH

3

t t t tH = D G D

tG

tH

1tx

-

,ii th

m

,ji th

,ji th

2

, , , , ,( ) ( ) ( )

ji t ji ji t j jj t i ii t ji ji th c L h L h L hg b b s h= + + + +


(5)

where , and are lag operators, and . Equation 4 is called a contagion equation, which is a

key part of the new risk contagion model and composed

of four parts, including the lagged values of the risk

contagion factor which is a latent variable and could capture the time-varying financial risk contagion, two

lagged realized variances ( and ) came from different markets, and an independent stochastic

innovation made up of a Gaussian white noise process. There are three reasons for this new contagion equation. First, for the reason that the risk contagion will appear in clusters as the conditional volatility which is an intrinsic reason of the financial contagion, we put

into Equation 4. Second, because the financial risk contagion comes from one financial market and affect other financial markets, and closely come in

contact with their realized volatilities, we put

and into Equation 4. The last, we put into Equation 4 to catch some stochastic information which could not be depicted by other factors. Therefore,

the latent variable of the contagion equation could measure the financial risk contagion effect and characterize its causality and determinants.

Furthermore, we could change Equations 4 and 5 to a vector equation (Equation 6) as follows:

(6)

where ,

is a variance-contagion matrix as , in which

the non-diagonal element is the risk contagion

factor, is a parameter matrix, , and

are parameter matrix, is the elements

of with five kinds cases as follows:

1. If and , then is a coefficient of the volatility equation (Equation 5) needed to estimate;

2. If and , then

is a coefficient of the contagion equation (Equation 4) needed to estimate;

3. If and

, then

is a coefficient of the contagion equation (Equation 4) needed to estimate;

4. If and , then is a coefficient of the contagion equation (Equation 4) needed to estimate;

5. Else, is set to zero;

where, , , ,

is a ceiling-int operator, . Then, Equations 1, 4 and 5 (or vector equation 6) could construct the contagion-MGARCH model, and be further optimized by taking the following methods:

1. For the covariance just needs weaker condition in

the new model, we let the correlation in be a

constant coefficient as the CCC-MGARCH model. Then, we can get the corresponding covariance

, and a new financial risk contagion model, that is, Contagion-CCC-MGARCH model. The number of parameters of this new risk contagion model is just the

second power of , which is the same as the BEKK model. 2. By referencing the SV model (Taylor, 1994), we let the

conditional variances be , and the risk contagion

be . Then, the positive definite condition of

matrix could be easily meet. Based on the preceding two settings, the contagion equation (Equation 4) and the volatility equation (Equation 5) of the contagion-MGARCH model can be expressed as follows:

(7)

(8)

2

, , , ,1,

( ) ( ) ( )N

ii t ii ii t j ji t i tj j i

h c L h L h Lb g a e= ¹

= + + +å

( )La ( )Lb ( )Lg j i¹

q

,ji th

,ii th

,jj th

,ji th

,( )

ji tL hg ×

,( )

j jj tL hb ×

,( )

i ii tL hb ×

,ji th

,ji th

' '

0 1) ( ) ( ) )

t t t tvec C C vec x x A L vec B L vece e= + + +

t tT T

11, 1 , 1, ,( , , , , , , )

i i N i N i NN iA diag a a a a= L L L

tT

n n´ tH

,ji th

'

t te e n n´ C i

A

jB 2 2n n´ ,xy j

b

jB

( 1)x k n k= - × + ( 1)y k n t= - × +,xy j

b

( 1)x k N k¹ - + ( 1)y Nl l= - +

,xy jb

( 1)x k N k¹ - +[ ( 1) 1] [ ( 1) ]y x N N x Nl l= - - - + - - ×

,xy jb

( 1)x k N k¹ - + y x= ,xy jb

,xy jb

1,2, ,t n= L 1,2, ,k N= L [ / ]x Nl =

[ ]g2

ji jia s=

,ij th

tH

ijr

, ,ij ii t jj th hr

n

,0.5

ii th

e

,0.5

e ij th

tH

2

, , , , ,( ) ( ) ( )

ji t ji ji t j jj t i ii t ji ji th c L h L h L hg b b s h= + + + +

2

, , , ,1

( ) ( ) ( ) log( )N

ii t ii ii t j ji t i tj

h c L h L h Lb g a e=

= + + +å

To illustrate in the bivariate case, the contagion-MGARCH model is simplified as follows:

, ,

(9)

(10) or

, (11)

(12)

(13)

(14)

(15) Based on the preceding equations (Equations 11 to 15), we could get the conditional covariances of the

information set as follows:

, (16)

, (17)

, (18)

, (19) By these conditional covariances of the information set

, it should be noted that there are some assumptions in the new risk contagion model, such as the time-varying risk contagion comes from the volatility of a financial market at sometime, and just affects other markets at next time, which are close to the real financial market in the discrete framework. Therefore, it may be a good way to extend this financial risk contagion model by modeling in continuous framework.

In summary, we think the new contagion model and latent variables could characterize the causality of risk

Zhou and He 6017 contagion, its economic significance, and its determinants.

ESTIMATION METHODOLOGY

Unfortunately, for the new financial risk contagion model, the Contagion-MGARCH model, some classical parameter estimation methods, such as the maximum likelihood (ML), the generalized method of moments (GMM), the Kalman filter (KF) and the Berndt-Hall-Hall-Hausman (BHHH) algorithm, are difficult to apply and calculate for the intractable form of the likelihood function and the latent variables. Therefore, in this paper, we investigate the Markov Chain Monte Carlo (MCMC) approach to estimate the parameters and latent variables in the new financial risk contagion model, and the basic steps are described as follows:

Step 1

Calculate the join distributions (Equations 20 and 21) of , and the joint posterior distribution (Equations 22 and 23) of the latent

variables .

(20)

(21)

(22)

(23)

Step 2

Assume the parameters , , , and are prior

independence, then, we em ploy a slightly informative prior for

and , and set the same priors

parameters as Meyer (2000), that is, set Beta prior

distribution be and , where and , and

with and , which could gives a prior mean of

0.86. Then, we let be a conjugate inverse-gamma prior

distribution, that is, , which gives a prior mean of 0.0167 and prior standard deviation of 0.0236.

Step 3

Estimate parameters based on the aforementioned MCMC method, which could calculate by the Gibbs sampling method including updating parameters and generating new values from posterior distributions, and get posterior sample mean of the parameters and the latent variables. Here, we suggest directly calculating this model via Gibbs sampling method with WinBUGS or Matlab.

Conclusions

In this paper, we have proposed a new econometric

et t t

Y = M +1

(0, )t

Ne x-t t

H:

11, 22,

11, 22,

( )/ 2

11, 12( )/ 2

21 22,

exp( ) e

e exp( )

t t

t t

h h

t

h h

t

h

h

r

r

+

+

é ùê ú= ê úê úë û

tH

2

11, 11 11 11, 1 11 12

21, 21 22 21, 21

12, 12 33 12, 31

2

22, 22 44 22, 1

0 0 0 log( )

0 0 0)

0 0 0

0 0 0 0log( )

t t

t t

t t

t t

h c a b b

h c a b bvec

h c a b

h c a

e

h

h

e

-

-

é ùé ù é ù é ùê úê ú ê ú ê úê úê ú ê ú ê úê úê ú ê ú ê ú= = + +ê úê ú ê ú ê úê úê ú ê ú ê úê úê ú ê ú ê úê úê ú ê ú ê úë û ë û ë ûë û

tT

11, 1

22 24 21, 1

33 34 12, 1

43 44 22, 1

0 0

0

0

0

t

t

t

t

h

b h

b b h

b b h

-

-

-

-

é ùé ùê úê úê úê úê úê úê úê úê úê úê úê úê úê úë ûë û

1, 1 1,t ty u e= +

2, 2 2,t ty u e= +

2

11, 11 11 11, 1 12 21, 1 11 11, 1log( )

t t t th c b h b h a e

- - -= + + +

21, 21 21 11, 1 22 21, 1 24 22, 1 21 21,t t t t th c b h b h b h s h

- - -= + + + +

12, 12 31 11, 1 33 12, 1 34 22, 1 12 12,t t t t th c b h b h b h s h

- - -= + + + +

2

22, 22 43 12, 1 44 22, 1 44 22, 1log( )

t t t th c b h b h a e

- - -= + + +

2tx

-

11, 21, 1 2 12cov( , )

t t th h bx

- -=

22, 21, 1 2cov( , ) 0

t t th h x

- -=

11, 12, 1 2cov( , ) 0

t t th h x

- -=

22, 12, 1 2 43cov( , )

t t th h bx

- -=

11, 1 21, 2 21cov( , ) 1 /

t t th h bx

- -=

22, 1 21, 2 24cov( , ) 1 /

t t th h bx

- -=

11, 1 12, 2 31cov( , ) 1 /

t t th h bx

- -=

22, 1 12, 2 34cov( , ) 1 /

t t th h bx

- -=

2tx

-

,i ty

,ji th

11,2 2

1, 1 11, 11, 1 21, 1 11 11 12 11 11, 12 1 12, , , , , , , , , ( , (1 ))t

h

t t t t ty u h h h a b b c N u ee r r

- --:

22,2 2

2, 2 22, 12, 1 22, 1 44 43 44 22 22, 21 2 21, , , , , , , , , ( , (1 ))t

h

t t t t ty u h h h a b b c N u ee r r

- --:

2 2

21, 11, 1 21, 1 22, 1 21 22 23 21 21 21 41 11, 1 43 22, 1 44 21, 1 21, , , , , , , ( , )

t t t t t t th h h h b b b c N c b h b h b hs s

- - - - - -+ + +:

2 2

12, 11, 1 12, 1 22, 1 31 33 34 12 12 12 21 11, 1 22 12, 1 23 22, 1 12, , , , , , , ( , )

t t t t t t th h h h b b b c N c b h b h b hs s

- - - - - -+ + +:

u a b c2s

(0, 0.001)u N: (0, 0.001)c N:

( , )a b

*a*b *2 1a a= - *2 1b b= -

20a = 1.5b =

2s2 (2.5, 0.025)IGs :

6018 Afr. J. Bus. Manage. model to calculate and analyze the financial risk contagion phenomenon, that is, the Contagion-MGARCH model (or the Contagion-CCC-MGARCH model), which has a natural interpretation about the financial risk contagion and is relatively parsimonious. The model parameters can be estimated without too much difficulty by the MCMC approach, which is also studied in detailed. Meanwhile, we think and believe that this new financial risk contagion model could capture common movements of financial risk contagion and volatility spillover in the financial markets, as mentioned before, and extend the multivariable GARCH model. It is a pity that we have not taken the empirical analysis and study using this new model and real financial data, definitely, which will be further investigated and studied in near future.

ACKNOWLEDGEMENTS

This work was supported by National Natural Science Foundation of China (No. 71071034, National Basic Research Program of China (973 Program, No. 2010CB328104-02), Funding of Jiangsu Innovation Program for Graduate Education (CXZZ-0183), Academic New Artist Ministry of Education Doctoral Post Graduate.

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An evaluation of regional difference of fusion between informationization and industrialization in China

Liu Qiang

School of Management Science and Engineering, Shandong University of Finance and Economics, Shandong, 250014, China. E-mail: [email protected].


This paper proposed an evaluating indicator system, and evaluated the level of fusion between informationization and industrialization (FII) in China by factor analysis. According to the result of factor analysis, author divided 30 provinces in China into five clusters by cluster analysis, and summarized each cluster’s features. Author also compared the level of fusion between 2004 and 2009. The result indicated that the overall level of fusion in China rise continuously and there existed a gap in different areas. The level of fusion could be impacted by economic aggregate, but there was no necessary connection between them, and economic structure also significantly impacted the level of fusion. The regional informationization level could promote the level of regional FII. Keywords: Fusion between informationization and industrialization, cluster analysis, factor analysis, China.

INTRODUCTION China is a developing country, and falls behind western countries in terms of the development of industrialization. In 21st century, along with the rapid development of information technology, informationization has already become an inevitable trend of social development. In order to avoid falling behind developed countries again in the process of informationization, the Chinese government put forward a strategy of fusion between informationization and industrialization (FII). FII strategy is to simultaneously develop industrialization and infor-mationization, to persist in using information technology to propel industrialization, which will, in turn, stimulate information technology application. The goal of FII is to blaze a new trail to industrialization featuring high scien-tific and technological content, good economic returns, low resources consumption, little environmental pollution and a full display of advantages in human resources. We define the industrialization with the aforementioned characteristics as new industrialization. China has made remarkable achievement by carrying out FII strategy. So it is important to evaluate the current situation of FII and analyze feature of FII in different regions for further propelling the FII strategy. In this paper, we proposed an

Abbreviations: FII, Fusion between informationization and industrialization; S&T, scientific and technology.

indicator system and studied the status quo of FII of different provinces in China, in order to provide support for government decision making about FII. Since the concept of FII is proposed, some scholars have studied the evaluation of FII. These studies can be divided into following categories: (1) Some scholars focus on the design of indicator system. Gong (2008, 2010) proposes an indicator system which can evaluate the status quo of FII in terms of the scope and depth of fusion. But it is very difficult to gather data for some indicators, so Gong’s indicator system is infeasible in practice. Wang et al. (2011) analyzes the maturity model of FII and proposes an indicator system for regional evaluation of FII, then calculate weights of indicators by analytic hierarchy process (AHP), but wang does not use this indicator system to evaluate a particular region. (2) Some scholars focus on studying particular region’s status quo of FII or the level of new industrialization. Cai et al. (2010) proposes an indicator system and evaluates Shanghai’s status quo of FII in terms of social environ-ment, large-size enterprises and middle and small size enterprises. According to Cai’s indicators, the total score of FII in Shanghai is 69.38. Yi et al. (2009) studies the status quo of informationization and FII in Guangzhou city, and conclude that Guangzhou’s development of

6020 Afr. J. Bus. Manage. informationization in 2006 is better than that of Japan and America in 2000 year. Yang and Liu (2011) uses gray relation analysis and AHP to evaluate the level of new Indus-trialization of six provinces in central China. Lin and Jiang (2008) establishes indicator system to evaluate the level and quality of new industrialization in Shandong province. (3) Some studies focus on the evaluation for a particular industry. In 2009 year, Ministry of Industry and Information Technology of People’s Republic of China organized an investigation to evaluate the status quo of FII for seven industries. Guo (2010) designs an indicator system to evaluate light industry’s status quo of FII. Wiboon (2011) and Lai et al. (2011) investigate the problem on high-tech industry in newly industrialized economies. (4) Some scholars focus on evaluating the level of informatonization. Huang et al. (2010) uses principal component analysis to analyze regional differences of FII in China, but Huang mainly performs analysis in terms of informationization. Hu et al. (2011) proposes an indicator system to evaluate social environment which could effects the development of FII, and analyzes the social environment of FII in China according to data of 2007 and 2008. Geng and Lin (2002), Li and Li (2006) and Su and Sun (2005) evaluate the status quo of informationization for all provinces in China, and analyze the relationship between informationization and economic growth. Yang et al. (2010) provides an evaluation model running through the full life cycle of regional informationization.

In this paper, we will analyze the conception of FII and design an indicator system according to the goal of FII (that is the feature of new industrialization), then use proposed indicator system to evaluate the status quo of FII in China, and classify provinces in China into different clusters according to the features of FII, and compare status quo of FII in 2004 with status quo of FII in 2009. METHODOLOGY

In order to evaluate the development of FII for different regions in China, we firstly establish an indicator system; this indicator system includes 16 indicators. Then select 30 provinces (all provinces in China except for Xizang, Hong Kong, Taiwan and Macao) as samples and collect data according to 16 indicators. All data can be obtained in China Statistics Yearbook, China Statistics Yearbook on High Technology and China Population and Employment Statistics Yearbook. Factor analysis was performed upon collected data and the scores of extracted main factors calculated. According to the main factors’ scores of each province, classify 30 provinces by cluster analysis. At last, the data of FII in 2009 was compared with data in 2004 and the progress of each province was analyzed. The details of analytic procedure are as follows. Establishment of indicator system

Informationization and industrialization are the basis of FII, so the level of FII can be reflected by the level of informationization and the level of industrialization. Furthermore, the goal of FII is also a

criterion for evaluating the level of FII. So we establish the indicator system in terms of following aspects: level of industrialization, level of informationization, scientific and technological content, economic returns, resources consumption and environmental pollution, human resources.

According to the research of Chenery and Robinson (1986) and Kuznets and Epstein (1941), per capita gross domestic product (GDP), added value of tertiary industry and the number of persons employed by tertiary industry will increase with the development of industrialization. So we evaluate the level of industrialization in terms of the three aspects mentioned.

The level of informationization can be reflected by the deve-lopment of information industry and information infrastructure. We evaluate the development of information industry in terms of value-added of information industry, persons employed by information industry, investment in fixed assets of information industry. We use indicator “Per Capita Bandwidth of Internet” to evaluate the development of information infrastructure and the application of information technology in people’s daily life.

The level of scientific and technological content can be evaluated in terms of capital investment for it. The capital investment includes enterprises’ expenditure and government budgetary expenditure. The level of human resources can be evaluated by the quantity of scientific and technical personnel of industrial enterprises.

In the progress of FII, industrial structure and mode of economic growth will gradually change. Economic returns, resources consumption and industrial pollutant discharge reflects the change of industrial structure and mode of economic growth. So we also select indicators from the three previously mentioned aspects. Economic returns can be evaluated in terms of “overall labor productivity” and “ratio of profits and taxes to funds”. Resources consumption can be evaluated in terms of “energy consumption per 10000 Yuan value-added”. Industrial pollutant discharge can be evaluated in terms of the discharge of waste water, SO2 and soot.

The final indicator system is shown in Table 1. “Basis of FII” evaluates the level of industrialization, development of information industry and information infrastructure. “Investment in FII” evaluates the development of FII in terms of capital investment and human resources investment. “Effect of FII” evaluates FII’s influence on industrial structure and mode of economic growth in terms of economic returns, resources consumption and industrial pollutant discharge. Indicator system totally includes 8 indicators in level 2 and 16 indicators in level 3.

Analysis on progress of FII We use the aforementioned indicators to evaluate the status quo of FII for different regions in China. Select 30 provinces in China except Xizang, Hong Kong, Taiwan and Macao as samples. Data of 30 samples for 16 indicators is denoted by

. The software used for the analysis is SPSS. Firstly, we analyze 30 provinces’ data in 2009. The procedure is as follow:

Step1: Standardized according to Formula 1.

(1)

is mean of and is the standard deviation

of .

= =, ( 1,...30; 1,...,16)i kx i k

= =, ( 1,...30; 1,...,16)i kx i k

−= = =%

, .

,

.

( 1,...30; 1,...,16)i k k

i k

k

x xx i k

s

.kx =, ( 1,...,30)i kx i.ks

=, ( 1,...,30)i kx i

Qiang 6021

Table 1. Indicator system for evaluating the level of FII.

Level 1 Level 2 Level 3

Basis of FII

Level of industrialization

I1: Percentage of added value of tertiary industry in GDP

I2: Percentage of persons employed by tertiary industry

I3: Per Capita GDP

Level of information industry

I4: Percentage of added value of information Industry in GDP

I5: Percentage of persons employed by information industry

I6: Percentage of investment in fixed assets of information industry

Level of information infrastructure I7: Per Capita Bandwidth of Internet

Investment in FII Scientific and technological content

I8: Percentage of government budgetary expenditure for science and technology in GDP

I9: Expenditures of industrial enterprises is above designated size on scientific and technological activities

Human resources I10: Scientific and technical personnel of industrial enterprises above designated size

Effect of FII

Economic returns of industry I11: Ratio of profits and taxes to funds

I12: Overall labor productivity

Resources consumption I13: Energy consumption per 10000-yuan value added by industrial enterprises above the designated size

Pollutant discharge

I14: Volume of industrial waste water discharged per 10000-yuan industrial value added

I15: Volume of SO2 discharged per 10000-yuan industrial added value

I16: Volume of soot discharged per 10000-yuan industrial added value

Industrial enterprises above designated size include all state-owned enterprises and those non-state-owned enterprises with an annual sales income over 20 million yuan. Step2: Performance of Kaiser-Meyer-Olkin (KMO) and Bartlett's test for standardized data. Step3: If the data pass the KMO and Bartlett’s test, then factor analysis upon the data performed. Extraction method is principal components analysis. Extract factors according to correlation matrix. Method of factor rotation is varimax with Kaiser normalization method. Display rotated factor loadings and component score coefficient matrix in result output. Step4: Interpret factors by the rotated factor loadings matrix and calculate factor scores of 30 provinces by Formula 2.

(2)

is the number of eigenvalue that is more than 1 in Table

4; , is the ith province’s score about factor j; , is the

jth factor’s score coefficient about the k

th indicator; , is

listed in Table 6. Step5: Regarded the factor’s eigenvalues that are more than 1 are weight, and each province’s total score calculated according to Formula 3.

(3)

is the ith province’s total score; , is the eigenvalue of

factor j.

Step6: Regard vector as the coordinate of

ith province and perform hierarchical cluster analysis to

classify 30 provinces. Cluster method is between-groups linkage, distance measure is Euclidean distance. After clustering 30 provinces into different clusters, we analyze the raw data of provinces in different clusters and extract the features of each cluster.

Comparison between 2004 and 2009 The scores of major factors can be calculated by factor analysis; however, due to the limitation of factor analysis, scores of factors in different years are not comparable. So we use following steps to compare level of FII in different years.

Step 1: Set an upper bound and a lower bound for

indicator k and compute the score for province i according to the raw data of indicator k. If indicator k is a positive indicator, use Formula 4, otherwise, use Formula 5.

=

= = =∑ %

16

, , ,1

* 1,..., 1,...,30i j k j i kk

f c x j p i

p

,i jf ,k jc

,k jc

λ

λ λ λ=

= =+ + +

∑ ,1 1 2

1,...,30...

pj

i i jj p

F f i

iF λ j

( ),1 ,2 ,, ,...,i i i pf f f

ku kl

,i kd


Table 2. Weights of 16 indicators.

Indicator Weight Indicator Weight

I1 0.051 I9 0.078

I2 0.036 I10 0.118

I3 0.043 I11 0.092

I4 0.087 I12 0.092

I5 0.043 I13 0.052

I6 0.056 I14 0.044

I7 0.037 I15 0.037

I8 0.098 I16 0.034

(4)

(5) Step 2: Consult experts about judgment matrix and compute a weight wk for each indicator by AHP. Step 3: According to the raw data in 2004 and 2009 years, calculate the FII index (FIII) for each province by Formula 6. The weight of each indicator is listed in Table 2.

(6) Step 4: Compare each province’s FIII in 2009 with FIII in 2004, and analyze 30 provinces’ progress in FII during this period.

RESULTS All data in the paper are from China Statistics Yearbook, China Statistics Yearbook on High Technology and China Population and Employment Statistics Yearbook. The software used for the analysis is SPSS. Factor analysis We performed KMO and Bartlett's test for the data of 2009, and the results are listed in Table 3. Value of KMO is 0.754 and Bartlett's test p=0.000, so the data of 2009 was appropriate to perform factor analysis. Then we performed factor analysis and the results of factor extraction are shown in Table 4. There were 4 factors whose eigenvalues were more than 1, and their cumu-lative variance contribution was 84.935%. So the four factors could explain 84.935% information of original 16 indicators. Table 5 was the rotated correlation coefficient

matrix between the 4 common factors and 16 original indicators. Table 6 was the score coefficient matrix obtained by factor analysis. We calculated 4 factors’

score (j=1,…,4; i=1,…,30) and total score Fi (i=1,…,30) of each province. The results are listed in Table 7. Cluster analysis The results of cluster analysis are listed in Table 8. 30 provinces were divided into five clusters. FII index in different years According to Formula 4 or 5, we calculated the 30 provinces’ FII index in 2004 and 2009 years. The results are listed in Table 9. DISCUSSION Interpretation of extracted factors As shown in Table 5, the first common factor was highly positive and correlated with indicators I14, I15, I5, I7, I8, and the correlation coefficients were 0.904, 0.920, 0.939, 0.756 and 0.907. Indicators I14 and I15 evaluated the volume of principal industrial pollutants discharged. I5 and I7 reflected the scale of information industry and information infrastructure, these could be collectively referred to as informationization level. Indicator I8 evaluated government’s financial investment in scientific and technology (S&T). So the first factor was named pollutant discharge, informationization level and government’s investment factor.

The correlation coefficients between the second factor and indicators I9, I10 were respectively 0.951, 0.944. These two indicators evaluated industrial enterprises’ investment in S&T in terms of funds and human resources. So the second factor was named the factor of industrial enterprises’ investment in S&T.

≥

= − − < < ≤

,

, , ,

,

1

( ) ( )

0

i k k

i k i k k k k k i k k

i k k

x u

d x l u l l x u

x l

≥

= − − < < ≤

,

, , ,

,

0

( ) ( )

1

i k k

i k k i k k k k i k k

i k k

x u

d u x u l l x u

x l

=

= =∑16

,1

1,...,30i k i kk

FIII w d i

,i jf

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Table 3. KMO and Bartlett's test.

Kaiser-Meyer-Olkin measure of sampling adequacy 0.754

Bartlett's Test of Sphericity

Approx. Chi-Square 569.380

df 120

Sig. 0.000

Table 4. Total variance explained.

Component Rotation sums of squared loadings

Total % of variance Cumulative %

1 5.775 36.093 36.093

2 4.707 29.420 65.512

3 2.010 12.561 78.074

4 1.098 6.861 84.935

Extraction method: principal component analysis.

Table 5. Rotated component matrix.

Indicator Component

1 2 3 4

I5 0.939 -0.024 -0.042 -0.068

I14 0.920 -0.080 0.009 -0.007

I8 0.907 0.098 -0.145 -0.114

I15 0.904 0.084 -0.054 0.268

I7 0.756 0.577 -0.093 -0.009

I3 0.711 0.546 -0.145 -0.218

I2 0.645 0.601 -0.242 -0.209

I9 -0.026 0.951 -0.071 0.013

I10 -0.075 0.944 -0.003 0.083

I4 0.038 0.878 -0.008 0.104

I13 0.528 0.747 0.006 0.053

I12 -0.066 -0.169 0.870 -0.148

I11 -0.348 0.078 0.860 0.013

I6 0.511 -0.023 0.585 0.184

I16 0.127 0.487 -0.169 0.701

I1 0.475 0.544 -0.151 -0.591

Extraction method: principal component analysis. Rotation method: varimax with Kaiser normalization

The third factor was highly correlated with I12 and I11, and correlation coefficients were separately 0.870 and 0.860. These two indicators evaluated economic returns of industrial enterprises the above designated size. So the third factor could be named factor of economic returns of industrial enterprises.

The forth factor was highly correlated with I16 and negatively correlated with I1, and the correlation coefficients were 0.071 and -0.591. It reflected the development of tertiary industry.

Analysis of factor’s score in 2009 According to scores of factor 1, Beijing (4.556), Shanghai (1.751) and Tianjin (0.855) were the best three provinces. Beijing and Shanghai’s scores were obviously higher than other provinces’, so these two provinces had considerable advantage in pollutants discharging, infor-mationization level and government’s financial investment in S&T. Hainan (0.401) province ranked forth, and ana-lyzed the original data, we found Hainan was backward in

6024 Afr. J. Bus. Manage. Table 6. Component score coefficient matrix.

Indicator Component

1 2 3 4

I4 -0.055 0.214 0.042 0.073

I5 0.191 -0.080 0.020 -0.009

I1 0.016 0.109 -0.023 -0.536

I2 0.064 0.094 -0.065 -0.173

I3 0.086 0.080 -0.013 -0.177

I7 0.107 0.081 0.015 0.018

I6 0.144 -0.021 0.329 0.193

I8 0.167 -0.050 -0.029 -0.056

I10 -0.085 0.240 0.044 0.045

I9 -0.082 0.237 0.011 -0.016

I11 -0.039 0.091 0.444 -0.020

I12 0.031 0.013 0.451 -0.146

I13 0.054 0.145 0.065 0.056

I14 0.197 -0.091 0.042 0.047

I15 0.193 -0.060 0.014 0.297

I16 0.020 0.083 -0.067 0.644

industry, but energy consumption and discharge of pollutants were less, and percentage of added value of tertiary industry in GDP was high. It indicated Hainan was developed in tertiary.

According to scores of factor 2, Guangdong (3.312), Jiangsu (2.424), Zhejiang (1.403), Shandong (1.359) and Shanghai (1.043) were the best five provinces. It indicated these provinces had the advantage in industrial enterprise’s investment in S&T. Beijing (-0.504) was 20

th.

It indicated, in Beijing, though government’s financial investment was great, industrial enterprise’s investment was less.

According to scores of factor 3, Heilongjiang (3.877) and Xinjiang (2.113) were the best two provinces. So, in these provinces, economic returns of industrial enter-prises were better. These provinces were not developed in industry, but were rich in natural resources. For exam-ple, Heilongjiang and Xinjiang were rich in petroleum, natural gas. Depending on these rich resources, economic returns of enterprises in relevant industries were better.

According to total scores, the best 3 provinces were Beijing, Guangdong and Shanghai. So these three provinces’ level of FII was highest. Heilongjiang ranked forth. But Heilongjiang’s development were not balanced, and factor 3’s score was obviously higher than other provinces, factor 1’s score ranked 5

th, factor 2’s score

ranked 10th, factor 4’s score ranked 15

th.

In the top 11 provinces, five provinces (Shanghai, Zhejiang, Jiangsu, Fujian and Shandong) located in East China, two provinces (Beijing and Tianjin) located in North China, and two provinces (Guangdong and Hainan) located in South China. So the level of FII in East China

was higher than other areas in China. In the last 15 provinces, seven provinces (Qinghai, Chongqing, Sichuan, Guizhou, Yunnan, Gansu and Ningxia) located in Northwest China and Southwest China, so the level of FII in China’s western region was lower than China’s Eastern region. Analysis of clustering result

Analyzing the raw data of provinces in different clusters, we summarize the features of each cluster. These features are shown in Table 10. Comparison between 2004 and 2009

Under the same indicator system, FII index of 2009 were higher than that of 2004. So the overall level of FII is continually improved in China. Guangdong, Jiangsu, Shandong and Zhejiang’s GDP in 2009 were the highest, and these provinces’ level of FII in 2009 was higher, too. It indicates the economic development can promote the development of FII. Henan, Hebei, Shanghai and Beijing ranked 5

th , 6

th ,7

th and 13

th according to GDP, but they

ranked 11th , 20

th ,3

rd and 4

th according to FII index. So

there is no necessary connection between GDP and level of FII, and so, the economic structure will affect the level of FII, too.

Beijing, Shanghai, Guangdong and Zhejiang were all better than others in terms of FII index in 2004 and 2009. So the previously mentioned four provinces’ levels of FII were higher and more stable. According to analyzed raw data, we found Shandong’s development of information industry lagging behind other forward provinces in 2009, so the ranking of Shandong fell from forth in 2004 to seventh in 2009. The FII index of Jiangsu, Shanxi, Hainan and Neimenggu greatly increased. Especially, Hainan province rose from 23

rd place in 2004 year to 13

th

place in 2009 year. So the measures and experience of the previously mentioned four provinces are worth learning by other provinces. Conclusion Based on aforementioned analysis, we obtained the following conclusions: (1) The level of FII can be reflected by 4 factors: informa-tionization level and government’s financial investment in S&T, industrial enterprises’ investment in S&T, economic returns of industrial enterprises and development of tertiary industry. (2) In the process of FII in China, according to the score of extracted factors, provinces in China can be divided into five clusters, and each cluster has their own features.

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Table 7. Factor’s scores of 30 provinces in 2009.

Order Province Score

Total score Factor 1 Factor 2 Factor 3 Factor 4

1 Beijing 4.5556 -0.5037 -0.3247 0.2120 1.7305

2 Guangdong -0.1497 3.3117 0.5003 0.7175 1.2154

3 Shanghai 1.7512 1.0433 -0.5471 -1.4993 0.9035

4 Heilongjiang 0.3186 -0.0927 3.8774 -0.0506 0.6726

5 Zhejiang 0.3043 1.4031 -0.9137 1.6737 0.6154

6 Jiangsu -0.5375 2.4242 -0.3654 0.3297 0.5838

7 Tianjin 0.8554 0.6013 -0.3463 -0.9892 0.4406

8 Fujian 0.1759 0.3009 0.2621 -0.0016 0.2176

9 Hainan 0.4016 -0.9056 0.1710 3.8398 0.1924

10 Xinjiang 0.0566 -0.5789 2.1127 -0.2556 0.1153

11 Shandong -0.7943 1.3592 0.0219 -0.5351 0.0932

12 Hunan -0.4179 -0.2657 0.5396 0.4194 -0.1559

13 Shaanxi -0.3590 -0.1942 0.7988 -0.7988 -0.1662

14 Liaoning -0.0870 0.0354 -1.0173 -0.7703 -0.2374

15 Henan -0.7533 0.0027 0.5791 -0.1585 -0.2463

16 Hubei -0.3882 -0.1825 -0.3484 0.1548 -0.2672

17 Shanxi -0.1547 -0.2961 -0.1676 -1.0702 -0.2795

18 Qinghai -0.1922 -0.6646 0.4983 -1.1496 -0.3310

19 Chongqing -0.3071 -0.2877 -0.4073 -0.5179 -0.3322

20 Sichuan -0.5315 -0.3012 -0.3110 0.3961 -0.3442

21 Jiangxi -0.5615 -0.2805 -0.1875 0.1261 -0.3533

22 Guizhou -0.0781 -1.0199 0.0601 0.2735 -0.3554

23 Jilin -0.1699 -0.5112 -0.6342 -0.1939 -0.3587

24 Yunnan -0.3269 -0.8705 0.2240 0.5147 -0.3657

25 Neimenggu -0.2628 -0.5344 -0.0443 -0.8129 -0.3690

26 Hebei -0.5053 -0.2525 -0.2346 -0.4143 -0.3704

27 Anhui -0.4796 -0.3657 -0.4271 0.1378 -0.3825

28 Guangxi -0.5531 -0.6409 -0.7922 1.1040 -0.4850

29 Gansu -0.4443 -0.8877 -1.1827 -0.0578 -0.6759

30 Ningxia -0.3648 -0.8452 -1.3935 -0.6234 -0.7042

(3) The process of FII in China has been continuously promoted. The FII index in 2009 is higher than that in 2004. (4) Though the overall level of FII has been improved, the regional and structural difference remains significant. In 2009, the best ten provinces all lie in Eastern China. The level of FII in the Midwest China is still lower. (5) Economic development can promote the development of FII, but there is no necessary connection between GDP and level of FII, and so, the economic structure will affect the level of FII, too. (6) According to the level of informationization, Yang et al. (2009) divides China into five classes of regions. In this paper, the top 10 provinces sorted by FII index in 2009 are all belong to the first and second classes of the regions. It indicates level of FII can be impacted by level of informationization.

(7) Provinces with high level of FII have the following common features: tertiary industry is developed, level of informationization is high, input of government or en-terprise in S&T is more and energy consumption is less.

Countermeasures

Based on aforementioned analysis and status quo of FII in China, we propose following suggestions:

1. Keep the predominance of east provinces. Support the development of Midwest provinces and improve their level of FII. 2. Increase the total economic, at the same time, adjust the structure of economy. The over-consumption of resources, heavy-pollution, unsustainable mode of eco-nomic growth should be changed. Backward productivity,


Table 8. Result of cluster analysis on 30 provinces.

Cluster no Province

1 Beijing

2

Tianjin, Hebei, Shanxi, Guangxi, Neimenggu, Shaanxi, Liaoning, Gansu, Jilin, Qinghai, Anhui, Ningxia, Fujian, Chongqing, Jiangxi, Sichuan, Henan, Guizhou, Hubei, Yunnan, Hunan, Shanghai

3 Heilongjiang, Xinjiang

4 Jiangsu, Zhejiang, Shandong, Guangdong

5 Hainan

Table 9. FII index in 2004 and 2009.

2004 2009

No. Province Index No. Province Index

1 Shanghai 0.6594 1 Guangdong 0.7452

2 Guangdong 0.6588 2 Jiangsu 0.6873

3 Beijing 0.6139 3 Shanghai 0.6407

4 Shandong 0.5796 4 Beijing 0.6381

5 Zhejiang 0.5735 5 Zhejiang 0.6098

6 Jiangsu 0.5646 6 Tianjin 0.5957

7 Tianjin 0.5228 7 Shandong 0.5580

8 Liaoning 0.4916 8 Heilongjiang 0.5157

9 Fujian 0.4745 9 Liaoning 0.4846

10 Heilongjiang 0.4521 10 Fujian 0.4840

11 Sichuan 0.4192 11 Henan 0.4694

12 Shaanxi 0.4086 12 Xinjiang 0.4431

13 Yunnan 0.3765 13 Hainan 0.4334

14 Xinjiang 0.3645 14 Hubei 0.4308

15 Henan 0.3586 15 Hunan 0.4295

16 Hubei 0.3581 16 Shaanxi 0.4276

17 Anhui 0.3454 17 Shanxi 0.4060

18 Hebei 0.3385 18 Sichuan 0.3982

19 Guangxi 0.3249 19 Anhui 0.3944

20 Jilin 0.3243 20 Hebei 0.3865

21 Hunan 0.3108 21 Neimenggu 0.3865

22 Shanxi 0.3068 22 Chongqing 0.3835

23 Chongqing 0.3038 23 Qinghai 0.3808

24 Jiangxi 0.3012 24 Jiangxi 0.3666

25 Qinghai 0.2808 25 Guizhou 0.3655

26 Guizhou 0.2768 26 Yunnan 0.3543

27 Hainan 0.2632 27 Jilin 0.3433

28 Neimenggu 0.2603 28 Guangxi 0.3065

29 Ningxia 0.2494 29 Ningxia 0.2860

30 Gansu 0.2433 30 Gansu 0.2817

technology and product should be washed out. Develop high and new-tech industries and raise the percentage of tertiary industry in GDP. Construct a resource-saving, environmentally-friendly and sustainable development

mode. 3. According to different types in the process of FII (five clusters are clustered out in this paper), appropriate measures should be taken to improve each region’s level

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Table 10. Features of each cluster.

Cluster No. Principle features

1

Volume of pollutants discharged is less

The scale of information industry is great and the level of informationization is high

Industrial structure is reasonable and the percentage of second and third industry in GDP is great

Government inputs more fund for S&T

2 Most aspects are general

3 Economic returns of industrial enterprise is better

4 Enterprises input more fund and human resource for S&T

Energy consumption is less

5 Industry is underdeveloped, but tertiary industry is developed

Volume of discharged pollutants is less

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the level of fusion of informationization and industrialization in Shanghai. Inform. Constr., 10: 21-23.

