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Volume 6 Number 19 16 May, 2012

ISSN 1993-8233
African Journal of
Business Management




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School of Economics and Finance
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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
ences
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 Kadgia Faccin


Leadership challenges associated with the management of
Generation Y employees: A proposed theoretical model 5999
Magda L. M. Hewitt and Wilfred I. Ukpere
Table of Contents: Volume 6 Number 19 16 May, 2012
ences

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

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


Table of Contents: Volume 6 Number 19 16 May, 2012
ences
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: mgastrow@hsrc.ac.za.

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 Gereffis 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: Wards 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
Regions share in
global production (%)
Regions share in
global production (%)
Regional sales
share in global sales
Regions share in
global sales (%)
1997
a
2006 1997 2006
General motors America
b
69 50 63 54
Ford America
b
67 43 64 55
Daimler Chrysler America
b
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: Wards 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 Chinas 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 Automobiles 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 Chinas Sichuan Tengzhong Heavy Industrial
Machinery Companys purchase of Hummer from
General Motors in 2009, Geelys purchase of Volvo from
Ford in August 2010 for $1.8 billion, and Beijing
Automotives (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
Japans total output, they have played a role in sustaining
Japans automotive trade surplus despite the countrys
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 countrys 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 highestthe 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
combineda 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
technologiesfor 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 Mosavi
1
, Rasoul Amirzadeh
2
* and Mohammad Sadegh Dadmehr
1


1
Department of Management, Payam Noor University, PO Box19395-3697, Tehran, Iran.
2
Department 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: am.rasoul@gmail.com.

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
5908 Afr. J. Bus. Manage.





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
5910 Afr. J. Bus. Manage.



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 (= 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
5912 Afr. J. Bus. Manage.



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 (= 0.94, t= 10.49, P<0.01), customer
inference from bank services (= 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 (= 0.91, t=
9.38, P<0.01) with improved customer satisfaction.

Significance level (probability) = P

Significant figure = t

Standard coefficient =

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
satisfaction: Focusing on service providers own and perceived
viewpoints. Int. J. Bank Mark., MCB University press, 15(7): 264-278.
Bonaccorsi E, Hardy CD (2005). Financial sector liberalization, bank
privatization, and efficiency: Evidence from Pakistan. J. Bank.
Financ., 29(8-9): 2381-2406.
Buttle F (1996). SERVQUAL: Review, critique, research agenda. Eur. J.
Mark., 30(1): 8-32.
Hartley K, Parker D (1991). Privatization: A Conceptual Framework, in
A. F. Ott and K. Hants: Edward Elgar.
Jamal A, Naser K (2002). Customer satisfaction and retail banking on
assessment of some of the key antecedents of customer satisfaction
in retail banking. Int. J. Bank Mark., 20(4): 146-160.
Kavosi MR, Saghayi A (2009). Measurement methods of customer
satisfaction. Tehran: Ame publication.
Keller AZ, Dogan , Eroglu (1994). Evaluating privatization policies in
Turkey. Int. J. Public Sector Manage., 7(1): 1524.
Levesque T, Mcdougall GHG (1996).Determinants of customer
satisfaction in retail banking. Int. J. Bank Mark., 14(7): 12-20.
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.
Mirzadeh A, Shahbazi M, Javaheri Kamel M (2009). A look at
Philosophy of the global trends of privatization. J. Tadbir, 20(209):
36-41.
Perkopenko J (2001). Privatization Management. (Akbari, H., Davari, D.
translator) Tehran: Arianna Industrial Research Center.
Razaghi I (1997). Critique on Iranian. Tehran: Resa Cultural Service
Institute.
Sadri MB (2009). Banks privatization. J. Bank Saderat Iran, 10(49): 12-
16.
Sharbat OA, Ekhlasi A (2008). Designing a model for evaluating
customer satisfaction in developmental banking industry based on
which customer satisfaction of Sanat and Madan bank is measured.
Tehran J. Knowl. Manage., 81: 24-31.
Suri G (2009). Study the privatization process in economy of Iran. J.
Iran Saderat Bank, 48: 17-25.









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?








