Rational Irrationality

The making of property decisions in firms as a part of resource allocation processes- A Korean Example

A thesis submitted in fulfilment of the requirements

for the degree of Doctor of Philosophy

Hyemi Hwang Faculty of Built Environment University of New South Wales Sydney, Australia

August 2011

Originality Statement

I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgment is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project’s design and conception or in style, presentation and linguistic expression is acknowledged.

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Abstract

According to the profit maximising assumption and neoclassic economics view of the behaviour of the firm, no firm is expected to behave differently in the market or it will be forced out of the market by incurring higher costs than the competitors. This research aims to investigate how property decisions as a part of resource allocation processes can be understood away from seemingly unrealistic and restrictive view of neoclassical economic theory of the nature of the firm and what motivates firms to behave in such ways that are observed in property markets.

By internalising incurring transaction costs, accepting the bounded rationality of people involved in property decision-making and recognising asset specificity, what a firm achieves is a new set of motivational assumptions which are distinguished from the theory of neoclassical economics on the nature of the firm. This new set of behavioural assumptions, derived from institutional economics, provides a little more realism to understanding the nature of the firm. It is also expected to broaden microeconomics approach into property decision making behaviours. Questionnaires given to asset and property managers in property markets in Korea for the interfirm- level behaviour of firms and interviews with employees in corporations in Korea provided insights into how property decisions are made as a part of resource allocation processes and the past experiences of firms in property markets for both an examination of intra- and interfirm-level behaviour.

The aim of the research is achieved with illustrating of a theoretical property decision mechanism for a firm. By synthesising a theoretical framework of assumptions of firms’ behaviour and the results from the analysis, the theoretical mechanism will be formulated and presented as a two parts algorithm illustrating how property decisions are made internally and consequently in the property markets. Non-monetary values of property, which include values of property ownership and attributed values of property, were identified to motivate firms to take one of the proposed initial positions. Inefficiency in the property market often forces firms to reposition themselves in the market. The culture which is formed by the authority figures in the corporate structure, also affected property decisions in the property market. I

Acknowledgements

It was a cold, wet day in June, gloomy and desperate, just like how I felt, and my supervisor asked me, “Are you looking for a supervisor?” on first seeing me. That was exactly what I wanted, what I have got and more. I was just determined enough to make my supervisor, Dr Göran Runeson, come out of retirement again. When that determination often became shaky, my supervisor was my strongest supporter, and it was his encouragement which pulled me out of misery. I have learnt to do research. I have learnt to think like a researcher, and hopefully I will soon be able to master writing while I am thinking! Most sincere thanks to my supervisor. As he promised that his supervision comes with a lifetime guarantee, I return my respect and friendship for him in kind.

It is only appropriate to thank my co-supervisor, Dr Jinu Kim, for his guidance through my candidacy. I would have had no better co-supervisor to complement my supervisor’s supervision. I would also like to thank him for keeping me occupied with work to do when I needed to be.

Especially to my dearest friends, Seong Ah, Sun Young and Rosa, thank you for putting up with me and being there for me all this time. I am still normal enough to pass as sane because of you. I owe you my sanity. Also my greatest gratitude to all my friends and acquaintances who helped me out without hesitation along the way to the completion of this thesis. Only with your help was it possible to finish the research.

To my parents, I thank them for their bottomless love, sacrifices and patience. They have been waiting a long time for their daughter to finish schooling. Finally, I am honoured to present my parents with the highest level of academic achievement. Thank you for trusting me and letting me being me. I love you both.