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Multi-skilling at a training institute (Western Cape Provincial Training Institute)

of the Provincial

Government of Western Cape, South Africa: Post training evaluation

T. M. Taryn Florence and A. A. Braam Rust*

Business Faculty, Cape Peninsula University of Technology, South Africa, P. O. Box 652, Cape Town, 8000,

South Africa.

Accepted 30 January 2012

As global and national markets become more competitive, businesses are forced to become more adaptable and the public service is by no means exempt from this phenomenon. However, in most organisations, the impact of training and development programmes are undermined. The value placed on increasing knowledge and skills is limited to attending a training programme. Resultantly, the newly acquired information and competencies are very seldom transferred from the classroom to the workplace and without a definite increase in performance and in service delivery; the contribution of actual learning is questionable. This research study used the IHRAP multi-skilling programme (presented by the Western Cape Provincial Training Institute) to gauge the importance of post training evaluation and the benefits that can be derived from it, both for the department and the employee. In addition, the study evaluated whether the participants of the training programme are able to apply concepts and techniques learned in the classroom. A research survey was conducted and the results were analysed. This enabled the researcher to determine where there were gaps in the post training evaluation process. Several recommendations were made to bridge these gaps and in so doing, enabled the training programme to have a greater impact on the participants and in the workplace. Key words: Public sector, post training, evaluation, training, development.

INTRODUCTION Change is unavoidable. From small organisations to big, powerful conglomerates, change cannot be averted. Certain changes are, however, necessary to survive and succeed in a dynamic environment. Resultantly, orga-nisations must be able to adapt to change if they want to continue to operate in a highly competitive business environment. Due to the subsequent effects of change within the workplace, a greater emphasis is being placed

*Corresponding author. E-mail: [email protected]. Tel: +27 (0)21 460 3911.

on lifelong learning and professional development. Additionally, organisations are realising the importance of streamlining processes through regular training of employees.

Mullins (2002) postulates that although staff is an essential resource, they are also costly. However, in order to sustain excellent performance, it is crucial to maximize the contribution of staff to meet the goals of the organisation. Parr (1996) concurs that a vast number of South Africans need new skills to keep up to date with the demands placed upon them by new technology, different management styles and improved service delivery. The training and development of employees is

therefore necessary to ensure a constant supply of staff who are knowledgeable and skilled and who are able to aspire to career development in general management positions or specialist areas.

Unfortunately, in their need to train employees, many organisations have failed to focus sufficiently on training evaluation procedures. Indeed, training is often seen as a tedious and dull exercise with little or no usefulness, whereas in reality post training evaluation is of the utmost significance. CHALLENGES REGARDING TRAINING AND DEVELOPMENT Training and development has, over the years, become more popular within most organisations. Yet, irrespective of the amount of money, time and resources spent on it, many organisations do not fully recognise the value it brings to an organisation. Even more worryingly, they do not know how to measure its worth to the organisation, or determine how the organisation can benefit from the training. Thus, organisations find it challenging to gauge the success or the relevance of training programmes.

Post training evaluation allows for the identification of skills gaps within the organisation and enables the organisation to find workable methods to close or at least narrow these gaps. An evaluation of the training programme will ensure that the course material can be amended to reflect any changes to the immediate environment of the employee. In addition, the work environment can be adapted so as to provide an opportunity for the employee to transfer the new skills from the classroom to the workplace. The absence of a full training evaluation process undermines the importance of continuous learning and impedes a culture of development and growth. GLOBAL TRAINING AND EVALUATION A common goal of business organisations is to grow from strength to strength, to achieve and to flourish in all their dealings. In such businesses there is an immense focus on training. It would be highly unlikely that a business would be able to attain its goals if it did not build in the capacity and ability to succeed. In other words, a business must put mechanisms and methods in place to ensure that it has the ability to be the best and to produce the best at all times. As such, training ensures that each employee does their job as best they can, using the correct tools and techniques and in so doing helps the business to achieve its objectives. Hackett (2003) stipulates that doing a good job involves efficient processes, competent people and outstanding performance.

Florence and Rust 6029 Contributors to a successful training intervention Even though many organisations spend millions of rands on state-of-the-art training facilities, the best presenters and the most expensive training techniques, this is still not a guarantee that the training will assist in delivering competent employees or outstanding performance.

Carrell et al. (1999) agree with the above statement, indicating that there are a number a conditions that must be in place before the training can be gauged as successful. These authors point out that should these conditions exist; it would encourage employees to continuously motivate each other. The conditions referred to above include performance evaluations, training interventions for the present and the future, support for training programmes and environments that encourage change. The training cycle The training cycle is a constant flow of preparation, application and evaluation. Irrespective of the nature of the training being conducted, it involves many processes. These processes are integrated, and therefore, some-times overlap. Carrell et al. (1999) agrees that the actual training is merely one part of a bigger picture. There are several other components, which must work together in order for training to actually materialize.

According to Furjanic and Trotman (2000) the training process consists of four stages, namely: Assessing, designing, delivery and evaluation. In order to focus more extensively on the last stage (evaluation), it is essential that the preceding stages be carefully examined. Stages of evaluation Evaluation can be conducted at various stages of the training intervention. The data gathered during each part of the intervention is relevant to the whole process of evaluation and should not be seen as an isolated facet. Each stage of evaluation measures different aspects of the training intervention, depending on what it hopes to accomplish. Agochiya (2002) gives a clearer explanation of the different stages of evaluation: Pre-training evaluation Pre-training evaluation is an opportunity to understand the knowledge and skills level of the participants before the programme begins. Pre-training evaluation will assist in identifying special areas that the trainer should concentrate on and it may also identify participants who need more attention than others during the programme.

6030 Afr. J. Bus. Manage. Evaluation throughout the programme

As part of the evaluation process trainers require continuous feedback in order to ensure that the standard of the training given is of a high quality. Monitoring data that has been gathered throughout the training programme helps the trainer to remain in control of the intervention.

End-training evaluation

This method of evaluation simply demonstrates how much learning has taken place during the training programme. End-training evaluation also provides an indication to the trainer of what the participant thinks of the training programme. Furthermore, it establishes what areas of the programme can be removed from future programmes that are the same or similar in nature. Post training evaluation

Post training evaluation takes place once the participants have completed the training programme and have returned to their workplace. Agochiya (2002), however, stipulates that there are several factors that contribute to the supposed effectiveness of information transfer to the workplace, such as the conduciveness of the work envi-ronment, barriers that prevent the transfer of information or the number of opportunities that arise for participants to actively implement what they have learned in the training classroom.

Training evaluation models

The concept of evaluation, implemented during any stage of the training programme, would be useless if there was no way to measure it.

Kirkpatrick’s levels of evaluation

The model comprises of four levels, as explained by Truelove (2006). Each level has an influence on the next level, and as the levels progress it becomes more time-consuming and challenging to implement. However, as the levels evolve, it does provide critical information.

Jack Phillips’s evaluation model

Based largely on the Kirkpatrick model, Jack Phillips has

amended his model to include an additional level, called return on investment. It is outlined by Phillips et al. (2004) that workplace-learning performance can be separated into a 5-Level framework, which represents various categories of data, and which will aid the process of evaluating a training programme. Context, input, reaction and outcome (CIRO) evaluation model Somewhat different to the Kirkpatrick approach is the development of the CIRO Model. Warr et al. (????) developed this model (Truelove, 2006). The acronym CIRO denotes the four levels of evaluation contained in this approach: Context, input, reaction and outcome. Brinkenhoff’s evaluation model This is another model that can be adapted to suit non-training performance interventions. This model consists of six phases (ASTD, 2001): Goal setting, programme design, programme implementation, immediate out-comes, immediate/usage outcomes, impacts and worth.

Training and development in South Africa

In order for organisations and employees to maintain a competitive edge in South Africa, it is important that the spotlight remains on the improvement of skills and knowledge. Organisations who do not encourage the use of ongoing training and development interventions and initiatives will find it difficult to keep up with changes in the market and in technology. There are, however, many other variables that play a role in the execution of training programmes.

Macro factors that affect training and development in South Africa

The methods and techniques used to conduct business have changed dramatically over the decades. These changes have mainly been driven by the advancement of information technology and the development of innovative thinking and ideas. Notwithstanding these changes, education and training remain vital components of a growing economy. This sentiment is shared by Haasbroek (2003) who draws attention to the relationship between a country’s growth and that of training and development initiatives.

Globalisation

According to Meyer et al. (2004), globalisation involves

the amalgamation of national and international economies and markets, resulting in universal systems, uniformed methods of communication, infrastructure and trade. Essentially this means that business partnerships and environments are no longer limited to the country in which a business operates. Business transactions have no boundaries and the global manner in which things are done, have become standard.

Productivity and adaptability Productivity and adaptability are important in any workplace because they ensure that business operates efficiently. Productivity helps the business to increase its performance and, in so doing, increase its profit. Along with the challenge to remain competitive and relevant is the need to increase productivity levels. An increase in productivity levels has several positive effects on employees.

Improvements in technology

Erasmus and Van Dyk (2003) explain that constant training and development initiatives are critical in ensuring that ideas and the “know-how” of technological processes can be transferred between employees. This therefore, suggests that as technology continues to advance, training should continue to take priority for new and existing employees.

Human immunodeficiency virus (HIV)

Work environments across the globe are daily being affected by the HIV/AIDS epidemic. This has led to the over utilisation of sick leave and rising numbers of deaths. Addressing this challenge is essential because as performance decreases due to ill-health, productivity levels and profits may also drop. Organisations must put appropriate workplace policies and programmes in place to ensure that the effect of HIV/AIDS is limited.

Labour market activities and educational levels in South Africa

Pre-1994 a lack of sufficient human resource development programmes ensured that certain citizens struggled to develop any significant skills that could be utilised in the workplace. The aftermath of this era, however, still has an effect on the economy and the skills level of individuals today.

Training legislation in South Africa

In the same way in which macro factors have an effect on

Florence and Rust 6031 training and development, so does training legislation. This includes the promulgation of various training policies and legislation that further encourage South African citizens to overcome the historic challenges of unequal educational opportunities.

In order to provide training that is relevant and updated, the South African government had to change its views on current training legislation. This meant that different legislation had to be introduced - legislation that assisted in correcting the imbalances of the past, thereby ensuring that all South African citizens have access to the same training opportunities.

Additionally, it became a priority to encourage labour flexibility and increase manufacturing, so that South African businesses can continue to compete internationally (Van Dyk et al., 2001).

Research setting

Within the confines of the Provincial Government of the Western Cape, the Provincial Training Institute is respon-sible for the fostering of skills through the development of functional training programmes as well as leadership and management programmes. The Integrated Human Resource Administration and Persal (IHRAP) programme is one of the learning interventions facilitated by the Provincial Training Institution.

The IHRAP programme has been jointly developed by the Departments of the Premier and Provincial Treasury. The main purpose of this programme is to advance the skills and competencies of all human resource employees on salary levels 3 - 10. This practice would subsequently lead to an increase in standardised procedures within the Western Cape. RESEARCH DESIGN AND METHODOLOGY Once permission to conduct the study had been approved by senior management at the Provincial Training Institute, the researcher was able to obtain the names and email addresses of those who completed modules of the IHRAP programme.

Fortunately this research study made use of a survey method, which proved to be inexpensive and could be conducted in a relatively short period of time. This research study is unique; Adler and Clark (2008) do specify that there are some general categories of expense involved in the research design and methodology of any research study. These include research costs (planning the study, costs of data collection, payment to staff for their time, facilities and equipment used to send emails or make telephone calls).

The reason for using this specific design and methodology is so that the researcher is able to identify challenges currently facing the IHRAP programme and to find ways in which to use the data to solve the challenges. Research population

In this research study the population refers to all the course

6032 Afr. J. Bus. Manage. participants of the IHRAP programme (N = 106).

All the programme’s participants are employees of the Provincial Government Western Cape. Within the public service (national and provincial departments) all jobs are categorised according to a salary level between 1 and 16. Participants of this particular programme must be between salary level 3 and 10. These salary levels cover the occupational categories of semi-skilled (level 3 to 5), skilled technical (level 6 to 8) and professionally qualified (level 9 to 12). This population group represents both permanent and contract employees across twelve different provincial government departments (including regional offices and institutions such as hospitals). Research sample

According to Sekaran (2000) a sample is derived from a population, and is classified as a sub-category. As such, the sample used for this study is a selection of participants from the greater population. From the 106 participants, only 95 participants were given the research tool to complete. The outstanding participants could not be located, and it is therefore assumed that they have already exited the public service. Sampling technique

This research project makes use of a non-probability technique. The reason for this is that the total population size is manageable and the researcher will therefore use all the participants available.

The convenience sampling method was considered and adopted as the sample design. This type of sampling was used because it was easier and more cost-effective than other types of sampling.

Notwithstanding some of the negative connotations of convenience sampling, this sampling technique was not merely selected because it was an easier option, but mainly for specific reasons linked to the research participants and the requirements of the subject matter. Data collecting method

For the purpose of this research study, a quantitative approach was used for gathering data. A questionnaire was therefore developed by the researcher and distributed to participants for completion.

Questionnaires are able to reach many participants in a short period of time, with minimal costs. This factor was particularly important as some participants of the IHRAP programme are located outside of Cape Town, in George and the surrounding areas. As opposed to utilising interviews or focus groups, the bias associated with interviewers is eliminated as participants were able to complete the questionnaires on their own (Bless and Higson-Smith, 1995).

Measuring instrument

A Likert scale was used in the questionnaires. Participants were able to select from the five options their level of agreement or disagreement with each question. This five-point rating scale gave participants the opportunity to select a positive, negative or an unsure answer. The scale was set-out as follows:

- Strongly disagree = 1 - Disagree = 2

- Unsure = 3 - Agree = 4 - Strongly agree = 5 Data collection process

Once approval to conduct this research study had been granted, the researcher obtained a list of names regarding all the parti-cipants of the IHRAP programme. The names of participants were recorded on an Excel spreadsheet and each allocated a questionnaire number.

The questionnaire, together with a covering letter, was emailed to each participant. The covering letter elaborated on the purpose and objectives of the research study and also highlighted the importance of the research topic. Participants were given seven days to complete the questionnaire.

Two days before the deadline for the submission of the questionnaires, the researcher distributed a reminder to the participants requesting them to participate in the study. It was, however, emphasised that participation in this research study was voluntary.

In an effort to minimise the possibility of a low response rate from participants, the researcher provided various options for the return of the questionnaires. The participants could either email the complete questionnaire back to the researcher; alternatively the researcher arranged an individual collection of the questionnaire. Statistical procedures The responses on each questionnaire were allocated a code value. This assisted the researcher in establishing the level of agreement. The excel spreadsheet containing all the scores and codes was then submitted to CPUT’s statistician, who utilised a statistical computer program to interpret the data. According to Kumar (2005) this assists in indicating the validity of the process. Once the data has been received it is analysed by the researcher, and the importance of post-training evaluation within the organisation is determined. Data analysis

As the study mainly utilises a quantitative methodological approach, a description relating to the value of the training, the opportunities available to implement the training, an increase in job performance, the effective transfer of learning and the overall impression of the programme are identified. There are, however, no representations in terms of demographics, as these are not relevant to the purpose of this study. Research participants

In total 105 participants attended the IHRAP multi-skilling training programme. However, the questionnaire was only distributed to the 95 employees who had access to email facilities at their place of work.

The table below provides an indication of the departments where the employees work. The higher attendance rates from the Departments of Health and Transport and Public Works is purely based on the need for this training programme within the departments. In addition, operational requirements dictate when it is suitable for candidates to attend training programmes, and may thus be responsible for the fewer number of participants in the

smaller departments (Table 1).

From the total questionnaires distributed (N = 95), 53 participants responded to the researcher. This equates to a total of almost 56(55.78%).

RESULTS

This research study aimed to establish how participants can gain further support in the workplace from managers and peers, how managers can act as mentors and coaches and how interpersonal skills can be improved upon. In addition, it sought to deduce the effect of the multi-skilling training programme on the participant’s ability to integrate information learned into their work environment.

Recognising the value of the training programme

The value that a training programme brings to an organisation is essential if it concentrates on the long-terms goals of the department. This could include developing employees who possess core competencies relevant to the work they perform. In today’s tough economic times, skilled, knowledgeable and capable employees can be a strategic advantage. It is for this reason that the impact of this training programme be acknowledged.

The survey indicated that a cumulative percentage of 18.87% (13.21% strongly disagree plus 5.66% disagree) of respondents did not share their knowledge and skills with colleagues and peers. However, as part of reco-gnising the value of this training programme, participants should be encouraged to discuss and confer information with their teams and work groups. Knowledge sharing would not only increase the value derived from the programme, but also the prestige associated with the training programme.

Opportunities to implement learning in the workplace

Although a cumulative percentage of 83.02% (5.66% strongly agrees plus 77.36% agree) agree that their behaviour in the workplace has changed due to the knowledge and skills acquired in the training programme, these changes in behaviour are not being adequately monitored. This is evident as the research shows that almost 72% of respondents are unsure if their manager notices a difference in the standard and application of their work. If sufficient opportunities are created for these participants to practice what they have learned, managers would be more aware of the difference the training programme has made. It would be viable for departments to create more opportunities for the participants to actually put into practice what they have learned at the training. In this way the learning is reinforced and when the task can be completed correctly

Florence and Rust 6033 it increases the confidence levels of the participant. Increase in job performance In this section of the questionnaire, approximately 60% of the respondents agree that since attending this training programme their job performance has increased. Completing the training enables employees to increase the quality of their work and also shorten the time it takes to complete a job. The survey shows that participants use their skills more frequently and make fewer errors in their work. This could also be attributed to the fact that the training programme combines both theory and practical demonstrations as part of its learning.

Despite the fact that almost 23% (15.09% strongly agree plus 7.55% agree) of respondents are unaware of the costs involved for them to attend this training programme, 85% (62.26% strongly agree plus 22.64% agree) of the respondents stated that this training is an investment in their career. If departments are aware of the costs for training, they may be more interested in fully utilising the participant when they return to work. This would be part of the department’s return on investment. The vast majority of respondents did feel they had an obligation to plough back into their workplace what they had learned in their training. Transfer of learning to the workplace Part of transferring learning to the workplace is the ability to monitor and track performance after the training has been completed. An area of concern, however, is that a cumulative percentage of 68% (3.77% strongly disagree plus 64.15% agree) agree that their managers have not discussed with them how the knowledge and skills can be integrated into their daily work. As a result, 96% (83.08% strongly disagree plus 13.21% disagree) of the respondents claimed that they do not have action plans in place to monitor their progress. Consequently, only 3.77% of respondents agree that they are being mentored or coached in the workplace. This is indicative that the skills transfer process is not being optimally managed by the departments.

However, owing to the amount of knowledge and skills accumulated during the training programme, almost 89% (3.77% strongly agree plus 84.91% agree) of respon-dents agree that they are willing to work on job rotation programme. This would assist the department in terms of service delivery, efficiency and quicker turnaround times.

Overall impression of the training programme Generally, the overall impression of this training


Table 1. IHRAP participants per department.

Department Number of participants % participants

Health 31 33

Transport and public works 22 23

Premier 17 18

Social development 9 9

Cultural affairs and sport 6 6

Economic development and tourism 5 5

Environmental affairs and development planning 2 2

Human settlements 2 2

Education 1 1

programme was extremely positive. Most respondents would recommend it to someone else. It is clear that the participants must have experienced professional growth and development after attending this programme. This in itself could be utilised by the departments as a way of retaining existing employees and further developing the talent found within the department. RECOMMENDATIONS This research study also focused on the importance of being able to transfer behaviour, skills, knowledge and competencies from the classroom to the workplace. Execution of post training evaluation Although summative and formative evaluation is conducted during and at the end of each module, it is imperative that post-training evaluation is also implemented.

Post-training evaluation ensures that there are opportunities for the participants to implement their new knowledge and skills in the workplace. Furthermore, it ensures that the training offered to the participants is relevant to the work that they do. Participants would be reluctant to attend training that will not benefit them in the workplace.

Post training evaluation should be implemented by the Western Cape Provincial Institute and/or by the department where the participant works. Post training evaluation will assist in establishing the degree to which the newly acquired skills and knowledge are being utilised in the job done by the participants. Consequently, this information can be filtered back into the training programme so as to improve future programmes.

Overall, post training evaluation can be used as a technique to align strategic training initiatives to the business objectives of the department.

Effective mentoring programmes Indicative in the survey conducted amongst participants, was that mentoring programmes are not being employed in the workplace. Mentoring, however, has several benefits for both the mentor and the mentee. According to Klasen and Clutterbuck (2002), “mentoring is one of the best methods to enhance individuals’ learning and development in all walks of life”.

Currently, departments are struggling to retain employees who are suitably qualified to assist their clients. However, employees who are mentored may feel more valuable to the department and therefore less likely to move elsewhere. This in turn would decrease turnover rates and increase productivity and job satisfaction. In addition, a mentor may assist the participant to practice the multi-skilling they have learned on the training programme. This would be an ideal opportunity for the mentor to assist the participant with practicing skills they have not yet fully mastered. In this way the participant is also able to gain more exposure and experience in other areas of human resources, not just the specific discipline they are used to. In this way mentoring encourages the participants to take responsibility for their own careers. A mentoring programme will build a team’s skills and competencies, enabling them to perform more functions than before. An increase in management commitment It is the opinion of the researcher that the training programme would be more effective if it had the full commitment of management. The training programme should be seen as a partnership between the department and the WCPTI. It is suggested that the managers of all participants are gathered together at the WCPTI for a briefing session before the training programme com-mences. This briefing session could include information relating to the course content, its purpose, the roles and

responsibilities of the managers and examples of the work to be covered. Implementation of action plans Merely attending the training programme does not signify the end of the training cycle. In fact, it is now vital to establish ways in which the transfer of information can take place from the classroom to the workplace. One such way is through the development of action plans.

Once the participant has completed the training programme, the immediate supervisor and participant should review what was learned in the classroom and decide on ways in which this new information can be implemented in the workplace. It would also be an opportunity for the participant and the manager to identify their goals and expectations after the training and the resources needed to ensure that these goals are met.

Action plans would be an ideal way of placing an emphasis on the knowledge and skills the participant has learned. Additionally, this would reinforce any positive behaviour and actions learned while attending the training programme.

The WCPTI trainers would be able to assist managers and participants in developing action plans and reviewing progress made by the participants. Creation of job rotation and job enlargement practices As stated by Dessler (1983) routine, monotonous work creates boredom, resulting in frustrated employees with low work attendance and productivity levels. This is the case with many of the participants - they specialise in one specific field of human resources only.

Job enlargement and job rotation would, however, offer these participants and opportunity to diversify their skills and further develop their area of expertise. Job enlargement would enable the participants to increase the number of similar tasks they perform, whilst job rotation would enable them to move from one job to another. The WCPTI would be able to provide assistance to the departments in this regard. Development of a culture that supports training and development In order to improve the performance culture of all departments, it is imperative that management and peer support for training and development is fostered. This includes the creation of a work environment which places an emphasis on keeping abreast with the latest technologies and techniques to complete jobs.

Florence and Rust 6035 Employees must be encouraged to find more efficient ways of doing their job.

Part of building a culture that supports training and development is making training programmes and other resources available for employees to attend. Managers should be less reluctant to send employees on training just because it means they will be away from the workplace for an extended period of time. The long-term benefits of training programmes must be thoroughly understood by all employees and the training or development programme offered to the employee must be closely linked to the work they do. Training should not be viewed as a way to escape the office.

In adopting a healthy approach to training and development the departments will be successfully contributing to bridging the wide skills gap we are currently faced with in South Africa. Providing a context for training needs

Several of the participants indicated that they were not sure why they were attending this training programme - it was simply just delegated to them. It is recommended that the participant be made aware of skills enhancement initiatives and how they can benefit the employer and the employee alike. It is further suggested that the employee is able to see the link between the training being offered and the work they are responsible for. This would decrease the level of anxiety an employee may face when experiencing something new, thus enabling the employee to focus on learning new information that can later be transferred to the workplace. Conclusions The WCPTI aims to deliver needs-based training pro-grammes that will enhance the efficiency of public service employees. Their approach to training is positive and professional, thereby assisting to develop and advance technical skills and core competencies of all participants. The IHRAP programme is a multi-skilling programme offered by the WCPTI and created specifically for human resource personnel. This programme formed the basis of this empirical study.

Although this study focussed on an in-house situation, and therefore, cannot be generalised, there are some worthwhile lessons that can be learned from the trainers. The trainers of this programme assisted each group to meet the goals of the course by taking into account the individual’s background and level of competency. The expectations of the groups were met through the initiation of practical exercises, collaborative discussions and lots of participation. The success of the programme can also be attributed to the way in which the curriculum was

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Exploration of the Democratic Republic of Congo (DRC) textile industry survival: Case of La Société Textile de

Kisangani (SOTEXKI)

A. Mwamayi1*, G. Wood2, R. Haines3 and M. Brookes4

1Department of Development Studies, Nelson Mandela Metropolitan University (NMMU), Port Elizabeth (PE), Eastern

Cape, Republic of South Africa. 2School of Management, Shielffield university, UK.

3Department of Development Studies, Nelson Mandela Metropolitan University (NMMU), Port Elizabeth (PE), Eastern

Cape, Republic of South Africa. 4Department of Economic and Statistics, Middlesex University, UK.


The Democratic Republic of Congo (DRC) textile and clothing firms had been facing multiple challenges of competitiveness. During the last past ten years the industry has dramatically declined and the only firm under review has managed to secure its survival by concentrating on niche markets. The previous situation is principally due to infrastructural challenges, second hand products, institutional instability, illegal imports from the East Asian countries and other internal problem. Here, special attention is given to La Société Textile de Kisangani (SOTEXKI), the only survival company in the DRC textile and clothing industry. This paper tries to explore the reasons why this survival company in the DRC textile industry continuously cope with these low cost competitions by looking at what works in the industry, why and what can be done to make things work better? It proposes to look at the different production paradigms (labour issues and value added production paradigm) by exploring their effectiveness to promote the textile industry’s survival and competitiveness. It then discusses some of the findings about this survival company in the DRC textile industry. In brief, an exploratory result from the fieldwork revealed the pertinence of involving in best labour practices and value added production paradigm to promote competitiveness and keeping the firm survival. Further results indicated that SOTEXKI as an integrated industry with significant forward and backward linkages focuses on value added production paradigms and keeps consistently complying to the best labour practices to remain survival and competitive. SOTEXKI is quite performing well. Key words: Survival, competitiveness, industry, labour cost cutting, retrenchment, and value added production paradigm.

INTRODUCTION This article seeks to explore the survival of the textile industry in the Democratic Republic of Congo (DRC). It explores and critically analyzes the only survival company and understands why this company has survived and what could be done to make things work *Corresponding author. E-mail: [email protected].

better. SOTEXKI represents the only survival company in the DRC textile and clothing industry which is still operating today. This company is an important contributor to the increase of national economic development by playing a key role in gross domestic product (GDP) formation, investment, foreign exchange earnings, exports and employment creation. According to Blair et al. (2000), survival in this study means that a company continues to exist as an independent publicly traded

6038 Afr. J. Bus. Manage. company. In other words, a survivor is defined as a company that did not experience merger, acquisition, bankruptcy, liquidation, or privatization.

The Economic Intelligence Unit (2004) revealed that during the 1990s, Sub Saharan Africa (SSA) only increased its global share of clothing output from 0.6 to 0.8%. Gibbon (2002) indicates that SSA countries accounted for less than 1% of global exports of clothing and textiles in 2001. SSA’s main trading partners are the United States and the EU, with US imports from these countries rising by 85.3% between 1999 and 2002, while EU imports dropped by 5.5% (Gibbon, 2002). Clothing and textiles account for 2.5% of total US imports from SSA in 2007 and the vast majority qualified under AGOA (Otexa, 2008). Many smaller, higher-cost, less-developed countries have been provided with valuable opportunities as they have been shielded from open competition (Minor et al., 2002). Preferential trade agreements have allowed SSA to expand its exports. Exports from the region are mainly low-price basic items such as trousers, T-shirts and sweaters that typically have long production runs, low labour content and few styling changes (US International Trade Commission, 2004; Economist Intelligence Unit, 2004). Since 2001, SSA has experienced a relative boom in clothing and textile production as countries gained duty-free access to the world’s largest clothing market, the United States, under the provisions of AGOA. Although, 36 SSA countries are eligible for AGOA status and can export apparel duty-free into the US, only six countries do so in significant amounts (Sedowski, 2008).

This paper remain critical on how SOTEXKI’s competitiveness can be promoted as the company is the only survival company in the DRC, thus take benefit of this international opportunity under AGOA as the country is beneficiary to the advantages of AGOA. The textile and clothing industry has undergone many structural pressures in the Southern African region and more particularly infrastructural challenges in DRC reason why this paper tries to explore and critically analyse these survival areas and understand why these areas as survived and what to do to make things work better? Two paradigms are the predominant ones among the survival company. The first set refers to value added production paradigm. According to Coltrain et al. (2000), adding value is the process of changing or transforming a product from its original state to a more valuable state. They further indicate that a broad definition of value added is to economically add value to a product by changing its current place, time, and form characteristics to characteristics that are more preferred in the marketplace (Coltrain et al., 2000). A company mainly adds higher value by means of product specialisation where either the technology or the process of production or both are highly specialised. In that way the company creates speciality niches for itself with the ability to export

to numerous countries right around the world (Maree, 1995). Maree (1995) further adds that some companies base their strategy primarily on consistent quality and reliability. Maree’s investigation discovered that few companies have adopted a strategy very uncommon to South Africa (but not elsewhere in the world) to raise the value-added to its production. These firms do so by making the fabric up into garments through subcontracting and then marketing the garments. These companies consider themselves to compete in the world market and have adopted a number of ancillary strategies to try to ensure their international competitiveness (Maree, 1995).

Indeed, the importance of value added as a concept lies in its focus on the wealth created by the company rather on its sales (which could, in large part, reflect the resale of expensive items the company has purchased) or on employment (which could be largely low skill, low value added jobs). This focus on the wealth created by the company facilitates questions about how much wealth is created, whether the company is increasing the wealth [it] creates year by year and how efficiently it is creating wealth (http://www.innovation.gov.uk, accessed on 21st June 2009). Illustrating the South African context, Velia et al. (2006) argue that the importance of looking at value added lies in the fact that many companies do little to transform the inputs they receive into factories. As they are not adding significant value, their contribution to wealth creation is limited. Thus, a process to significant raise the design input into the weaving of grass baskets and related branding activities for exports will raise the value added by such a process and improve the wealth generation impacts. In the view of the paradigm, the second set relates to labour repression which refers to an unfair cost advantage in production process consisting of wage repression, reduction of workers’ rights, reduction of workers benefits, reduction of labour production cost, reduction of working hours, etc. According to Fields (1994), wage repression would be necessary to prevent higher returns to labour from pricing the exports of the newly industrializing economies out of competition in the world markets. He further indicates that wages and other forms of labour remuneration must be held down an exporting country to remain competitive in world markets. As argued by Janquieres (2004), what makes China’s textile and clothing successful? Two important factors contributed to this Chinese competitive advantage such as currency manipulation and breaking down labour standard or wage repression (low wage).

One of the major concerns is how countries such as China, who has become a looming threat to many textiles and apparel producing countries around the world, will behave once quotas are removed. China’s exports of clothing have already increased to approximately a quarter of the world total since it joined the WTO in 2001 (Janquieres, 2004), and in the first half of 2004 China

sold $42 billion worth of clothing and textiles (Beware, 2004). The international labour organisation’s recent report (ILO, 2005) have repeatedly drawn attention to the persistent, high, and in several regions of the world, growing, unemployment since the early 1990, growth of a typical employment or underemployment, (for example home-based work, ‘informal’ work) or precarious paid employment’, decline of standard full-time/permanent jobs, reduced job-security etc. As illustrated previously, Sinamela (2008) added that forced labour, forced contri-butions and forced removals are the major constituents of the regime of extra-economic coercion in Swaziland.

His study reveals that Texrey a textile factory fully owned by Taiwanese has been a grim picture of labour repression characterized by extreme exploitation of workers, tendencies of aggression, inhumane treatment of workers, irregular working hours, unsafe working conditions, suspensions and arbitrary sacking are some of the issues (Sinamela, 2008), the latter attracted to Swaziland by low wages and access to Southern African markets, and aided and abetted by one of the world’s absolute monarchies. This article seeks to explore the survival of the textile industry in the Democratic Republic of Congo (DRC). It explores and critically analyzes the only survival company and tries to understand why this company has survived and what could be done to make things work better. This study was sub-divided as follows. An introduction to the study was given, after which the research proposition was made. This was followed by a presentation of the DRC textile and clothing industry, and a discussion of the methodology used. The study presents the results and discussion about the survival of SOTEXKI. First of all, the researcher discusses about the basic details of SOTEXKI, the different trends regarding the performance of SOTEXKI and the different production paradigms used by the aforementioned company by exploring the issues related to labour force and value-added production paradigm. Secondly, the researcher explores the survival company in the DRC and critically analysed the reasons for their survival before discussing its competitiveness. Lastly, the researcher then proposes the different interviews with the stakeholders. Further-more, the study was concluded. The researcher also proposes few recommendations about what can be done to make things work better. RESEARCH PROPOSITION This paper has only one preposition. Is SOTEXKI involved in best labour practice and value added production paradigms for its survival and competitive-ness? This proposition will help understand the significance of value added production and its effectiveness. And what makes a value added paradigm and the overall performance of the company? It then

Mwamayi et al. 6039 discusses the different related labour issues concerning SOTEXKI and helps understand its significance and contribution to the company survival? This paper tries to explore the survival of SOTEXKI by looking at what works in the industry, why and what can be done to make things work better?

The central aim of this paper is to explore the survival of the textile industry in the Democratic Republic of Congo from 1999 to 2010. In order to achieve the main objectives, the paper seeks to do the following: (1) To discuss the survival of SOTEXKI by looking at its involvement in best labour practice and value added production paradigm for the competitiveness of the industry; (2) To analyze the performance of SOTEXKI by looking at the different trend about certain indicators such as profit level and output level; (3) To understand the impact of the findings for the key stakeholders and how to promote the textile and clothing industry’s competitiveness in the DRC. PRESENTATION OF THE DRC TEXTILE AND CLOTHING INDUSTRY La Société Textile de Kisangani (SOTEXKI) is the only active firm in the sector. In 2007, UTEXAFRICA closed completely due to its inefficiency, high competition and from isolation during the different recent armed conflicts in the country. Due to war of 1996 to 2003, SOTEXKI is producing a fraction of what they used to produce in the 70s and 80s and this situation destroyed the main infrastructures which lead today to cotton shortages. As Mwamayi (2004) indicates, DRC counted several textiles and clothing companies such as NOVATEX, SOLBENA, UTEXAFRICA, SINTEXKIN, CPA, FILTISAF, SOTEXKI, CONGOTEX etc but unfortunately all have been progressively destroyed, expect SOTEXKI, as two year ego UTEXAFRICA closed. Société Textile de Kisangani (SOTEXKI) is registered to the Congolese Enterprises Federation (FEC). SOTEXKI is located in Kisangani Northern Province of DRC. Actually, the DRC is depending almost exclusively from the importation of the textile and clothing from China and India.

Table 1 reveals the poor performance of the textile and clothing sector in the DRC which was characterized by unstable and decrease situations or ups and downs in term of the number of meters sold as the quantity produced and sold locally is inferior to demand of the population. This situation profit well to the East Asian companies by their penetration and dominance into the local market through the imported products. In brief, the destruction of the local industry is slowly taking place. Table 1 also shows that the local produced products and sold products from the DRC textile and clothing sector


Table 1. Sales of the textile and clothing sector in meters (m).

Years/Rubrique UTEXAFRICA SOTEXKI SINTEXKIN PAGNES importes Total sector

1996 5 166 000 3 380 000 780 000 42 674 000 52 000 000

1997 5 110 000 5 530 000 1 590 000 40 470 000 53 000 000

1998 3 675 000 1 170 000 2 695 000 41 160 000 49 000 000

1999 3 093 000 N/A 2 520 000 36 387 000 42 000 000

2000 2 377 000 N/A 2 353 000 34 489 000 39 000 000

2001 2 229 000 N/A 1 380 000 42 391 000 46 000 000

2002 4 375 000 700 000 3 675 000 26 250 000 35 000 000

2003 4 050 000 3 150 000 5 400 000 32 400 000 45 000 000

Source: Mwamayi (2004); UTEXAFRICA (2004): Marketing and Commercial Department.

are less than 20% of the total market consumption and more than 80% of the products consumed and sold locally are from outside of the country. This situation shows clearly the poor performance and lack of com-petitiveness of the DRC textile and clothing industry since 1996 and as a result, many firms were precipitated to close down facing low cost competition. The researcher observes that only SOTEXKI has survived and continues to operate. Underlining here one important thing is that SOTEXKI’s administration or siege is in Kinshasa Capital City of DRC but all the factories of the company are located in Kisangani in Northern Province of DRC. An interesting observation is that SOTEXKI stopped to operate between 1999 and 2001 due to war in Kisangani and its occupation by the Ugandan and Rwandese armies which destroyed a number of equipments and so on. As argued by Mwamayi (2004), there is a need for drastic measures to protect the local industry as the sector is under disappearance. Protecting the local industry relies and remains first of all governmental prerogative or obligation and also to promote the national production of textile and clothing industry through a veritable development path by stopping to be an economy of speculation which DRC’s economy has been for very long time and becoming an economy of production. Protecting the local industry is a necessity for the economy in face of a disloyal concurrence or ‘sauvage concurrence’ of products subject of dumping and subsidies in their countries of origin. In DRC, the textile and clothing industry imports everything from the inputs to the raw materials (cotton). These importations always necessitate an important sum of money to permanently buy for at least six months stock. One of the biggest concerns is that the national production of wax made in DRC is largely inferior to Asian concurrency. A number of Congolese firms work with outdated equipments and machineries which explain why these firms are performing poorly and consuming a lot of energy. Lack of infrastructures (roads) is another big problem for the country. Another problem is the low level

of investment which influences negatively the firm to improve things and promote competitiveness. Institutional stability is another important factor to stimulating new investment and promotes national development. Lastly, there is a shortage of cotton due to the destruction of different productive sites during the armed conflict occupied by the foreign armies. This situation can be also explained by the lack of basic infrastructures; an East Asian massive imports and looting during the recent war in the country. This is due to the fact, as suggested by Mwamayi (2004), that the Congolese textile and clothing is facing a lot of difficulties. Some of the difficulties are as follows: Looting of September 1991 and 1993 which explain why the distribution network in different provinces remain disconnected, the different wars in the country and more specifically the illegal imports from Asian countries. Other difficulties are due to production problems such as lack of infrastructures, decayed equipments which result on lack of competitiveness of the different production units, shortage of electricity and finally lack of financial resources to upgrade the machinery, also difficulty due to distribution which nationally is due to a weak capacity to purchase by the local population and mediocre salaries of people; massive illegal imported products and under-invoicing; dysfunctionment of the financial system, multiplicity of taxes-bureaucracy and a lot of policy interferences etc., and internationally is due to a problem between national legislation and the transformation of the international environment, promote local products in international market and the cost of doing marketing outside the country. Lastly, is the difficulty in provisioning which create a lot of shortage in terms of buying locally the raw material (cotton) as the majority of these raw materials are brought from outside of the country. The implication of this is that firms performing poorly will negatively affect the life of many people as their strategy will consists first of all to reduce the production cost through retrenchment and reduce their contribution to the economic activities.