African Journal of Business Management Vol. 6(19), pp. 5916-5926, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.420
ISSN 1993-8233 2012 Academic Journals




Full Length Research Paper

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: martin@binus.ac.id,
martin@my-consulting.org.
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 stocks 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
assets price in its market not only impacted by volatility
shock, but also by its reaction to shock on assets 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
t
y calculated using following formula:


) / log( 100
1
=
t t t
P P R


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
1 1 0
2

+ =
t t




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
1 2
2
1 1 0
2

+ + =
t t t
h


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.


t i t j t j t i t i
h R R R
, , 3 , 2 1 , 1 0 ,
+ + + + =

(1)


t j t i t i t i
h h h
, 1 1 , 2
2
1 , 1 0 ,
+ + + =

(2)


t j t i t i t j t j
h R R R
, , 3 , 2 1 , 1 0 ,
+ + + + =

(3)


t i t j t j t j
h h h
, 1 1 , 2
2
1 , 1 0 ,
+ + + =

(4)

Where:

t i
R
,
= return of i-stock market at t period,
1 , t i
R = return of i-stock market at t-1 period,
t j
R
,
= return of j-stock market at t period,
t i
h
,
= volatility of i-stock market at t period,
1 , t i
h = volatility of i-stock market at t-1 period,
t j
h
,
= volatility of j-stock market at t period,
t i,
= error of i-stock market at t period,
t j ,
= 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
5920 Afr. J. Bus. Manage.



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
Jarque-Bera 2653.082
Probability 0.000000


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
Jarque-Bera 480.2427
Probability 0.000000


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).
5922 Afr. J. Bus. Manage.



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).
Mulyadi and Anwar 5923



Table 1. Data processed from equation 1 and 2.

Spillover
0

1

2

3

0

1

2

1

USUK 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
USGR 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
UKGR -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%.



Table 2. Data processed from equation 3 and 4.

Spillover
0

1

2

3

0

1

2

1

USUK -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
USGR 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
UKGR 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
5924 Afr. J. Bus. Manage.



Table 3. Data processed from equation 1 and 2.

Spillover
0

1

2

3

0

1

2

1

USUK 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
USGR 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
UKGR -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

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



Table 4. Data processed from equation 3 and 4.

Spillover
0

1

2

3

0

1

2

1

USUK -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
USGR 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
UKGR 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

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



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
Mulyadi and Anwar 5925



Table 5. Data processed from equation 1 and 2.

Spillover
0

1

2

3

0

1

2

1

USUK 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
USGR 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
UKGR 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

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



Table 6. Data processed from equation 3 and 4.

Spillover
0

1

2

3

0

1

2

1

USUK -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
USGR -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
UKGR -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

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



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%.


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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 1993-82332012 Academic Journals




Full Length Research Paper

Inter-organizational culture, trust, knowledge sharing,
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


1
Department of Shipping and Transportation Management, National Taiwan Ocean University, 2 Pei-Ning Road,
Keelung, Taiwan 20224, Republic of China.
2
Department of Aviation and Maritime Transportation Management, Chang Jung Christian University, No. 396, Sec. 1,
Chang-Rong Rd., Gui-Ren, Tainan County 711, Taiwan.
3
Department 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 developing 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 refers to an efficient and effective operation of industry
related activities, relying 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. Hence, the main purpose of the research aims to discuss the linkage
between inter-organizational culture, trust, knowledge sharing, collaboration, and performance in
supply chain of maritime industries. The questionnaires are mailed to different firms of maritime
industries. This article uses exploratory factor analysis, reliability and validity analysis for collecting
data. By using structural equation modeling (SEM) analysis, 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. The major contribution of this article is linking
different maritime industries and research dimensions 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: jfding@mail.cjcu.edu.tw.
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 colla-
boration. 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

Scheins (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:

H
1
: Organizational culture has positive influence on inter-
organizational trust.
H
2
: 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:

H
3
: Inter-organizational trust has positive influence on
inter-organizational knowledge sharing.
H
4
: Inter-organizational trust has positive influence on
collaboration.
H
5
: 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:

H
6
: 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
5930 Afr. J. Bus. Manage.



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 analyses

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 Cronbachs to
measure the consistency of all items covered in each
variable. If the coefficient of Cronbachs 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
5932 Afr. J. Bus. Manage.



Table 3. Factor analysis of trust.

Factor name Items of trust
Factor
loadings
Eigen
values
Variance
(%)
Accumulated
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 the
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 stan-
dardized 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
(%)
Accumulated
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.
5934 Afr. J. Bus. Manage.



Table 5. Factor analysis of collaboration.

Factor name Items of collaboration
Factor
loadings
Eigen
value
Variance
(%)
Accumulated
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
(%)
Accumulated
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 Cronbachs Factors
Question
items
Cronbachs
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 Knowledge 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)
Cronbachs 0.92 0.94 0.92 0.93 0.86

1. N=252, =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
5936 Afr. J. Bus. Manage.



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.