In addition to the aforementioned fact, underlining that

for many decades the DRC’s economy did experienced a negative growth. Actually, the DRC’s economy has experienced an average annual growth rate of 6.1% between 2003 and 2008 boosted by the end of war and a sustained rise in commodity price; post-conflict country which economy is structurally weak and depending on importation; weakness in public finances management; inadequate reform in the mining sector; decayed production tools; and irregularity and cuts inopportune of the electricity. The DRC economy was not affected by the international financial crisis but only internal choc due to the securization of the Eastern Province which had chocking consequences on the public finances. There is a need to diversify the DRC economy through agriculture, industrialisation and other important sectors of life. Thus, a brief recent descriptive situation of the clothing sector in the DRC is subsequently provided.

Table 2 shows an important contribution of this sector to the economic activity. This means that consumption of clothing products in the country has increased each year but the majority of these products are coming from outside of the country, while a very small quantity is produced locally. Thus, DRC is depending totally from outside products which have a big impact on local industry destruction and many job losses.

SOTEXKIN is continuously playing an important role in the DRC economic activity as they create jobs, protect jobs and contribute to the GDP of the country. Government remains one of the principal buyers of SOTEXKI wax or pagnes with uniform for police and military forces and other governmental services during national manifestation and also a good number of Congolese consume SOTEXKI products. But today, SOTEXKI is the only national firm operating in the sector with only 15% of its operational capacity. This firm is facing a serious challenge for its survival, improving the quality of their products but there is an urgent and consistent need for government assistance to help the firm become competitive and try to extend its market destination by exporting as the country is beneficiary of the AGOA advantages. METHODOLOGY

Here, the study’s aim is to analyse, present and interpret the data that was obtained from the empirical study. Both qualitative and quantitative methods were used to adequately address the research problem, aims and objectives. Data was gathered directly from the SOTEXKI by describing the incidence, frequency and distribution of the different factors contributing to the textile industry’s survival and competitiveness, and studying the interaction of factors. Thus, the paper involves a combination of quantitative methods such as a structured questionnaire and qualitative methods such as semi-structured interviews. Existing secondary data was also used, such as official reports, company reports and government document. The targeted respondents of this study were respectively human resources managers (HRM), or any Managing Directors. But at the time of the interview none of the

Mwamayi et al. 6041 aforementioned respondents were willing to cooperate giving excuses why the researcher asked for the first time a 45 years Chief Infographiste (Creator) Male to complete the questionnaire but one of the obstacle was that this aforementioned respondent did not know all the aspects of the firm and he was limited in giving information and completing the questionnaire. As suggested by the supervisor, for the second time the researcher hired a women researcher based at the University of Kinshasa (UNKIN) to follow up and secured an interview and get completed the questionnaire. The women researcher succeeded to interview a 50 years Male First Responsible du Siege SOTEXKI/Kinshasa with 16 years working experience within the firm who completed the question-naire. This responsible du siege is more than a Managing Director or Administrateur Delegue General looking at all the aspect of the firm. All data collected and received was analyzed by using STATISTICA software due to its flexibility, excellent capacities for labeling variables.

RESULTS AND DISCUSSION The following findings illustrate well the respondent’s answers and views. Firstly, basic details of SOTEXKI are discussed. Secondly, the different trends regarding the performance of SOTEXKI are presented. This was followed by an exploration of the issues related to labour force and value-added production paradigm. The survival area and the reasons for survival and what can be done to make things work better are critically analyzed.

Basic details of the firm

SOTEXKI is a mixed economy company which is composed by both local ownership and foreign ownership. The turnover of the firm improved for the last past five years between 1 to 3 million US$ compared to the situation 1990s and 2000s where the DRC firms were performing poorly and many of those firms closed during that period. These periods were characterized by a decreased of turnover due to institutional instability, poor performance of firms, lack of competitiveness and war firstly in the eastern province (1996 to 2003) of the country, looting (1991 to 1993) which destroyed the economic activity of the country, many infrastructural problems and also due to the international competition. The turnover level is an important indicator describing the capacity of the firm to resolve problem and how can a firm engage in different activities for its development. This turnover put the firm in the medium firm category or classification as its turnover is between 1 and 3 million US with a work force of 500 workers.

The other findings revealed that SOTEXKI did not change its ownership structure in the last five years and continually tried to survive. The relevance and interesting side of the previous findings is that the capacity of the firm to resolve problems are looking good compared to the 1990s and 2000s period and shows also how the firm has tried hard to cope with low cost competition and


Table 2. Details of price indicator realized by the Research Economic and Social Institute (IRES) (base: December 1993 = 100).

Period Market price (Congelese Franc)

Clothing

2006 1 944 643 055.6

2007 2 627 247 596.0

2008 3 592 767 651.2

2009 4 366 946 042.6

2010 5 084 552 887.1

2011 (January and February)* 1 153 417 606.8

Source: Banque Centrale du Congo (2011).

survive after all these situations where a very good number of the other firms in the country have closed. The firm shows some kind of resiliency for its survival and more governmental support, good environment for doing business can help again this firm compete hardly and penetrate the international market for its sustainability and competitiveness.

The size of the labour force is stable around 500 workers only according to the respondent. This means that SOTEXKI is a medium firm and can be classify in the second classification characterized by a turnover between 1 to 3 million US$. It has been shown previously that this study categorized four classifications of firms: First classification had a turnover of between below 500 000 US$ and 500 000 to 900 000 US$ (small firm); the second classification had a turnover between 1 to 3 million US$ and 4 to 7 million US$ (medium firm); the third classification has the turnover between 8 to 10 million US$ and 11 to 15 million US$ and the last or fourth classification was characterized by a turnover over 15 million US$. In addition to this, Morris (1978) succeeded to classify firms in four major types: Their industry grouping, their location, their size (in terms of capital employed), and whether or not there were foreign controlled. In the addition to the foregoing, Salinger et al. (1999) suggest that firms can be classified according to several criteria, including size, type of output, location, degree of modernity of plant equipment and manage-ment, labour relations, relations with retailers, and degree of dependence on international markets. According to Morris (1978), the size of capital employed was categorized as follows: Under R100 000, R100 001 to R500 000, R500 001 to R3 000 000, R3 000 001 to R8 000 000, over R8 000 000 and this range from small firms to very large firms.

The firm produce the following products: Tissus pagnes, babies’ lange, drill, cloths, woven, towelling, medical gauze, accessories, printed fabrics and other products. The strengths of the firm competitiveness rely on product of good quality, delivery services and quick

response and flexibility. The implication of this finding is that SOTEXKI is producing good quality product which helps the firm to remain competitive and survive facing these East Asian low cost competition.

The principal market destination of the firm is the local market and SADC. This is an important finding showing if the firm is doing well or not and its overall performance. The findings showed that SOTEXKI is doing quite well and continues to survive. A good quantity of its product is consumed locally in which another small quantity is destined to neighbouring countries in SADC. One of the objectives in this study was to understand the actual performance of this firm and its competitiveness. The importance of this finding responds somehow to one of the objectives of the study on how SOTEXKI has continuously been doing to survive and face this low cost competition. The researcher also observed that this firm is performing quite well but this situation is not necessarily accompanied by hard HRM consisting to reduce the production cost through labour cost cutting. However, an increased demand in the region and increased demand in home market constituted the principal sources of change regarding output directed towards primary markets within the past five years. One of the research questions was to understand if this firm under investigation is surviving? This question is one of the principal research questions in this study. The question provides crucial and sensitive details about the firm’s competitiveness in this study. Underlining that the researcher proposes to measure the survival of the firm by using the profit level because a firm which experiencing a serious problems of compete-tiveness cannot continue to operate for very long period of time without collapsing. The idea behind this question is that during the last past five years there is a very good number of firms which did not realise a profit and they continue to operate by experiencing serious problems

of competitiveness, which is the reason why the researcher suggests to call those firms ‘survival’.

According to the respondent, the profit level of the firm has decreased during the last past five years which does not necessary mean that the firm does not make profit or just that the profit is reduced a bit as compared to the finding which constitutes the principal indicator for the firm performance. The overall performance of this firm is doing quite well or surviving where a very good number of firms in the country have closed. Responding to the previous question, SOTEXKI is a surviving company and showing a resiliency to remain in business but govern-ment must also help to promote the local industry. These indicators also explain well how SOTEXKI continues to put in place mechanism to adapt and remain competitive. The proportion of the change regarding profit level is above 10%. Trends regarding the performance of the firm Table 3 shows the way SOTEXKI has been performing through the sales level of the firm measured in number of tissues sold which also correspond somehow to the output level of the firm. This respond well to one of the objectives of the study on how firms overall are per-forming. SOTEXKI production and sales have improved too much compare to 20 years ago. The Table 3 revealed that from 2007 to 2009 the number of tissus produced and sold by the company have increased for these last three years. This finding shows that in 2007, SOTEXKI sales represents 17% of those three years, while in 2008 the same firm experienced an improvement in sales compare to the previous year which represents 33% of those three years and lastly in 2009 the company has performed well as the company succeeded to sell more than the two previous years by selling double of its products which represents 50% of those three years in comparison. This implies that the company is performing well and continuously occupies an important place in the DRC economic activity with its contribution to the economic activity. This situation is due to institutional stability since 2005 and more investors are willing to invest in the different sectors of life but underlining that there is a number of other factors such as amelioration of condition of doing business in the country, election of 2006 as a sign to the end of war by attracting more investors, a small amelioration of the socio-economic condition of people, etc.

Table 4 is just completing and confirming the previous findings in Table 3 by showing that SOTEXKI is performing well as the sales level in Congolese Franc is increasing between 2009 and 2010. One of the interesting observations in (Table 4) June 2010 which correspond with the celebration of the 50th anniversary of DRC independence shows that SOTEXKI generated

Mwamayi et al. 6043 more revenue or money than other months and chocking news is that the same revenue for June 2010 is superior to the total of sales in 2009. This also contradicts clearly what some corrupted governmental official usually think and under estimate the capacity of the local industry to respond to the domestic market. According to Dieudonné Kasembo, an official to lease between the private operator and Commissariat Général pour le Cinquantenaire, esteem that SOTEXKI cannot produce more than 100.000 wax or pagnes and the other problem is the quality. The researcher observed that a number of officials in the country remain corrupt and stopping the governmental effort to improve the socio-economic activities by destroying lives of thousands due to bribery and corruption. This official forgot that in a newly born democracy in DRC, people must be accountable and deliver by looking first the general interest of the population instead of their personnel interest. This kind of position for a high official of government is purely irresponsible and contributes to the destruction of the local industry. Promoting the local industry should be-come the first priority of this new democratic government by protecting the local industry against these low cost competitions from the East Asian countries. There is a need of good collaborators in the country to help promote the local industry as any developmental activity requires conscious and responsible patriots.

Concerning the recent SOTEXKI performance, the respondent shows that the profit level of the firm has decreased which does not necessary mean that the firm does not make profit or is reduced. This finding constitutes the principal indicator for the firm performance. Overall performance of this firm is doing quite well or surviving where a very good number of firms in the country have closed. These indicators also explain well how SOTEXKI continues to put in place mechanism to adapt and remain competitive. The proportion of the change regarding profit level is above 10%. The firm does export to few SADC countries but this means the majority of the products produced by the firm are destined to the local market and only a very small quantity is export. The domestic market need is higher than what SOTEXKI have to offer. The meaning of this is that SOTEXKI production is too small to respond to all the needs of the Congolese market and only small quantities have been exported as a reward and expansion of the good quality products which is a good indicator showing the good performance of the company and brought in country foreign earnings.

But the previous result and performance remain challenged by the East Asian products which have eroded, penetrated or invaded the DRC market by covering or responding to the Congolese market needs of about 90%. For illustration, Chinese copies all the local designs by faking the quality or selling poor quality products at low price. The findings revealed that the


Table 3. Production vendues or sales of SOTEXKI tissus in meters (m).

Nature de prod Year Production vendue Production stockée Production total %

Designation/Unite

Tissus 2007 1195298365 10966695 1.206.265.060 17

Tissus 2008 2350145153 20205302 2.370.350.485 33

Tissus 2009 3402981359 122132796 3.525.114.155 50

Source: Direction Générale des Impôts (DGI) Kinshasa/Gombe.

Table 4. Vente SOTEXKI or SOTXKI sales in Congolese Franc.

S/No. Month 2009 2010

Sales in Franc Congolais (FRC) Sale en Franc Congolais (FRC)

1 January 20 020 748.65 5 270 000.00

2 February 20 032 634.80 38 070 000.00

3 March 20 035 986. 30 39 127 000.00

4 April 20 098 670.34 40 340 345. 00

5 May 11 202 773.29 38 450 230. 00

6 June 12 006 734. 60 263 898 000.00

7 July 12 565 926.44 88 578 900. 00

8 August 12 569 623. 40 65 911 500.00

9 September 9 458 020.73 52 732 690.00

10 October 4 385 070.00 137 479 240. 00

11 November 9 397 352. 00 257 850 010.00

12 December 9 487 620.00 169 635 750.00

Total 161 261 160.55 1 197 343 665.00

Source: SOTEXKI, Direction Générale.

market destination of the firm has remained stable over the last past five years. The researcher found that protection against illegal products was the principal constraint expected to become binding in the immediate future as the firm progress. However, competition from abroad and availability of raw material constituted the principal constraints for the firm progress in the past. Labour issues and value added production paradigm labour issues The findings in Table 5 showed that the number of workers has remain stable for the last three years concerning the permanent workers and a relative improvement of the temporary workers force in the last past three year. Thus, underlining SOTEXKI is not involved in labour cutting costs. SOTEXKI used other strategies rather than retrenching people from their work to remain survival and competitive. Underlining also that in DRC there is no respect to the law or labour legislation as workers can spend months without their salary, other

characteristics can be reduction of workers’ rights, reduction of workers benefit or reduction of work hours, etc. The implication of the previous finding is that jobs should always be protected and other ways should be sought to reduce the production cost such as cutting unnecessary cost of electricity by using for example, efficiently the electricity, using efficiently your labour force, etc.

The respondent added that the stable or increased labour force is due to fiscal facilities, parafiscal and tarifaire given by the government to stimulate the local industry to maintain jobs. The findings revealed that only in 2007, 50 temporary workers were retrenched from their work. The respondent said that the reason for retrench-ment is due to unpredictable increasing circumstances. This situation leaves thousands of workers and their families without any stable source of revenue. This is a ‘hard’ variant of HRM considering employees only as a resource of the organization and the firm can reduce production cost of time in order to achieve its vision and goals. This afore mentioned situations correspond to hard HRM practice covered in the literature review chapter.

Mwamayi et al. 6045

Table 5. SOTEXKI labour force.

Criteria/Year 1999 2004 2005 2006 2007 2008 2009 2010

Number permanent workers 250 300 300 350 450 500 500 500

Temporary workers 75 120 120 100 50 135 110 150

Part time workers - - - - - - - -

Source: SOTEXKI Enquête 2011.

With this hard variant, human resource management focuses on cost reduction and containment, links with strategy and the role of HRM in furthering the competitive advantage of the organisation (Manning and Worland, 2005). In the hard model, control is more concerned with performance systems, performance management, and tight control over individual activities, with the ultimate goal to secure the competitive advantage of the organiza-tion (Guest, 1995). This implies that the individual is managed on a much more instrumental basis than under the soft model, where both competitive advantage and employee commitment are accorded equal importance. One interesting phenomenon discovered in DRC is that the retrenched people from the formal sector went informal by selling low cost products from East Asian countries to survive and alleviate poverty which somehow promote this disloyal competition.

Concerning the labour best practice, the firm is involved in training and developmental activities. This firm offers an external training and developmental activities. This training usually takes between 10 and 15 days. The implication of training and development activities in the company is that it contributes a lot to the firm productivity and thus helps for the firm’s competitiveness and survival. In addition to the aforementioned, Vlok (2006) added that training and development became the focus point for the clothing and textile industries, because they realized that it required skilled and high-levelled educated staff for modern manufacturing. Although these needs were identified in the industry, it is still reported that the investment in the clothing and textile sector has not significantly expanded the pool of highly skilled workers and technicians.

The study found that the firm does provide a reward system regarding performance based on pay, which is offered individually. This is also an important indicator for productivity, but more contribution is needed to the development of the workers as a motivation to always get a surplus. The firm is unionized and that union is recognized. The unions play an important role in terms of job protection and wage negotiation, which is a good thing for workers to be represented. The firm is also engaged in collective bargaining. In addition, the firm have a work council. The implication of the earlier stated is that jobs are protected and there is an organ to monitor

the work condition and other related issues to the workforce.

Concerning the quality circles, SOTEXKI do not make use of the following: teamworking, team briefings, general workforce meeting, staff notice boards, make use of surveys and suggestion boxes. But according to the respondent, SOTEXKI usually discusses about any related matter concerning the workforce through union representatives or ‘delegation syndicale’.

In addition to the earlier mentioned, the study shows that during the last past five years there was no strikes and lockouts in the different factories/production units of the firm. In brief, the findings showed the pertinence of best labour practices or best HRM practices such as workers participation and involvement, formal training, engagement and discussion with union representatives about all job related matters, flexibility in term of job design, performance related and incentive pay; but SOTEXKI consistently uses this best labour practice to promote competitiveness by protecting its labour force as a crucial strategy to keep the firm survival as well as functioning. Value-added production paradigm SOTEXKI is focusing/ involved in value-added production means transforming inputs into marketable items of a higher market value. Only very limited small quantity of high value added is produced for niche market and is always copied by East Asian countries. According to the respondent, SOTEXKI is an integrated industry with significant forward and backward linkages acquiring raw material (cotton), then preceded through weaving and spinning mill of the cotton, finishing in the different factories by impression in pagnes or printed fabrics. In addition, Velia et al. (2006) said that value added is used to provide some insight into the degree of transformation which occurs within industries. Though, it is associated with the notion of productivity, the concept is on the product as opposed to the factor of production and on how they are combined to yield the output.

The respondent in this study agreed that this value added production is not helping to keep the firm sustainable and competitive. Velia et al. (2006) further

6046 Afr. J. Bus. Manage. indicated that this value added production did not create wealth in the firm and only the labour force constitutes its strength. Niche market is sustaining and helping its survival. The implication of the aforementioned is that SOTEXKI is working hard to remain competitive and survival but the government has a continuous important role to promote the local industry, penetrate the inter-national market for its competitiveness and sustainability. DRC is beneficiary of AGOA advantages which can be an interesting incentive to promote SOTEXKI. As suggested by the United States Trade Representative (2008), AGOA provided new market opportunities for African exports, especially of non-traditional and value-added products, AGOA has helped African firms to produce higher value products and become more competitive internationally, thereby bolstering sub-Saharan African economic growth and helping to alleviate poverty in one of the poorest regions of the world. One of the research questions was to understand if this firm under investigation is involved in labour repression? This question is one of the principal research questions in this study. Underlining that in this study, labour represssion refers to any unfair cost advantage use in the company to remain competitive. It comprises the issues such as wage repression, abusive reduction of labour production cost, exploitative salary, deprivation, inhumane treatment, arbitrary sacking, repression of workers’ rights, code of conduct violation, reduction of worker benefit, forced labour, unfair retrenchment, abusive retrenchment, very bad working conditions and the use of child labour. Also underlining here that retrenchment is viewed in this study as a preventive or curative strategy to help the firm remain survival and competitive. One of the researcher questions is to understand if there is any sign or indication of labour repression in the textile and clothing firm under investigation. The researcher proposes to look at the overall labour issue on how these textile and clothing firms could be related to the labour repression.

This paragraph looks at the following variables: retrenchment, involvement in training and development activities, involvement in union, involvement in strikes, work council and quality circle. In this study, the findings revealed that this firm was not involved in labour cost cutting or retrenchment but a stable labour force due to fiscal facilities, parafiscal and tarifaire; involved in training and developmental activities; provide reward system regarding performance based pay; involvement in union; no strikes manifestation. This means that the firm is doing quite well in term of best labour practice and no indication of labour repression. In brief, there was no report of abusive retrenchment and no strikes manifestation or

protest was discovered in this study as a result of wages discussion, demand for training which means there was no labour repression in the firm.

But, the firm have a number of machinery which comprises of machinery of less than 10 years old; 10 to 19 years old machinery and above 49 years old machinery. The implication of the finding in the foregoing shows that SOTEXKI brought new machinery recently which has a major contribution to its performance, sustainability and competitiveness. The firm is characterised by consistent quality, design and product specialisation. This is a good indicator on how the com-pany is continuously working hard to remain competitive.

The finding shows that the force for the firm competitiveness and sustainability are quality products and shorter lead time. This finding is an important indicator of the firm’s ability to stay ahead of potential competition and how continual and consistent strategies will help the firm perform well in a particular market. One of the pertinent questions was to understand whether these previous working forces help the firm remain competitive, the respondent response was no, which means that the company relies more on other reduction production cost strategies such as cutting workers benefits, work hours, etc., to keep going instead of retrenching the workforce. The implication of these previous strategies is to help the firm remain as the survival company. The respondent reveals that the company has some kind of governmental support to improve things. The study further indicates that the firm benefits from different measures and other facilities such as paraficales, fiscales et tarifaires, etc. The implication of the aforementioned is that government intervention in the textile and clothing industry is required to help SOTEXKI to remain competitive and survive, also SOTEXKI contributes to the economic activities and job creation in the country, this is the reason why government should continue to support the company until the firm becomes competitive.

Another important concern about the promotion of sustainability and competitiveness is that the respondent required that government protect SOTEXKI as the actual environment of the textile and clothing sector is characterized by disloyal competition and controls that competition is loyal. The respondent further indicates that recently the imported products or pagnes from China and India are beneficiary of dumping and subsidies in their respective countries which make those products to be cheaper than the ones produced locally here in DRC.

SOTEXKI does export a small quantity of its production in few SADC countries but the company does not have any governmental incentives to export. The implication of this is that government should not be limited just to protect the local industry but promote the industry to become more competitive in both domestic and interna-tional market. Concerning the question in what ways

(positive or negative) has government impacted on your firm; the respondent responded that positively government should facilitate the firm through different measures of exemption or exoneration such as fiscal measures, parafiscal and tarifaire and more importantly to promote the local industry by ordering the public order to SOTEXKI, and negatively government should try by all means to discourage the importation of pagnes from East Asian countries. The respondent acknowledges that the company does have assistance from the Ministry of Industry. This Ministry is an important governmental player in local industry promotion and protection. The last question was to know what is working between workforce adjustment and value added production paradigm to keep the company sustainable and competitive. Responding to the previous question, the respondent said that promoting the labour force should be a way. The respondent further indicates that normally when a worker is motivated, there is a lot of benefit to company such as improving productivity, increase profit, etc. INTERVIEW SUMMARY AND OTHER FINDINGS According to First Responsible du Siege SOTEXKI/Kinshasa, there is an urgent need to protect and secure the only survival textile company in the next five years against the effect of globalization, disloyal competition and dumping. Looking at the liquidation of UTEXAFRICA (Kinshasa) and SINTEXKIN (Lubumbashi), the respondent requires that government continuous to help and support the local industry by all means by providing different facilities and exemptions such as fiscal, parafiscal and tarifaire, also still export with new types of incentives to help the company remain competitive.

In addition to the fact given in the foregoing, the Director of the Congolese Enterprises Federation (FEC) indicates that many problems have contributed to the closure of many textile and clothing firms. He further indicates that one of the big problems is the absence of local industry protection and a very bad industrial policy. In addition to this, he added that the country’s economic situation under the first Kabila regime was under international sanctions and isolated economically which contributed to the DRC economic activities regression. From the same interview, FEC Director indicates that the closure of the textile and clothing firms is due to a number of problems such as inadequate technology, multiplicity of taxes, a very bad system of compensation between government and textile and clothing firms and the fact that most of government services buying from these firms do not pay back. Other problems faced by the textile and clothing firms are under-invoicing, illegal imports, corrupt system.

According to Dieudonné Kasembo, an official to lease

Mwamayi et al. 6047 between the private operator and Commissariat Général pour le Cinquantenaire, esteem that SOTEXKI cannot produce more than 100.000 wax or pagnes and other problem is the quality. He further describes that they ordered Chinese wax or pagnes which can last long and can cost only 15 dollars US, against 24 dollars US for SOTEXKI product. Le Commissariat Général pour le Cinquantenaire and the importers (retailers) ordered 800.000 wax or pagnes in East Asia, especially from China to celebrate the 50th anniversary of DRC independence. The researcher observed that a number of officials in the country have been corrupt and looking first their interest instead of the general interest of the population. This kind of position for a governmental official is purely irresponsible and contributes to the destruction of the local industry. Promoting the local industry should become the first priority of this new democratic government by protecting the local industry against these low cost competitions from the East Asian countries.

For the Union Representative, they are more worried about bad national legislation of labour, inadequate social protection, shortage of skilled labour, unnecessary training and development, salary increase and promotion problem, use of minimum wage (SMIG or Salaire Minimum Interprofessionnel Garanti) which is not adapted to the economic leaving conditions’ of workers and sometime workers are not paid even on time. Other findings revealed a number of factors which contributed to the closure of the textile and clothing firms such as lack of competitiveness, inaccessibility to financial institution, increased illegal importation, development of the informal sector, inadequacy between the wax price and the level of people poverty, etc. According to RAID (2009), in DRC, there is a labour inspection body (l’Inspection du Travail), workers have no effective right to a remedy since they cannot trust the authorities or the courts to uphold the law and to protect the human rights of formal or informal workers.

In addition to the fact in the foregoing, Rights and Accountability in Development-RAID (2009) indicates clearly that the Congolese Government has the principal obligation to enforce the rule of law and to strengthen protection of labour and other human rights but in a country that is emerging from years of conflict and with weak institutions there is a great need for the international community to assist them to overcome these challenges. In such circumstances it is incumbent on foreign investors to adhere to the highest possible standards. According to the Ministry of Mining (2003), the DRC Government produced a simplified guide in English for companies wishing to invest in the Congo’s mining sector. The guide explains the role of various government departments and agencies involved in regulating the mining sector and it provides a summary of the Mining Code. But the guide says very little about the investors’

6048 Afr. J. Bus. Manage. obligations under the Mining Code to protect the environ-ment and has only fleeting references to the Labour Code. An important opportunity therefore has been lost to ensure that all foreign investors are adequately informed about their responsibilities as regards human rights, the health and safety of their workers and the environment. This deficiency needs to be corrected (RAID, 2009).

Furthermore, RAID’s research indicates that numerous provisions of the Congolese labour law set out in the 2002 Code du Travail are routinely breached by many companies. These include: The prohibition on employing children below the age of eighteen (Article 133); Ensuring safe and salubrious working conditions (Articles 55 and 170); Payment of the minimum wage for the job or sector (Article 86 to 97); Payment of sickness and injury benefits (Articles 105 and 108); Providing access to health care (Articles 160 and 177); Respecting the maximum working week of 45 h or 9 h shifts per day (Articles 119 and 120); Provision of a written employment contract, registration with the Congolese Employment Bureau (Office National de l’Emploi-ONEM) and payment of national insurance contributions (Articles 44 to 49); 22-day limit on hiring workers on a casual basis (Article 40); Termination of contracts and dismissing workers (Article 57 to 60) (RAID, 2009).

Economist Intelligence Unit (2004) found that high production costs make SSA unattractive for investors: labour costs are higher than many competitors in Southeast Asia, productivity is lower and non-labour input costs are higher. Further disadvantages include logistics (notably transport costs and longer lead times), unreliable telecommunication systems and inadequate physical and technical infrastructure. Many argue that SSA firms will find it difficult to compete in the new quota-free environ-ment. It is unclear whether US and EU preferences schemes will be sufficient to keep the industry competitive outside of the man-made fiber sub-sectors where SSA is considered competitive as US import duties are high. Haward (1999) found that rapidly lowering protectionism can lead to problems on the revenue side as inexpensive imports can quickly flood local markets.

The revenue problem can also be exacerbated by the tendency of the austerity embedded in conditionality to lower real wages and domestic sources of demand. Mwamayi (2004) found that the textile and clothing industry in the DRC has declined over the last twenty years largely as result of the competition from the economy liberalisation. This situation has lead to infrastructural problems in the DRC. Mwamayi (2004) further indicates that UTEXAFRICA works under approximately 10% of its capacity utilisation, broken financial balance, succession of negative results, negative evolution of treasury, continual financing request to the financial institutions, inadequate human resources, inefficient machinery, second-hand products; all of these factors contributing to its poor performance. So why

continue producing this when it can be bought elsewhere at a cheaper rate? According to Tang (2010) found that “the booming markets in clothes, electronics and cars, imported or manufactured by Chinese companies, not only benefit the consumers, but also stimulate growth of distribution, transport and other related sectors” in DRC.

Many smaller, higher-cost, less-developed countries have been provided with valuable opportunities as they have been shielded from open competition (Minor et al., 2002). Preferential trade agreements have allowed SSA to expand its exports. Exports from the region are mainly low-price basic items such as trousers, T-shirts and sweaters that typically have long production runs, low labour content and few styling changes (US International Trade Commission, 2004; Economist Intelligence Unit, 2004). The production and export of clothing and textiles is concentrated in a small number of SSA countries. A disadvantage for SSA is that it is not a particularly low-cost location. Labour costs are relatively high, pro-ductivity is low, lead times are long and non-labour input costs are higher than in Asia. Further disadvantages include poor logistics (notably transport costs and longer lead times), unreliable telecommunication systems and inadequate physical and technical infrastructure.

As noted by Kaplinsky and Morris (2008), preferential trade access through AGOA has had a major impact on a significant number of SSA countries. These poor, less-developed countries have managed to develop or even create from scratch their clothing industries, and expand their export output to the United States market through locking them into AGOA-dependent clothing and textiles value chains, excepts DRC textile and clothing industry which are still producing for the local market.

This has had a significant impact on employment in countries such as Lesotho, which had little industrial base of any consequence and where waged labour was confined to the ever-shrinking export of migrant labour to the South African gold mines. The impact on employ-ment, and hence poverty reduction, in countries such as Lesotho, Madagascar and Kenya has been significant. The extent to which China and the rest of the Asian clothing producers in the post-MFA environment have reduced these countries’ clothing exports is however also significant (Kaplinsky and Morris, 2008). If this was to stop, or the reverse was seen for these industrializing trends, then the developmental consequences will be severe.

According to the National Agency for Investment Promotion (ANAPI, 2010), in order to boost the economy and stimulate more investors in the textile and clothing industry the country’s authorities decided the following measures: (1) Implementation of free-market economy; (2) Adoption of exchange floating rate system; (3) Promulgation of new laws designed to favour

business development in the country (Investment code, mining code, forest code, labour code); (4) Progressive cut of domestic tax rates; (5) Revival of cooperation with International Financial Institutions (World Bank, IMF); (6) Setting up of facilitation and supporting structures for the private sector (ANAPI, 2010). CONCLUSION AND RECOMMENDATIONS This paper explored the survival and competitiveness of the textile industry in the DRC, case study of SOTEXKI the only firm operational in the country by looking at what works in the industry, why and what can be done to make things work better? The findings revealed the pertinence of involving in best labour practices and value added production paradigm to promote competitiveness and keeping the firm survival. The DRC textile firm is facing multiple challenges of competitiveness, and the only firm under review has managed to secure its survival by concentrating on niche markets.

SOTEXKI is focusing on value-added production paradigm to remain survival and competitive as an integrated industry with significant forward and backward linkages. High value added products for niche market helps but it is usually smaller quantities. And as soon as it is successful, it is being copied by countries like China, India at much lower prices. In addition to the fact given in the foregoing, this SOTEXKI had a stable permanent workforce and retrenched in small number of its temporary workforce for the last past three years but still provides external training and skills development initiative and other best labour practices as a response to increased overseas competition. Also, underlining that there was no indication of any labour repression involvement in this study but the company under investigation does comply to best labour practice.

The overall performance of the company was quite good as the company is penetrating the regional market but one important thing is that SOTEXKI is a survival firm that has its profit level decreased during the last past five years. The firm showed some interest on how to comply to best labour practices or best HRM practices such as workers participation and involvement, formal training, engagement and discussion with union representatives about all job related matters, flexibility in term of job design, performance related and incentive pay, also the firm had a work council; there was not involved in retrenchment; also the firm was not involved in quality circles (use of teamworking, use of staff notice board, suggestion box, etc.,) but the company usually discussed about any related matter about the work force with union representatives or ‘delegation syndicale’; there was no strike manifestation and lastly there was no sign of labour repression. But SOTEXKI uses consistently this best

Mwamayi et al. 6049 labour practice to promote competitiveness by protecting its labour force as a crucial strategy to keep the firm functioning and survival.

A large portion of clothing production is labour-intensive, requires low skill levels, has low barriers to entry and has been the source of rapid export-led Indus-trialisation (Gereffi and Memedovic, 2003). Generally, more complex, higher value-added tasks remain in developed countries with higher paid skilled labour, while less skilled tasks have moved to low-cost locations mainly in the developing world. Textile production is more capital-intensive and developing countries have struggled to create backward linkages (Morris and Sedowski, 2006). Sustainable factories still seem to have a long way down the industry’s agenda and significant levels of recycling remain a pipe dream.

For industrial sustainability to become a realistic prospect, global companies must take the lead by addressing every aspect of their product’s lifecycle (Cervi, 2007). Thus, (USTR, 2005) shows that infrastruc-tural factors play an important role in the competitiveness of firms. Logistical problems with customs, inland and sea transport, electricity costs and reliability, internet and telecommunications, and rent increase the vulnerability of producers in DRC. However, DRC is not alone in facing these problems; most SSA countries face infrastructural barriers to efficient trade.

In addition to the fact given in the foregoing, Joomum (2006) indicated that the textile and clothing industry in SAR has to become more efficient, productive and quality-oriented despite the rising costs of production. The success of this industry lies therefore in the capacity of all stakeholders to rapidly adapt to the changing economic environment and on their will to meet the new challenges ahead. Thoburn and Roberts (2002) add that protection against imports in a sector generates anti-export bias, encouraging firms to produce for the domestic market instead of exporting. This arises because their exported output receives no protection. But Morris and Barnes (2007) add that these SSA countries cannot learn to compete on the basis of more than tariff-protected prices, through internalizing the production lessons of manufacturing excellence, substantially ratcheting up their operational performance, upgrading their production capabilities, and meeting the critical success factors demanded by global buyers, then they will ultimately drop out of the global clothing and textiles value chains. They cannot expect to remain competitively disadvantaged and successful. This places a major policy onus on governments and international agencies to provide production capability upgrading assistance to firms (such as firm-level innovation, capital equipment, continuous improvement networks, and benchmarking programmes) as well as finance to access technological innovation.

The article proposes the following recommendation.

6050 Afr. J. Bus. Manage. SOTEXKI is a producing product of good quality and design and cannot compete with East Asian countries based on low prices and bad quality. As for illustration Chine is notorious for its ‘lack of design’ or master in copying products. In the short term, SOTEXKI should continue to produce for the niche market but in the long term the firm should try to explore the international market as the country is beneficiary to AGOA advantage. It should also continue to be involved in best labour practice to remain competitive. Government must continuously put in place good measures to encourage the local industry. These measures will contribute to the survival of the textile and clothing industry. The above government measures should include fiscal incentives, parafiscale incentives and tarifaire, customs facilities, provide affordable energy cost, improve social and health conditions, improve skills development and technology upgrading, building new road and telecommunication infrastructure, etc. There is also a need that government protect the local industry by putting in place a contingent plan to limit the imported products from Asia. Stimulate the production of cotton in the country. Also stimulate the DRC textile firm to export. China’s penetration in Africa is destroying the local industry. Make more awareness and incentives that consumers buy locals products to promote the local industry.

In term of policy recommendations, SOTEXKI needs to be constantly innovating, increasing investment and upgrading by improving ways of doing business, improving the quality of their products with better prices, improving internal and external efficiency performance, involving in best labour practice, and focussing on export as the major requirement of competitiveness. Govern-ment should provide stable economic policy and more incentives. Stability of macroeconomic variables such as interest rates, wages, exchange rates etc., are important to encourage exports and stimulate the economic activity. Also, government should play a crucial role by providing production capability upgrading assistance to firms; improving policies; promoting local industry and stimulating growth productivity as well as finance to access technological innovation. As indicated by Morris and Barnes (2007), policy levers must therefore be directed not only towards export market possibilities, but also towards realigning the domestic value chain in order to ensure competitive access to domestic market opportunities. In the same way, as developed economy clothing and textile producers have needed to create manufacturing capabilities that meet incredibly onerous fast fashion, lean retailing and replenishment retailer requirements as a means to survival.

Other recommendations are as follow: (1) A need to keep encouraging this survival firm which is performing well with award or stimulating certificate for best performance or facility grants to keep boosting the

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Velia M, Robbins G, Valodia I, Lebani L (2006). An Assessment of the Opportunities to Increase the Value-added in KwaZulu-Natal’s Dominant Export Industries. Research Report 68 from the Department of Economic Development KwaZulu-Natal/School of Development Studies, UKZN.

Vlok E (2006). The Textile and Clothing Industry in South Africa. In Herbert Jauch/Rudolf Traub-Merz (eds.), The Future of the Textile and Clothing Industry in Sub-Saharan Africa. Bonn: Friedrich-Ebert-Stiftung.



Study of relation between accounting information with market venture: Case study of Iran Stock Exchange

Iman Zare* and Jafar Nekounam

1Young Researchers Club, arak Branch, Islamic Azad University, arak, Iran.


Risk and return are among the effective factors on investment. In this study, a number of accounting variables such as accounting profit, degree of operating leverage (DOL), degree of financial leverage (DFL) and degree of total leverage (DTL) were selected as symbols of accounting information. Then their relation with market venture (systematic risk) of those companies accepted in Tehran Stock Exchange was investigated. The goal of this research was to identify the relation between accounting profit, operational, financial and DTLs with systematic risk. In this research, a sample including 87 companies accepted in Tehran Stock Exchange were selected during a 10 years period (2000 to 2010). Regarding to nature and method, this is correlation research. In order to test the assumptions, linear regression was used and in order to test correlation of variables, p-value test was used. The results showed that there is a direct relation between accounting profit and DFL with systematic risk by 90% confident level. Also, there is no significant relation between DOL and DTL with systematic risk. Different variables differently affect systematic risk. Thus, the effect of accounting profit on systematic risk is more than the effect of DFL on systematic risk. Also, the effect of DFL is more than that of DTL, and the effect of DTL is more than that of DOL. Key words: Market venture, leverage, financial, operating.

INTRODUCTION Now, accounting plays an important role in economical system. Precise decision-making is inevitable by individuals, companies, government, etc for proper distribution and efficiency of financial resources. To make such decisions, decision-makers must have reliable information. In fact, the goal of accounting is to help these decision-makers. On the other hand, investment is essential in growth process and economical development of country. Risk and return are among the effective factors on investment. The role of risk and return in investment is similar to the role of supply and demand in pricing goods. Theoretically, risk means a potential and measurable loss in investment. Up to 1950s, “risk” was a qualitative factor. But, it became quantitative by efforts of Harry Markowitz. Also, deviation of cash flows of investment plans in different economical, social, and Corresponding author. E-mail: [email protected] Tel: 00989139739735

political conditions was introduced as “risk measure” (Subramanyam, l996).

Effect of an investment risk to total investment risk requires calculation of “covariance” and “correlation coefficient”, which complicated calculations. Then, William Sharp offered a simple and applicable model to investment world by getting the coefficient as risk criterion (Islami and Heibati 1995). Using current theories and methods and theorizing requires production information in accounting system, which undoubtedly, would be got hardly in the new investment market of our country. For this reason, recognition of relation between market risk and accounting information is very important. Other studies imply relation between accounting ratios and market risk. They propose using accounting ratios to anticipate beta of securities (Ahmadpour and Gholami, 2004). All manager, brokers, investors and companies accepted in bourse can anticipate market risk by results of this research and by accounting profit and DFL. Also, this study shows either accounting profit is more capable in risk anticipation or leverages degrees.

THEORETICAL FUNDAMENTALS AND HISTORY OF RESEARCH Many accounting researches are based on investment market implied suitability of accounting information for determination of securities risk. Also, several studies investigated correlation between accounting variables (financial leverage, operational leverage, etc) and systematic risk (Namazi and Khajavi, 2003). Investment in order to maximize profit requires anticipation of stocks market and selection of a suitable portfolio. According to the model offered by Sharp, Fisher, one of the important factors that cause changes in stocks return and will not minimize by diversification of portfolio is systematic risk. Therefore, anticipation of systematic risk plays an important role in anticipation of stocks return and maximization of profits of stockholders.

Systematic risk stems from a set of economical factors such as money supply, inflation, industry strategy, etc and effects on all active companies in market (Haw et al., 2001). Iman zare suggested that DFL and DOL describe a large part of systematic risk changes directly and positively. (zare, 2011) Also, suggested that systematic risk has a direct relation with DFL and a reverse relation with DOL. Thus, in this study, we investigate relation between accounting profit and operational, financial and DTLs to find a suitable model for decision-making of investors. According to pricing model of investment asset, it is assumed that systematic risk is one of the factors that vibrate return (Namazi and Khajavi, 2003). In a research titled “Study of effect of investment structure on systematic risk”, Qalibaf (1993) studied relation between financial leverage and systematic risk. The results showed that financial leverage affect systematic risk directly, namely, by increment of financial leverage (debit), systematic risk increases, too (Qalibaf, 1993). In a research titled “Effect of operational and financial leverages and company size on systematic risk”, Ahmadpour and Namazi (2004) studied it in companies accepted in Tehran Securities Bourse.

The results showed that financial leverage affects systematic risk directly, namely, by increment of debit of companies, systematic risk increases, too. But, operational leverage does not affect systematic risk. On the other hand, company size affects systematic risk reversely, namely, by increment of assets of a company, systematic risk decreases (Ahmadpour and Namazi, 1997). Namazi and Khajavi (2003) studied profitability of accounting variables to anticipate systematic risk of companies accepted in Tehran Securities Bourse. The results showed that there is a relation between accounting variables and risk and these variables are effective for anticipation of systematic risk. The most important application of the results of this study was evaluation of companies out of bourse and new comers. According to the results, this pattern can be used to determine expected return rate (discount rate), so that

Zare and Nekounam 6053 first systematic risk index of a company is identified by model coefficients and variable value, then this index and other variables are used to obtain expected return rate to find a base for evaluation of stocks price of the company (Namazi and Khajavi, 2003) DOL is degree of operating leverage, DFL is degree of financial leverage and DTL is degree of total leverage (Bowman, 1979).

In a paper, Ahmadpour and Gholami studied the relation between accounting information and market risk in the companies accepted in Tehran Securities Bourse. The results show that some of independent variables including ratio of debit to stockholders’ rights, ratio of current assets to current debits, and sum of index assets for evaluation of risk of companies have no relation to market risk of companies. In other words, history accounting information does not include price and risk of securities. Therefore, the previous results about market efficiency can be confirmed (Ahmadpour and Gholami, 2004). In a study titled “Relation between accounting profit and cash flow with systematic risk in Tehran Securities Bourse”, Mollayi investigated the relation between accounting profit and operational cash flow with systematic risk. They concluded that accounting variables including accounting profit and operational cash flow have a positive relation with systematic risk. Also, accounting profit is more powerful in anticipation of systematic risk than operational cash flow (Mollaei, 2006). Gholamali in his thesis studied the relation of DFL with systematic risk. He finally concluded that systematic risk increases by increment of financial leverage and there is a direct relation between them (Gholamali, 1998).

In a paper, Bowman studied the theoretical relation between systematic risk and financial variables. Financial variables used by Bowman were company leverage, accounting beta, profit changes, growth, company size and profit-sharing policies. He showed that there was a systematic relation between company’s leverage and accounting beta and profit changes, growth, company size and profit sharing cannot relate with systematic risk. He defined growth variable in two cases: first, growth as investment in projects in which expected return is more than company’s current return. Secondly, he suggested growth as opportunities for investment in projects that conclude additional return. Then he used these definitions to imply no relation between growth variable and systematic risk (Bowman, 1979). In a study, Brimble studied role of accounting information to estimate systematic risk. These accounting variables included accounting beta, profit changes, growth, size, profit payment ratio, current ratio, financial leverage, interest coverage ratio and operational leverage. He used information of 123 companies during 1991 to 2000. His results showed that the above accounting variables clarify more than 57% of systematic risk changes (Brimble, 2003). Iman zare tried to use accounting infor-mation to anticipate payment disability, sale capability, purchase capability and interest rate. Then they ranked

6054 Afr. J. Bus. Manage. debentures upon them (zare, 2012).

Also, Robert and Chi-Chang Chiou, in a paper titled “Relation between systematic risk and accounting variables” suggested that the determinative factors of systematic risk are accounting profit, sale growth, book value, stocks profit, DOL, DFL, market return and free risk. He offered 3 general results about systematic risk and accounting variables. First, for an economical unit with positive previous year income and current year sale rate, if compound effect of current book value, stocks profit and its incomes are positive on stocks price, then DFL and DOL resulted from DTL have a positive effect on systematic risk. Secondly, when book value and incomes of stocks price are positive and when stocks profit has a reverse effect on stocks price, then profit has a positive (reverse) effect on systematic risk. Thirdly, for an economic unit, DOL related to DFL positively (reversely) by positive (reverse) sale growth (Chei-chang and Robert, 2007). ASSUMPTIONS OF RESEARCH The first group of assumptions discusses about the relation between accounting profit and leverage degrees with systematic risk. Second group assumptions dis-cusses about the ability of accounting profit and leverage degrees with anticipation of systematic risk. Main assumption 1: There is a relation between accounting profit or DOL, DFL, or DTL with systematic risk. Sub-main assumption 1: There is a relation between accounting profit and systematic risk. Sub-main assumption 2: There is a relation between DOL and systematic risk. Sub-main assumption 2: There is a relation between DFL and systematic risk. Sub-main assumption 2: There is a relation between DTL and systematic risk. Main assumption 2: Accounting information is more powerful in anticipation of systematic risk than DFL; DFL more than DTL; and DTL is more than DOL. Sub-main assumption 5: Accounting information is more powerful in anticipation of systematic risk than operational leverage risk. Sub-main assumption 6: Accounting information is more powerful in anticipation of systematic risk than financial leverage risk. Sub-main assumption 7: Accounting information is more powerful in anticipation of systematic risk than total leverage risk. Sub-main assumption 8: DTL information is more powerful in anticipation of systematic risk than operational leverage risk. Sub-main assumption 9: DFL information is more powerful in anticipation of systematic risk than operational leverage risk.

Sub-main assumption 10: DFL information is more powerful in anticipation of systematic risk than total leverage risk. Research variables In this research, systematic risk, which is a base for decision-making of investors, is considered as dependent variable. Also, accounting profit, DOL, DFL and DTL are independent variables. RESEARCH METHODS The application research is due to solve problem and the goal of this research is to identify the relation between accounting profit, operational, financial and DTLs with systematic risk. Regarding to nature and method, this is correlation research, which studies the above relation by field study and experimental data. Regarding to scientific scope and subject, this research is in management area and investment market area. It is especially in information area for accounting profit, DOL, DFL, DTL and systematic risk. By location, the subject of research is in area of public joint-stock companies. This research was conducted in early 2000 and it ended in 2010. In this research, data was gathered from libraries including books, papers and internal and external journals. Also, field study and experimental methods were used to test the assumptions. Data was gathered from documents, databases and observations. Data include return, accounting profits, interest costs, stocks numbers and stocks prices of sample companies existing in financial information of audited financial statements. This data was extracted from records of Rahavard Novin Software, electronic archives and internet. Also, Excel and SPSS were used to analyze and conclude from data. Statistical society and sample statistical society of this research includes all companies accepted in tehran securities Bourse (Iran). The reason to select these companies is simplicity of access to their audited financial statements and their stocks returns in different times. Regarding to a ten years period of this research (the early of 2000 to the end of 2010), those companies selected that were members of Tehran Securities Bourse at least at early of 2000 and their financial year ended to March 20 (29 Esfand). On the other hand, a transactional interruption in stocks of these companies during this period complicates calculation of systematic risk, because systematic risk index is obtained according to time regression between return of company’s securities and market return. Existing of a transactional interruption causes a company to be measured precisely. As a result, time regression will not have an intellectual result. Therefore, those companies were selected without a transactional interruption on their stocks. Interruption period in stocks transaction is a maximum of 6 months. Since a period less than 6 months removes many companies and a period more than 6 months complicates calculation of systematic risk, thus those companies meeting the following conditions were selected: 1. To be a member of Tehran Securities Bourse at early 2000. 2. Having a financial year ending to March 20 (29 Esfand). 3. Having no interruption in its stocks transactions. 294 companies were accepted in Tehran Securities Bourse in 2000 (Iran). 217 companies had financial year ending to March 20. After

Zare and Nekounam 6055

Table 1. Variable indices: central index, dispersion index and distribution form index.

Variable Index

Risk (ββββ) Accounting return DOL DFL DTL

Number 87 87 87 87 87 Average 0.3545290 0.2766111 3.5926480 0.6241404 6.6860055 Deviation error 0.00445 0.00693 1.4131116 0.8195969 5.6262683 Median 0.1964953 0.2489100 0.9605778 1.0980765 1.0941366 Mode -7.33773 0.23334 0 1 0 Deviation 1.31317 0.2044022 41.68080 24.17463 165.9511 Variance 1.7244137 0.00418 1737.289 584.4130 27539.76 Skewness 0.425 0.972 15.855 -29.134 17.707 Standard error of skewness coefficient 0.083 0.083 0.083 0.083 0.083 extension 4.595 4.022 293.458 855.955 473.033 Standard error of extension coefficient 0.166 0.166 0.166 0.166 0.166 Changes domain 14.17364 2.1048 1017.7018 738.92577 5526374 Lowest -7.33773 -0.74256 -132.042 -708.722 -1346.95 Highest 6.83591 1.36224 885.65980 30.20377 4179.424 Total 308.44026 240.65170 3125.604 543.00214 5816.825

removing those companies with transactional interruption for more than 6 months, 87 companies were selected as statistical society. DATA ANALYSIS AND TEST OF ASSUMPTIONS In this research, Excel software was used to calculate dependent and independent variables. Linear regression was used to test assumptions. P-value (sig) by SPSS was used to test significance of correlation between variables. To better identification of research society and familiarity with research variables, data interpretation was done before data analysis. Also, data interpretation is a step to identify their pattern and a base to clarify relations between variables. This image includes indices to interpret the research variables. The indices include central index, dispersion index and distribution form index. Regarding to the Table 1, all variables can be examined by indices. For example, Table 1 shows that variance of accounting return variable is 0.00418. It also shows the lowest and highest data and their distance. Regarding to output of SPSS software (the following table) and regarding to sig less or more than 10%, correlation of variables is confirmed or rejected. Also, the calculated correlation coefficient is effective and powerful for determination of correlation between variables and ranking. Table 2 shows the results of test of assumptions regarding to output of SPSS (2010). Conclusion This research concluded that there is a direct relation between accounting variables including accounting profit, DOL, DFL and DTL with systematic risk. Other variables have little correlation with systematic risk with confidence

level of 90%. Another result is that power of effect of variables on systematic risk can be obtained. They affect on systematic risk in the order of accounting profit, DFL, DTL and DOL. It should be mentioned that two independent variables of DTL and DOL have a significant correlation with the dependent variable (systematic risk) and a low effect on dependent variable, but their ranks is identified in anticipation of systematic risk. Results of assumptions are: Main assumption 1: Regarding to acceptance of main assumption 1 and results for the first sub-main assumptions, there is a relation between accounting information including accounting profit, DOL, DFL and DTL with systematic risk. Sum-main assumption 1: Regarding to acceptance of sub-main assumption 1, there is a positive relation between accounting profit and systematic risk. Sum-main assumption 2: Regarding to rejection of sub-main assumption 2, there is no relation between DOL and systematic risk. Sum-main assumption 3: Regarding to acceptance of sub-main assumption 3, there is a positive relation between DFL and systematic risk. Sum-main assumption 4: Regarding to rejection of sub-main assumption 4, there is no relation between DTL and systematic risk. Main assumption 2: Regarding to acceptance of main assumption 2 and 6 results for the second sub-main assumpions, accounting profit information is more powerful in anticipation of systematic risk than DFL, DFL more than DTL, and DTL more than DOL. Sum-main assumption 5: Regarding to rejection of sub-main assumption 5, accounting profit information is more powerful in anticipation of systematic risk than DOL.


Table 2. Results of test of assumptions.

Statistical component

Assumption

Pierson corr.

Determination coeff.

Adjusted deter. coeff. F t Error

level Significance

level Test result

Relation between accounting profit and systematic risk

0.24 0.058 0.056 32.836 5.730 0.00 10% Confirmed

Relation between DOL and systematic risk

0.028 0.001 -0.002 0.312 0.558 0.577 10% Rejected

Relation between DFL and systematic risk

0.083 0.007 0.005 3.758 -1.930 0.053 10% Confirmed

Relation between DTL and systematic Risk 0.031 0.001 -0.001 0.391 -0.625 0.532 10% Rejected

Correlation coeff. of accounting profit for systematic risk is more than DFL; DFL is more than DTL; DTL is more than DOL

Result from comparison of four sig and correlation coefficient

sigDOL > sigDTL > sigDFL > sigprofit

RDOL < RDTL < RDFL < Rprofit

Confirmed

Sum-main assumption 6: Regarding to acceptance of sub-main assumption 6, accounting profit information is more powerful in anticipation of systematic risk than DFL. Sum-main assumption 7: Regarding to acceptance of sub-main assumption 7, accounting profit information is more powerful in anticipation of systematic risk than DTL. Sum-main assumption 8: Regarding to acceptance of sub-main assumption 8, DTL information is more powerful in anticipation of systematic risk than DOL. Sum-main assumption 9: Regarding to acceptance of sub-main assumption 9, DFL information is more powerful in anticipation of systematic risk than DOL. Sum-main assumption 10: Regarding to acceptance of sub-main assumption 10, DFL information is more powerful in anticipation of systematic risk than DTL. REFERENCES Ahmadpour A, Gholami R (2004). Information about accounting and

market risk. Social Sciences Magazine and Human Shiraz University. The period of twenty-two. Second issue.

Ahmadpour GA, Namazi M (1997). Leverage effect operational and financial company, as well as on systematic risk. Modares Second Round, 6: 101-74.

Bowman RG (1979). The theoretical relationship between systematic risk and financial (accounting) variable. J. Financ., 30: 617-630.

Brimble A (2003). The revelance of accounting information for valuation stocks. J. Financ., 30: 525-531.

Chei-chang CH, Robert KU (2007). On the relation of systematic risk and accounting variables. Department of Accounting, University of Taiwan.

Haw IN Mu, Daqing QI, Woody Wu (2001).The nature of information in accruals and cash flows in an emerging capital market: The case of China. Inte. J. Account., 36: 391-406.

Islami BGH, Heibati F (1995). Portfolio management of beneficial index merely production units, Financial research, Programming and Administrative Sciences Faculty of Commerce Tehran University, pp. 25-56.

Mollaei M (2006). Relation between the profit accounting and cash flow of operational with totally systematic risk in stock Tehran. The letter Ma, the University of Isfahan.

Namazi M, Khajavi SH (2003). utility accounting variables tactful nose systematic risk companies totally accepted stock Tehran. Account. Audit., 38: 119-93.

Qalibaf asl H (1993). impact of the capital structure Incrust systematic risk. The Letter Ma, Tehran. Administrative Sciences Faculty Commercial Programming and University of Tehran.

Subramanyam KR (l996). The price of discretionary accruals. J. Account. Econ., 22: 249-281.



Banking reform and SME financing in Ethiopia: Evidence from the manufacturing sector

Ashenafi Beyene Fanta

Department of Public Financial Management, Ethiopian Civil Service College, Addis Ababa, Ethiopia. E-mail: [email protected]. Tel: +251911446832.


This study investigates the effect of banking reform on Small and Medium Enterprise (henceforth SMEs) access to bank credit during post-liberalization period 1994 to 2007. Aiming at casting light on the changes in the country’s banking sector, bank concentration, competition, efficiency, and liquidity have been assessed. In addition, survey of 102 randomly selected manufacturing SME has been conducted to examine changes in SME access to bank loan. Assessment of changes in the banking sector reveals that the sector has become less concentrated. However, competition among banks is weak, which is manifested through operational inefficiency and accumulation of large stock of liquidity. This led to persistence of lack of access to bank loan even after the reform. The study also finds that access to loan is limited across firms of different age groups, ownership forms, and at different stages of SME development. In general, despite the introduction of banking sector reform in 1994 that led to expansion of the banking industry, SMEs’ problem of credit access has persisted. This implies that changes in the banking sector structure per se are not sufficient to introduce competition in the banking industry and an improvement in SME credit access. Policy makers should therefore devise mechanisms that enhance competition in the banking sector and establish a policy framework that encourages them to lend to the SME sector. Keywords: Ethiopian financial sector, Banking reform, SME financing, manufacturing sector, credit Access.

INTRODUCTION The effect of banking sector liberalization on SMEs

access to loan is one of the most interesting areas in the study of financial liberalization and credit access. Extant literature on financial liberalization documents that libera-lization boosts economic growth through fostering the development of the SME sector by easing their access to external finance (Laeven, 2000; Beck et al., 2004). This is further supported by country case studies that brought to light the positive effect of liberalization on SME credit access. For instance, financial liberalization in Korea led to a narrower interest spread and a lesser reliance of banks on collateral (Hübler et al., 2008), easing of the access to credit of hitherto financially constrained firms (Koo and Shin, 2004). However, studies focused more on emerging economies in Asia, South America and Central and Eastern Europe, while only a few on SSA countries. Besides, owing to the fact that countries pursued different paths in liberalizing their financial sector, more country

case studies are needed to help in establishing the theoretical framework useful in understanding the nexus between banking liberalization and SME credit access.

Ethiopia undertook a banking reform program in 1994 three years after the centrally planned economy was scraped, and a market economy was launched by the new government. The reform, ardently supported by the World Bank and International Monetary Fund (IMF), brought about changes to the financial platform. Opening the financial sector to private investment was the first step in liberalizing the market. The banking sector libera-lization policy, however, inhibits foreign bank entry in any form and does not allow purchase of shares by foreign nationals. Besides, despite proliferation of domestic private banks, state owned banks still lead the banking sector with a considerable share of the market. This prompts a legitimate question as to whether banking sector liberalization eases SME credit access under a

6058 Afr. J. Bus. Manage. condition where the sector is dominated by state owned banks and where it remains closed against foreign entry. This study is therefore needed to answer this vital question, thereby bringing the experience of a developing country in the SSA region into the extant body of literature. To the best of my knowledge, this is the first ever piece of study shedding light on the link between banking liberalization and SME credit access in Ethiopia.

Thus, the study investigates performance of the banking sector over the period from 1994 to 2007, focusing on concentration, competition, efficiency, and liquidity. Aiming at examining changes in SME access to bank loan, survey of 102 randomly selected manu-facturing SME was conducted and access to credit is evaluated in relation to form of ownership, age, and possession of fixed assets; and at three stages of development: startup, operation, and growth. Assess-ment of changes in the banking sector reveals that the sector has become less concentrated, concentration declining at a much faster rate in the loan market than in the deposit market. However, the results suggest that there is no significant change in competition and efficiency, and the sector has been continuously accumulating liquidity. In general, the financial reform did not bring a robust change in the banking sector that can enhance SME access to credit.

Survey result also shows that there is no improvement in SME credit access during the post-reform period. No significant variation is observed in access vis-á-vis age and ownership form. It has been found that firms that own fixed assets have a relatively better access to loan compared to those that do not, signifying the importance of collateral in the credit market. Assessment of access at different stages of business life cycle also shows that SMEs are constrained at all stages of their life cycle. In general, it has been found that a change in the structure of a banking sector per se does not enhance credit access. Hence unless the banking sector becomes so competitive as to compel the incumbent institutions to design schemes that help in reaching out to the hitherto financially constrained firms, SME exclusion from the credit market will persist. The policy and theoretical implication of this finding are two folds. First, it brings a lesson that a mere change in the structure of the banking sector does not boost credit access. Second, SME financial constraints may stay unresolved unless banks make a shift from collateral-based lending toward schemes that recognize such important attributes as profitability, degree of business risk and management quality.

The rest of the paper is organized as follows. Subsequently, the study reviews related literature, after which the financial liberalization in Ethiopia was described by tracing back the origins and evolution of banking in the country. The data and research methodology are described, and the change in the Ethiopian Banking sector from the dimension of

concentration, competition, liquidity and efficiency was presented. This was followed by a report on the results of the survey of manufacturing SMEs, shedding light on their access to loan during the post reform period, after which the study was concluded. LITERATURE REVIEW In their seminal papers, McKinnon (1973) and Shaw (1973) postulated that financial liberalization, narrowly defined as interest rate decontrol, promotes saving and investment, leading to economic growth by improving efficiency of capital allocation. They argue that the interest rate that equates demand for and supply of deposit encourages savings, and makes more funds available for investment. This has been confirmed through empirical studies in developing countries that shows that keeping interest rate at a moderate level boosts growth (see Ghatak, 1997, Ang and McKibbin, 2007; Levchenko et al., 2009).

Despite successful implementation of financial libera-lization program and attainment of financial deepening and economic growth in some countries, there are indeed nations that did not reap the desired benefits. Even worse, some dived into a deep financial crisis following liberalization. For example, Mexico liberalized its financial system in the 1990 only to see serious banking crises afterwards, costing the government quite a large sum of money in bailing out insolvent banks. Similarly, Korea had a financial crisis in 1997 triggered by financial libera-lization, resulting in financial insolvencies and closure of many of its banks. In SSA countries such as Kenya and Nigeria, financial liberalization played no discernible role in achieving financial deepening and economic growth (Ayadi and Hyman, 2006). In their paper that investigates the causes of financial crises in selected SSA countries in the 1980s and 1990s, Daumont et al. (2004), also find that the financial liberalization program gave rise to banking crisis that swept across countries in the region.

Following unfruitful liberalization efforts in some countries and a banking crisis in others, scholars started to doubt the role of financial liberalization in enhancing economic development. Studies revealed that, for finan-cial liberalization to succeed, macroeconomic stability and institutional framework are prerequisites. Explaining why bank efficiency has dropped following liberalization of Turkish financial sector, Denizer et al. (2007), blame macroeconomic instability and existence of scale problems. According to Levine et al. (1999) legal and accounting reforms must precede financial reform in order for it to bear fruit. Similarly, Tornell et al. (2003) discovered that countries with contract enforcement fared better in their financial reform program than those that launched a liberalization program without legal and institutional framework in place. Explaining the causes of financial system collapse following liberalization in SSA countries,

Daumont et al. (2004), hold the macroeconomic instability and heavy hands of the government as the chief culprits.

However, both theoretical and empirical studies mutually agree that, despite the fact that liberalization in some countries was followed by banking crisis and decline in national output, it pays off, especially when the economic cost of a repressed system is taken into account. That is why researchers and policy makers, including the two Breton woods institutions, ardently advocate it. As discovered by Wyplosz (2001), compared with industrialized nations, developing countries have a strong economic boom following financial liberalization. There is a strong empirical support that a cautiously laid out plan of liberalization brings about financial deepening, credit access to hitherto marginalized enterprises, cut in unemployment, and growth in national output. The adverse economic conditions that followed liberalization are not its inherent consequences but simply outcomes of mismanagement. Reinforcing the foregoing claim, Hagen and Zhang (2006) warn that a drastic move towards financial liberalization is counterproductive, and firmly advocate a gradual and careful move. The failure of both Mexico and Korea in their liberalization effort lies in the fact that both undertook liberalization without putting in place institutional and legal framework beforehand. It is therefore indisputable that a wisely implemented libera-lization program may enhance financial development and economic growth.

Although, literature converges to the view that financial liberalization leads to efficient allocation of resources, the channel through which its effects are revealed is subject to debate. Some scholars, following the same line of argument as McKinnon (1973) and Shaw (1973), show that interest decontrol encourages saving and hence makes more funds available for investment, boosting up investment activities leading to a higher national output (Koo and Shin, 2004). Others, on the other hand, present evidence that the affirmative effect of financial liberalization is revealed through its enhancement of SME credit access (see Berger et al., 2004). Consistent with the latter group Laeven (2000), using a panel data on a large number of firms in 13 developing countries, finds that liberalization affects small and large firms differently. His findings are consistent with earlier literature that a repressed financial system harms smaller firms much more than larger ones, and a financial reform therefore benefits SMEs much more than large and well established firms.

The move to date by governments around the world towards financial liberalization shows that some have drastically launched liberalization program by entirely relinquishing state ownership of banks and allowing foreign investors in the sector, while others opted for an overly cautious move with continued state control. The two being extremes in the continuum, there are quite a lot of different models. For instance, in Ethiopia, state owned banks run in tandem with domestic private banks.

Fanta 6059 Although, literature does not provide a clear cut view as to which particular mode of liberalization leads to an optimum result, scholars heavily criticize government control of financial institutions. While the efficacy of privatization of state owned banks is an ongoing matter of scholarly debate, many share the view that relinquish-ment of ownership control of banks by the state is a signal of a more efficient financial sector (Berger et al., 2004). Studying the effect of bank privatization, Clarke et al. (2005) show that benefit of bank privatization is maxi-mized when the state fully relinquishes control interest. State ownership of banks is often associated with inefficient credit market characterized by politically motivated lending.

Equally debatable is the real effect of foreign bank entry in fostering competition in the banking sector and in enhancing credit access. Empirical evidence has a mixed result, fueling further debate in the area. Cull et al. (1999) ,in their study on the Argentinean banking sector, find that foreign banks compete in sectors where they have a comparative advantage, and domestic banks face a stiffer competition in areas where foreign banks enter. It follows that market segments less attractive to foreign banks would see no discernible change in access to bank loan. This has been confirmed by Gormley (2009) who, drawing the post-liberalization experience of India, finds that foreign banks engage in “skimming the cream”, focusing on the most profitable segment of the market, disregarding lending to SMEs. Moreover, firms reported a fall in loan accessibility following foreign bank entry, due to a drop in domestic bank loan, and the decline was significant among SMEs. Supporting the earlier view, Sengupta (2007) posits that foreign banks lend more to large firms thereby disregarding SMEs.

In contrast, Haas and Naaborg (2005) find that acquisition of local banks by foreign banks has not led to a persistent bias in the credit supply towards large multinational corporations. Instead, increased competition and the improvement of subsidiaries’ lending techno-logies have led foreign banks to gradually expand into the SME and retail markets. Using data from 35 developing and transition economies, Clarke et al. (2006) find that all enterprises, including SMEs, face lower financing obstacles in countries with higher levels of foreign bank presence. Foreign bank entry is followed by a drop in margin and profit caused by increased competition in the market. Using data from 80 countries, Claessens et al. (2001) also find that in developing countries, foreign banks win a significant share of market from domestic banks using their excellence in competition. This leads to domestic banks engaging in lending to firms hitherto considered not commercially viable to compensate for market surrendered to more efficient foreign banks. This is consistent with Unite and Sullivan (2003) who find that foreign entry corresponds with improvement in operating efficiency. In general, under a well functioning bank regulatory and supervisory system and institutional and


legal framework, foreign bank entry can enhance SME access to bank loan, either through foreign banks participation in the sector or through a spillover effect of its entry on domestic banks.

Elsewhere in SSA, financial liberalization is accompanied with foreign bank entry. Consequently, foreign banks constitute a significant part of the banking market in the neighboring Kenya, Sudan, and other countries in the region. Ethiopia, however, opted out foreign entry in its liberalization program. Although evaluating policy maker’s rationale of following a closed-door policy is outside the purview of this paper, the paper assesses what SME financing looks like in the absence of foreign players in the market. Studies that shed light on SME access to credit under state bank predominance and a closed banking market against foreign entry are scant. This paper therefore tries to fill the void in SME financing literature by drawing experience of the Ethiopian SMEs during a post-reform period.

FINANCIAL LIBERALIZATION IN ETHIOPIA Financial services in Ethiopia dates back to the onset of the 20

th Century, when Bank of Abbyssinia, the first bank

in the country, was established in 1905 as a branch of Bank of Egypt by the courageous move of Emperor Menilik II, based on a 50 years concession with the British authorities. Bank of Ethiopia was established in 1931, replacing Bank of Abyssinia after agreement was reached among stakeholders to liquidate the latter. However, it too was liquidated following the Italian invasion in 1936, and was re-established in 1942 bearing the name State Bank of Ethiopia. Three specialized banks were also established during the same period: Development Bank of Ethiopia in 1951, the Imperial Saving and House Ownership Public Association (ISHOPA) and the Housing and Saving Bank in 1962, and the Investment Bank of Ethiopia in 1963. In addition to state owned banks, there were private banks operating in the country in which foreigners as well had ownership equity. The Agricultural and Industrial Development Bank (AIDB) was set up in 1970, taking over two earlier development banks: the Development Bank of Ethiopia and the Ethiopian Investment Corporation. The Housing and Savings Bank was created in 1975 out of a merger between two earlier housing finance institutions (see Mauri, 2003).

The socialist regime that took power in 1974 redesigned the banking platform of the country through its nationalization policy. All the private banks operating at that time were brought into state ownership and merged with Commercial Bank of Ethiopia. The state owned banks were designed to serve as a tool in materializing the government’s economic policy, built on the socialist ideology. Nationalization of the financial and non-financial firms led to a significant fall in private sector

loan. Credit to the private sector fell to 40% of outstanding loans during the socialist regime, from 100% during the Imperial period (Addison and Geda, 2001).

The banks focused on serving the public sector, and private sector investment was marginal. Substantial portion of the loans were channeled to state owned farms and public enterprises. The credit market disenfranchised the private sector as evidenced by average private sector credit of 14% over a period from 1985 to 1989 compared with loan to the central government of 60% of outstanding loans (Addison and Gada, 2001).

The 1991 revolution brought with it market economy, compelling the government to gradually relinquish control of the economy, and promote economic growth through private sector development. The new government placed financial liberalization at the top of its Economic policy and allowed participation of the private sector through banking business proclamation of 1994. The reform did not, however, take privatization of state owned banks as a necessary step. The private sector expanded driven by denationalization of state owned enterprises and opening of large parts of the economic sector to private invest-ment. It was thus, expedient that the financial sector is redesigned to satisfy the increasing demand for financial services. Banking sector reform has been undertaken giving rise to the reemergence of private banks that brought change in the face of the financial platform.

Following licensing of private banks, state owned banks gradually relinquished market share to a bit more efficient new banks. The sector had three players in the field in 1994, all state owned, with CBE alone controlling above 90% of the market share, while there are ten more banks in 2007, all private owned, controlling nearly one half of the market. Bank branch network has increased from 192 in 1994 to 458 in 2007 of which 44% belong to private banks. CBE alone mobilized 95% of deposits in 1994 while its share in the deposit market has plummeted to 60% in 2007, surrendering a third of its deposit market to private banks. Outstanding loans stood at ETB 3.8billion in 1994, while it rose to ETB 24.8 billion in 2007, of which more than 60% represents that of private banks. Assets of the banking sector has also grown from ETB 12billion in 1994 to ETB 65 billion in 2007, and bank capital increased over seventeen folds from ETB 275 million to ETB 4.7 billion. Taken at face value, the foregoing Figures 1 to 8 suggest that there is change in the banking sector, serving as a primary motivation for this study that investigates (1) whether there are changes in concentra-tion, competition, liquidity, and efficiency and (2) impacts of the changes, if any, on SME credit access. DATA AND METHODOLOGY

Data

This study uses combination of primary and secondary data. The primary data involves survey of manufacturing SMEs, while the secondary data is collected from two state owned banks and six

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Figure 1. Loan to deposit ratio; based on data from Annual Reports.

Figure 2. Net Interest Margin; based on data from Annual Reports.

Figure 3. Overhead cost; based on data from Annual Reports.


30 40 50 60 10 20 0

Percentage

Figure 4. Form of ownersip; Field Survey.

Nu

mb

er o

f fi

rms

Figure 5. Firm age by regime; Field Survey.

private commercial banks operating in the country. The survey was conducted covering a randomly selected sample of 102 manufacturing SMEs operating in Addis Ababa, the capital that hosts nearly one half of manufacturing SMEs. The samplerepresents 13% of manufacturing SMEs operating in the country. The firms are stratified into 10 industrial classes: Food products and beverages (31.4%), wearing apparel (5%), Tanning and dressing of leather; manufacture of footwear, luggage and handbags(7.8%), Paper products and printing (15.7%), Chemical and chemical products (5%), Rubber and plastic products(6.9%), Non-metalic mineral products(5.9%), Fabricated metal products(2.9%), Machinery and equipment(7.8%), and Furniture (11.8%). In terms of age, the sample includes firms with varying age groups ranging from those established during the present regime (58%) to those set up during the socialist regime (21%) and imperial regime (21%). The survey is conducted using a door-to-door interview. The secondary data includes key financial figures acquired from audited annual financial statements of two state owned banks (Commercial Bank of Ethiopia (CBE) and Construction and Business Bank(CBB)) and six private banks (Awash International Bank Sc.(AIB), Dashen Bank Sc.(DB), Bank of

Abyssinia Sc.(BoA), United Bank Sc.(UB), Wegagen Bank Sc.(WB), and Nib International Bank Sc.(NIB)) over a period that stretches from 1994 to 2007.

Methods

Changes in the commercial banking sector have been evaluated using concentration, competition, liquidity, and efficiency indicators. Dominant bank’s market share, n-concentration ratio, and Herfindhal Hischerman Index (HHI) are used to measure structural concentration. Lerner (1934) index an indicator of market power is used to determine the extent of competition. Banking sector efficiency is measured using net interest margin and overhead cost, following the work of (Beck et al., 1999). The net interest margin is measured as the ratio of accounting value of a bank’s net interest revenue to its total assets. Overhead cost ratio is measured by computing the accounting value of a bank’s overhead costs by total assets. Bank liquidity is measured using the ratio of loans to deposits.

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Per

cen

tage

of

firm

s

Figure 6. Access to loan by Non-residentialbuilding status; Field Survey.

Per

cen

tage

Figure 7. Source of seed money; Field Survey.

IMPACT OF THE REFORM ON THE BANKING SECTOR Prior to the reform, the Ethiopian banking sector comprised three state owned banks. CBE was the market leader mobilizing over 95% of deposits, 85% of loans, and with branch net work of around 76% of bank branches in the country. It would also act as a financier for the other two specialized state owned banks, by extending long-term loans and also by keeping a time deposit to satisfy their demand for fund. The financial reform, marked by opening of the sector for domestic private investment through Licensing and Supervision of Banking Business Proclamation No. 84/1994, has brought changes into the state-bank-dominated banking

market of the country. One new bank popped up in the banking market every year till 1999, bringing the number of private banks to six by the end of 2007.

A cursory look at the CBEs gradual loss of predominance shows the changing face of the banking sector. CBE, the industrial giant that assumed a market leading position with a quasi-monopoly power, is now sharing the market with the private banks. Its branch net work now represents only 38% of bank branches, falling from 90% in 19 94; mobilizes 61% of deposits compared with 95% in 1994; originated 35% of bank loans outstanding in 2007 compared with 87% in 1994; and its net worth represents only 33% of banking sector capital diving from 84% in 1994. To paint a better picture of the trend of changes in the banking market, we look at


Figure 8. Source of working capital; Field Survey.

structural concentration, competition, liquidity and efficiency. Concentration and competition Concentration is measured using dominant bank’s market share and n-concentration ratio, and HHI. The market share of CBE is used to compute the dominant bank’s market share; CR-3 includes three biggest banks namely the CBE, AIB, and DB. The HHI includes all banks in the study.

As shown in Table 1, Dominant bank’s share, CR-3, and HHI have all been generally declining. One can note that the decline in concentration in the loan market is faster than that in the deposit market, implying a more vigorous penetration of private banks into the credit market. Decline in the deposit market at a slower pace manifests the government’s long standing directive that obligates government agencies to keep their account at the state owned Commercial Bank of Ethiopia. This directive helps the bank to cling to large share of the market, losing only a small portion of it over the years. Consequently, the private banks could not penetrate into the entire deposit market, but managed to narrow the gap in the loan market significantly, as evidenced by a fall in CBEs share in loans to 35% from 87% compared to a fall in the share in deposits to only 61% from 95%.