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African Journal of Business Management Vol. 6(19), pp. 5939-5949, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1136
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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:
davoodgharakhany@yahoo.com.
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 studys 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. Bayraktars 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 buyersupplier 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 Bozic (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 companys 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 organizations
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:

H
1
: 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:

H
2
: 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. Camisn and Lpez (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:

H
3
: 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
Cronbachs alpha (). 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
5944 Afr. J. Bus. Manage.



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), Aragn-
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
Gharakhani et al. 5945



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.
This study has several implications. First, the findings
of this study will help decision makers in companies to
5946 Afr. J. Bus. Manage.



know the importance of SCM and how SCM practices
influence innovation performance.
Therefore, decision makers should focus on improve
their SCM practices. Secondly, the findings also indicate
that innovation performance significantly affects
organizational performance. Therefore, managers should
focus on improve their firms innovation performance.
Finally, the analysis of the relationship between SCM
practices and organizational performance indicates that
SCM practices might directly influence organizational
performance. Therefore, decision makers should
continue to improve their firms SCM practices.
There are several limitations of this study that suggest
further research. Perhaps, the most serious limitation of
this study was its narrow focus on Iranian firms. Future
studies could use the model developed in this study and
test it in other developing countries. The complexity of
SCM practices in Iran can also constitute a limit. Future
studies can also examine the proposed relationships by
bringing some contextual variables into the model, such
as industry type, organizational size and supply chain
structure.


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5948 Afr. J. Bus. Manage.



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











Gharakhani et al. 5949



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


African Journal of Business Management Vol. 6(19), pp. 5950-5956, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1411
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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

Hassan Amozad Khalili
1
, Seyed Babak Ebrahimi
2
* and Sorosh Nalchigar
3


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

2
Department of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran.
3
Department of Management and Economy, Tehran University, Tehran, Iran.

Accepted 21 February, 2012

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: B_ebrahimi@iust.ac.ir. 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 criterias 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
5952 Afr. J. Bus. Manage.



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
5954 Afr. J. Bus. Manage.





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 C
6
.
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 . 0
13785800 . 0 155265 . 0 ... 44491782 . 0 230945 . 0 4 . 0
1055090 . 0 288427 . 0 ... 2019130 . 0 169339 . 0 6 . 0
A of weight Final
so
) 1 ( .
C criterion
of weight Local
C criterion of respect
with A of weight Local
A of weight Final
1
10
1 j j
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
A
2
is the most preferred alternative, followed by A
1
, A
4
, A
5
and then A
3
.


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.
5956 Afr. J. Bus. Manage.



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.




African Journal of Business Management Vol. 6(19), pp. 5957-5968, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1540
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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

Mei-Cheng Wu
1,2
*

and Chia-Yon Chen
1


1
Department of Resources Engineering, National Cheng Kung University, Taiwan.
2
Department 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: monet@livemail.tw.
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, j is the factor weighting; Si

and Sr
+
are the slack
variables for the inputs and outputs. In addition, is the TE
CRS
of the
k
th
DMU under CRS for the input side; the efficiency value ranges
from 0 to 1. If = 1, Si

= 0, and Sr
+
= 0, then the DMU is located on
the efficiency frontier and has achieved TE; if is close to 0, then
the DMU is inefficient.

1 1
k
1
Subject to
p m
k i r
i r
n
ik j ij i
j
s s
X X s

+
= =

=

=


=

k
Min E



1
n
j rj rk r
j
Y Y s
+
=
=



j , Si
-
, Sr
+
0, j = 1,., n, i = 1,., m, r = 1,., p
Xij: the number of i
th
inputs for the j
th
DMU;
Yrj: the number of r
th
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
p m
k i r
i r
n
ik j ij i
j
s s
X X s

+
= =

=

=


=

k
Min E



1
n
j rj rk r
j
Y Y s
+
=
=



1
1
n
j
j =
=



j , Si, Sr
+
0, j = 1,., n, i = 1,., m, r = 1,., p

The BCC model includes an additional convexity constraint j = 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:

Ek0i Z ik (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, k:
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 hotels primary
customer segment was business travelers, then Z4 = 1; if a hotels
primary customer segment was tourists, then Z4 = 0. For guest
nationality, if over 50% of a hotels 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 cafs 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

E
k

i
Z
I
+
k
(i = 1,., 5)

E
k
: Overall technical efficiency of the k
th
DMU, Z
1
: The




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

5962 Afr. J. Bus. Manage.



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 (H
0
) and the alternative hypothesis (H
1
) are
expressed as described subsequently (Table 4):

H
0
:
TE
2007

TE
2006

H
1
:

TE
2007

TE
2006

Based on a significance level of = 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 H
0
; as
such, there was a trend of improvement. However, H
0
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 = 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,
H
0
and H
1
were described as follows (Table 7):

H
0
:
PTE
2007

PTE
2006

H
1
:

PTE
2007

PTE
2006

5964 Afr. J. Bus. Manage.



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.