Despite the use of concentration as a signal for degree of competition, recent literature casts doubt over its propriety in serving as a proxy for competition. Berger et al. (2004) suggest that concentration may not be an appropriate measure of competition because it may not prohibit competition in a market with less regulation and more possibility for foreign bank entry. Schaeck and Čihák (2007) and Casu and Girardone (2009) also find that concentration as a measure of market structure is

unlikely to capture competition. Instead, Lerner (1934) index as shown in Table 2 commonly used as an indicator of the degree of market power, is considered more robust in capturing competition. The index denotes the extent to which firms fix a price (p) above marginal cost (mc) using their market power. A value of the index close to zero indicates perfect competition, while a value of one indicates monopoly. Analysis of competitiveness in the banking market is confined to the period 2000 to 2007, over which data for all banks under study is available.

A Lerner index that hovers around 0.50 suggests that the banking market is neither perfectly competitive nor monopolistic; it is moderately competitive with a certain degree of monopolistic power. Although, volatile, there seems to be an increase in market power of each bank, suggesting that there is a room for banks to exercise such power. As indicated by the average, CBE is still predominant in the banking industry. Virtually all the private banks have gained a lot of market power, but they could not emulate the industrial giant. Despite a persistent decline in bank concentration in Ethiopia since 1994, competitiveness in the banking sector has not improved so well. This is because for one thing interest is not fully decontrolled as the minimum deposit rate a bank can pay is still dictated by the National Bank of Ethiopia. Secondly, a boundary has been set for private banks to compete in the deposit market by requiring all governmental agencies to keep their demand deposit at the Commercial Bank of Ethiopia, this gives the state-owned bank an exclusive advantage over private banks. Thirdly, with the lowest bank-branch to population ratio, demand for financial services still exceeds the supply, leaving little incentive for banks to aggressively compete for market. The divergence in our conclusion using measures of concentration and competition might be due to inability of concentration to serve as a proxy for

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Table 1. Bank concentration Ratios.

Year Dominant Bank’s share in

Deposits Dominant Bank’s share in

Loans CR-3-

Deposit CR-3-Loan

HHI-Deposits

HHI-Loan

1994 0.95 0.87 0.95 0.87 0.91 0.74

1995 0.95 0.88 0.96 0.90 0.91 0.75

1996 0.94 0.89 0.96 0.92 0.89 0.78

1997 0.90 0.87 0.95 0.93 0.81 0.74

1998 0.89 0.86 0.95 0.92 0.79 0.70

1999 0.85 0.83 0.92 0.91 0.73 0.66

2000 0.82 0.77 0.91 0.86 0.68 0.55

2001 0.80 0.71 0.90 0.83 0.65 0.45

2002 0.77 0.64 0.88 0.80 0.61 0.36

2003 0.73 0.55 0.87 0.75 0.55 0.25

2004 0.71 0.52 0.85 0.74 0.52 0.21

2005 0.68 0.49 0.83 0.73 0.48 0.19

2006 0.65 0.39 0.82 0.67 0.44 0.11

2007 0.61 0.35 0.80 0.63 0.40 0.07

Own calculation based on data from audited annual financial statements.

competition. Liquidity Liquidity of banks measures the extent to which they extend loan out of the funds they acquire from depositors. Too low liquidity, represented by a high loan to deposit ratio, may signal a lax lending policy and excessive credit risk, while too much liquidity may signal a stringent lending policy and hence a credit restraint. Consistent with the findings of Sacerdoti (2005) for selected countries in SSA region, the Ethiopian banks too have excess liquidity. The average ratio for the period 1997-2007 ranges from the minimum of 44% for CBE and maximum of 93% for NIB. The industrial average is 77% and CBEs loan to deposit ratio represents a little more than one half the industrial average, implying that compared with the private banks, the state owned bank lags in mobilizing deposits. The foregoing ratios show that banks follow an overly conservative lending policy, which is testified by a huge collateral requirement. For instance, 96.3% of loans in the country are backed by collateral compared with average of 73.6% for SSA, and value of collateral as a percentage of loan is 173.6%, by far greater than the regional average of 109.1%. Besides, collateral burden of 178% for SME loan compared with 165% for large firms signifies that the burden is heavier on smaller firms.

As depicted in Figure 1, the industrial average follows a declining trend, despite private banks share exhibiting no significant change over the study period as the ratio stayed at slightly the same level in 2007 relative to 1997. A continuous decline in CBE’s loan to deposit ratio implies that the bank has been continually tightening its

credit policy. Although by far better, even the private banks did not maintain their original pace in giving out loans; as revealed by a lower ratio since 2002. The industrial average rose only momentarily over two years, receding to its previous position afterwards. The implica-tion one can draw is that overall, lending has not been growing in tandem with the growth in deposits. Although there was a rise in the industrial average in the first few years, compared with its 1997 position, the ratio did not change much over the period, manifesting “no collateral no loan” policy of the banks that led to rejection of possibly commercially viable projects. Efficiency As depicted in Figure 2, the net interest margin stayed almost unchanged till 2005 after which it started to rise. This can be explained by the fact that private banks that have been relying more on time deposit (a more expensive source of funds) started attracting deposits (relatively cheaper money) by expanding their branch networks. Private Banks has had a better margin than state owned banks since 2000 because the former charge a higher interest on loans than the latter. Overhead cost of the banking industry has been fluctuating over the entire period. Most notable is the upsurge in 2002 and a fall afterwards. The rise in overhead cost in 2002 is driven by increase in the provision for doubtful loans following issuance of a more stringent doubtful loans provision by the National Bank of Ethiopia through directive Number SBB/32/2002. State owned banks have a lower overhead compared with private banks, implying that the former, through its long years of experience might have managed to cut costs. An


Table 2. Lerner index (LI).

Year

Bank 2000 2001 2002 2003 2004 2005 2006 2007 Average (%)

CBE 0.469 0.159 0.504 0.549 0.563 0.570 0.624 0.469 49

CBB 0.090 0.125 0.086 0.145 0.238 0.515 0.669 0.559 30

AIB 0.295 0.302 0.141 0.196 0.356 0.349 0.472 0.469 32

DB 0.271 0.345 0.319 0.274 0.409 0.416 0.506 0.535 38

BOA 0.404 0.402 0.091 0.095 0.441 0.541 0.558 0.356 36

UB 0.178 0.239 0.201 0.226 0.403 0.569 0.427 0.475 34

WB 0.342 0.381 0.269 0.24 0.211 0.473 0.473 0.452 36

NIB 0.242 0.577 0.482 0.293 0.523 0.483 0.503 0.508 45

Own calculation based on data from annual financial statements.

alternative explanation may be that state owned banks have excessive investment in fixed assets while private banks investment in fixed assets is smaller, bringing the ratio down. Assessment of both net interest margin and overhead cost however shows that, overall, the change in efficiency of the banking sector is unremarkable. SME financing during the post reform period Here, the reports survey result in two segments; the first segment presents access to bank credit in relation to firm characteristics, that is, ownership form, age, and possession of tangible asset. This is followed by findings on SME of access to credit upon startup, in raising working capital, and in financing growth.

Credit access related to characteristics of the firms

Form of ownership

Form of ownership of firms is heterogeneous. It takes sole proprietorship, cooperatives, partnership or privately limited companies (PLCs). As depicted in Figures 4 and 5, 48% of the manufacturing SMEs are owned by a sole proprietor and 42% are PLCs; the two alone constituting 90% of the ownership form of SMEs in the sample. Of the PLCs, majority are owned within a family group.

Analysis of access to credit based on ownership form reveals that compared with sole proprietors, PLCs had a relatively better access to bank loan. Of the firms that ever had a bank loan, sole proprietors constitute only 25% while 68% are PLCs. The figure for both partner-ships and cooperative is even lower at 4% each, suggesting that these two forms have the worst access to bank credit. Only 30% of SMEs reported to have had a bank loan in their life time, of which 26% constitute sole proprietors, 4% partnerships, and 70% PLCs. Despite a marginal variation in access to loan among different forms, the overall picture is that irrespective of ownership, firms are seriously constrained in raising bank credit. This

is consistent with the findings of Berkowitz and White (2004) that lenders disregard small firms' organizational status in making loan decisions, because bankruptcy of the business entails foreclosure of the personal property of the owners. Where the personal property of owners is legally protected against foreclosure, lenders hesitate to extend loan in the absence of security backed by collateral. Consequently, even the incorporated SMEs have no significant advantage over the unincorporated in accessing bank loans.

Age

Country case studies document that age is also among the factors that influence firms’ access to bank loan. The influential role of age in explaining disparities in financial access of firms is accentuated when the financial system accommodates relationship lending. In countries where banks attach recognition to the length of their relationship with borrowers, older firms with a longer relationship with lenders have an upper-hand in accessing loans. This has been confirmed by Abor and Biekpe (2007) who find that older firms have a stronger relation with their bank and hence a better access to bank credit compared with younger firms that have no or lesser ties with their financier.

SMEs included in our study have ages ranging from 3 to 52 years, classified into three age groups: those set up during the imperial regime, socialist regime and the current regime. As depicted in Figure 5, 20% were established during the imperial regime, 20% during the socialist regime, and 60% during the current regime, showing that majority of the firms were set up during the post reform period in response to the private sector development strategy the government has pursued.

Disparity in access to bank loan is observed among firms set up in all the three regimes. A vertical analysis of firms across the three age groups reveals that, of those that succeeded in acquiring a bank loan, 36% are imperial regime, 15% socialist regime, and 49% current regime firms. The above figures, without prejudice to any

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Table 3.The most serious challenge in establishing a business.

What is the most serious challenge in setting up a new business?

No. of firms Percentage

Finance 78 76

Premise 19 19

Others 5 5

Total 102 100

Field Survey.

additional probe, imply that post reform firms are excep-tionally better in accessing bank credit. A horizontal analysis, however, tells a different story. Over 50% of imperial regime firms had access to bank loan, compared with only 26% of socialist regime firms and 23% of post reform firms. Taken at face value, this later figures may imply that imperial regime firms are better positioned in accessing credit than the younger firms.

But the reality is, those established during the imperial period might be survivors of restrained financial markets of the past and have enough collateral to pledge to secure a bank loan, whereas included in the post- reform firms are those that may not survive the existing financial famine. This weakens the effect of age in the lending decision of banks.

Ownership of collateralizable assets

SMEs were inquired on the status of the building they presently occupy to carry out business. Only 30% own the property in which they carry out business while 70% use rented building or acquired in some other way. Ownership of property varies based on size, as evidenced by 63% of medium firms have their own property while the figure for smaller one is 37%. As depicted in Figure 6, firms that own a non-residential building fared relatively better in getting a bank loan compared with those that do not have one. While 38% of firms with non-residential building had a bank loan in the past, only 16% of those without non-residential building managed to get a bank credit. It can be noted that a bank credit is not automatic even for firms that own a property. This might be due to the possibility that owing to existence of legal issues not all properties owned by SMEs are eligible to be accepted by banks as collateral.

As explained in the analysis of the credit market, collateral plays a vital role in accessing bank loan. Many SME owners complain that they are denied loan despite a strong earning capacity and future growth prospect.

Access to bank credit at different stages of development A firm’s access to fund is often evaluated based on its

ability to raise money upon startup, during operation, for business expansion, and also to meet unprecedented requirements driven by some exogenous events. Our discussion in this section is confined to the first three, namely, financing startup, operation, and expansion. Source of seed money (financing start-up) And add the (see Table 3) As reported by SME owners, the most serious challenge in setting up a business concern is securing funds; 76% believe raising seed money is the most daunting challenge. One of the impediments to development of a vibrant SME sector in developing countries like Ethiopia is entrepreneurs’ inability to raise start up money due to lack of willingness on the bank’s side to extend loan on a non-collateral basis. Survey result shows that establishing a business concern is difficult in Ethiopia. As reported by SME owners, the most serious challenge in setting up a business concern is securing funds; 76% believe raising seed money is the most daunting challenge.

Survey result also shows that more than 50% of the SMEs use their own saving to set up their business, while only 2% succeed in obtaining a bank loan. Using own saving is the most accessible source of financing but it is meager in most cases and hence does not cover all their start up costs. Consequently, new firms oftentimes limit their capital investment to the most essential ones that in turn restrains them from achieving the desired size upon start up.

Financing operation

Financing working capital is as challenging as financing startup for most SMEs in developing countries. Many startups die out few years after establishment due to inability to raise funds for working capital. Ismail and Razak (2003) find that firms in general prefer debt financing to equity financing, and this tendency is higher among smaller firms because of lesser desire of owners to sale ownership interest. Heavy reliance of SME on bank loan exposes them to a serious financing constraint in markets where banks follow a conservative lending policy. Survey evidences that only 4% managed to


Table 4. Primary means of financing business expansion.

Variable Frequency Percent

Retained earnings 77 75.49

Credit from friends 1 0.98

“Iqqub” 15 2.94

Bank loan 9 11.76

Total 102

Field Survey.

access bank credit in the form of overdraft and a short-term loan. More than 45% of the SMEs use retained profit and 33% use “Iqqub” to finance operation. The popularity of retained earnings as a means of financing operation is consistent with the findings of Abor and Biekpe (2007) that SMEs tend to retain profit to finance operation instead of seeking a bank loan.

Financing growth

As shown in Table 4 Quite a lot of the SMEs ardently desire to expand business; as evidenced by the survey result that shows 98% of them having a growth plan.

The overwhelming majority of Ethiopian SMEs plan to expand operation, with more than 85% of them want to raise production capacity, the major driver behind their capacity expansion plan being existence of market. While 83% of the firms believe they have enough market to serve, 10% believe they have an edge over competitors in producing and distributing the main product. Profit retention is the predominant means of financing planned expansion, with 75% of SMEs opting it.

As a choice of 15% of the firms, “Iqqub” is the next most important source of financing growth. Only 9% of SME hope to get a bank loan to finance their planned expansion, signifying inaccessibility of bank loan. Reliance on retained profit as a source of financing growth has two problems. First, profit is less predictable and expansion plan is jeopardized when earning fails to measure up to expectation, hence hindering growth. Second, retained profit is not big enough to allow scaling up of operation by raising capacity or penetrating into a new market.

CONCLUSION AND POLICY IMPLICATIONS

Quite a lot of studies on the nexus between financial development and economic growth suggest that there is indeed an economic gain in fostering the development of the financial sector, without denying the fact that if not well designed, any reform program may prove counterproductive. Consequently, many nations kept liberalization of the financial system at the top of their economic development agenda. Empirical evidence

shows that a well laid out program of financial reform enhances economic development via different channels, one among which is improving financial access. How-ever, studies considered countries that have taken long strides in reforming the sector, disregarding those that are gradually moving towards full scale liberalization. Besides, studies of this kind in SSA countries are so scant that the region is almost precluded from the literature. This study is set out to fill the void, shedding light on the impact of financial liberalization in Ethiopia on its SME sector.

This study covers the Ethiopian banking sector over a period from 1994 to 2007, focusing on the most important parameters: structural concentration, competition, efficiency, and liquidity. To examine changes in SME access to bank loan, survey of 102 randomly selected manufacturing SME is conducted, and access was evaluated in relation to form of ownership, age, and possession of fixed assets, and also at three stages of development including startup, operation, and growth. Assessment of changes in the banking sector reveals that the sector has become less concentrated. Concentration has been declining at a much faster rate in the loan market than in the deposit market. However, the results suggest that there is no significant change in competition and efficiency, and the sector has been continuously accumulating liquidity. In general, no robust change is found in the banking sector that enhances access to SMEs.

Survey result also shows that there has been no im-provement in SME access during the post-reform period. Also no significant variation is found in access in relation to age and ownership form. However, firms that own assets for collateral are found to have a relatively better access, signifying the importance of collateral in the credit market. Assessment of access at different stages of business life cycle also shows that SMEs are financially constrained at all the stages. In general, the banking reform that changed structure of the banking sector did not succeed in igniting competition among the banks. Consequently, SMEs continue to be disen-franchised by the credit market limiting the vital role the sector can play in the economic development of the country.

Our policy recommendation comes in two packages. First and most critical is that the government should promote competition in the banking sector by lifting its heavy hands but without compromising safety and stability of the financial system. Secondly, government should step in to the rescue of the SME sector using combination of schemes. This includes initiating establishment of credit bureaus that maintain borrower information in a systematic manner useful in extending credit by employing credit scoring techniques. Besides, the state needs to launch credit guarantee programs that can run without subsidy targeting SMEs in selected industries because efficiently managed guarantee schemes can robustly enhance credit access with little distortion to the market.

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Do immigrant-owned businesses grow financially? An empirical study of African immigrant-owned businesses

in Cape Town Metropolitan Area of South Africa

Robertson K. Tengeh1*, Harry Ballard1 and Andre Slabbert2

1Department of public management, Cape Peninsula University o f Technology, Cape Town - South Africa.

2Department of Research, Cape Peninsula University o f Technology, Cape Town, South Africa.


Given the fact that numerous challenges prohibit African immigrants from availing financial capital for the purpose of starting a business in South Africa, this paper sets out to investigate whether those that succeeded experienced a significant increment in their financial capital three or more years after start-up. This paper was designed within the quantitative and qualitative research paradigms. A triangulation of three methods was utilised to collect and analyze the data. From a quantitative perspective, the survey questionnaire was utilised. To complement the quantitative approach, personal interviews and focus groups were utilised as the methods within the qualitative approach paradigm. The primary data collection instrument used was the survey questionnaire which was complemented by personal interviews and focus group debates. The results revealed that the majority (71.1%), of African immigrants had an estimated start-up financial capital in the range of R 1 000 and R 5 000, which tended to vary across the different ethnic groups studied. After three or more years, the estimated financial capital of the majority (39.3%) of the respondents moved to a new range of R 50 001 - R 100 000. Noting a disparity in capital growth exhibited by the different ethnic groups, it was found that all the Ethiopians who started with a capital within the range of R1 000-R5 000 moved into a new capital range (R50 001- R100 000) three or more years after business start-up. Although, the absolute migration in terms of capital demonstrated by the Ethiopian is not into the highest capital range, they were nonetheless the only country that experienced this phenomenal growth. In terms of occupying the highest capital range (R250 001- R500 000) 11.1% of Cameroonians moved into that range followed by 7.4% of Somalians. Using an increase in financial capital (generated by ploughing back profits) as a proxy for growth, we were able to prove that these African immigrant-owned business grow and the rate of growth varied across the different ethnic groups studied. Key words: Immigrant entrepreneurship, immigrant-owned businesses, financial capital, financial growth, African immigrants, business start-up resources and South Africa.

INTRODUCTION From a business viewpoint, the process of employment and economic development begins with the humble start-up and operation of successful small businesses. *Corresponding author. E-mail: [email protected]. Tel: 082 640 8558.

Whether these businesses are started by natives or immigrants become irrelevant. According to Basu and Parker (2001) and the Federal Reserve Bank of Dallas (2010), in recent years there has been a growing awareness of the importance of new business start-ups for long-term economic growth and employment creation. With economic growth and employment as a central objective, many governments today are actively involved

in promoting small business start-ups. According to Van Praag (2003), it is increasingly acknowledged that an effective policy to decrease unemployment is to stimulate the number of new businesses. It is widely recognised that a key element of successful start-ups is adequate financing (Basu and Parker, 2001).

The literature on small businesses in general and immigrant-owned businesses in particular, stresses the dual role played by finance. Firstly, a growing number of studies have expressed the importance of having the right type of financial capital (Jacobs, 2003; Colombo et al., 2004), in the right quantity (Huck et al., 1999; Colombo et al., 2004) and at the right price and at the right time for starting up a business. Secondly, other studies have emphasized the fact that the need to survive (Kushnirovich and Heilbrunn, 2008; Tengeh et al., 2011) is the force that drives immigrants into setting up business ventures. Such a need can only be implicitly satisfied by a positive financial return from the business venture. A measure of the financial capital of a business at start-up and over time is one of the ways of ascertaining whether an entrepreneur is ‘reaping’ the fruits of his or her labour.

A key debate issue confronting small businesses in general and informal businesses in particular is the perception held in certain quarters that these businesses (immigrant owned businesses included) do not grow. Such a perception stems from the fact the overwhelming need to survive is the driving force behind most of these establishments. On these grounds, logic may suggest that these businesses may remain at the same level over the years while maintaining the subsistence of their owners or cease to exist once the basic survival needs have been met. However, the fore going postulation is not necessarily true. If there were to be sufficient evidence proving that small businesses (immigrant-owned included) do not grow, this would call for a shift in the popular perception that they are the engines of economic growth and very instrumental in the fight against poverty.

Cognisant of the numerous challenges that prohibit African immigrants from availing financial capital for the purpose of starting a business in South Africa, this paper sets out to investigate whether those that succeed in starting-up new businesses, experience a growth in their financial capital three or more years after start-up. The specific questions addressed in this paper include the following: What amount of financial capital do the African immigrants use when starting a business? Is the amount of financial start-up capital used by African immigrants consistent across the different ethnic groups under study?

Do the African immigrant-owned businesses under study experience financial growth?

Is the growth in financial capital noted in African

Tengeh et al. 6071 immigrant-owned business consistent across the different ethnic groups under study? LITERATURE REVIEW Entrepreneurship is a broad area of study covering a wider spectrum of interrelated activities carried out by entrepreneurs. Although, immigrant entrepreneurship, which is an emerging sub facet of entrepreneurship, has been widely researched in the developed countries, this cannot be said of the less-developed countries. In South Africa, immigrant entrepreneurship is an emerging area of study that needs attention. Definition of immigrant entrepreneurship From a historical perspective, the word entrepreneur is loaned from the French word ‘entreprendre’, which means ‘to undertake’. Examining entrepreneurship from the process dimension as noted by Stokes et al. (2010), the word entrepreneur, according to Pinkowski (2009), is simply someone who starts or operates their own businesses. Putting forward the behavioural and outcome dimensions, Markova and Perkovska-Mircevska (2009) stated that entrepreneurs often have strong beliefs about a market opportunity and organise their resources (land, labour and capital) effectively to accomplish an outcome that changes existing interactions.

Exploring entrepreneurship from an immigrant perspective, Basu and Altinay (2002) and Sahin et al. (2006) concurred with the fact that entrepreneurship normally involves setting up a new business or buying an existing one. And when the process of entrepreneurship is carried out by an immigrant, the phenomenon is referred to as immigrant entrepreneurship (Sahin et al., 2006). Considering that there is probably no significant difference between an entrepreneur and a non-entrepreneur as suggested by Fertala (2006), the question that comes to mind would be whether there is a difference between entrepreneurial activities carried out by foreign-born and native entrepreneurs. The answer to the preceding question may lie in the preponderance of business start-up between the two groups as well as the success of these establishments. Measuring business success and firm growth Acquiring the necessary resources for business start-up and operation has been noted to be a challenging task (Jacobs, 2003). Success draws one’s attention to a task satisfactorily completed according to specified standards. In order to measure success, a standard or bench mark must have initially been set, against which the result would be compared. In business, different dimensions

6072 Afr. J. Bus. Manage. have been used to indicate success. For instance, profit is commonly used to indicate success (Kloosterman and Rath, 2001). Other indicators of success include survival or numbers of years that the business has existed, which is ultimately indirectly linked to profit, in that a business that does not break even is doomed to close down.

In a study in Germany, Fertala (2006) defined a successful immigrant entrepreneur along the following lines: The longer an immigrant survives in business the more successful he or she is.

The faster the process of incorporating new information than relying on experience, the more successful the entrepreneur is.

The greater the sales volume, the more successful the entrepreneur. According to the online encyclopedia, Wikipedia, growth refers to an increase in some quantity over time. When applied to business, one would expect firm growth to be associated with an increase in the size of the business. However, size in its self is not a straight-forward concept. In view of the fore going, various approaches have been used to measure the growth of firms, ranging from an increase in the number of people employed (Feizpour and Jamali, 2009), an increase in market share or venture capital funding, to growth in revenue, return on investment or the number of customers of a firm. Cooney and Malinen (2004) posit that among these approaches, employment is generally the most accepted method of measuring growth. According to Cooney and Malinen (2004) the employment approach gains precedence over the others because the data is easily gathered, determined and categorized, and because this system is already frequently utilised to ordain firm size. Additionally, employment figures will be unaffected by inflationary adjustments and can be applied equally in cross-cultural (Cooney and Malinen, 2004).

Exploring small business start-up and growth from a South African perspective, Von Broembsen (2005), notes that the creation of a new business is a two-phase process. The first phase is the start-up phase, a three–month period when (one or more) individuals identify the products or services that the business will trade in, access resources such as finance and put in place the necessary infrastructure which includes staff. When the business is in this phase, it is referred to as the start-up phase (Von Broembsen, 2005).

The next phase, a period of 3-42 months is when this new business begins to trade and compete in the market place. When a business is in this phase of development, it is referred to as a new firm. The definition of a new firm is a business that has paid salaries or wages for longer than 3 months (Von Broembsen, 2005). It is therefore, possible to classify a business as a start-up indefinitely ifit fails to pay salaries and wages. Once a business has

established itself and is more than 42 months old it is referred to as an established business (Von Broembsen, 2005).

The TEA index, the primary measure used to compare the rate of entrepreneurship both among countries and annual variations with a country, measure the number of new businesses that are started in a given year. South Africa’s Total Entrepreneurial Activity (TEA) is estimated at 5.15% (Von Broembsen, 2005). In other words, between 4.32 and 5.95% of South African adults between the ages of 18 and 64 have started a business in the last 3 ½ years with others or on their own. While a slightly higher figure of 5.4% for South Africa’s TEA was recorded in 2004, the difference is not significant and falls within the range of the last 4 years (Broembsen, 2005). In this study, the duration in business and increment in financial capital are seen as the fundamental indicators of success and growth. More importantly, it is assumed that the increase in financial capital results solely from profits that have been ploughed back. Business start-up and operation resources Historically, creating any product or service has often involved combining what has since been referred to as factors of production (Jacobs, 2004). The acknowledged factors of production have included: land, labour, capital and the entrepreneur. According to the Federal Reserve Bank of Dallas (2010), all the economies around the world possess land, labour, capital and entrepreneurship. Land represents natural resources, that is, soil, food crops, trees, and lots that we build on. An example of labour includes the farmers, accountants, cab drivers, dry cleaners, assembly-line workers and computer programmers who provide skills and expertise to build products or offer services in exchange for wages and salaries. Capital represents the buildings, equipment, hardware, tools and finances needed for production. Entrepreneurship represents ideas, innovation, talent, organisational skills and risk. This notwithstanding, the availability of these resources has been noted to vary from one region to another, with some areas having abundance and others scarcity (Smith, 2007). The impact of which may be positively or negatively felt by individuals, depending on the geographical space that they occupy at any one time.

Although, the advent of globalisation has minimised the shortage of some of these factors, such as labour, entrepreneurship and capital, in that they can be transferred from a region of abundance to a region of scarcity, the degree to which these factors can be moved is still limited by both man-made and natural factors. The natural factors include weather, natural disasters and so forth. The man-made factors include laws and regional policies that hinder mobility (Smith, 2007). Capital as a factor of production can be classified into financial

(savings and loans), physical (land, buildings and machinery), human (education and skill enhancement) and social (trust, reciprocity and mutuality), based on its source (Coleman, 1988; Smallbone et al., 2001). Sanders and Nee (1996) noted that, despite being an important factor of production, the foreign-earned human capital of most immigrants is not highly valued by employers in their host countries who frequently rely on educational credentials and work experience as proxies for direct measures of skills and the potential productivity of employees. Acknowledging a variation in the quality and quantity of the factors of production available to individuals would logically suggest that business success drivers would vary from region to region, between sectors, and even over time. According to Elfring and Hulsink (2003), entrepreneurs rarely possess all the resources required to start-up and operate a successful business. Financial capital as a business start-up and operation resource Finance as a business resource refers to all those resources that take the form of, or can be readily converted into cash. Financial resources are valuable as far as business start-up and operation are concerned in that they do not have a single purpose but can be used to acquire other resources (Jacobs, 2003). From this angle, the acquisition and use of this type of resource may be important for the start-up and operation of any business (immigrant-owned businesses included). Finance can be obtained from different sources. The first source is the entrepreneur and the money he or she invests into the business is known as equity capital (Jacobs, 2003). The second source of funds is money loaned to the business by outsiders, such as individuals, banks or other lending institutions.

Traditionally, would-be small business owners meet the challenge of obtaining capital to start and run their businesses by using informal sources, as well as personal assets and loans from formal sources (Huck et al., 1999). It has been observed that while native entrepreneurs are more likely to finance new businesses using formal financial sources such as banks, this is unlikely to be the case for migrant entrepreneurs who are constrained to use informal sources. On this basis, informal financing via networks can substitute for borrowing in the formal sector, either because formal credit is not offered or because informal financing is preferred (Huck et al., 1999). Credit offered by a supplier, or trade credit, is another alternative to borrowing from financial institutions. Trade credit in itself is highly dependent on trust, which happens to be a core component cultivated by social networks. Businesses form networks with their suppliers, and there may be an ethnic dimension to these networks, in that the ethnicity

Tengeh et al. 6073 of the supplier may matter for some transactions. The importance of finance for business start-up and growth At a more general level, and following the 2009 global financial crisis that recently hit the world economy, the importance of finance for economic growth cannot be ignored. Although, a plus for most African countries at this stage has been that the effects of the crisis have been minimal due to less exposure to global financial markets, such a characteristic of a poorly developed financial system is still lamentable (IDC, 2009). A financial market, according to Berry et al. (2002), implies any mechanism that brings agents with money surpluses, such as banks, together with agents with need for money (such as SMMEs) who are willing to pay a price for the capital they acquire.

At first sight, if the market functions well, it should be able at a particular interest rate, to allocate the entire supply (surpluses) of the economy and to accommodate the entire demand for money, and by so doing address the problem of accessibility (Berry et al., 2002). However, this is often not the case and financial systems have been noted to be skewed at a regional level (Gries and Naude, 2008) and within regions (Claessens, 2005). Logically therefore, under perfect market conditions, one would expect finance to be readily available for business start-up regardless of race or size of business.

Over the last decade, finance has been recognised as an important driver of economic growth. Although, a large body of literature has established a positive association between financial sector depth and economic growth at the country, industry, and firm level, Beck et al. (2005) believe that little is known about the breadth of financial systems across countries, the extent to which enterprises and households use financial services, and their relationship to desirable outcomes. Claessens (2006) posits that finance is a vital component of economic growth and that there is a causal relationship between the depth of the financial system on the one hand, and investment, growth, poverty and total factor productivity on the other hand.

Empirical research has shown that initial financial development is one of the few robust determinants of a country’s subsequent growth (Beck et al., 2005; Claessens, 2006). As development takes place, one question that often arises has to do with the extent to which credit can be offered to the poor (including immigrants) to facilitate their taking advantage of the developing entrepreneurial activities (Atieno, 2001). Agreeing with the foregoing author, Claessens (2006) suggests that although finance is crucial for economic growth and the general well-being of society, a universal access to financial services has not been a public policy objective in most countries and would likely be difficult to

6074 Afr. J. Bus. Manage. achieve. At a firm level, it has been argued that higher start-up costs reduce start-up rates through capital.

From a small business perspective, access to capital is an important policy issue because business owners may face funding limits, known to economists as liquidity constraints. According to Huck et al. (1999), although many observers might take funding limits as self-evident, studies have revealed that liquidity constraints affect entrepreneurs both upon start-up and when the business is operationally underway. These constraints deter entry into self-employment and force would-be owners to save for longer periods before launching a business. The effects of start-up constraints extend to ongoing businesses, because starting with more capital increases an owner’s prospects of developing a viable, growing business (Colombo et al., 2004; Claessens, 2006).

Drawing a distinction between the financial needs of established firms and those of new start-ups, Berry et al. (2002) observed that while the latter cannot afford too much debt and will rather require equity, the former can be better-off using debt. On the contrary, Gries and Naunde (2008) argued that where start-up is high, access to external finance becomes important.

Atieno (2001) notes that banking systems and capital markets, especially in developing countries, are often skewed towards those who are already better-off, catering mainly to the large enterprises and wealthier individuals. Atieno (2001) posits that the failure of specialised financial institutions to meet the needs of the underprivileged (in which case one may include immigrants) has underlined the importance of a needs-orientated financial system. The popular belief that there is a lack of capital to fund business start-up has been the subject of many recent investigations (Astebro and Bernhardt, 2005). Sub-optimal capital levels in new firms due to credit constraints may have been a burden on the economy, although it has not been fully established how large the problem is, if it exists (Astebro and Bernhardt, 2005). Forms and sources of start-up capital In many countries, finance for business start up takes the form of bank loans. The next largest source of funds is family members. In contrast, equity finance tends to be of relatively minor importance (Basu and Parker, 2001). Earlier studies documented that start-up firms in traditional industries are mainly financed with equity capital, invested by the entrepreneur and friends or relatives, with bank loans and with trade credit (Huyghebaert and Vande Gucht, 2002). For these firms, Huyghebaert and Vande Gucht (2002) add that venture capital is not typically available at start-up stage. While acknowledging that start-up capital comes from both equity and debt sources, Bates (1996) notes that greater equity investments tend to make debt capital more

accessible. Given the lack of prior history and reputation, the high failure risk, and the key role played by the entrepreneur, creditors will typically be concerned about adverse selection and moral hazard problems when lending funds at start-up (Huyghebaert and Vande Gucht, 2002).

In a South African survey of SMMEs, Chandra (2001) notes that sources of capital include private savings, family savings, individual savings, and retained earnings from a previous business. Other sources of start-up capital, including church and community groups, retrenchment packages, and government agencies, play a minor role and finance less than five percent of all firms.

Considering the available choices that entrepreneurs face with regards to the form and source of finance, the logical question one may ask is: which form of finance facilitates small business start-ups the most? According to Nee and Sanders (2001), human and financial capital are the forms of capital preferred by elite and middle class immigrants, which is an indication of the class advantages that they enjoyed in their home country. However, Nee and Sanders (2001) warn that financial capital may not be as liquid or as movable an asset as human capital when constraints are imposed by the home country on the portability of financial assets.

Financial capital is required for immigrants who enter entrepreneurial careers. In the USA, Nee and Sanders (2001) note that immigrants who bring with them substantial amounts of this form of capital enjoy a head start in establishing family businesses. Notwithstanding this, many immigrants accumulate needed start-up capital after their arrival in the USA (Nee and Sanders, 2001). The importance of informal sources of funding suggests that it is worth exploring ways to combine the presumed flexibility and informational advantages of informal networks with the formal sector’s ability to mobilise capital (Huck et al., 1999). Community development financial institutions and micro-lending pools are examples of institutions that, in some ways, combine the strengths of formal and informal sources of capital.

The ethnic differences in the amount of capital used and the sources of capital illustrate the importance of learning more about how formal and informal capital and credit markets work with regard to ethnic networks and neighbourhoods. These results have important implications for ethnic differences in business survival and growth, the decision to become self-employed, and income and wealth accumulation (Huck et al., 1999). Size of business start-up funds There seems to be a pronounced ethnic difference in the start-up funding used by different ethnic groups (Basu and Altinay, 2002; Robb and Fairlie, 2009). Huck et al.

(1999) found that black Americans in particular, start their businesses with significantly less capital than their Hispanic counterparts, even after controlling for differences in industry type and various measures of human capital (such as skills, abilities, training, and so on). In a more recent study, Robb and Fairlie (2009) also noted that Asian immigrants in the USA started their businesses with substantially greater capital than their white native counterparts. The inherent gap in the total amount of start-up funding may be attributed to the differences in the levels of non-personal resources put up by the owner.

Evidence from other studies indicates that the amount of financial capital available at start-up is important because more capital increases an enterprise’s chances of survival (Huck et al., 1999; Colombo et al., 2004). At the level of the immigrant, Huck et al. (1999) argue that differences in experience, cultural attitudes toward risk, skills level and willingness to start small businesses account for the differences between groups as far as choosing the start-up funding level is concerned.

Nevertheless, mounting evidence suggests that some owners are constrained in the amount of start-up funding that they are able to obtain and are forced to begin their businesses with less capital than the optimal amount of capital (Huck et al., 1999). Social network as a business start-up and operation resource Social networks and most importantly ethnic networks become critical when it comes to setting up a business in a foreign country. The literature on social networks, with regards to business start-up and growth, points to the important role that these networks play in providing the necessary resources for the success of a business. According to Elfring and Hulsink (2003) a network is one of the most powerful assets any person may possess, in that it provides access to wide range of valuable resources. These resources may include information, a niche market, financial capital, human capital and so forth (Elfring and Hulsink, 2003). Social networks and social capital From a general perspective the migration theory addresses the cumulative causation of migration as a result of reduced social, economic and emotional cost of migration associated with the migration network formations (Light et al., 1989). In the same vein, Elfring and Hulsink (2003) posit that the value of networks as an integral part of the explanation of entrepreneurial success is widely recognised. However, the role that networks or specific components of networks play in explaining start- up rate is still limited. According to Light et al. (1989:1), the existing treatment of migration networks often

Tengeh et al. 6075 overlooks the role of these networks in expanding the migrant economy at locations of destination – a role that migrant networks perform when they support immigrant entrepreneurship.

By developing social or migration networks, Bates (1996) and Salaff et al.(2002) believe that immigrants create social capital which becomes a useful source of start-up finance. According to Fukuyama (2001), social capital in the general sense of the word has been given a number of different definitions, many of which refer to manifestations of social capital rather to social capital. In sociology, where the term was initially coined, social capital refers to the advantages and opportunities accruing to people through membership of certain communities. According to Fukuyama (2001), social networks breed social capital.

Although it is sometimes argued that social capital differs from other forms of capital because it leads to bad results like hate groups or inbred bureaucracies, Fukuyama, (2001) argues that this does not disqualify it as a form of capital, in that other forms of capital also have their downsides. For instance, physical capital can take the form of assault rifles or tasteless entertainment, while human capital can be used to devise new ways of torturing people. Fukuyama (2001) further argues that since societies have laws to prevent the production of many social evils, one can presume that most legal uses of social capital are no less good than the other forms of capital insofar as they help people achieve their aims. Virtually all forms of traditional culture-social groups like tribes, clans, village associations, religious sects and so forth are based on shared norms and use these norms to achieve co-operative ends (Fukuyama, 2001).

According to Fukuyama (2001) and Elfring and Hulsink (2003), a plausible downside of social networks (and the cultivation of social capital) is that strong in-group moral bonding and solidarity reduces the ability of a group’s members to co-operate with outsiders, and often imposes negative externalities on the latter. In a free-market liberal democracy, Fukuyama (2001) notes that the economic function of social capital is to reduce the transaction costs associated with formal co-ordination mechanisms like contracts, hierarchies, bureaucratic rules and the like.

How does one measure social capital? According to Fukuyama (2001), one of the greatest weaknesses of the social capital concept is the absence of consensus on how to measure it. It has been suggested that the membership and the degree of trust within a group is a close measure of the group’s social capital (Fukuyama, 2001). While a social network group may be united around some common interest or passion, Fukuyama (2001) cautions that the degree to which individual members are capable of collective action on the basis of mutual trust depends on their relative position within the organisation.