Variable Chain hotels Independent hotels
Z test (Wilcoxon score) -1.043 -1.947*
P-value 0.1485 0.026

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



In terms of the = 5% significance level, it can be seen
that H
0
is rejected based on changes in the average
overall efficiency of independently-operated hotels,
indicating that there was a trend of improvement.
However, H
0
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 (SE1).


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, H
0
and H
1
were explained as
follows (Table 10):

H
0
:

SE
2007

SE
2006

H
1
:

SE
2007

SE
2006


In terms of level of significance = 1%, H
0
was rejected
for both chain hotels and independently-operated hotels.
Therefore,
SE
exhibited a significant trend of
improvement.

5966 Afr. J. Bus. Manage.




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.

Variable Chain hotels Independent 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 =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.



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African Journal of Business Management Vol. 6(19), pp. 5969-5974, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1600
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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

Mohammad Reza Soleimanpour
1
, Seyed Jamal F. Hosseini
1
*, Seyed Mehdi Mirdamadi
1
and
Alimorad Sarafrazi
2


1
Department of Agricultural Extension and Education, Science and Research Branch, Islamic Azad University, Tehran,
Iran.
2
Department 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: jamalfhosseini@srbiau.ac.ir.
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.


2 2
2
) . (
) . (
s t Nd
s t N
n
+
=
,

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 Cronbachs
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 R
2
R
2
Ad.
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 R
2
=. 48 Taking the results shown in Table 5, the
linear equation resulting from regression analysis is as
follows:

Y=0.312(X
1
) +0.745(X
2
) +0.567(X
3
) + 0.465 (X
4
)

The components of the equation include:

Y = Entrepreneurship potential of nanotechnology,
X
1
= Entrepreneurship spirit,
X
2
= Job experience,
X
3
= Familiarity with applications of nanotechnology in
agriculture,
X
4
= 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.
African Journal of Business Management Vol. 6(16), pp. 5975-5979, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2441
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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: serban_mihaela_621@yahoo.fr.
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
5976 Afr. J. Bus. Manage.



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)
P
I
B

S
M
E
s



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 + ,

Where: Yi GDP is created in him; Ti You are free time
and quantify the influence of regression model non-
simple (univariate) of GDP; 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
P
I
B

S
M
E
s



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 Gnrale du March
intrieur 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.


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African Journal of Business Management Vol. 6(19), pp. 5980-5989, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2670
ISSN 1993-8233 2012 Academic Journals






Full Length Research Paper

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.

Accepted 22 February, 2012

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: wiukpere@uj.ac.za.
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
(authors 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 employees
dismissal cannot be based on the employees 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 countrys 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 ARVs 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?


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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





Full Length Research Paper

Social capital in Brazilian wine industry networks

Janaina Macke
1
*, Denise Genari
2
and Kadgia Faccin
3


1
Graduate Program in Business Administration, University of Caxias do Sul (UCS), Caxias do Sul, Brazil.
2
Faculty Cenecista of Bento Gonalves (FACEBG), Brazil.
3
Faculty of Serra Gacha (FSG) and Faculty Cenecista of Bento Gonalves (FACEBG), Brazil.

Accepted 6 February, 2012

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 competitiveness of two Brazilian wine industry
networks: Aprovale and Aprobelo. In a previous study, 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 competitiveness differ significantly from one network to
another. In this paper, we sought to analyze the results found in the quantitative phase in a qualitative-
descriptive way. The main results pointed out that, despite economic, human and intellectual
difficulties, a network can raise significant levels of social capital, since the network has shared goals
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: jmacke@terra.com.br. 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 Gacha Wine Cluster (southern Brazil): a Aprovale
(Associao dos Produtores de Vinhos Finos do Vale dos
Vinhedos) and Aprobelo (Associao 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 mecha-
nism; 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 Gacha
is responsible for 80% of the national production of wine. The
production of grapes in the cluster of the Serra Gacha 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. Ros wines: 209,971 L (ros 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 Gonalves, 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 Gonalves, 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. Slections 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. Avaliao Nacional de Espumantes held in Garibaldi city(National Evaluation of
Sparkling Wines): 3 medals
2. Avaliao Nacional de Vinhos held in Bento Gonalves 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 Aprobelos 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 Gonalves,
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.