Newly arrived immigrants rely on social capital to reduce the costs involved in settling in a new country

6076 Afr. J. Bus. Manage. (Nee and Sanders, 2001). The social networks are in themselves not capital or finance per se, but they facilitate the accumulation of finance for small business start-up as well as growth. The question one may ask is: How then do they fill in the financial gap as far as small business start-ups are concerned? Firstly, the trust embodied in social capital is important in business start-ups (Salaff et al., 2002).

Secondly, it is believed that these networks are a source of new ideas and lucrative opportunities (Elfring and Hulsink, 2003). Thirdly, it is assumed that the trust, solidarity, cohesiveness and the zeal to help each other is translated to social capital and particularly start-up finance (Salaff et al., 2002). Despite the importance of social networks in harnessing resources for entrepreneurial purposes, recent studies such as that of Tesfom (2006) have found the role of social networks to be limited. To avoid competition among co-ethnic members, entrepreneurs do not share business information especially on how they identified the business opportunity and how they draw resources (Tesfom, 2006). Tesfom (2006) found no evidence to either support the fact that first generation East African entrepreneurs posses ethnic self-help institutions or have individual ties that provide access to training, credit, capital and information. On the contrary, Tesfom (2006) argues that it is the strong cultural value of a savings tradition, persistency and the desire for income continuity that fuels their entrepreneurial drive.

Nee and Sanders (2001) make an important observation that, unlike financial and human-cultural capital, social capital is available to all classes of immigrants in that it is a form of capital that is spontaneously produced and reproduced within a family or social network level within the immigrant community.

Drawing a distinction between financial or economic capital, human capital and social capital, Portes (1998) notes that whereas economic capital is in people’s accounts and human capital is inside their heads, social capital is inherent in the structure of their relationships. At the individual level, Portes (1998) concludes that while social ties or networks can bring about greater control over wayward behaviour and provide privileged access to resources; they can also restrict individual freedoms and bar outsiders from gaining access to the same resources through particularistic preferences. For this reason he adds, it seems preferable to approach these manifold processes as social facts to be studied in all their complexity, rather than as examples of a value. Human capital as a business start-up and operation resource Human resources comprise of all the people and the

efforts, skills, knowledge and insights that they contribute to the success of a business (Jacobs, 2003). The most frequently mentioned aspects of human resource (capital) that have impact on entrepreneurship in general and more specifically on the start-up and growth of small businesses include education and prior work experience.

The literature on human capital and how it influences business start-up and operation is inconclusive. On the one hand, successful businesses have been associated with a certain level of formal education attained by the owner. On the other hand, other studies have found no association. In a related study, Merz and Paic (2006) found that prior experience positively influenced the start-up survival of a business. It has been suggested that the level of education of the business owner plays a crucial role in its chances of survival. Joachim and Peter (2006) found this position to be true but noted that it varied from one type of business to another. RESEARCH METHODOLOGY The study was designed within the quantitative and qualitative research paradigms, in which a triangulation of three methods was utilised to collect and analyze the data. From a quantitative perspective, the survey questionnaire was used. To complement the quantitative approach, personal interviews and focus groups were utilised as the methods within the qualitative approach paradigm. The primary data collection instrument used was the survey questionnaire which was complemented by personal interviews and focus group debates. The major advantage that triangulation brings to the fore is the reliability of information collected, as the various methods used will compensate for the shortcomings of one another.

In choosing the research population for this study, some screening was done. Being an African immigrant himself and having been actively involved in entrepreneurial activities since immigrating to South Africa, the researcher developed interest in the topic. Out of curiosity, we wanted to study all immigrants but after preliminary studies and observation, it was found to be practically not feasible given the time frame and resources. On this basis, the research population was then narrowed to African immigrants. However, due to communication difficulties and the fact that certain groups were more visible in business activities than others, five countries were chosen for the study. The research population for this study comprised of all immigrants of African origin that met the following criteria: Respondents must be of Cameroon, Ghana, Ethiopia, Senegal and Somalia origin. Operate a small, medium or micro size enterprise (SMMEs) at the time of interview. Business operation must be located within the Cape Town Metropolitan Area. Business operation must be three or more years in existence. Sample design Using the snow balling technique, a sample of 135 immigrant-owned businesses was drawn. Selected businesses had to be three or more years old. According to the snowballing sampling technique, once a suitable respondent is identified, he or she nominates other respondents. McDonald et al. (1999) reckons that

Table 1. Description of immigrant-owned businesses.

Frequency Percent

Cell phone repairs 17 12.6 Clothing 2 1.5 Crafts 2 1.5 Electrician 2 1.5 Fridge repairs 1 0.7 Manufacturing 1 0.7 Mechanic 3 2.2 Night club owner 1 0.7 Panel-beater 3 2.2 Restaurant 2 1.5 Shoe repairs 4 3.0 Trading 89 65.9 Other service 8 5.9 Total 135 100.0

this method allows for an element of randomness and ensures that the confidence of the interviewee would be maintained by being referred by a friend. To avoid some of the inherent bias associated with snow balling, once a suitable respondent is found, such a respondent helps identifies at least two other ethnic businesses (and most importantly their owners) within that suburb, and the researcher randomly selects one for an interview. By tossing a coin, one of the two nominated candidates is chosen for survey. Two approaches were used to arrive at the sample size of 135 used in this study. Firstly, a review of the following recent related studies: Basu and Altinay (2002), Rogerson (2004) Tesfom (2006), Kushnirovich and Heilbrunn (2008), indicted that on the average a sample size of 118 was utilised. All of the aforementioned studies made used of the snowballing technique and the interviews were conducted on a face to face basis. Secondly, in an attempt to justify and to ensure that the same size is big enough to give satisfactory results at a 95% statistical power, the G*Power software was implored. Using G*Power 3.1.2 software, and striving to achieve a statistical power of 95% a sample size of 134 seemed ideal (Faul et al., 2009). Data collection and analysis While using the survey questionnaire as the primary data collection instrument, focus group discussions were used to supplement as well as to test the results of the survey. The questionnaire was pre-tested on twenty African immigrant-owned businesses. The pilot participants were asked about the clarity of the items and whether they felt any items should be added or deleted. Based on the feedback from the pre-test and the statistician, some questions had to be reframed as they were grossly misunderstood by the respondents. It also became clear that having an African immigrant to administer the questionnaire would yield more satisfying results than otherwise, the reason being that they tend to trust one of their own more. Two focus group discussions were held, in which attempts were made to answer the research questions with parti-cular emphasis laid on the outcome of the survey questionnaire. The focus group participants were drawn from the same sample from which the survey questionnaire participants were drawn. Two groups of six and seven participants were drawn. In a group session that lasted one and a half hour each, participants shared

Tengeh et al. 6077 their experiences as they attempted to provide answers to the research questions. Personal interviews were conducted with key informants, banks and SMME support organisations. The pre-liminary interviews conducted with key informants was informal and provided information that guided the planning and as well as the identification of the sample population. Furthermore, interviews with key informants like focus group discussion also provided a means of validating the survey results. Specifically, a total of four formal interviews were conducted. The choice of whom to interview emerged from a preliminary analysis of the quantitative survey questionnaire and served to corroborate and as well as to complement it. Two interviews were held with officials of two of the most prominent banks in South Africa. Being banks that are actively involved in SMME development, it was imperative that their own side of the story be heard as it could complement or contradict that told by immigrants in the quantitative survey questionnaire. Another two interviews were held with two prominent SMMEs support organisations. It was believed that their viewpoint on things would shade some light on the topic and by so doing strike a balance. These organisations were purposefully chosen with one representing the government and other representing the civil society. RESULTS AND DISCUSSION Background information on successful African immigrant-owned businesses This study outlines and discusses the general back-ground findings on immigrant-owned businesses. Description of African immigrant-owned businesses The results as shown in Table 1 indicates that African immigrant entrepreneurs in South Africa engage in a variety of entrepreneurial activities. An overwhelming majority (65.9%) of those surveyed were engaged in what could be generally classified as trading. Besides trading, a significant proportion was engaged in cell phone repairs (12.6%), and the remaining proportion was distributed between clothing, crafts, electricians, fridge repairs, manufacturing, mechanics, night club owners, panel-beating, restaurants, shoe repairs, trading and other services. A major notable characteristic of the surveyed businesses is the ease of entry and the minimal capital outlay required to start-up and operate. Formality, age, gender and marital status characteristics of immigrant-owned businesses The majority of the businesses surveyed fell within the informal sector of the economy. Formality as used here refers to whether the business is registered with the Registrar of Companies in South Africa, or not. A business considered to be informal is one that has not been registered with the said authority. Although, none of the businesses surveyed could be considered as


Table 2. Demographic characteristics of African immigrant-owned businesses.

Formality of business Frequency %

Formal 10 7.4 Informal 125 92.6 Gender of owner Male 118 87.4 Female 17 12.6 Age of owner Below 20 years 5 3.7 20 to 40 years 122 90.4 41 to 60 years 8 5.9 Marital status of owner Single 40 29.6 Married 94 69.6 Widowed 1 0.7

N=135 Table 3. Highest level of formal education attained.

Highest level of formal education Frequency %

Less than high school or no schooling 57 42.2 High school diploma 59 43.7 Vocational/technical degree 1 0.7 Uncompleted university 16 11.9 Bachelors degree 2 1.5 Total 135 100.0

N=135 Table 4. Estimate of capital used by African immigrant during business start- up.

Best estimate start-up capital Frequency Percentage R1000 – R5000 96 71.1 R 5 001 – R10 000 25 18.5 R 10 001 – R20 000 8 5.9 R 30 001 – R 50 000 6 4.4 Total 135 100

hawkers in that they all operated from a fixed location and particularly in a permanent enclosure or shop, a majority of these businesses could be referred to as informal. As indicated in Table 2, 92.6% of these businesses were informal and only 7.4 % were formal.

In terms of the level of education attained, Table 3 shows that while a significant majority (43.7%) of the respondents had less than high school education (42.2%) or no schooling, a good percentage had high school diplomas. Measuring the start-up finance or capital of African immigrant-owned businesses At the very onset, and in line with other studies including Fertala (2006), it was assumed that the number of years that a business has existed and its sales volume (reflected in the growth in capital) are good indictors of success. Having met the first criteria by ensuring that only businesses that were three years or older were included in the survey, this paper set out to investigate the amount of start-up capital that these businesses used, and if they had experienced any growth at all after three or more years later. Table 4 shows the start-up capital of all the businesses surveyed.

According to Table 4, an overwhelming majority (71.1%) of the businesses surveyed reported that they started their businesses with R5 000 or less. Another 18.5% started with capital ranging between R 5 001 and R 10 000 inclusively. Eight percent started with capital in the range R10 001 to R 20 000. Validating this result qualitatively, this is what one of the participants at the focus group meetings had to say: “When I finally met my host, I had only R1200.00 and after reserving R200.00 for miscellaneous expenses he bought me a ‘starter’s pack’ of goods so that I could commence trading”. Said Mbaye from Senegal.

Based on the results noted in Table 4, a cross tabu-lation was conducted to ascertain how the start-up capital used by African immigrant entrepreneurs varied among the ethnic groups.

As noted in Table 5 the ethnic groups contributed differently toward making R1 000 – R5 000 the dominant capital range. The Ethiopians were noted to have contri-buted the most (28.0%), while the Senegalese, Somalis, Cameroonians, and Ghanaians contributed 27, 23, 22 and 0.0%, respectively. Examining start-up capital usage in terms of size, table 6 demonstrates that while Ghanaians (18.5%) used the most capital, the Ethiopian (100%) used the least.

In order to determine whether the business has noted any growth, an estimation of the financial capital these entities was done three or more years after start-up. From Table 7, it is evident that a majority (39.3%) of the businesses surveyed now have capital of between R50 000 and R100 000 inclusive. Even though, a reasonable proportion still falls within the R10 000 to R20 000 bracket, it is worth noting that another 20.7% occupied the R100 001 - R200 000 bracket, and that none (0%) now occupy the R1 000 - R 5 000 bracket.

In an attempt to understand how the various ethnic

Tengeh et al. 6079

Table 5. Cross tabulation between ethnic group and start-up capital.

Best estimate of start-up capital Country / Ethnic group

Total Cameroon Ethiopia Ghana Senegal Somalia

R 1 000 - R 5 000 21 27 0 26 22 96 R 5 001 - R10 000 5 0 20 0 0 25 R 10 001 - R20 000 1 0 2 0 5 8 R 30 001- R 50 000 0 0 5 1 0 6 Total 27 27 27 27 27 135

Table 6. Size - distribution of start-up capital among ethnic groups.

Best estimate of start-up capital Country / Ethnic group (%)

Cameroon Ethiopia Ghana Senegal Somalia

R 1 000 - R 5 000 77.8 100 0.0 96.3 81.5 R 5 001 - R10 000 18.5 0.0 74.1 0.0 0.0 R 10 001 - R20 000 3.7 0.0 7.4 0.0 18.5 R 30 001- R 50 000 0.0 0.0 18.5 3.7 0.0 Total 100 100 100 100 100

N=135

Table 7. Estimate of capital used by African immigrants three or more years after start up.

Best estimate of capital now (that is, 3 or more years after start-up) Frequency %

R 10 001 – R20 000 28 20.7 R 20 001 – R 30 000 19 14.1 R 30 001– R 50 000 2 1.5 R 50 001 – R 100 000 53 39.3 R 100 001 – R 200 000 28 20.7 R 250 001 – R 500 000 5 3.7 Total 135 100

groups fared in terms of growth in capital, a cross tabulation was done. The results in Table 7 indicate that a majority of the respondents (39.3%) now fall within the R50 001–R100 000 bracket, and also the fact that there is a variation in the contribution of the different ethnic groups. This variation is indicated in the cross tabulated table (Table 8). With regards to the noted results (Table 8), Ethiopians contributed the most (51%), followed by Senegalese (28%), Cameroonians (9%), Somalis (9%) and Ghanaians (2%).

In terms of capital growth, it can be noted that all the Ethiopians, who started with a capital within the range of R1000-R5000 (Table 5) have moved into a new capital range (R50001- R100000, Table 9). Although, the absolute migration in terms of capital demonstrated by the Ethiopian is not into the highest capital range, they are, nonetheless, the only country that experienced this

phenomenal growth. In terms of occupying the highest capital range (R250 001- R500 000), 11.1% of Cameroonians moved into that range followed by 7.4% of Somalians. Conclusions Sampling businesses that are three or more years old and using an increase in financial capital (resulting from profits ploughed back) as a proxy for growth, we were able to prove that these businesses grow and the rate of growth varied across the different ethnic groups studied. We found that a significant majority (71.1%) of African immigrants had an estimated start-up financial capital in the range of R 1 000 and R 5 000, which tended to vary across the different ethnic groups studied. After three or


Table 8. Cross tabulation between ethnic group and best estimate of capital now (that is, 3 or more years after start-up).

Best estimate of your capital now Country / Ethnic group Total


R 10 001 – R20 000 8 0 0 0 20 28 R 20 001 – R 30 000 7 0 1 11 0 19 R 30 001– R 50 000 2 0 0 0 0 2 R 50 001 – R 100 000 5 27 1 15 5 53 R 100 001 – R 200 000 2 0 25 1 0 28 R 250 001 – R 500 000 3 0 0 0 2 5 Total 27 27 27 27 27 135

Table 9. Size - distribution of capital among ethnic groups, three or more years after business start-up.

Best estimate of your capital now Country / Ethnic group (%)


R 10 001 – R20 000 29.6 0 0 0 74.1 R 20 001 – R 30 000 25.9 0 3.7 40.7 0 R 30 001– R 50 000 7.4 0 0 0 0 R 50 001 – R 100 000 18.5 100 3.7 55.6 18.5 R 100 001 – R 200 000 7.4 0 92.6 3.7 0 R 250 001 – R 500 000 11.1 0 0 0 7.4 Total 100 100 100 100 100

N=135 more years in business, the estimated financial capital of the majority (39.3%) of the respondents moved to the range R 50 001 - R 100 000. Looking at start-up capital usage, it was found that at the time of start-up, Ghanaians (18.5%) used the most capital within the range of R 30 001- R 50 000, the Ethiopians (100%) used the least (R1 000–R5 000). Noting a disparity in capital growth exhibited by the different ethnic groups, it was found that all the Ethiopians, who started with a capital within the range of R1000-R5000 moved into a new capital range (R50001- R100000) three or more years after business start-up. Although, the absolute migration in terms of capital demonstrated by the Ethiopian is not into the highest capital range, they were nonetheless the only country that experienced this phenomenal growth. In terms of occupying the highest capital range (R250 001- R500 000), 11.1% of Cameroonians moved into that range followed by 7.4% of Somalians. In comparative and general terms, these results may suggest that there has been a noticeable growth in capital. In so doing, and considering that all the businesses surveyed were three or more years old, this result may therefore maintain that all the African immigrant businesses surveyed experienced growth in terms of financial capital. Considering the dire need for more businesses to be established in South Africa, and the minimal outlay of

financial capital used by African immigrants, a support from the government and civil society would go a long way towards advancing this goal. Do immigrant owned-businesses grow? The answer is a yes. LIMITATION AND FURTHER RESEARCH

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Corporate sustainability in Southern Africa: An ecosystem approach

James Kamwachale Khomba 1*, Ishmael B. M. Kosamu 2 and Ella Cindy Kangaude-Ulaya 3

1Department of Management Studies, University of Malawi, Private Bag 303, Blantyre 3, Malawi.

2Department of Physics and Biochemical Sciences, University of Malawi, Private Bag 303, Blantyre 3, Malawi.

3Department of Business Administration, University of Malawi, Private Bag 303, Blantyre 3, Malawi.

Accepted 24 April, 2012

Ecosystems provide goods and services that are impo rtant for the needs of humanity. Corporate sustainability programmes balance the need for econ omic growth with environmental protection and social equality. This study examines the extent to which organisations in Southern Africa are linking their business operations to sustainability of the natural environment. A desk review was done of documents collected from different sources, includi ng stock exchanges, registrars of companies, companies’ annual reports, organisational constitut ions, national statistical offices, government publications and internet sources. Primary data was obtained from managers at registered organisations using both structured and unstructure d interviews, as well as through questionnaires. Direct observations were employed wherever necessar y in the study. This study found that 69.3% of organisations in Southern Africa indicated that the y do not consider the natural environment as their main stakeholder in their planning and performance measurement systems; and that they do not have proper measurement systems to assess the impact of their operations on either the natural environment or society. It is recommended that if c orporate sustainability in Southern Africa is to be a success, then organisations must immediately start to value and protect ecosystems which are the backbone of their business operations. Key words: Malawi, Southern Africa, corporate planning, corporate sustainability, ecosystem, stakeholders.

INTRODUCTION Corporate sustainability is important to the survival of organisations and future generations of humanity. Corporate sustainability programmes balance the need for economic growth with environmental protection and social equality. However, most organizations in Southern Africa lack a holistic strategic plan to address corporate sustainability issues. As a result, the African organisations address sustainability issues piecemeal and usually in an uncoordinated manner. An uncoordinated execution of a plan may result in the organ *Corresponding author. E-mail: [email protected].

-isation’s exposure to unnecessary business risks, thereby forcing enterprises to miss out on strategic opportunities for future growth and development (Fisher, 2010a; Lozano, 2012). Business growth also depends on the existence of relationships between an organisation and its stakeholders and relationships between the stakeholders themselves. Stakeholders come from both within and outside the organisation. Internal stakeholders include management and employees. External stakeholders include shareholders, government, debt providers, customers, suppliers, competitors, the natural environment (ecological systems) and the community (David, 2005; Laudon andLaudon, 2006; Rossouw, 2010b). A good balance of internal and external factors is vital for

long-term sustainability of any organisation.The business environment has become ever more volatile as modern economies have emerged (David, 2005; Laudon and Laudon, 2006).

Hence, modern industries cannot afford to be static and mechanistic, as there are constant rapid technological changes; there has been a shift to more knowledge-work based management systems; there is currently an increased emphasis on corporate citizenship in respect of social responsibility and corporate conscience issues; and industries have to address the problems of environmental degradation and global warming challenges (Lozano, 2012).Modern business practices also dictate that companies have to be ethical in their undertakings. For instance, manufacturing companies have an ethical duty to protect the environment against degradation and pollution (Rossouw, 2010a; Laudon and Laudon, 2006; Porter, 2008). Once goods and services are produced, they are given back to the environment through customers and consumers for final consumption. A proper Life Cycle Analysis (LCA) for a product or service then becomes necessary to minimise environmental degradation.

To sustain current operations for the benefit of future generations, organisations need to create the potential to maintain social well-being, which depends on the well-being of the natural environment. Thus, organisations must have a conscience regarding their obligation to be responsible in the proper use of natural resources. Survival of all organisations depends on ecosystems which basically provide the final products and raw materials of goods and services.

Organisations have started paying more attention to sustainability issues, which have become more pronounced amidst social concerns and anxiety about global warming which are currently attracting attention worldwide (Fish, 2011; Strategic Direction, 2010). Governments and international institutions have changed and adapted legislation and policies in order to address concerns about sustainability. There has been consumer pressure on organisations regarding quality and healthier “green” products; and concern over the environment has become aligned with concern for a business’s reputation. Research problem and objective Most of the times, sustainability issues that hinge on social and environmental elements are not given much emphasis within corporate planning and measurement systems of many organisations.

This is prevalent within large corporations including the large-scale multinational companies. This study brings into context the extent to which corporations in Southern Africa are linking their business operations to sustainability issues, with special reference to the natural environment elements.

Khomba et al. 6083 CORPORATE SUSTAINABILITY DEVELOPMENTS Recent developments show that many corporations are paying more attention to and are reporting on corporate sustainability issues. For example, 100% of companies on the financial times stock exchange (FTSE) now include sustainability issues on their corporate websites.

Furthermore, it is widely recognised that a sustainable business must be resource-efficient, respect the natural environment and be a good neighbour to society (Fisher, 2010b; Sustainable Business Team, 2000). It is indicative of these developments that accommodating sustainability issues is now essential if businesses are to continue realising profits in the long term. Ecosystem principles The new paradigm that is emerging regarding sustainability issues requires a holistic world view, that shifts from the common “business as usual’ to where corporations see the world as an integrated whole, rather than as a dissociated collection of individual parts (Capra and Pauli, 1995). There is therefore a need to understand the principles of ecological systems and their relationships which are the base of all enterprises. Such principles include the interdependence of members of the ecosystem, who are interconnected in a complex web of relationships, and the notion that all life and processes depend on one another. Furthermore, the interdependence among parts of an ecosystem involves an exchange and sharing of energy and resources that are in a cyclic continuous flow. In such partnerships, members are engaged in a subtle interplay of competition and cooperation (Capra and Pauli, 1995). Ecosystem and corporate sustainability practices Based on a good understanding of ecosystem principles, there have been calls for tougher definitions and an increase in the practices of corporate sustainability in order to benefit society, the natural environment and business (Strategic Direction, 2010). The concept of sustainability provides a framework to integrate both the environmental and social performance of corporations with the traditional economic approach (De Lima and Buszynski, 2011). By combining three measures of sustainability (environmental sustainability, social sustainability and economic sustainability) under the same umbrella, executive managers are able to create a comprehensive sustainability strategy for long-term corporate performance (Lozano, 2012).

Most organisations are now applying environmental management techniques such as eco-efficiency, pollution prevention, total quality environmental management systems, and design for the environment (Adewunmi et al.,

6084 Afr. J. Bus. Manage. 2012). In addition, organisations are embracing the concept of a stakeholder-centred approach to management, where all stakeholders, such as the natural environment, are considered critical for successful business operations (Stead and Stead, 2004). For example, major accounting and auditing firms such as KPMG have started to recognise the relevance of sustainability reporting (KPMG International, 1999; White, 2005). Apart from its core financial auditing, KPMG also offers a variety of sustainable development services that include environmental and social reporting opinions, assurance on environmental and social management systems, risk and performance management, hot issue reporting on such things as climate change, emerging standards and regulations, human rights, supply chain risks and stakeholder activism.

Wal-Mart (which took over the South Africa-based retailer Massmart Holdings Limited) is another organisation that improved its sustainability and profitability with improvements in the supply chain management systems (Smorch, 2007). Wal-Mart focused on key areas, such as package design, material optimisation, shelf impact, stock-keeping unit consolidation, productivity improvements, alternative packaging and material handling. In improving the internal packaging systems, Wal-Mart also made sure that they made the packaging materials environmentally friendly. It is therefore to be expected that many corporations will take advantage of such services and include them in their corporate planning and performance measurement systems. Conceptual framework of stakeholder relationships and network On corporate sustainability paradigm and for better understanding of the same within an African context, Khomba (2011) developed a conceptual framework of stakeholder relationships and networks as shown in Figure 1.

The conceptual framework of stakeholder relationships and networks recognises that every business engages in a series of complex activities involving different constituents that are interlinked and work together for organisational success (Khomba, 2011). Thus, the conceptual framework recognises the interconnectedness and relationships of corporate activities with those of other stakeholders, and also of the relationships and interdependence of the stakeholders themselves.

Diagrammatically, the afore-mentioned conceptual framework depicts four system layers representing different levels of stakeholder involvement in organisational activities (Khomba, 2011). The first is the ‘corporate level’, representing internal activities, including those of management and employees. The second is the ‘industry level’, representing the boundary within which

similar businesses run by different companies operate. At the industry level, there are customers, shareholders, government, suppliers, regulatory bodies and competitors. The third level of the conceptual framework of stakeholder relationships and networks is the community level, which represents a larger grouping of all industries and where different final consumers reside.

The fourth is the ecological (natural environmental) level for the largest ecosystems, where natural resources that are used as inputs during production are sourced from and also where all the wastes are finally deposited.

On a daily basis, and in a very complex manner, different stakeholders interact with an organisation during the value/wealth creation processes (Khomba, 2011). Based on this organisational premise, it is expected that business executives and financial managers should report corporate performance to all stakeholders that have diversified interests in and contribute substantially towards the day-to-day operations of an organisation. RESEARCH METHODOLOGY Initially, some exploratory research (Babbie and Mouton, 2007) was conducted in Malawi to ascertain the general perspectives on corporate performance as measured by economy, efficiency and effectiveness. During this exploration, 112 large Malawian companies were visited through questionnaires and interviews with business executives. The results indicated that, in general, Southern African organisations need a special orientation on management systems that are in line with a sustainable business environment.

A desk review was done of documents collected from different sources, including stock exchanges, registrars of companies, companies’ published annual reports, organisational constitutions, national statistical offices, government publications, and the internet, university publications, chambers of commerce and industry from different countries in Southern Africa. Some of the documents reviewed include Malawi’s Companies Act (Malawi Government, 1986), the South African Companies Act, No. 61 of 1973 (South Africa, 1973), Malawi’s Capital Market Development Act (Malawi Government, 1990) and the South African Stock Exchange Control Act, No. 1 of 1985 (South Africa, 1985).

The primary data collection method was a field survey methodology, using correlational research design. A cross-sectional (correlational) research design studies some phenomenon by investigating different constructs at a single time (Babbie and Mouton, 2007; Welman et al., 2005).

A Likert scale survey questionnaire was used as the main instrument to gather quantitative data for this study. The questionnaire was designed around a range of formulated statements as a means to explore respondents’ perceptions of a wide range of corporate planning and performance measurement systems. A Likert scale provides a measurement technique based on standardised response categories (Babbie and Mouton, 2007). This kind of questionnaire has also been used by other researchers on corporate performance and measurement systems or similar studies, including those of Flamholtz (2005) and Kennerley and Neely (2002). The researchers also interviewed people who have vast knowledge and experience of corporate planning and performance measurement systems, as recommended by Selltiz and Cook (1964).

In order to collect data that represented the activities of various organisations involving corporate planning and performance

Khomba et al. 6085

System Level ► Corporate Industry Ubuntu

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Figure 1. A conceptual framework of stakeholder relationships and networks. Source: Khomba (2011).

measurement systems, the sample was randomly selected from big corporations that are registered with the Registrar of Companies or

the Malawi Stock Exchange in Malawi and from companies registered with the Johannesburg Stock Exchange or the Johanne-

6086 Afr. J. Bus. Manage. sburg Chamber of Commerce in South Africa. A limited number of companies from other countries were reached via their diplomatic missions, either in Malawi or in South Africa.

A total of 518 questionnaires were transmitted electronically to the sampled participants and then followed up for feedback. For non-responses, electronic reminders were sent via e-mail every two weeks for the two months of the questionnaire survey. The reminders increased the response rate significantly.A total of 102 hard copy questionnaires were administered through the deployment of research assistants who collected data from targeted companies. The research assistants delivered the hard copies to the business executives concerned, and thereafter collected them at an agreed time. The hard copy administration proved to be more effective in terms of response rate than the electronic copy administration. This is largely because the follow-ups were more personalised than was the case with electronic administration via e-mail. The electronic administration had a response rate of 58.5% (303 responses out of 518 transmissions), whereas the hard copy realised a response rate of 82.4% (84 responses out of 102 remittances). DATA RELIABILITY AND VALIDITY Data reliability as a measure of the internal consistency of the data constructs was determined by means of the Cronbach alpha (α) – and α coefficient above 0.7 is considered reliable (Bryman and Bell, 2007; Costello and Osborne, 2005; Field, 2009). In this study, the overall α coefficient was 0.887, which suggests that the internal consistency of the data constructs was excellent.

In terms of data validity, researchers were careful in sampling the targeted population. Though randomly done, the questionnaire was targeted at large corporations by focusing on business executives at senior management (60.7% of respondents) and middle management (37.0% of respondents), and other business executives including the board members (2.3%). Such business executives include the chief executive officers (CEOs), chief financial officers (CFOs), financial managers, management accountants, and company secretaries who are conversant with issues raised under the study; hence maintaining homogeneity of the sample. Further, a total of 71.3% of the respondents have industrial work experience of more than six years.

Though participating organisations came from different countries across Southern Africa as earlier highlighted, study statistics indicate that the Bartlett’s test of sphericity χ2 (64) = 5874.56, p<0.001 was significant for all factors indicating that we can be confident that the sample was homogenous and that multicolinearity does not exist under these survey data according to Field (2009). Thus, the Bartlett’s test of sphericity χ2 (64) = 5874.56, p<0.001 signifies that the study results are valid for any conclusive analysis and discussions. RESULTS AND DISCUSSION We present analyses and discussion of the results as emanated from empirical primary data collected during

the study. Country of origin of participating organisations The demographics of the participating organisations (Total = 387) indicate that 168 respondents (43.4%) were from South Africa, 187 respondents (48.3%) were from Malawi, and 32 (8.3%) respondents were from other African countries, which included Zimbabwe, Mozambique, Lesotho, Botswana and Zambia. As reflected in the statistics, the majority (91.7%) of respondents were in Malawi and South Africa, combined with 8.3% in other African countries. Managerial level of respondents The study targeted both senior and middle management teams, who should be conversant with issues concerning corporate planning and performance measurement systems. Other business executives, such as board members, were also interviewed during the study. However, junior employees such as supervisors and operators were not interviewed, as these levels are largely involved in the day-to-day running of organisational operations and not necessarily with corporate strategy issues.

The study demographics indicate that 60.7% of the respondents were in senior management, whilst 37.0% were middle managers and 2.3% were members of the board. The participation of the vast majority of senior management (60.7%) in this study suggests that the survey results are valid and reliable. Work experience of respondents The structured questionnaire also asked respondents to indicate their work experience in terms of the number of years that they have been serving on the organisational management team. The demographics show that most of the respondents (71.3%) had work experience in this capacity of over five years and above, whilst 40.6% of respondents have work experience of over ten years. Work experience and management knowledge are critical tenets in corporate planning and sustainability issues. Industry of participating organisations The study focused on the commercial sector, where all statements made on the structured questionnaire would be addressed. The study results indicate that all industries of the commercial sector were represented, with most of the respondents in the information and communication (19.4%), finance and insurance (17.3%), manufacturing (14.5%), and wholesale and retail trade

(13.7%) industries. The “other” industry category (9.8%) consisted largely of educational institutions, consulting groups, and health practitioners. Number of employees The participating organisations were also asked to indicate the number of their employees, as this data provided a way of assessing the size of the organisation. However, some organisations, especially those that are service-oriented, are not labour intensive, but rather capital intensive, as most of their business processes are automated – this is very typical of financial institutions.

The results indicate that the majority (84.2%) of the respondents have over 100 employees. Furthermore, the data indicate that 64.1% employ more than 400 people, and the majority (57.6%) employ more than 500 people. The findings also indicate that 27.6% of respondents employ over 1 000 people, comprising the biggest category of the organisations. The afore-mentioned statistics show that the majority of participating organisations can be classified as large-scale companies, rather than as small and medium entreprises (SMEs). Organisational stakeholders Each participant was asked to indicate the stakeholders that they consider when executing their corporate planning and performance measurement. The results indicate that some of the popular stakeholders include external shareholders (99.0%), auditors (90.2%), competitors (78.6%), regulatory bodies (78.0%), the community (69.5%) and debt providers (66.7%). However, the majority of the respondents (69.3%) indicated that they do not consider the natural environment as their main stakeholder.

Further industry analysis shows that a lack of recognition of the natural environment as a stakeholder is prevalent amongst the service industries, such as the tourism and hospitality industry (100.0% “disagree”), the real estate industry (100.0% “disagree”), and the financial and insurance industry (78.7% “disagree”). Only among organisations from the manufacturing (60.7% “agree”), mining and quarrying (57.9% “agree”), and transport and storage (71.8% “agree”) indicate that they include the natural environment as the main stakeholder, with the rest indicating that they do not.

The industrial analysis by country shows that most organisations in Malawi (76.5%), South Africa (60.7%) and other African countries (71.9%) indicated that they do not consider the natural environment as their main stakeholder. The afore-mentioned statistics demonstrate that most organisations disregard the natural environment as a primary source of capital, confirming the findings of a study by Epstein and Wisner (2001). The present status of focus on issues relating to the natural environment should be a source of serious concern, as it

Khomba et al. 6087 may be a recipe for the sacrifice of long-term corporate sustainability. Corporate image for maintaining and promoting environmental protection The study found that few agree that their organisations are respected for maintaining and promoting environmental protection. A total of 44.2% agree (20.2% “agree” and 24.0% “strongly agree”) with the statement. The results reveal that a total of 27.7% disagree (25.6% “disagree” and 2.1% “strongly disagree”), whilst 28.2% “Somehow agree” with the afore-mentioned statement. The findings in this analysis resonate with the afore-mentioned findings regarding the disregard on environmental reporting systems by many organisations (69.3%). This lack of corporate respect would be a result of either a corporation’s disregard for environmental protection matters or, if it is engaged in such environmental protection projects, there is non-disclosure of such information through the corporate external reporting systems, thus ignoring the recommendations of the King III Report - Institute of Directors in Southern Africa (2009). A high focus on natural environmental activities by the corporation would enhance the sustainability of a business for the current and future generations. Organisational focus on protection of the natural environment as a stakeholder With regard to the natural environment as a stakeholder, 48.3% agree (31.5% “agree” and 16.8% “strongly agree”) that they focus on the protection of the natural environment. Moreover, the study results indicate that a total of 30.5% (21.7% “disagree” and 8.8% “strongly disagree”) of respondents do not focus on protecting the natural environment, whilst 21.2% “somehow agree” with the statement. This analysis demonstrates that the natural environment is disregarded by many corporations, confirming the findings of a study by Epstein and Wisner (2001). It is therefore not surprising that the King III Reports on governance recommends that corporations should also report on environmental and social elements apart from financial bottom line in their corporate reports (Institute of Directors in Southern Africa, 2009). As the natural environment determines the sustainability of future business (Stead and Stead, 2004; White, 2005), corporate planning must capture elements of the natural environment as well. Measurement of an organisation’s impact on the natural environment Many corporations are not able to measure the impact of their operations on the natural environment. The study

6088 Afr. J. Bus. Manage. results indicate that only 41.4% agree (26.4% “agree” and 15.0% “strongly agree”) that they are able to objectively measure the impact of their operations on the natural environment. A total of 26.7% disagree (20.2% “disagree” and 6.5% “strongly disagree”), while 32.0% “somehow agree” with the statement. The afore-mentioned analysis of results demonstrates that despite the fact that some organisations have embraced environmental measurement systems, many corporations are still experiencing problems in measuring the environmental impact of their activities (Senge et al., 2007; Vernon et al., 2003). This could be largely as a result of the complexity that is involved in environmental measurement systems.

The analysis also indicates that there is a need to redesign current measurement systems so that corporations will be able to measure the vital environmental impact of their operations, and meet the requirement for environmental reporting as an aspect of good corporate governance as recommended by the King III Report - Institute of Directors in Southern Africa (2009). Organisation’s financial support for natural environmental projects A total of 45.9% of the respondents indicate that their organisations reserve funds for the preservation of the natural environment, whilst 28.5% do not. Out of the respondents, 25.6% indicate that they “somehow agree” that their organisations allocate funds towards natural environmental projects.

These research findings demonstrate that issues of environmental preservation and protection are in transition, as many organisations are still not putting much emphasis on the issue of environmental protection. This finding is worrying, because the sustainability of current and future businesses and generations depends on how organisations conserve the natural environment today. The protection of the natural environment would improve the likelihood of the continued provision of many raw materials and other inputs for production, which is a fundamental facet in sustainability science. CONCLUSION AND RECOMMENDATIONS Corporate sustainability is an important ingredient towards the survival of organisations as well as future generations of humanity. In general, corporate sustainability programmes are supposed to balance the need for economic growth with environmental protection and social equality. These three facets of economic, environmental and social dimensions form the foundation of any corporate sustainability endeavours for the current and future generations. However, the study findings reveal that most organizations in Southern Africa lack

a holistic strategic approach towards addressing corporate sustainability issues. The major finding in this study is that the natural environment is not regarded as a main stakeholder by most organisations in Southern Africa. An overwhelming majority of 69.3% indicated that they do not consider the natural environment as their main stakeholder in their planning and performance measurement systems. Further analysis shows that this response is prevalent amongst the service industries, such as the tourism and hospitality, real estate, and financial and insurance industries. However, the majority of organisations from the manufacturing, mining and quarrying, and transport and storage industries indicate that they see the natural environment as their main stakeholder. The industrial analysis by country shows that most organisations in Malawi (76.5%), South Africa (60.7%) and other African countries (71.9%) indicated that they do not consider the natural environment as their main stakeholder.

Furthermore, most organisations indicated that they do not have proper measurement systems to assess the impact of their operations on either the natural environment or society. Only 41.4% of organisations indicated that they are able to objectively measure the natural environmental impact of their operations. The analysis of the results demonstrates that while some organisations have embraced environmental measurement systems, others still experience problems in measuring the environmental impact of their activities. This could be a result of a de-emphasis on and/or the complexity that is involved in such measurement systems.

The analysis of the findings also indicates that there is a need for an emphasis on natural environmental elements as well as the development of performance measures related to the natural environment in corporate management systems.

If this trend of disregarding the natural environment as a stakeholder continues, the sustainability of future business operations and generations may be severely jeopardised. Thus, there is a lot to be done by organisations in Southern Africa to achieve sustainable utilisation of ecosystems on which their business operations depend. It is also imperative that all corporations adhere to good corporate sustainability reporting systems that embrace all the three areas on the economic, environmental and social elements as enshrined by the Institute of Directors in Southern Africa (2009). It is through wide sensitisation processes and strict adherence of laid provisions of good corporate governance that corporate sustainability will be enhanced in Southern Africa. REFERENCES Adewunmi YA, Omirin M, Koleoso HA (2012). Developing a sustainable

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The effects of relationship marketing on relationship quality in luxury restaurants

Seyed Alireza Mosavi* and Mahnoosh Ghaedi

Department of Business Administration, Firoozabad Branch, Islamic Azad University, Firoozabad, Iran.


The main purpose of this research is to develop a new model to examine the impact of relationship marketing underpinnings namely: customer orientation, expertise, food quality, price fairness and physical environment on the quality of firm-customer relationship as well as the levels of contribution of these underpinnings and explore the effects of relationship quality on customer satisfaction, word-of-mouth and customer loyalty. The new model of relationship quality based on literature was developed and tested empirically among 25 luxury restaurants in Shiraz (Iran). The questions used in this study were taken from the relevant literature which contained 36 questions addressing all the variables. Face-to-face interview of customers was administered in the luxury restaurants for a period of two weeks. A total of 830 usable questionnaires were collected. The findings suggest that relationship quality most influenced by customer orientation (29%), expertise (24%), food quality (20%), price fairness (15%) and physical environment (12%). Beside, this study shows that the most impacts of relationship quality are on customer satisfaction (53%) customer loyalty (36%), word-of-mouth (20%). Also customer loyalty most influenced by customer satisfaction (42%). Customer satisfaction also has an effect on word-of-mouth (33%). Luxury restaurants can build and maintain quality customer relationship through customer orientation, expertise, food quality, price fairness and physical environment. The outcome of the study can help luxury restaurants in developing effective strategies for enhancing the quality of firm-customer relationships. It has been suggested that in order to keep customers satisfied firms should constantly improve overall relationship quality. By comparing the levels of contributions of the relationship marketing underpinnings, luxury restaurants are now able to decide on the level of attention and effort to be assigned to each, based on their importance. Key words: Customer orientation, expertise, food quality, price fairness, physical environment, relationship quality, customer satisfaction, customer loyalty, luxury restaurant.

INTRODUCTION The study and practice of relationship marketing has experienced explosive growth over the last decade (Srinivasan and Moorman, 2005; Palmatier et al., 2006). The impetus for the heightened interest in relationship marketing seemingly comes from studies that have demonstrated significant increases in profits from increases in customer retention (Rigby et al., 2003; Winer, 2001). Relationship marketing states that firms should identify their most profitable customers and then customize marketing strategy on the basis of customer asset value *Corresponding author. E-mail: [email protected].

(Greenleaf and Winer, 2002; Lewis, 2005). The goals of a relationship marketing strategy are to get and keep valu-able customers. Just to maintain one’s block of business, it is necessary to generate new customers because some existing customers will be lost. The intense competitive nature of today’s business environment has resulted in a greater need for firms to build closer relationships with customers (Wong and Sohal, 2002). However, only high quality firm-customer relationship would deliver the needed competitive edge. This occurs when the firm begins leveraging firm-customer relationship to gain privileged information about customers and thereby better understand their needs and serve them more satisfactorily than competition (Ndubisi, 2007).

Quality relationship therefore ensures that: the firm is close enough to customers to be able to correctly sense and serve their needs more effectively; and customers stick with the firm from which they enjoy a good relationship. Customer orientation involves practicing the modern marketing concept at the individual level (Saxe and Weitz, 1982), which should foster long-term relationships with customers based on customer-driven value creation (Jonson, 1997). It is generally believed that customer orientation should foster stronger relationships, and that relationship quality is an indicator of a stronger relationship (Anderson, 1996). The model proposed and tested in this study examines employee customer orientation and expertise as key antecedents of interpersonal relationship quality, which in turn leads to greater customer satisfaction (Macintosh, 2005). Further, the model tests the expected link between customer satisfaction and two key relationship outcomes, customer loyalty and word-of-mouth (WOM). However, the model also tests the direct effects of interpersonal relationship quality on customer loyalty and WOM (Gremler et al., 2001).

By examining these linkages, the study hopes to provide a clearer understanding of the relationships between customer orientation, relationship quality, and positive marketing outcomes at the organizational level. Delivering superior service and ensuring higher customer satisfaction have become strategic necessities for companies. The economic benefits of customer satisfact-ion and customer loyalty are immense. Loyal customers recommend new customers to a company, exhibit preference for it over its competitors and repurchase from it (Zeithaml et al., 1996). Cultivating loyalty and retaining customers is important in any business (Reibstein, 2002). Many studies have explored and confirmed the relation-ships from service quality to customer satisfaction and further to customer loyalty and willingness to recommend in a consumer market context (Fornell, 1992; Rust et al., 1995). However several important issues in this line of research remain to be addressed and empirically tested. In services, word-of-mouth (WOM) frequently has a significant impact, both positively and negatively, on the acquisition of new customers. Therefore, as Hennig-Thurau et al. (2002) suggest, loyalty and WOM are two key service relationship outcomes.

This research extends prior literature by investigating possible antecedents of customer WOM behaviors. Customer WOM is arguably one of the most important outcomes of customer-firm relationships (Brown et al., 2002; Reichheld, 2003; White and Schneider, 2000). Managers need to be aware of the ability that relationship benefits and service relationship quality may have to increase customer WOM propensity. Kim et al. (2006) was one of the first studies to examine predictors and outcomes of relationship quality within the luxury restaur-ant industry. Iranian consumers were used as respon-dents. The study developed both conceptual and structural

Mosavi and Ghaedi 6091 models to examine the mediating effect of relationship quality on a number of relationship management activities and outcomes. The purpose of this paper is to apply the measurement model originally tested with Iranian customers to confirm that the predictors of relationship quality for luxury restaurants are valid. This study also examines the relative importance of each predictor of relationship quality, and identifies strategies for luxury restaurants that should enhance the level of customer satisfaction, customer loyalty and word-of-mouth. LITERATURE REVIEW Relationship marketing is an important strategy for organizations that strive to remain competitive in today’s marketplace (Kale, 2004). The increased interest in relationship marketing is due in part to the important influence of customer satisfaction on customer loyalty (Gustafsson et al., 2005). Shani and Chalasani (1992) define relationship marketing as “an integrated effort to identify, and build up a network with individual consumers 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”. Morgan and Hunt (1994) use a more general definition of relationship marketing by defining it as “all marketing activities directed toward establishing, developing, and maintaining successful. relational exchanges”.

The present study focuses on “relationship quality” as a relationship outcome and an overall means of assessing the strength of a relationship between firm and customer (Garbarino and Johnson, 1999). There is, as yet, no clear consensus in the literature on the set of dimensions that comprise the construct of “relationship quality” (Hennig-Thurau et al., 2002). The importance of relationship satisfaction and loyalty as indicators of the higher-order construct of relationship quality has been stressed by various authors (Shamdasani and Balakrishnan, 2000; Hennig-Thurau et al., 2001). Other researchers have added word-of-mouth as a dimension of relationship quality (Roberts et al., 2003; Hewett et al., 2002). In the same context, de Wulf et al. (2001) assumed that better relationship quality is accompanied by greater satisfaction, loyalty, and word-of-mouth – pointing out that, although these three attitudinal dimensions are distinct, consumers tend to “lump” them together (de Wulf et al., 2001). On the other hand, Woo and Ennew (2004), conceptualised relationship quality as a higher-order construct using cooperation, adaptation and atmosphere as first-order constructs determining overall relationship quality. They provided evidence of a direct and positive influence of relationship quality on service quality but failed to establish the same link with satisfaction and behavioral intention.

Researchers generally agree that customer satisfaction is a key factor in determining long-term business success

6092 Afr. J. Bus. Manage. (Reynolds and Arnold, 2000). The salesperson with which the customer has the most contact has been identified as a critical determinant of the degree to which customers experience satisfaction (Williams and Attaway, 1996). Since the salesperson is a critical determinant of customer satisfaction (Jap, 2001), it can be argued that the salesperson’s customer-orientation level would be a significant factor in determining customer satisfaction levels.

Such an argument is based on the fact that sales-people possessing greater levels of customer orientation have higher ratings of customer satisfaction (Gillis et al., 1998). In the marketing literature, loyalty has been widely recognised as being of the utmost importance (Howard and Sheth, 1969).

Reichheld (1996) studied the positive effect on profits of having a loyal customer base. Aaker (1991) discussed the role of loyalty in the brand equity process, specifically noting that customer loyalty reduced marketing costs. Fornell and Wernerfelt (1987) noted that the costs of customer retention are substantially less than those of customer acquisition. In addition, loyalty produces positive word-of-mouth recommendation, and greater resistance among loyal consumers to competitive strategies from rival suppliers (Oliver, 1999; Dick and Basu, 1994).

Defined as any positive communication about a service firm’s offerings, word-of-mouth (WOM) is considered a key relational outcome (Hennig-Thurau et al., 2002; Harrison-Walker, 2001). As an information source, WOM is a powerful input into decision making. With consumers exposed to numerous marketer-generated communi-cations, which are designed to gain attention and alter behavior, WOM stands out as a highly trusted information source.

Word-of-mouth assists in attracting new customers which is important for a firm’s long term economic success (Hennig-Thurau et al., 2002). It also serves to reduce cognitive dissonance for existing customers (Wangenheim, 2005).

Because cognitive dissonance, is experienced by individuals, over the concern of having made a wrong decision (Festinger, 1957) customers spread WOM as they try to convince themselves of the customers to reduce their post-decision dissonance purchase decision they made (Wangenheim, 2005).

Evidently, WOM is one of the strategies used by service providers whose offerings are largely intangible, and experience or credence based. In these services customers rely heavily on the advice and suggestions from others who have experienced the service (Kinard and Capella, 2006). Customer orientation Donavan and Licata (2002) describe customer orientation as a personality variable that reflects the service worker’s

disposition to meet customer needs. A number of researchers have also reported that a customer-oriented firm outperforms competitors and is more likely to establish long-term, mutually beneficial relationships with customers (Bejou and Palmer, 1998; Saxe and Weitz, 1982). For service providers, employees’ customer orientation is commonly identified as an indicator of relationship quality (Parsons, 2002). Employees who are able to provide prompt and courteous service are likely to enhance customer satisfaction.

A number of studies emphasize the important influence of customer orientation on relationship quality (Gustafsson et al., 2005). Kim et al. (2006) found employees’ customer orientation to have a very strong influence on relationship quality. Customers expect excel-lent service via courteous and knowledgeable employees (Bove and Johnson, 2000). Therefore, it is expected that firms which are highly customer oriented will be able to enhance the overall relation quality with the customers. Customer orientation is a focus on discovering and meeting customers’ purchase needs while keeping their best interests in mind (Saxe and Weitz, 1982). Kelley (1992) contended that management could positively or negatively influence customer orientation. The positive relationship of customer orientation to job performance in a variety of fields has been well established (Boles et al., 2001; Joshi and Randall, 2001). Researchers also have proposed antecedents to salespeople’s customer orientation including job satisfaction, organizational commitment (Bettencourt and Brown, 2003), emotional intelligence (Rozell et al., 2004), organizational culture (Williams and Attaway, 1996), and motivation and sales skills (Pettijohn, 2002).

Customer orientation is initially developed in personal selling management and is often regarded as an indicator of the quality of customer–salesperson relationships. Customer orientation refers to the extent to which sales-people adjust their sales strategies to help customers make purchase decisions that will satisfy their needs (Saxe and Weitz, 1982). Salespeople that are customer-oriented are able to empathize with customers and are concerned with satisfying their needs better than would their competitors (Wray et al., 1994). Driver (2001) has noted that customer orientation has a significant impact on the relationship quality in a number of studies. Bejou and Ingram (1996) use artificial neural network analysis to investigate the determinants of relationship quality and find that the degree of customer orientation has a significant impact on the relationship quality. Kim et al. (2006) found employees’ customer orientation to have a very strong influence on relationship quality for luxury restaurants. Customers of luxury restaurants expect excellent service via courteous and knowledgeable employees. As a result, a customer-oriented dining staff will have a positive influence on customer satisfaction and customer loyalty (Bove and Johnson, 2000). There-fore, it is expected that restaurants which are highly customer oriented will be able to create a high level of

customer satisfaction and enhance the overall relation quality with their customers (Meng and Elliott, 2008). H1: There is a significant positive relationship between customer orientation and relationship quality. Expertise Prior research on relationship quality (Crosby et al., 1990) suggests that contact person expertise is a signifi-cant antecedent of relationship quality. Other research suggests that expertise is perhaps the most important antecedent of relationship quality (Doney and Cannon, 1997) and has been found to be related to satisfaction at the individual level (Macintosh, 2002; Macintosh, 2005). Experienced and knowledgeable employees can reduce customers’ perceived uncertainty and anxiety, which may lead to higher customer satisfaction and loyalty. There-fore, the level of expertise possessed by employees including knowledge, experience or skills relevant to a particular domain or activity is a vital determinant of relationship quality (Cheng et al., 2008). H2: There is a significant positive relationship between expertise and relationship quality. Food quality Research has shown that food quality is often the most important factor impacting customer loyalty with regard to restaurant choice (Clark and Wood, 1999; Mattila, 2001). MacLaurin and MacLaurin (2000) also concluded that food quality was one of nine important elements for theme restaurants in Singapore. These studies demonstrate the importance of food quality in developing customer satisfaction and customer loyalty within the restaurant industry. Based on previous research, it is hypothesized that food quality has a significant influence on the relationship quality restaurants are able to create with their customers (Meng and Elliott, 2008). H3: There is a significant positive relationship between food quality and relationship quality. Price fairness Perceived price fairness is a psychological factor that plays an important role in consumers’ reactions to price (Kim et al., 2006). Ranaweera and Neely (2003) found that perceived reasonable price has a positive influence on customer retention. Similarly, Oh (2000) suggests that price fairness has a positive impact on purchase intention through the mediating role of customer value. Bhattacharya and Friedman (2001) also argue that perceived price fairness can be used to enhance profits

Mosavi and Ghaedi 6093 and customer satisfaction. Organizations that offer different prices to various customers may create resentment among their customers, thus negatively impacting customer satisfaction. Given the previous findings, it is hypothesized that perceived price fairness has a direct impact on the level of relationship quality between luxury restaurants and their customers. H4: There is a significant positive relationship between price fairness and relationship quality. Physical environment Research has shown that the physical environment for firms within the hospitality industry can influence overall customer satisfaction (Garbarino and Johnson, 1999). Specific to the restaurant industry, Stevens et al. (1995) demonstrate the importance of physical facilities on the perceived level of service quality provided by restaurants. Tangibles, such as decor, dining area comfort, and cleanliness of both the dining area and restrooms, were all shown to impact perceived service quality. Because customers of luxurious restaurants typically pay higher prices for their meals, their expectations related to com-fort, decor, and cleanliness are higher than for customers of non-luxurious restaurants. Therefore, it is hypothesized that the physical environment of luxury restaurants will have a positive and significant impact on the relationship quality between luxury restaurants and their customers (Meng and Elliott, 2008). H5: There is a significant positive relationship between physical environment and relationship quality. Relationship quality and customer satisfaction Relationship quality refers to a customer’s perceptions of how well the whole relationship fulfils the expectations, predictions, goals, and desires the customer has concerning the whole relationship (Jarvelin and Lehtinen, 1996). It in turn forms the overall impression that a customer has concerning the whole relationship including different transactions. Gummesson (2002) identified two dimensions of relationship quality in the service interface. He defined them as professional relations and social relations. The former relationship is grounded on the service provider’s demonstration of competence, while the latter is based on the efficacy of the service provider’s social interaction with the customer.

Relationship quality is considered as an overall assessment of the strength of a relationship (Garbarino and Johnson, 1999) and captures the essence of relationship marketing (Jap et al., 1999). Although discussion regarding the conceptualization of relationship quality remains unresolved, there is agreement that relationship quality is a “higher-order construct consisting

6094 Afr. J. Bus. Manage. of several distinct, although related dimensions” (Dorsch et al., 1998) and different dimensions need to be combined to an overall relationship quality measure (Walter et al., 2003). Relationship quality is viewed as a three-dimensional construct composed of customer satisfaction, word-of-mouth and customer loyalty. Kim and Cha (2002) investigate the antecedents affecting relationship quality between employees and customers and the consequences influenced by the relationship quality. Tseng (2005) explores the effects of relationship marketing tactics on enhancing relationship quality in the service industries. They are included as constitutional elements of relationship quality.

Customer satisfaction is defined as a judgment that a product or service feature, or the product or service itself, provides a pleasurable level of consumption related fulfillment including the level of under or over fulfillment (Oliver, 1997). Satisfaction is thus a function of relative level of expectation and perceived performance. Customer satisfaction is a complete evaluation of the accumulated purchase and consumption experience, which reflects a comparison between the sacrifice experienced and the perceived rewards (Chitty et al., 2007).

The level of customer satisfaction reflects perceptions and attitudes formed from previous service experiences, and influences repurchase intentions (McGuire, 1999). Service incident or a long-term service relationship (Rust and Oliver, 1994). Customer satisfaction is an important element in service delivery because understanding and satisfying customers’ needs and wants can generate increased market share from repeat custom and referrals (Barsky, 1992). Satisfaction is defined as the customer’s overall evaluation of his/her experience with the firm. Customers also make assessments of their satisfaction with the contact person that they interact with. Satis-faction with the contact person is suggested as a key component of relationship quality. Since in many service organizations, contact service people serve as the key representative of the firm (Macintosh, 2005). Prior research on luxury restaurants has shown that relation-ship quality is positively related to customer satisfaction (Kim et al., 2001; Kim et al., 2006). H6: There is a significant positive relationship between relationship quality and customer satisfaction. Customer loyalty Oliver (1997) defines loyalty as a deeply held commit-ment to rebuy or repatronise same-brand or same brand-set purchasing despite situational influences and marketing efforts; having the potential to cause switching behavior. The marketing literature suggests that customer loyalty can be defined in two distinct ways (Jacoby and Kyner, 1973). These are described as the “behavioral approach” and the “attitude approach”. According to the

behavioral approach, customer loyalty is defined by the actual repurchase behavior of the customer (Cunningham, 1961). It is assumed in this theory that the preference structure of the consumer is reflected in the consumer’s behavior. One of the strengths of this approach is that it offers a relatively objective measurement of customer loyalty (H ّst and Andersen, 2004). The attitude-based approach, on the other hand, defines customer loyalty as intention to repurchase (Fournier and Yao, 1997). According to this approach, merely describing the actual behavior of the consumer does not suffice, but a proper analysis and description is clearly required of the under-lying attitudes/preference structure of the consumer, if the loyalty concept is to have a real explanatory value and does not just – in the worst case – happen to be based on coincidence. The attitude-based approach has later been extended to incorporate the concept of “relative attitude” (Dick and Basu, 1994). Acknowledging that loyalty is not an unambiguous concept and that both the attitude-based and the behavioral approach deserve merit. They have developed a model for loyalty that integrates both of these approaches (Chitty et al., 2007).

Previous research suggests that customer satisfaction can influence customer loyalty and future purchase intentions (Abdullah et al., 2000). Several authors have suggested that it is the most important element of custo-mer loyalty (Anderson and Fornell, 1994). Hypothesis 7 examines potential direct effect of relation-ship quality on customer loyalty. This hypothesis is premised on the prior research findings that suggest that a strong relationship at the interpersonal level can represent a bonus to the firm in the sense that it provides an additional bond that ties the customer to the firm (Macintosh and Lockshin, 1997). H7: There is a significant positive relationship between relationship quality and customer loyalty. Word-of-mouth Word-of-mouth (WOM) refers to the informal communication between consumers about the characteristics of a business or a product (Westbrook, 1987). The goals of a relationship marketing strategy are to get and keep valuable customers. Just to maintain one’s block of business it is necessary to generate new customers because some existing customers will be lost. Hennig-Thurau et al. (2002) suggest that WOM is a key service relationship outcome. Considering the importance of WOM in services, most service providers have done little to implement specific strategies to foster WOM (Gremler et al., 2001). Most have assumed that satisfaction with the service alone drives WOM. Gremler et al. (2001) suggest and offer empirical support that the interpersonal relationship between contact employees and customers can help foster WOM communication. The recent focus in the literature on relationship marketing

Mosavi and Ghaedi 6095

Expertise

Customer Orientation

Food Quality

Price Fairness

Customer Loyalty

Customer Satisfaction

Word-of-Mouth

Physical Environment

H2

H3

H4

H6 H9

H10

H8

H5

H1

H7

Relationship Quality

Figure 1. Hypothesized model.

highlights potential responses that can emerge from efforts directed at forming relationships with consumers (Verhoef et al., 2002). Of all these responses, some scholars suggest that WOM may be among the most important (White and Schneider, 2000). The basic idea behind WOM is that information about products, services, stores, companies, and so on can spread from one consumer to another. Reichheld (2006) argues that the ultimate test of strong customer relationships is their willingness to recommend the firm. Word-of-mouth represent the favorable personal recommendations from one individual to other individual regarding a firm and its products and services. Word-of-mouth is well understood as a credible source of communications and plays an instrumental role in new customer acquisitions (Reichheld and Sasser, 1990).

Many firms focus on building relationships with customers to enhance positive WOM. Research suggests that customer-employee relationships enhance positive WOM among customers (Gremler et al., 2001). Furthermore, customers who feel quality relationships with service providers are more likely to be advocates of the firm, which is often shown through positive WOM (Reynolds and Beatty, 1999). Hence, it is important to investigate how the quality of a relationship influences WOM. Many studies have shown that aspects of relation-ship quality (satisfaction, trust) influence WOM (Hennig-Thurau et al., 2002; Sui and Baloglu, 2003). Since relationship quality is a combination of satisfaction, trust, and commitment, we suggest that relationship quality

enhances customer’s likelihood of engaging in WOM. Indeed, prior research on luxury restaurants has shown that relationship quality is positively related to WOM (Kim et al., 2001; Kim et al., 2006). H8: There is a significant positive relationship between relationship quality and word-of-mouth. The conceptual framework in Figure 1 suggests that relationship quality influence customer satisfaction and, subsequently, customer loyalty (Cronin and Taylor, 1994; Rust and Zahorik, 1993). Recent research in services supports this important linkage (Hennig-Thurau et al., 2002). In order to identify the link between satisfaction and loyalty in this study, satisfaction is defined as a customer’s post-consumption evaluation of a service, which includes cognitive and affective components, while loyalty is treated as a customer’s commitment to a service provider, which develops from satisfaction and includes the cognitive, affective and conative (intention) components that lead to repeat purchase. The literature has established a strong linkage between customer satis-faction and customer loyalty (Cronin and Taylor, 1994). Impact of WOM is particularly important in services (Gremler, 1994; Heskett et al., 1997), where consumers are more likely to be dependent on the communication of others. Past research supports a linkage between customer satisfaction and word-of- mouth (File et al., 1994; Hennig-Thurau et al., 2002).

The last two hypotheses examine potential direct effects


Table 1. LISREL results for the measurement model.

Model Chi-square DF Ratio Sig. RMSEA RMR CFI IFI NNFI Result

Measurement 1076 377 2.85 0.00 0.07 0.07 0.95 0.95 0.94 Accept

Note: RMSEA, root-mean-square error of approximation; RMR, root-mean-square residual; CFI, comparative fit index; IFI, incremental fit index; NNFI, non-normed fit; DF, degrees of freedom.

effects of customer satisfaction on customer loyalty and word-of-mouth. Specifically, it is suggested that customer satisfaction has a direct influence on customer loyalty and word-of-mouth.

H9. There is a significant positive relationship between customer satisfaction and customer loyalty. H10. There is a significant positive relationship between customer satisfaction and word-of-mouth. RESEARCH METHODOLOGY Sampling and data collection The effective sample analyzed consisted of 952 customers of 25 major luxury restaurants in Shiraz (Iran). Each respondent was asked to recall his/her most recent experience with a luxury restaurant. A total of 830 usable questionnaires were collected. Male respondents made up 62% of the sample, with 38% being female. The ages of respondents ranged from teenagers to senior citizens, with the most common age groups consisting of 20 to 38-year olds (69% of respondents) and 41 to 60-year olds (31% of respondents).

All measures were adopted or adapted from previous research. To ensure conceptual equivalence and word-clarity, we conducted translation and back-translation. The translated questionnaire was evaluated by two bilingual faculty members to examine its face and content validities. Before the main study, 32 MBA students having similar backgrounds with people in the sample were recruited to pretest the questionnaire in order to avoid vague concepts and keep the questions as simple, specific, and concise as possible (Podsakoff et al., 2003). All scale items for, customer orientation, expertise, food quality, price fairness, physical environment, relationship quality, customer satisfaction, customer loyalty and word-of-mouth were measured using a 5-point Likert-type scale, with 1 indicating “strongly disagree” and 5 indicating “strongly agree”. The questionnaire Thirty-six items were used to capture the various latent constructs (see Appendix). Four items were used to measure customer orientation (Kim and Cha, 2002; Parsons 2002). Expertise was measured by five items adapted from the scales developed by Crosby et al. (1990) and Kim and Cha (2002). Three items were used to measure food quality (Fu and Parks, 2001). Four items were used to measure price fairness (Oh, 2000) and four items were used to measure physical environment (Garbarino and Johnson, 1999). Items for relationship quality were adapted from (Garbarino and Johnson, 1999). Four items measure relationship quality. Customer satisfaction three items were adapted from Feick et al. (2001). Customer loyalty was measured via five items adapted from a measure developed by Gremler and Gwinner (2000). Word-of-mouth was measured via four items adapted from a measure developed by Gremler and Gwinner (2000).

Measurement The measurement model developed and tested with Korean consumers (Kim et al., 2006) was applied to Iranian consumers and tested simultaneously utilizing LISREL 8.72. The measurement model was estimated using summed indicators for the constructs. Three types of information were considered in assessing model fit: chi-square, measurement error, and fit indices. Since chi-square values are sensitive to sample size and likely to be significant if a large dataset is utilized, the chi-square test was not an absolute criterion in evaluating model fit. A second piece of information that was examined was measurement error. The root-mean-square error of approximation (RMSEA) and root- mean-square residual (RMR) were both used. The final piece of evidence that was examined were fit indices. The goodness of fit index (GFI), comparative fit index (CFI), incremental fit index (IFI), non-normed fit index (NNFI), and normed fit index (NFI) are important indices to evaluate and report. Further analysis was also conducted to assess the relative predicting power of the 36 individual items comprising the nine independent variables. Step-wise regression was used for this analysis. RESULTS The results for assessing model fit are shown in Table 1. The chi-square statistic of 1076.0 was significant at 377 degrees of freedom; however, chi-square is almost always statistically significant with a sample of more than 200 (Kenney, 2003). Other fit indices all demonstrate a good model fit. The fit indices of CFI, IFI, and NNFI were all high at 0.95, 0.95, and 0.94, respectively. In addition, the RMSEA and the RMRs were both relatively low at 0.07 each. Therefore, the measurement model is accepted and assumed valid for Iranian consumers.

Since the measurement model tested was deemed valid for Iranian consumers, further analysis was con-ducted to assess the relative importance of the variables. All measurement scales demonstrated high internal reliability, with Croncach alpha scores ranging from 0.81 to 0.97. Multicollinearity was also assessed for each construct and found to be in the acceptable range, with all tolerance statistics greater than 0.65 and all variance inflation factors lower than 1.55. Although not an absolute test for the importance for each predictor, standardized beta coefficients are often useful in determining the relative importance of independent variables in predicting dependent variables.

Although not an absolute test for the importance for each variable, standardized beta coefficients are often useful in determining the relative importance of indepen-dent variables in predicting dependent variables. As shown in Figure 2, "customer orientation" positively affects


Expertise

Customer Orientation

Food Quality

Price Fairness

Relationship Quality

Customer Loyalty

Customer Satisfaction

Word-of-Mouth

Physical Environment

0.24

0.20

0.15

0.36 0.42

0.33

0.20

0.12

0.29

0.53

Figure 2. Structural model.

affects "relationship quality" (beta = 0.29, p < 0.01) providing support for H1. Moreover, "expertise" significantly and positively affects" relationship quality" (beta = 0.24, p < 0.05) supporting H2. Furthermore, "food quality" positively affects "relationship quality" (beta = 0.20, p < 0.01) so H3 is supported. From H4," price fairness" shows a strong positive relationship with "relationship quality" (beta = 0.15, p < 0.05) Thus, H4 is supported. "Physical environment" has a strong positive effect on "relationship quality" (beta = 0.12, p < 0.05) therefore, H5 was supported. From H6, "relationship quality" shows a positive relationship with "customer satisfaction" (beta = 0.53, p < 0. 01) Thus, H6 is supported .The results also showed that" relationship quality" positively affects "customer loyalty" (beta = 0.36, p < 0.01) providing support for H7. "Relationship quality" was found to significantly affect "word-of-mouth" (beta = 0.20, p < 0.01), so H8 is supported. Moreover, "customer satisfaction" significantly and positively affects "customer loyalty" (beta = 0.42, p < 0.05) supporting H9. Further-more, "customer satisfaction" positively affects WOM (beta = 0.33, p < 0.01) so H10 is supported.

Exploratory analysis (maximum likelihood analysis with oblique rotation) was conducted on the items to investi-gate if the theorized value dimensions could be extracted from the data. The Kaiser-Mayer-Olkin measure of sampling adequacy was good (0.869) and Bartlett’s Test of Sphericity was significant, indicating that the items were correlated and suitable for factor analysis (Hair et

al., 1998). The correlations between the composite variables are shown in the lower triangle in Table 3. All of the correlations were significant, thus supporting the nomological validity of the constructs. DISCUSSION AND CONCLUSION The result indicates that customer orientation, expertise, food quality, price fairness and physical environment exert significant positive impacts on relationship quality. Customer orientation results in the strongest positive relationship with relationship quality, followed by expertise, and food quality. Structural equation analyses confirmed that the proposed predictors of relationship quality identified in this study are valid for Iranian consumers. Moreover, further analysis showed that customer orientation had the strongest influence on relationship quality. Individual item analysis shows that the “friendliness of dining staff” is very important to customers of luxury restaurants. Therefore, restaurants that are able to provide prompt and courteous service are likely to enhance customer satisfaction. Restaurants need to emphasize to their staff, through continual training and positive reinforcement, that providing excellent customer service is critical in the development of customer loyalty and satisfaction.

The perceived risk has prompted customers to attach particular importance to the professional capabilities and


Table 2. Measurement model results.

Construct and items Standardized loading t-value AVE α

Customer orientation 0.85 0.98

CO1 0.88 19.57 CO2 0.77 17.38 CO3 0.83 18.54 CO4 0.77 17.29

Expertise 0.81 0.94 EX1 0.73 15.72 EX2 0.86 19.22 EX3 0.81 18.39 EX4 0.74 16.15 EX5 0.85 19.74

Food quality 0.74 0.86 F1 0.79 17.98 F2 0.88 19.32 F3 0.75 17.54

Price fairness 0.86 0.91 PF1 0.67 13.59 PF2 0.86 19.17 PF3 0.77 17.63 PF4 0.61 12.76

Physical environment 0.72 0.88 P1 0.68 13.64 P2 0.62 12.58 P3 0.73 17.24 P4 0.65 13.55

Relationship quality 0.84 R1 0.8 19.24 R1 0.89 19.79 R3 0.73 17.06 R4 0.87 19.58

Customer satisfaction 0.87 0.95 CS1 0.89 19.86 CS2 0.82 19.05 CS3 0.78 17.48

Customer loyalty 0.75 0.87 CL1 0.81 19.48 CL2 0.76 17.52 CL3 0.68 13.64 CL4 0.89 19.92 CL5 0.62 12.38

Word-of-mouth 0.77 0.89 W1 0.71 16.04 W2 0.84 19.62 W3 0.65 12.53 W4 0.67 12.53


Table 3. Correlations of the study variables matrix.

Construct 1 2 3 4 5 6 7 8 9

Customer orientation 1 Expertise 87% 1 Food quality 85% 82% 1 Price fairness 79% 84% 87% 1 Physical environment 86% 63% 73% 89% 1 Relationship quality 78% 81% 62% 75% 82% 1 Customer satisfaction 75% 72% 66% 79% 75% 84% 1 Customer loyalty 64% 75% 87% 63% 67% 77% 85% 1 Word-of-mouth 79% 71% 63% 86% 86% 61% 82% 69% 1

knowledge possessed by restaurant salespersons. How-ever, having knowledgeable and competent salespersons is only a precondition for the development and maintenance of successful relationships (Hennig-Thurau, 2004). Kotler et al. (1996) also suggested that it is more difficult for service firms to train their employees to be friendly and caring than to provide them with the needed skills. The dynamic interactions between customers and employees may play an important role in affecting customers’ perceived service. More specifically, the attitudes and behaviors of service employees contribute significantly to customers’ perceived service quality (Sharpley and Forster, 2003). Once recruited, luxury restaurants need to provide their salespersons with ongoing training and development sessions in order to enhance work-related knowledge and skills in response to customers’ demands. The “quality of food” also has a strong influence on relationship quality between customer and restaurant. This finding reinforces the importance of food quality in developing customer satisfaction and customer loyalty within the restaurant industry. It is important for luxury restaurants to stress consistent food quality, so that customers have a positive experience each and every time they patronize the restaurant. Food preparation and presentation are critical factors that must be addressed in order to develop long-term relationships with loyal customers.

The physical environment of the restaurant is another important element affecting relationship building for luxury restaurants. Restaurant decor, dining area comfort, and cleanliness of the dining area and restrooms are all important elements of the physical environment that impact customer dining satisfaction. “Clean and elegant dining equipment” appears to be a top priority to patrons of luxury restaurants. Customers of luxurious restaurants typically have high expectations of comfort, decor, and cleanliness, so it is imperative that these restaurants meet the expectations of their customers.

Perceived price fairness also plays an important role in influencing customer loyalty and satisfaction. Customers appear to use perceived price fairness (that is, price charged is appropriate) as a means to evaluate customer

value. Therefore, luxury restaurants that overprice their products or offer different prices to different customers may negatively impact customer loyalty and customer satisfaction. Even though most customers are willing, and even expect to pay higher prices at luxurious restaurants, perceived value is still important to them. Luxury restaur-ants must provide customer value through consistent fair prices for top quality food and service. Restaurants that are able to do this are much more likely to develop a loyal and satisfied customer base.

Also this survey shows that relationship quality has important direct effects on customer satisfaction, customer loyalty and word-of-mouth. Restaurants mana-ger should note that customer satisfaction and customer loyalty are two constructs that develop over time and therefore require continuous monitoring and evaluation. This research reiterates the importance of considering interpersonal level variables and firm level variables in assessing marketing relationships. While it may be argued that service organizations are interested in promoting strong relationships between customers and the firm, firms cannot ignore the fact that a potentially stronger relationship can be established at the inter-personal level with the contact service employee. Similarly, in most cases one would expect that quality of the interpersonal relationship would be consistent with the customer’s assessment of the firm. However, relation-ship quality at the individual level can have important direct effects on customer loyalty and positive word-of-mouth. Since this research supports the importance of customer orientation, more research should be conducted on improving the selection, training, and motivation of customer-oriented employees.

Future research might also focus on individual differences in the importance of interpersonal relation-ships to customers, such as differences in relational preferences (Reynolds and Beatty, 1999) or perceived risk (Macintosh, 2002). Finally, additional research is needed to better understand the factors that influence word-of-mouth, particularly factors that might aid managers in attempts to successfully manage word-of- mouth (Meng and Elliott, 2008).

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6102 Afr. J. Bus. Manage. APPENDIX Physical environment (1 to 5 Likert-type scale) P1 = The restaurant has visually attractive building exteriors and parking area. P2 = The restaurant has a visually attractive dining area that is comfortable and easy to move around within. P3 = The restaurant has appropriate music and illumination in keeping with its atmosphere. P4= The restaurant has clean and elegant dining equipment. Food quality (1 to 5 Likert-type scale) F1= Quality of food and beverage is consistently high during each visit. F2 = The restaurant offers excellent taste of food. F3 = The restaurant offers excellent appearance of food. Customer orientation (1 to 5 Likert-type scale) CO1 = The dining staff is friendly. CO2 = The dining staff is always willing to help you. CO3 = The dining staff is knowledgeable and confident. CO4 = The dining staff understands your specific needs. Price fairness (1 to 5 Likert-type scale) PF1 = The food prices at this restaurant are fair. PF2 = The beverage prices at this restaurant are fair. PF3 = The price charged by this restaurant is appropriate. PF4 = The price charged by this restaurant is rational. Relationship quality (1 to 5 Likert-type scale) R1 = The quality of service at this restaurant is consistently high. R2 = The service performances at this restaurant always meet my expectations. R3 = I am concerned that the service performance will not be worth the money (reversed scored). R4 = The ingredients and quality of food at this restaurant are reliable.

Word-of-mouth (1 to 5 Likert-type scale) W1 = I am willing to recommend the services of this restaurant to my friends. W2 = I am willing to encourage individuals to dine in this restaurant. W3 = I have only good things to say about the services of this restaurant. W4 = I will encourage friends and relatives to dine in this restaurant. Customer satisfaction (1 to 5 semantic differential scale) CS1 = How would you rate your level of satisfaction with the quality of service? Very low……. Very high CS2 = How would you rate your overall satisfaction with this restaurant? Very low…….Very high CS3 = How would you rate this restaurant compared with other restaurants on overall satisfaction? Very low…….Very high Expertise (1 to 5 Likert-type scale) EX1 = The dining staffs exhibit adequate knowledge about services. EX2 = The dining staffs are adept at their work. EX3 = The dining staffs are highly qualified. EX4 = The dining staffs are competent in providing service. EX5 = The dining staffs have received substantial training. Customer loyalty (1 to 5 Likert-type scale) CL1 = In the future, I would like to dine in this restaurant. CL2 = This restaurant I have chosen has personal meaning to me. CL3 = I will recommend this restaurant to persons I know. CL4= I intend to remain a customer of this restaurant. CL5 = I will keep on dining in this restaurant as long as it offers the best interest rates for me.