Source: primary results, using Balestrin and Verschoore (2008) taxonomy.



capital elements, such as cooperation and reciprocity
(structural dimension), trust and participation (relational
dimension).
Social capital has a qualitative dimension, which must
take into account the nature of collective action that a
group is capable of. Thus, we sought to link the results
found in this study to demographic, historical and cultural
issues present in the region studied. In the future, this
process will be deepened and expanded to other
collaborative networks.


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African Journal of Business Management Vol. 6(19), pp. 5999-6004, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM12.533
ISSN 1993-8233 2012 Academic Journals



Full Length Research Paper

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: wiukpere@uj.ac.za.
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 1980s to the mid 1990s.
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 todays 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 Africas 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 Ys 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:

H
1
: 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:

H
2
: 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 Ys 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:

H
3
: 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 Africas 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:

H
4
: 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
todays 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 Ys 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:

H
5
: 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 mentorships, 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:

H
6
: 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:

H
7
: 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 firms
EO (Dess and Lumpkin, 2005). Future research should
consider the impact of Gen-Yers tenure of employment
on existing firms EO. The antecedents 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

H
7


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) (CEOs). 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
orientation within small business context. J. Entrep. Cult., 13: 21-45.
Amar AD (2004). Motivating knowledge workers to innovate: a model.
Eur. J. Innov. Manag., 7(2): 89-101.
Arnold J (1997). Managing careers in to the 21st century. London: Paul
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African Journal of Business Management Vol. 6(19), pp. 6005-6013, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2420
ISSN 1993-8233 2012 Academic Journals




Full Length Research Paper

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: saeed.m1362@gmail.com. Tel:
+989144052660.
Ittner et al., 1997; Murphy, 1999); hence, managers have
a proclivity to manage the firms 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
stockholders equity. Under this definition, a firms
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 accountants 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.
Managements 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 managers 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 firms 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 managers 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.

t i,

1 t i,
A
t i,
PPE
3

1 t i,
A
t i,
REV
2

1 t i,
A
1
1

1 t i,
A
t i,
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,
1, 2, 3 = Firm specific parameters, = the residuals.

The second step is to use these firm-specific parameter estimates
from the previous equation (that is, 1, 2, 3) 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.



1 t i,
A
t i,
PPE
3

1 t i,
A
t i,
REC
t i,
REV
2

1 t i,
A
1
1

t i,
NDA

=


t i,
NDA
1 t i,
A
t i,
TA
t i,
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
Basus (1997) specification:

t i,

t i,
R
t i,
D
3

t i,
R
2

t i,
D
1

1 t i,
P
t i,
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
Basus (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:

t

t
SIZE
t j, t
R
t j, t
D
11

t
LEV
t j, t
R
t j, t
D
10

t
MB
t j, t
R
t j, t
D
9

t
DA
t j, t
R
t j, t
D
8

t j, t
R
t j, t
D
7

t
SIZE
t j, t
R
6

t
LEV
t j, t
R
5

t
MB
t j, t
R
4

t
DA
t j, t
R
3

t j, t
R
2

t j, t
D
1

t 1, j t
P
t j, t
E
+ ++ +



+ ++ +



+ ++ +




+ ++ +



+ ++ +



+ ++ +

+ ++ +


+ ++ +

+ ++ +

+ ++ +

+ ++ +

+ ++ + = == =




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 RDA (3)
measure the relationship between earnings timeliness with regard
to good news and DA.
The coefficients on DRDA (8) 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 8 <
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 Basus 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 DRDA 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
DRSIZE is significantly negative as expected in all
models, which accordance with the larger firms tends to
report fewer conservative earnings. The coefficient on
DRLEV 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 firms 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.
6010 Afr. J. Bus. Manage.



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
RDA 0.101 2.497 0.013
RMB -0.002 -1.437 0.151
RLEV 0.017 3.317 0.001
RSIZE 0.012 0.878 0.380
DR 2.102 2.635 0.009
DRDA -0.115 -0.537 0.592
DRMB 0.020 1.679 0.094
DRLEV -0.089 -3.003 0.003
DRSIZE -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.


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6012 Afr. J. Bus. Manage.



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
RDA 0.066 1.454 0.147 0.254 3.113 0.002
RMB -0.001 -1.024 0.306 -0.002 -2.236 0.026
RLEV 0.023 4.142 0.000 0.022 4.180 0.000
RSIZE 0.005 0.404 0.687 0.021 1.582 0.115
DR 4.751 4.293 0.000 6.774 4.509 0.000
DRDA -0.215 -1.182 0.238 -1.468 -5.070 0.000
DRMB 0.046 2.430 0.016 0.117 2.472 0.014
DRLEV -0.023 -1.057 0.291 -0.063 -1.915 0.056
DRSIZE -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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African Journal of Business Management Vol. 6(19), pp. 6014-6018, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2820
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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: zw453@163.com. 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 t
y y y
t
Y = L
e
t t t
Y = M +
1
(0, )
t
N e x
- t t
H :
11, 22, ,
[ , , , ]
T
t t nn t
e e e e =
t
L
t
H
t
H
1 t
x
- t
H
q
e
t
p
t
H
1 J
t
x
t
H

1 ' ' 1
0 1
) ( ) ( ) )
t t t t
vec C C vec x x A L vec B L vec e e = + + +
t t
H H
2 *' * *' ' * *' ' * *' 2 *
0 0 1 1
1 1 1 1 1
q p K K K
k t t k ik t i t i ik jk j jk
k k i k j
C C C x x C A A B B e e
- - -
= = = = =
= + + +
t t
H H
) vec

1
) vec
t
H
( ) L a ( ) L b
0
C 2
1 n
1
C 2 2
n J i
A
i
B 2 2
n n
*
0
C
*
ik
A
*
jk
B
n n
*
0
C
*
1k
C
n J
2
t
H
n
n
3
t
H
ij
r
, , , ij t ij ii t jj t
h h h r =
n t
D
, ii t
h { }
ij
r =
t
G
3
t
H
3
t t t t
H = D G D
t
G
t
H
1 t
x
-
, ii t
h
m
, ji t
h
, ji t
h
2
, , , , ,
( ) ( ) ( )
ji t ji ji t j jj t i ii t ji ji t
h c L h L h L h g b b s h = + + + +
6016 Afr. J. Bus. Manage.



(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 t
j j i
h c L h L h L b g a e
=
= + + +

( ) L a ( ) L b ( ) L g j i
q
, ji t
h
, ii t
h
, jj t
h
, ji t
h
,
( )
ji t
L h g
,
( )
j jj t
L h b
,
( )
i ii t
L h b
, ji t
h
, ji t
h

' '
0 1
) ( ) ( ) )
t t t t
vec C C vec x x A L vec B L vec e e = + + +
t t
T T
11, 1 , 1, ,
( , , , , , , )
i i N i N i NN i
A diag a a a a = L L L
t
T
n n t
H
, ji t
h
'
t t
e e
n n C i
A
j
B 2 2
n n
, xy j
b
j
B
( 1) x k n k = - + ( 1) y k n t = - +
, xy j
b
( 1) x k N k - + ( 1) y N l l = - +
, xy j
b
( 1) x k N k - +
[ ( 1) 1] [ ( 1) ] y x N N x N l l = - - - + - -
, xy j
b
( 1) x k N k - + y x =
, xy j
b
, xy j
b
1, 2, , t n = L 1, 2, , k N = L [ / ] x N l =
[ ] g
2
ji ji
a s =
, ij t
h
t
H
ij
r
, , ij ii t jj t
h h r
n
,
0.5
ii t
h
e
,
0.5
e
ij t
h
t
H
2
, , , , ,
( ) ( ) ( )
ji t ji ji t j jj t i ii t ji ji t
h c L h L h L h g b b s h = + + + +
2
, , , ,
1
( ) ( ) ( ) log( )
N
ii t ii ii t j ji t i t
j
h c L h L h L b g a e
=
= + + +





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
e
t t t
Y = M +
1
(0, )
t
N e 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
+
+


=



t
H

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 0 log( )
t t
t t
t t
t t
h c a b b
h c a b b
vec
h c a b
h c a
e
h
h
e
-
-




= = + +





t
T
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
-
-
-
-









1, 1 1, t t
y u e = +
2, 2 2, t t
y u e = +
2
11, 11 11 11, 1 12 21, 1 11 11, 1
log( )
t t t t
h c b h b h a e
- - -
= + + +
21, 21 21 11, 1 22 21, 1 24 22, 1 21 21, t t t t t
h 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 t
h c b h b h b h s h
- - -
= + + + +
2
22, 22 43 12, 1 44 22, 1 44 22, 1
log( )
t t t t
h c b h b h a e
- - -
= + + +
2 t
x
-
11, 21, 1 2 12
cov( , )
t t t
h h b x
- -
=
22, 21, 1 2
cov( , ) 0
t t t
h h x
- -
=
11, 12, 1 2
cov( , ) 0
t t t
h h x
- -
=
22, 12, 1 2 43
cov( , )
t t t
h h b x
- -
=
11, 1 21, 2 21
cov( , ) 1 /
t t t
h h b x
- -
=
22, 1 21, 2 24
cov( , ) 1 /
t t t
h h b x
- -
=
11, 1 12, 2 31
cov( , ) 1 /
t t t
h h b x
- -
=
22, 1 12, 2 34
cov( , ) 1 /
t t t
h h b x
- -
=
2 t
x
-
, i t
y
, ji t
h
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 t
y u h h h a b b c N u e e 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 t
y u h h h a b b c N u e e 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 t
h h h h b b b c N c b h b h b h s 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 t
h h h h b b b c N c b h b h b h s s
- - - - - -
+ + + :
u a b c
2
s
(0, 0.001) u N : (0, 0.001) c N :
( , ) a b
*
a
*
b
*
2 1 a a = -
*
2 1 b b = -
20 a =
1.5 b =
2
s
2
(2.5, 0.025) IG s :
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.