The application of European customer satisfaction index (ECSI) model in determining the antecedents of satisfaction, trust and repurchase intention in five-star

hotels in Shiraz, Iran

Mojtaba Kaveh*, Seyed Alireza Mosavi and Mahnoosh Ghaedi

Department of Business Administration, Firoozabad Branch, Islamic Azad University, Firoozabad, Iran.


The main purpose of this study is to examine the relationships of several antecedents of satisfaction, trust and repurchase intention in five-star hotels in Shiraz, Iran. A series of hypotheses was developed from the services marketing literature and built into a 40 item questionnaire administered to 509 customers staying at the five-star hotels in Shiraz, Iran. Each variable is measured using a 7-point Likert-scale: Image (4 items), technical dimension (6 items), repurchase intention (2 items), trust (5 items), price (4 items), perceived value (8 items), functional dimension (5 items) and customer satisfaction (6 items). The European customer satisfaction index (ECSI) was used to measure the strength and direction of the determinants of customer satisfaction trust, and repurchase intention. Goodness of fit for the structural models of hypothesized model shows promising findings. The findings suggest that perceived value most influenced by Image, technical dimension, functional dimension and price. Beside, this study shows that customer satisfaction most influenced by perceived value. Also customer satisfaction has an effect on trust and repurchases intention. Key words: Image, customer satisfaction, repurchases intention, functional dimension, technical dimension, price, trust, perceived value.

INTRODUCTION Customer satisfaction has been extensively studied for the last four decades. Seminal articles, particularly, Oliver (1997) on customer satisfaction laid the foundation for numerous studies on the construct. Relatively more recently, studies have enunciated the constructs of adjusted expectation (Yi and La, 2004), trust (Kennedy et al., 2001; Singh and Sirdeshmukh, 2000), and their linkages to satisfaction and repurchase intention (Lambert-Pandraud et al., 2005; Tsai et al., 2006; Yi and La, 2004). Thematically, these constructs and their interrelationships have been prominently featured in the customer behavior literature, as one would expect. Still, our understanding of the mediating roles between customer *Corresponding author. E-mail: [email protected].

satisfaction and repurchase intention, which is also central for shopping behavior, is much more limited. More specifically, a number of potential mediating variables that are evident in the literature should be addressed. The literature is uncertain regarding potential mediating constructs between satisfactions and repurchases intention in different contexts (Lin and Wang, 2006).

Following Oliver (1980, 1981), a number of studies have confirmed the importance of customer satisfaction on firm profits. Scholars have critically examined these constructs in terms of their impact on customer profitability and firm performance. Although, numerous academic studies offer a positive portrait of the effects of satisfaction on firm performance (Hsu, 2008; Jiang and Rosenbloom, 2005; Kim et al., 2006). While the import-ance of these concepts for business has been recognized and established, a full understanding of the relationship

6104 Afr. J. Bus. Manage. between customer satisfaction and repurchase intention is still essential. Although, customer satisfaction has been regarded as an antecedent of repurchase, Yi and La (2004) assert that such traditional beliefs need to be challenged as counter arguments arise that higher customer satisfaction does not necessarily result in higher repurchase. Evidence is also supported by (Jones and Sasser, 1995). Yi and La (2004) also suggest that investigating new paradigm of post-purchase satisfaction is necessary since the link between customer satisfaction and repurchase intention seems to be more complex than expected (Anderson and Srinivasan, 2003). One recent research outlined by Seiders et al. (2005) confirms that the relationship between two parties is contingent on the mediating effects of several variables. Their study focused mainly on consumers’ purchasing situation and their income in a retail context, but consumers’ psychological judgments may also play a crucial role in building the relationship between satisfactions and repur-chase. Taking into account findings from prior research, an evaluation of the determinants of the customer satisfaction-repurchase relationship is necessary to further our understanding in this context (Ha et al., 2008).

Trust is one of the factors that differentiate relationships from transactions (Delgado-Ballester and Munuera-Alema, 2001; Garbarino and Johnson, 1999; Morgan and Hunt, 1999; Sirdeshmukh et al., 2002). Any personal relationship, whether interpersonal or between a person and a company, is built on trust. In a marketing context it is impossible to completely detach trust from satisfaction. Trust and satisfaction are highly related constructs, and some conceptualizations of trust even include satisfaction as a component of trust (Sirdeshmukh et al., 2002). We propose that performance satisfaction is a condition of trust.

In previous discussions of relationships between company and customers, trust is usually related to a combination of company and product or service attributes: altruism, integrity, quality, and reliability (Hess, 1995; Moorman et al., 1993; Morgan and Hunt, 1994; Garbarino and Johnson, 1999). However, we typically isolate perceived quality and reliability of products or services, combine them into a summary construct, and call it satisfaction – an indication of expected future performance based on meeting past performance expect-ations. In this role, satisfaction explains some customer behavior, but not until placed in the context of trust, is satisfaction’s role in building customer relationships clarified. Hence, satisfaction with the outcomes of company interactions is antecedent to trust.

Satisfaction can either refer to transactional measures focusing on a discrete incident or a cumulative construct resulting from a series of transactions (Garbarino and Johnson, 1999). Ongoing satisfaction, which is required for trust to develop, results from consistent satisfaction with individual transactions over time, but unlike trust, there are no illusions about the motivations of the

company. Satisfaction is necessary but not sufficient for the formation of trust, and not all satisfied customers trust the company. The remaining components of trust are altruism and integrity. Unlike quality and reliability, these reflect on the company rather than what is produced by the company. Trust reflects customers’ general belief that the company is looking out for them, will do whatever it takes to make them happy, and is responsive to their needs (Hess, 1995). Trust has previously been defined in terms of confidence in, or willingness to rely on an exchange partner, arising from perceived expertise, integrity, or intentionality (Moorman et al., 1993; Morgan and Hunt, 1994). We believe that the core component of trust, differentiating it from future expected performance, is perceived motivation of the company that derives from altruism, integrity, or a combination of the two. Com-panies express these motivations by doing such things as resolving problems quickly, providing consistently good food, and greeting customers with friendly, efficient employees. Trust is important as the bridge between satisfaction and personal connection, transforming a positive transactional orientation toward a company into an enduring and close personal relationship with a company. Entrenched relationships characterized by feelings of personal connection depend largely on trust, while satisfaction, as an indicator of past and future meeting of expectations, is primarily an indicator of functional connection (Hess and Story, 2005).

The paper begins with the literature review and hypotheses development of this study. We then describe the research design and methodology. Finally, discussion and conclusion are presented. LITERATURE REVIEW In the 1990s, customer satisfaction had a significant impact on management thinking. In fact, the realisation that understanding, meeting, and anticipating customer needs was probably the most important source of sustained and competitive advantage for a company had a decisive effect on the setting of corporate priorities and practices. Among the large number of currently available approaches for studying customer satisfaction, a very promising one appears in the Swedish barometer in 1989 (Fornell, 1992). It was followed, in 1994, by the start-up of the American customer satisfaction index (Fornell et al., 1996) and more recently with the preparation of the European customer satisfaction index (ECSI) (ECSI Technical Committee, 1998). This approach computes a customer satisfaction index using an econometric model that, in terms of a causal relationship, ties a set of latent variables (like customer expectations and customer perceptions of quality and value) to a customer satisfaction index (Vilares and Coelho, 2001). The ESCI model is a conceptual framework of customer satisfaction that includes the independent variables of technical and

Kaveh et al. 6105

Figure 1. Hypothesized model.

functional dimensions, image, and price. The ECSI is derived from successful applications of the Swedish and American national customer satisfaction indices, designed to improve the measurement of customer satisfaction, and have been validated in such service industries as telecommunications, postal services and banks. Kristensen et al. (2000) describe it as “a structural equation model with unobservable latent variables ... that link customer satisfaction to its determinants and, in turn, to its consequence, namely "trust" and "repurchase intention". The original ECSI model included customer expectations as an independent variable.

The revised model suggests that perceived value has an impact on satisfaction, which, in turn, is an antecedent to customer trust and repurchase intention. Perceived value is assumed to result from a passenger’s perceptions of the core service provided (termed “technical dimensions”), perceptions of service processes (termed “functional dimensions”), the image of the service provider and the price of the accommodation. This conceptual framework is shown in Figure 1. Image Image has been defined as “the perceptions of an organization reflected in the associations held in consumer memory” (Keller, 1993). This is similar to corporate image which is assumed to influence the customer’s choice of service company when it is difficult

to distinguish between service attributes. Corporate image is established or developed in the consumer’s mind through communication and experience (Fornell, 1992). Keller (1993) suggested that image is based on customers’ beliefs about a brand, while Grönroos (2000) argued that it is a value-added antecedent determining satisfaction and trust. Despite its clear relevance to customer satisfaction, image does not appear to have been explicitly examined in much of the associated research (Chitty et al., 2007).

According to Fournier and Yao (1997), if customers believe that one institution is more credible and trustworthy than another, they develop a favorable image of that institution. That in turn tends to filter marketing communications and affects the word-of-mouth inform-ation that influences value perceptions. Kristensen et al. (2000) have noted that image has a significant impact on perceive value in a number of ECSI studies (Eakuru et al., 2008). H1: Image has a direct impact on perceive value. Technical dimension Technical (or outcome) dimensions of a service en-counter are the tangible objects that remain after the completion of the service production process, when interactions between providers and their customers have ceased (Dobholkar et al., 1996; Grönroos, 2000; Morgan

Image

Technical

Dimension

Perceived

Value

Functional

Dimension

Customer

Satisfaction

Repurchase

Intention

Trust

Price

H1

H4

H3

H2

H5

H8

H6

H7

6106 Afr. J. Bus. Manage. and Piercy, 1992). In the case of five-star hotels’ customers, the technical dimensions are what they receive or experience after checking into a five-star hotel. They include such physical facilities as availability of parking spaces or clean and comfortable accommo-dation, as well as such other benefits as a TV room, laundry and kitchen areas. One of the objectives of this research is to determine how technical dimension of a service experience influences customer’ perceived value of the services performed by five-star hotels (Bill Chitty et al, 2007). H2: Technical dimension has a direct impact on perceive value. Functional dimension The functional dimension of the service process, also described as “process quality” dictates how the service and its concurrent production and consumption process are received and experienced by customers (Dhabolkar et al., 1996; Grönroos, 2000; Morgan and Piercy, 1992). Unlike the technical dimension, which can be objectively evaluated, the functional dimension is intangible and subjectively determined by customers (Grönroos, 2000). Both dimensions of the service product influence customers’ perception of value. In earlier studies, Parasuraman et al. (1985) and Suprenant and Solomon (1987) suggest that friendliness, courtesy and personalised service are components of the functional dimension that contribute to and customer satisfaction. Some specific functional dimensions in the context of five-star hotels are the behavior of the staff, the ease of checking in and out, and whether the customers are shown to their rooms or left to find them on their own.

Due to fact that the evaluation of the functional dimension varies between individuals, it plays an import-ant role in determining customer satisfaction. A related purpose of the current research is therefore, to ascertain how the functional dimension of a service encounter affects customer’ perceived value of the service offered by a five-star hotel (Chitty et al., 2007). H3: Functional dimension has a direct impact on perceive value. Price Price is the cost incurred in making a purchase (Tse, 2001) which influences perceptions of value (Rust and Oliver, 1994). In the microeconomic literature, evidence can be found that the perception of price is closely linked to the concept of consumer surplus: ...the excess of the price which a man would be willing to pay rather than go without having a thing over what he actually does pay is

the economic measure of this satisfaction surplus (Marshall, 1890).

Price affects spending behavior because consumers’ discretionary spending limits will determine what is to be bought on the basis of the price (Monroe, 1990). How much they are willing to pay differs because their readiness depends on their needs, and the importance of the service to them at a given time and place (Heskett et al., 1997). As a result, consumers, particularly inex-perienced ones, tend to base their expectations and perceptions of image, quality and value on price (Dodds et al., 1991; Monroe, 1990; Zeithaml et al., 1990). H4: Price has a direct impact on perceive value. Perceived value and customer satisfaction Customer satisfaction is defined as a judgment that a product or service feature, or the product or service itself, provides a pleasurable level of consumption related fulfillment including the level of under or over fulfillment (Oliver, 1997). Satisfaction is thus a function of relative level of expectation and perceived performance. Expectations are formed on the basis of past experience with the same or similar situations, statements made by friends or other associates (Kotler and Clarke, 1987).

There is a multifaceted meanings of value which vary according to different functional context –economics – (utility and monetary costs), social science (human values) (Rokeach, 1973); industrial settings (processes and costs), and marketing (consumers’ perspective on tradeoffs between benefits and sacrifices or costs) (Dodds et al., 1991; Roig et al., 2006; Patterson and Spreng, 1997). The meaning is not limited to these functional definitions but also include cognitive and affective aspects of value such as social, emotional and epistemic value (Sheth et. al., 1991). Drawing from the vast literature on value, the definition employed in this study is from the marketing perspective whereby Bolton and Drew (1991) define perceived value as a “richer measure of customers’ overall evaluation of a service than perceived service quality. Luarn and Lin (2003) define perceived value from economic perspective which is the customers’ perceived service utility relative to its monetary and non-monetary costs (Eakuru et al., 2008).

Perceived value of a service has been defined by McDougall and Levesque (2000) as the benefits customers believe they receive relative to the costs associated with its consumption. Zeithaml and Bitner (2000) have suggested that it is an overall evaluation of a service’s utility, based on customers’ perceptions of what is received at what cost, and that working definition was adopted for the present study. Value includes not only quality, but also price. Rust and Oliver (1994) contend that a service may be of excellent quality but still be rated as poor value by customers if the price is too high.

Heskett et al. (1997) argue that value is not necessarily equated with low prices because services with a perceived high value may in practice carry high or low prices. Their proposition that the value of a service to customers determines customer satisfaction is supported by the classic work of Kotler and Levy (1969) and Howard and Sheth (1969). The findings of personal inter-views conducted by the authors as part of a pilot study suggest that the technical and functional dimensions of service delivery, as well as price, are important to customer. Given that perceived value is the result of the interactions of all the independent variables in the conceptual model, customers’ perceptions of value were measured in the study (Chitty et al, 2007).

H5: Perceived value has a direct impact on customer satisfaction. Trust For the purpose of this study, we define trust as “a psychological state comprising the intention to accept vulnerability based on positive expectations of the intentions or behaviors of another” (Rousseau et al., 1998). Trust, in a broad sense, is the confidence a person has in his/her favorable expectations, based, in many cases, on previous experiences (Gefen, 2000). Trust weakens or strengthens by experience (Yoon, 2002). Although, researchers show that trust serves as an antecedent to satisfaction (Grewal et al., 1999), such a trust is depended on consumers’ prior experiences or satisfaction judgments (Ha and Perks, 2005).

From the relationship marketing perspective, Yoon (2002) addressed that the level of trust has been conceptualized to be contingent upon the consumers’ perceived level of interaction between company which provides information and consumers who receive it (Ha et al., 2008). The buyer’s overall satisfaction with the buying experience is proposed to have a positive impact on his/her trust of the manufacturer. Prior research has shown that constructs of trust and satisfaction are positively correlated (Crosby et al., 1990; Yoon, 2002), but the causal ordering of the two has not been assessed. However, evidence outlined by Kennedy et al. (2001) shows that customer satisfaction is an antecedent of trust of the manufacturer.

Trust has been linked to a variety of outcomes. Hennig-Thurau and Klee (1997) theorize that trust will play important roles in repurchasing decision. Such arguments are supported by the empirical findings of Bart et al. (2005) who found a strong relationship between trust and behavioral intent. Behavioral intent may include willing-ness to navigate further activities, such as purchasing or repurchasing from the company. Although, trust mediates the relationship between two parties, we expect that trust based on prior affective experience play a crucial role in facilitating consumers’ further behavioral intentions.

Kaveh et al. 6107 Furthermore, trust affects the consumer’s attitude, which in turn influences the willingness to buy (Järvenpää et al., 2000; Ha et al., 2008).

H6: Customer satisfaction has a direct impact on trust. H7: Trust has a direct impact on repurchase intention.

Repurchase intention

Repurchase intention refers to the individual’s judgment about buying again a designated service from the same company, taking into account his or her current situation and likely circumstances ((Lacey and Morgan, 2007). The trend in marketing toward building relationships with customers continues to grow, and marketers have become increasingly interested in retaining customers over the long run (Lemon et al., 2002). Many researchers suggest that customer satisfaction is a key determinant of customer retention (Bolton, 1998; Zeithaml et al., 1996). According to Reichheld (1996), satisfaction measures have accounted for up to 40% of the variance in models of customer retention. Customer retention is regarded as essential factor in CRM (Hoekstra et al., 1999; Reichheld, 1996). Increasing customer satisfaction and customer retention leads to improved profits, positive word-of-mouth, and lower marketing expenditures (Reichheld, 1996).

The theory of reasoned action proposes that behavior can be predicted from intentions that correspond directly (in terms of action, target and context) to that behavior (Ajzen and Fishbein, 1977). This study thus postulated that consumer purchase intentions provide an acceptable proxy for actual purchase behavior. Additionally, previous studies have suggested that customer satisfaction positively influences purchasing intentions. For instance, Rust and Zahorik (1993) noted that customer satisfaction significantly influences customer retention, market share, and profitability.

H7: Customer satisfaction has a direct impact on repurchase intention.

Sampling The survey sample contained more males than females (64:36%). The mean age of the sample was 32 years. Almost half (47%) were travelling alone. A face-to-face interview of passengers was administered at five-star hotels (Chamran Hotel, Eram Hotel, Persepolis Hotel, Saadi Hotel, Hafez Hotel and Pars Hotel) in Shiraz in June 2011 for a period of one month. Approximately 84% of the passengers approached agreed to participate.

The survey questionnaire was developed from the literature review. A total of 509 usable questionnaires were collected. Respondents expressed the strength and directions of their feelings on a seven-point Likert scale from “strongly disagree” (=1) to “strongly agree” (=7).

6108 Afr. J. Bus. Manage. MEASUREMENT Following Anderson and Gerbing (1998), we conducted confirmatory factor analysis to establish the reliability and discriminant validity of the multi-item scales. Although the x

2 value

for this model was significant [181.940 with 109 degrees of freedom (df)],( p = 0.00), this statistic is sensitive to sample size and model complexity; as such, the goodness-of-fit index (GFI), Tucker-Lewis index (TLI), and comparative fit index (CFI) are more appropriate for assessing model fit here (Bagozzi and Yi, 1988; Bearden et al., 1982).

GFI (0.933), AGFI (0.905), TLI (0.975), CFI (0.980), SRMR (0.039) and RMSEA (0.048) indicate satisfactory model fit. Furthermore, all the individual scales exceeded the recommended standards proposed by Baggozi and Yi (1988), in terms of construct reliability (for example greater than 0.60) and average variance extracted (AVE) by the latent construct (greater than 0.50). And all the item’s loadings indicated significant t-values, suggesting convergent validity was achieved.

The squared correlation between the two constructs is less than all the AVE for each construct (Tables 1 and 2), suggesting discriminant validity was achieved (Fornell and Larcker, 1981). In addition, we checked the confidence interval for each pair wise correlation estimate (Anderson and Gerbing, 1988). As shown in Table 2, the confidence interval for each pair wise correlation estimate does not include the value of 1.

These results suggest that discriminant validity was achieved. Measure validation was also examined for internal consistency by computing Cronbach’s α coefficient. As shown in Table 1, Cronbach’s α was found to be greater than 0.70, in accordance with Nunnally’s (1967) standard.

RESULT Goodness of fit of the overall model The hypothesized relationships were tested using the technique of structural equation modeling (SEM). Covariance structure analysis (AMOS 4.0) testing the proposed model (Figure 1) resulted in a x

2/df ratio below

2.0, indicating a good fit between the theoretical model and the data. Other goodness of fit indices is also indicative of a good fit: GFI (0.923), AGFI (0.894), TLI (0.967), CFI (0.973) (Bagozzi and Yi, 1988; Bearden et al., 1982). Results of hypotheses tests The results of the hypotheses test are summarized in Table 3, which shows that all proposed relationships received strong support. Specifically, we find a positive relationship between image and perceived value (coefficient = 0.565, t = 9.252, p < 0.001), supporting H1. Technical dimension had significant positive relationship with perceived value (coefficient = 0.523, t = 9.173, p < 0.001) bolstering H2.

As predicted by H3, functional dimension had a significant and positive relationship with perceived value (coefficient = 0.184, t = 3.289, p < 0.01). Price had significant positive relationship with perceived value

(coefficient = 0.127, t = 2.407, p < 0.05) bolstering H4. As predicted by H5, perceived value had a significant and positive relationship with customer satisfaction (coefficient = 0.332, t = 5.706, p < 0.001).

H6 and H8 predicted that customer satisfaction would directly influence trust (coefficient = 0.479, t = 6.934, p < 0.001) and repurchase intention (coefficient = 0.583, t = 9.656, p < 0.001). As predicted trust had a significant relationship with repurchase intention (coefficient = 516, t = 9.028, p < 0.001), supporting H7.

DISCUSSION In the last decade, a number of national customer satisfaction indices or barometers have been introduced. They can be seen as a performance measure for the quality level of goods and services across firms, industries and countries. The Commission of the European Union encouraged the ECSI initiative (Commission of the European Union, 1999) in order to make industries in member states aware of total quality management strategies for the constant improvement of performance and customer satisfaction. Despite this potential strategic significance, neither academics nor practitioners have so far taken up the concept in Iran. This study is the first attempt to do so. We believe that our Iranian customer satisfaction index demonstrates the importance of national indices, and will encourage further research in Iran. Moreover, considering its potential for measuring the performance of whole countries, it could play a critical part in the process of integrating the Iranian economy into the EU economy, by showing in which sectors the economy has competitive advantage over existing member states, according to customer perception. Most existing national indices are based on structural modeling. Since we have added new constructs and modified the structure, we may argue that this model is the most comprehensive national index to be developed so far. Adding the trust and repurchase intention factors to the model increases the explanatory power of the index substantially.

The objective of this research is to establish relationships between the stipulated antecedents of customer satisfaction, trust and repurchase intention in five-star hotels. However, this study manages to assert eight of the proposed hypotheses. All of them supports relationships between antecedents of customer satis-faction, trust and repurchase intention. An image is a customer’s perception based on the perceived benefits, the physical attributes and the branding. In this case, it reflects the history of five-star hotels and is as much a consumer perception of how well they can satisfy needs and wants as it is the result of previous service encounters. Image can be considered to be an extrinsic product cue related to the service product (Olson and Jacoby, 1972). For five-star hotels, that cue provides

Kaveh et al. 6109

Table 1. Confirmatory factor analysis results. Note:* Parameter estimates are significant at the 0.001 level.

Construct/items Standardized

loading t-value

Construct reliability

AVE Cronbach’s α

Image 0.92 0.801 0.937

IM 1 0.905* 20.782

IM 2 0.745* 14.636

IM 3 0.850* 17.219

IM 4 0.839* 16.59

Customer satisfaction

0.873

0.863

0.916

CS 1 0.983* 21.012

CS 2 0.736* 13.573

CS 3 0.898* 18.248

CS 4 0.812* 17.986

CS 5 0.947* 21.435

CS 6 0.723* 13.219

Repurchase intention

0.958

0.729

0.942

RPI 1 0.892* 19.208

RPI 2 0.955* 21.814

Functional dimension

0.832

0.824

0.951

FDI 1 0.931* 21.338

FDI 2 0.844* 18.207

FDI 3 0.737* 14.731

FDI 4 0.961* 21.557

FDI 5 0.750* 15.345

Technical dimension

0.945

0.755

0.974

TDI 1 0.907* 20.149

TDI 2 0.849* 19.726

TDI 3 0.760* 15.031

TDI 4 0.833* 19.581

TDI 5 0.914* 20.018

TDI 6 0.746* 13.246

Price

0.961

0.871

0.935

PR 1 0.976* 21.847

PR 2 0.799* 15.88

PR 3 0.804* 16.276

PR 4 0.911* 20.563

Trust

0.972

0.849

0.961

TR 1 0.928* 20.412

TR 2 0.819* 19.037

TR 3 0.901* 20.451

TR 4 0.933* 20.358

TR 5 0.730* 13.809

Perceived value

0.895

0.793

0.955

P V 1 0.991* 21.829

P V 2 0.857* 19.773

P V 3 0.824* 18.42


Table 1. Contd.

P V 4 0.766* 14.295

P V 5 0.917* 20.813

P V 6 0.953* 20.988

P V 7 0.806* 17.304

P V 8 0.854* 17.025

Table 2. Correlation matrix.

IM CS RPI FDI TDI PR TR P V

0.296 0.17 0.282 0.198 0.184 0.215 0.211

0.528 0.251 0.341 0.247 0.235 0.354 0.269

0.473 0.532 0.376 0.218 0.332 0.273 0.321

0.651 0.519 0.545 0.315 0.317 0.184 0.377

0.458 0.483 0. 537 0.652 0.422 0.336 0.289

0.634 0.427 0.618 0.471 0.638 0.328 0.395

0.549 0.642 0.673 0.536 0.491 0.684 0.417

0.517 0.563 0.491 0.529 0.533 0.521 0.542

Notes: IM, image; CS, customer satisfaction; RPI, repurchase intention; FDI, functional dimension ; TDI, technical dimension; PR, price; TR , trust; PV, perceived value.

Table 3. Results of hypotheses test.

H Hypothesized path Coefficient (t-value) Result

H1 image → perceived value 0.565*** (9.252) Supported

H2 technical dimension → perceived value 0.523*** (9.173) Supported

H3 functional dimension → perceived value 0.184** (3.289) Supported

H4 Price → perceived value 0.127* (2.407) Supported

H5 perceived value → customer satisfaction 0.332*** (5.706) Supported

H6 customer satisfaction → trust 0.479***(6.934) Supported

H7 Trust → repurchase intention 0.516*** (9.028) Supported

H8 customer satisfaction → repurchase intention 0.583*** (9.656) Supported

Note: * p < 0.05; ** p < 0.01; *** p < 0.001.

consumers with better predictive value for consumers because the intrinsic cues associated with the service are difficult to evaluate before experiencing it.

From the hotel guest’s perspective, the image of the five-star hotels can serve to reduce the complexity of the decision making processes and its associated risks, by selecting accommodation which has few evaluative intrinsic attributes. The results of research into the behavior of hotel guests conducted by Bowen and Chen (2001) indicated that, as customer satisfaction increased, trust and repurchase intention indices more than doubled. This suggests that there is a greater probability of building guest’s trust and repurchase intention when they are completely satisfied.

The general objectives of the research study reported

here were to identify and examine the key attributes that shape perceived value, and to determine whether it in turn influences satisfaction and, ultimately, trust and repurchase intention. The results of the data analysis suggest that the proposed model did meet those objectives. Consistent with previous studies (Baker and Crompton, 2000; Sivadas and Prewitt, 2000; Zhu et al., 2002), this study found a positive relationship among customer satisfaction and purchase intentions in five-star hotels.

Much of previous research on relationship marketing in the industrial context highlights the role of trust in inducing favorable behaviors (Morgan and Hunt, 1994; Kumar et al., 2003). The results reveal that trust has significant influence on repurchase intention. In managing

relationships, it is worthwhile for firms to cultivate trust gradually among their customers, and subsequently maintain high-quality relationships. Customers who have deep trust in their providers tend to continue the relationship. Therefore, managers should realize that trust is fundamental to buying–selling relationships.

This study extends current knowledge related to the interrelationship between satisfaction and trust. B2C marketing literature indicates that increasing satisfaction between two parties might strengthen their partnership, increase competitiveness and information exchanges, and improve trust (Abdul-Muhmin, 2005; Geyskens et al., 1999). Our results thus indicate that trust in post-satis-faction situations can play a significant role in bridging a gap between consumer judgment and behavioral intention.

CONCLUSION

This study has achieved its objective in examining relationships of certain antecedents of customer satisfaction, trust and repurchases intention among five-star hotel customers in Iran. Image is found to be the most significant factor that five-star hotel customer look for in order to be satisfied with the hotel. Functional dimension, technical dimension and price, are found to be important for customer satisfaction, while perceived value is found to be a significant factor for improving customer satisfaction, trust and their repurchase in the future. REFERENCES Ajzen I, Fishbein M (1977). “Attitude-behavior relations: a theoretical

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APPENDIX Image (four items) 1) The reputation of five-star hotels is important to me. 2) This five-star hotel makes a good impression on its guests. 3) This five-star hotel has a good reputation amongst customers. 4) I feel this five-star hotel suits my needs. Technical dimension (six items) 1) Satisfied with kitchen 2) Satisfied with TV room 3) Satisfied with internet facilities 4) Satisfied with telephone facilities 5) Satisfied with meals 6) Satisfied with location. Functional dimension (five items) 1) Staff were polite 2) Staff were helpful 3) Staff were friendly 4) Staff had knowledge about attractions and activities 5) The personnel provides a friendly atmosphere. Perceived value (eight items) 1) This five-star hotel offers good value for money. 2) I believe this five-star hotel offers good quality accommodation. 3) I will enjoy my stay at this five-star hotel. 4) I believe this five-star hotel provides good accommodation for the price. 5) The personnel knowledge is up to date. 6) The personnel know their job well.

Kaveh et al. 6113 7) The personnel have the knowledge of all services offered by the entity. 8) The service as a whole is good. Satisfaction (six items) 1) I am satisfied with the interactions I have with this five-star hotel’s staff. 2) I am satisfied with the interaction I have with other guests. 3) In general I am satisfied. 4) I am very satisfied with the five-star hotels services provided. 5) I feel this five-star hotel is better than expected. 6) I am satisfied with my stay at this five-star hotel. Trust (five items) 1) This five-star hotel treats me in an honest way in every transaction. 2) Overall I have complete trust in this five-star hotel. 3) My overall trust in this five-star hotel is good. 4) This five-star hotel gives me a feeling of trust. 5) Employees of this five-star hotel show respect to customers. Price (four items) 1) The food prices at this five-star hotel are fair. 2) The beverage prices at this five-star hotel are fair. 3) The price charged by this five-star hotel is appropriate. 4) The price charged by this five-star hotel is rational.


Short Communication

The impact of collaborative work climate on knowledge sharing intention

Aliereza Mooghali

Department of Public Administration, Payame Noor University, P.O. Box 19395-3697, Tehran, Iran. E-mail: [email protected].


The current study investigated the relationship between collaborative work climate and intention to share knowledge in Fars Regional Power Distribution Company (FRPDC), Iran. Using stratified random sampling method, a sample of 214 employees were selected for further analysis. The analysis of the data showed that the relationship between the perception of collaborative work climate and intention to share knowledge is significant and positive. The results also indicated that there are significant relationships between dimensions of collaborative work climate (work group support, immediate supervisor support, business unit culture and employees attitude) and intention to share knowledge. The values of R

2 also indicated that workgroup support, business unit culture, immediate supervisor

and employees’ attitudes have moderate, moderate to high, low and moderate impact on intention to share knowledge respectively. Key words: Collaborative work climate, knowledge, knowledge sharing, climate.

INTRODUCTION Knowledge sharing is the activity of sharing components of knowledge (that is, information, expertise and skills) amongst members of a community. It has been regarded mostly in organizations for making organizational competitiveness (as a competitive advantage) in today’s turbulent business. While issues such as regarding knowledge as a personal property (Dalkir, 2005) reduce the propensity for sharing it amongst the organizational members, it is very useful to have an organizational climate that motivates the individuals for sharing knowledge.

Many researchers have emphasized on the perceptions of work climate on knowledge sharing intention amongst employees within the organization (Blackler, 1995; Bok and Kim, 2002; Davenport and Prusak, 1998) and amongst all, the impact of collaborative work climate is rarely investigated on knowledge sharing intention. Organizational climate refers to shared and agreed perceptions of employees of their work environment. In fact, organizational climate is an interpretation of organizational messages by the organization members. Climate emerges from what individuals perceive to be important and influential in their work so that studying

climate is more appropriate to capture the aspects of the social environment consciously perceived by organizational members (Shim, 2010). How staff perceive the climate determines how they will behave with it based on a social exchange perspective. According to social exchange theory (Blau, 1964), if the staff perceive the organization as a supportive organization, based on a reciprocity rule, they tend to be more effective in the organization.

Collaborative climate refers to shared elements of an organization’s culture that inspires staff to share knowledge (Sveiby and Simons, 2002). According to Sveiby and Simons, the success of knowledge management practices depends on the incorporation of trust and collaboration in organizational culture. They confirmed that in the collaborative climate of a business unit, an immediate superior and coworkers in a workgroup play the most important roles in knowledge sharing.

In the electricity and power organizations (like Fars Regional Power Distribution Company, FRPDC), it is very critical to share knowledge due to the human hazards and also delivering high quality services to the people. In

this regard, developing an organizational climate that encourages knowledge sharing is very helpful. Thus, the main questions of the current study were; how is the perception of a collaborative work climate in FRPDC? How do perceptions of collaborative climate impacts intention to knowledge sharing in FRPDC? For answering these questions, the following hypotheses were proposed: H0: The relationship between the collaborative work climate and intention to share knowledge is significant in FRPDC. H1: The relationship between the work group support and intention to share knowledge is significant in FRPDC. H2: The relationship between the support of immediate supervisor and intention to share knowledge is significant in FRPDC. H3: The relationship between employee attitude and intention to share knowledge is significant in FRPDC. H4: The relationship between the business unit culture and intention to share knowledge is significant in FRPDC. METHODOLOGY Sample A sample of 214 employees including males (64%) and females (36%) working in different branches of Fars Regional Power Distribution Company (FRPDC) were selected using stratified random sampling method. FRPDC is the state power distribution company of Fars Province in Iran. Measures For assessing the collaborative work climate, the collaborative climate survey (CCS) was used. This measure includes four dimensions for measuring collaborative work climate; work group support, immediate supervisor, employee attitude, and business unit culture. The Cronbach’s alpha coefficient estimates calculated for this instrument showed internal reliability; its value was 0.82. Also, knowledge sharing behavior was assessed by the instrument of Bock and Kim (2002). The Cronbach’s alpha coefficient calculated for this instrument showed the internal consistency of the measure (0.082).

STATISTICAL ANALYSIS AND RESULTS Pearson correlation coefficients were calculated for analyzing the data. For the first hypothesis, The Pearson correlation analysis resulted in an R value of 0.636 with a p-value of 0.0001. Based on these results, H0 was supported. These results indicate that collaborative work climate positively and significantly influence the intention to knowledge sharing in the organization. Further, the strength of the relationship was 0.404 as measured by R

2; hence indicating that collaborative work climate

exerted a moderate to high influence on intention to knowledge sharing.

Mooghali 6115 For H1, the Pearson correlation analysis resulted in an

R value of 0.582 with a p-value of 0.0001. Based on these results, H1 was supported. These results demonstrated that work group support positively and significantly influence the intention to knowledge sharing in the organization. Further, the strength of the relationship was 0.332 as measured by R

2; hence

indicating that work group support exerted a moderate influence on intention to share knowledge.

For H2, the Pearson correlation analysis resulted in an R value of 0.43 with a p-value of 0.0001. Based on these results, H2 was supported. These results demonstrated that support of immediate supervisor positively and significantly influence the intention to knowledge sharing in the organization. Further, the strength of the relationship was 0.185 as measured by R

2; hence,

indicating that support of immediate supervisor exerted a low influence on intention to share knowledge.

For H3, the Pearson correlation analysis resulted in an R value of 0.642 with a p-value of 0.0001. Based on these results, H3 was supported. These results demonstrated that employee attitude positively and significantly influence the intention to knowledge sharing in the organization. Further, the strength of the relationship was 0.413 as measured by R

2; hence

indicating that employee attitude exerted a moderate to high influence on intention to share knowledge.

For H4, the Pearson correlation analysis resulted in an R value of 0.58 with a p-value of 0.0001. Based on these results, H4 was supported. These results demonstrated that business unit culture positively and significantly influence the intention to share knowledge in the organization. Further, the strength of the relationship was 0.336 as measured by R

2; hence indicating that business

unit culture exerted a moderate influence on intention for knowledge sharing.

DISCUSSION AND CONCLUSIONS The current study investigated the impact of collaborative work climate on intention to share knowledge amongst staff of Fars Regional Power Distribution Company (FRPDC). The results of hypotheses indicated that, the relationship between the perceptions of a collaborative climate has a significant and positive relationship with intention to share knowledge in the organization of Sveiby and Simons (2002). The result shows that when the employees perceive the organization more collaborative, they will tend to share knowledge more and more. Therefore, for having a good rate of knowledge sharing in the organization, all managerial actions should be organized toward creation of a collaborative work climate. Managerial activities like open communication space, innovative friendly organization, reward system optimization, using transformational leadership styles, management by objective, and decentralization are advised.


Results showed that the dimensions of collaborative work climate have different effects on knowledge sharing intention. The immediate supervisor had a low impact on knowledge sharing intention and this is due to the fact that in the organization under the study, the nature of work was very centralized and bureaucratic. In fact, the organizational procedures, rules and obligations were very strict.

As a general conclusion, as it is pointed by Allahdadi (2011), it can be concluded that a type of psychological empowerment can occur as a result of collaborative work climate and this will lead to better knowledge sharing capability amongst employees in the organizations.

The study examined the relationship between collaborative work climate and intention to share knowledge in a power and electricity company. Due to the fact that the power distribution needs accuracy and making mistakes can lead to irreparable losses and damages, in the current organization, we were faced with strict obligation, reducing the authorities of middle managers and their roles were low in the knowledge sharing intention. Therefore, the current study can be done in different organizations to gain a better understanding of the role of middle managers and immediate supervisors in knowledge sharing intention.

REFERENCES Allahdadi F (2011). Women’s Empowerment for Rural Development. J.

Amer. Sci., 7(1): 40-42. Blackler F (1995). Knowledge, knowledge work and organizations: An

overview and interpretation. Organ. Stud., 16(6): 16-36. Blau PM (1963). Exchange and power in social life, New York: Wiley. Bock GW, Kim Y (2002). Breaking the myths of rewards: An exploratory

study of attitudes about knowledge sharing. Inf. Resour. Manag. J., 15(2): 14-21.

Dalkir K (2005). Knowledge Management in Theory and Practice, Jordan Hill, Oxford: Elsevier Inc: 132-133.

Davenport TH, Prusak L (1998). Working Knowledge: How Organizations Manage What They Know. Harvard Business School Press, Boston.

Ohlinger J, Brown MC, Laudert S, Sue S, Fofah O (2003). Development of potentially better practices for the Neonatal intensive care unit as a culture of collaboration: communication, accountability respect, and empowerment. Pediatrics, 111(4): 471-482.

Shim J (2010). The relationship between workplace incivility and intention to share knowledge: the moderating effects of collaborative climate and personality traits. Doctoral Dissertation, University of Minnesota, U.S.

Sveiby KE, Simons R (2002). Collaborative climate and effectiveness of knowledge work – an empirical study. J. Knowl. Manag., 6(5): 420-433.

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