REFERENCES

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Engle RF, Kroner KF (1995). Multivariate simultaneous generalized
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Forbes KJ, Roberto R (2002). No Contagion, Only
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Financ., 57: 2223-2261.
Lin S X, Tamvakis M N (2001). Spillover Effects in Energy Futures
Markets. Energy Econom., 23: 43-56.
Meyer RY (2000). BUGS for a Bayesian analysis of stochastic
volatility models. Econom. J., 3: 198-215.
Taylor SJ (1994). Modeling stochastic volatility: A review and
comparative study. Math. Financ., 4: 183-204.
Tse YK (2000). A test for constant correlations in a multivariate
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African Journal of Business Management Vol. 6(19), pp. 6019-6027, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2913
ISSN 1993-8233 2012 Academic Journals



Full Length Research Paper

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: lq7991@126.com.

Accepted 24 January, 2012

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 clusters 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 Gongs 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 regions
status quo of FII or the level of new industrialization. Cai
et al. (2010) proposes an indicator system and evaluates
Shanghais status quo of FII in terms of social environ-
ment, large-size enterprises and middle and small size
enterprises. According to Cais 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 Guangzhous 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 Peoples 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 industrys 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 peoples 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 FIIs 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 k
x i k
= =
,
( 1,...30; 1,...,16)
i k
x i k

= = =
%
, .
,
.
( 1,...30; 1,...,16)
i k k
i k
k
x x
x i k
s
.k
x =
,
( 1,...,30)
i k
x i
.k
s
=
,
( 1,...,30)
i k
x 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 Bartletts 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 i
th
provinces score about factor j; , is the
j
th
factors score coefficient about the k
th
indicator; , is
listed in Table 6.

Step5: Regarded the factors eigenvalues that are more
than 1 are weight, and each provinces total score
calculated according to Formula 3.

(3)

is the i
th
provinces total score; , is the eigenvalue of
factor j.
Step6: Regard vector as the coordinate of
i
th
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,...,30
i j k j i k
k
f c x j p i
p
, i j
f
, k j
c
, k j
c


=
= =
+ + +
,
1
1 2
1,...,30
...
p
j
i i j
j
p
F f i
i
F
j
( )
,1 ,2 ,
, ,...,
i i i p
f f f
k
u
k
l
, i k
d
6022 Afr. J. Bus. Manage.



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 provinces 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 F
i

(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 I
14
, I
15
, I
5
, I
7
, I
8
, and
the correlation coefficients were 0.904, 0.920, 0.939,
0.756 and 0.907. Indicators I
14
and I
15
evaluated the
volume of principal industrial pollutants discharged. I
5
and
I
7
reflected the scale of information industry and
information infrastructure, these could be collectively
referred to as informationization level. Indicator I
8

evaluated governments financial investment in scientific
and technology (S&T). So the first factor was named
pollutant discharge, informationization level and
governments investment factor.
The correlation coefficients between the second factor
and indicators I
9
, I
10
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,...,30
i k i k
k
FIII w d i
, i j
f
Qiang 6023



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 I
12
and I
11
, 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 I
16
and
negatively correlated with I
1
, and the correlation
coefficients were 0.071 and -0.591. It reflected the
development of tertiary industry.
Analysis of factors 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 Shanghais scores were obviously higher
than other provinces, so these two provinces had
considerable advantage in pollutants discharging, infor-
mationization level and governments 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
enterprises investment in S&T. Beijing (-0.504) was 20
th
.
It indicated, in Beijing, though governments financial
investment was great, industrial enterprises 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 Heilongjiangs development were not balanced,
and factor 3s score was obviously higher than other
provinces, factor 1s score ranked 5
th
, factor 2s score
ranked 10
th
, factor 4s 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 Chinas western region was lower than Chinas
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 Zhejiangs 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 11
th
, 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 Shandongs 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 governments 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.
Qiang 6025



Table 7. Factors 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,
6026 Afr. J. Bus. Manage.



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 regions level
Qiang 6027



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



of fusion.


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African Journal of Business Management Vol. 6(19), pp. 6028-6036, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2942
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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: RustB@cput.ac.za. 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.


Kirkpatricks 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 Phillipss 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.


Brinkenhoffs 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 countrys 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 programmes 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 CPUTs 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 participants
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 todays 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 departments 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

6034 Afr. J. Bus. Manage.



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 teams 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
individuals 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

6036 Afr. J. Bus. Manage.



developed in that it links with the participants experience.


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African Journal of Business Management Vol. 6(19), pp. 6037-6051, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2972
ISSN 1993-8233 2012 Academic Journals



Full Length Research Paper

Exploration of the Democratic Republic of Congo (DRC)
textile industry survival: Case of La Socit Textile de
Kisangani (SOTEXKI)

A. Mwamayi
1
*, G. Wood
2
, R. Haines
3
and M. Brookes
4


1
Department of Development Studies, Nelson Mandela Metropolitan University (NMMU), Port Elizabeth (PE), Eastern
Cape, Republic of South Africa.
2
School of Management, Shielffield university, UK.
3
Department of Development Studies, Nelson Mandela Metropolitan University (NMMU), Port Elizabeth (PE), Eastern
Cape, Republic of South Africa.
4
Department of Economic and Statistics, Middlesex University, UK.

Accepted 24 January, 2012

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 Socit 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 industrys 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: adam3fr@hotmail.com.
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. SSAs 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
worlds 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 SOTEXKIs
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. Marees 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 Chinas
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. Chinas 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 organisations 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 worlds
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
industrys competitiveness in the DRC.


PRESENTATION OF THE DRC TEXTILE AND
CLOTHING INDUSTRY

La Socit 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. Socit 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

6040 Afr. J. Bus. Manage.



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
SOTEXKIs 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 DRCs 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 DRCs economy did experienced a
negative growth. Actually, the DRCs 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 studys 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
industrys 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 respondents
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

6042 Afr. J. Bus. Manage.



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 firms 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 Dieudonn
Kasembo, an official to lease between the private
operator and Commissariat Gnral 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

6044 Afr. J. Bus. Manage.



Table 3. Production vendues or sales of SOTEXKI tissus in meters (m).

Nature de prod
Year Production vendue Production stocke 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 Gnrale des Impts (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 Gnrale.



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 Enqute 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 firms 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 firms 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 countrys 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 Dieudonn Kasembo, an official to lease
Mwamayi et al. 6047



between the private operator and Commissariat Gnral
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 Gnral 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
(lInspection 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 Congos 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, RAIDs 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 lEmploi-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 countrys 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 industrys 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 products 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. Chinas 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




competitiveness and increase productivity;
(2) A need to support and assist this survival firm to keep
complying to best labour practice and help to improved
the different existing channels for collaboration between
employers, union and other important stakeholders;
(3) Protect and promote the local industry by giving the
only survival company some adequate good incentives
and stimulate more investors in the sector to increase the
national demand which is covered by East Asian
products;
(4) Lobbying continuously for effective mechanism for
monitoring, evaluating and reviewing both trade and
industrial policy on continuous basis;
(5) Provide firms in the sector with findings to help them
raise their competitiveness levels and stimulate growth
productivity;
(6) Stop corruption and policy enforcement is more
needed to enhance efficiency and competitiveness of the
local industry.


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African Journal of Business Management Vol. 6(1), pp. 6052-6056, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.2977
ISSN 1993-8233 2012 Academic Journals




Full Length Research Paper

Study of relation between accounting information with
market venture: Case study of Iran Stock Exchange

Iman Zare* and Jafar Nekounam

1
Young Researchers Club, arak Branch, Islamic Azad University, arak, Iran.

Accepted 22 January, 2012

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:
iman.accounting@yahoo.com 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 companys 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 companys 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
companys 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 ( ) 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.
6056 Afr. J. Bus. Manage.



Table 2. Results of test of assumptions.

Statistical
component
Assumption
Pierson
corr.
Determinatio
n 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.
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African Journal of Business Management Vol. 6(19), pp. 6057-6069, 16 May, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.3050
ISSN 1993-8233 2012 Academic Journals





Full Length Research Paper

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: ashenafizb@gmail.com. Tel: +251911446832.

Accepted 25 January, 2012

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 countrys 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 (Hbler 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--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 recog