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Table of Contents

Abstract ...... I

Acknowledgements ...... II

Table of Contents ...... III

List of Figures ...... X

List of Tables ...... XII

Chapter 1 Introduction ...... 1

1.1. Background to the research ...... 1

1.2. Scope and importance of the research ...... 3

1.3. Research question ...... 4

1.4. Research aim ...... 5

1.5. Research objectives ...... 6

1.5.1. Objective 1 ...... 6

1.5.2. Objective 2 ...... 7

1.5.3. Objective 3 ...... 8

1.5.4. Objective 4 ...... 11

1.6. Research outline ...... 12

Chapter 2 Literature Review ...... 15

2.1. Introduction ...... 15

2.2. Traditional economic theories and firms ...... 17 III

2.3. Criticism of microeconomics ...... 18

2.3.1. Profit maximisation assumption ...... 19

2.3.2. Rationality assumption ...... 21

2.4. Motivations for the behaviour of the firm ...... 23

2.4.1. The nature of the firm ...... 23

2.4.2. Introduction to institutional economics ...... 25

2.4.2.1. Transaction costs theory ...... 26

2.4.2.2. Bounded rationality and opportunism ...... 27

2.4.2.3. Asset specificity ...... 29

2.4.2.4. Vertical and horizontal integration ...... 30

2.4.2.5. Organisation and hierarchy ...... 31

2.4.3. Principal agent theory ...... 32

2.4.4. Property rights approach ...... 34

2.4.5. The firm as nexus of contract...... 36

2.5. Decision-making and corporations ...... 38

2.5.1. Decision-making model ...... 38

2.5.2. Strategy and corporate decision-making ...... 40

2.5.3. Culture in organisations ...... 42

2.5.4. Leaders and the behaviour of the firm ...... 44

2.5.5. Asset specificity and property ...... 46

2.6. Attributed values of property and the firm...... 50

2.6.1. Utility of property...... 50

2.6.2. Property as a profit booster ...... 52

2.6.3. Property as means of control ...... 52

2.6.3.1. Reasons for owning property ...... 54

2.6.3.2. Reasons for leasing property ...... 54 IV

2.6.4. Property as a supporting tool for business activities ...... 55

2.6.4.1. Property and the growth of the firm ...... 56

2.6.4.2. Property and external environments ...... 57

2.6.5. Property as a symbol ...... 59

2.7. Summary ...... 61

Chapter 3 Methodology and Methods ...... 62

3.1. Introduction ...... 62

3.2. Research philosophy ...... 63

3.2.1. Methodology ...... 63

3.2.2. Explanations and mechanisms ...... 65

3.2.3. Explanations in organisational study ...... 67

3.3. Research Design ...... 68

3.3.1. Concepts and scope ...... 69

3.3.2. Aspects of theory ...... 71

3.3.3. Units of analysis ...... 73

3.4. Surveys...... 77

3.4.1. Surveys design ...... 79

3.4.1.1. Asking questions ...... 79

3.4.1.2. Questionnaire: Self-administered questionnaires ...... 81

3.4.1.3. Interviews: Face- to-face interviews employing an interview schedule ...... 82

3.4.2. Data sampling ...... 83

3.4.2.1. Sampling units ...... 83

3.4.2.2. Snowball sampling ...... 84

3.4.2.3. Contacting respondents and response rate ...... 85 V

3.4.3. Data analysis ...... 86

3.4.3.1. Mode of collected data ...... 86

3.4.3.2. Thematic analysis ...... 87

3.5. Description of the collected data ...... 89

3.5.1. Part 2-1 Survey: Self-administrated questionnaire ...... 89

3.5.2. Part 2-2 Survey: Face-to-face interviews ...... 91

3.6. Summary ...... 94

Chapter 4 Analysis and Results ...... 96

4.1. Introduction ...... 96

4.2. Part 2-1 Self-administrated questionnaires ...... 97

4.2.1. The property market participants ...... 97

4.2.2. Scope of asset and property management companies’ service ...... 99

4.2.3. Role of property as seen from the property market ...... 100

4.2.4. Owner-occupiers as seen from the property market ...... 103

4.2.5. Property ownership as seen from the property market ...... 105

4.2.6. Costs of using market agents ...... 107

4.3. Part 2-2 Face-to-face interviews ...... 108

4.3.1. The property decision-making process ...... 109

4.3.2. Property management ...... 113

4.3.3. Property strategies and other company missions ...... 116

4.3.4. The participating companies’ current property portfolio ...... 122

4.3.5. Attributed values of property ...... 124

4.3.5.1. G-1: A publicly owned business group without a significant major individual shareholder in the manufacturing industry ...... 125

VI

4.3.5.2. G-2: A publicly owned business group with a strong major individual shareholder in the manufacturing industry ...... 127

4.3.5.3. G-3: A publicly owned business group with a strong major individual shareholder in the manufacturing industry ...... 128

4.3.5.4. G-4: Publicly owned business group with a strong major individual shareholder in manufacturing and in the retail industry...... 130

4.3.5.5. G-5: Publicly owned business group with a strong major individual shareholder in the construction management industry ...... 132

4.3.5.6. G-6: Foreign direct invesment business group in retail industry .... 133

4.3.5.7. NG-7: Foreign direct investment company in the retail industry.... 135

4.3.5.8. NG-8: Publicly owned company with a strong major individual shareholder in the banking and insurance industry ...... 137

4.3.5.9. NG-9: The property fund and the operating company ...... 138

4.3.5.10. NG-10: Privately owned company in the service industry ...... 140

4.3.5.11. NG-11: Privately owned company in the manufacturing industry .. 141

4.3.5.12. Summary of concepts and themes ...... 141

4.3.6. Attributed values of property ownership ...... 142

4.3.6.1. Protecting property rights ...... 142

4.3.6.2. Vertical and horizontal integration ...... 146

4.3.6.3. Image: Prestige, branding, stability and credibility ...... 149

4.3.6.4. Accumulated property ...... 150

4.3.6.5. From an owner-occupier to a lessee ...... 150

4.3.7. Headquarters, the symbol of non-monetary-value-related property .... 152

4.3.8. Alternative method of protecting property rights ...... 157

4.3.9. Property market as constraints ...... 159

4.3.9.1. Use of market agents ...... 159

4.3.9.2. Market availability ...... 161 VII

4.3.9.3. Importance of lawyers and contracts ...... 163

4.4. Results ...... 164

4.4.1. Property decision-making behaviour styles ...... 165

4.4.2. Results of hypotheses tested ...... 170

4.4.2.1. Hypothesis 1 ...... 170

4.4.2.2. Hypothesis 2 ...... 171

4.4.2.3. Hypothesis 3 ...... 173

4.4.2.4. Hypothesis 4 ...... 174

4.5. Summary ...... 176

Chapter 5 Discussion ...... 178

5.1. Introduction ...... 178

5.2. Property positioning of corporations ...... 178

5.3. What motivates property decisions of firms? ...... 183

5.4. What is property ownership in the firm? ...... 186

5.5. What attributes determine the utility of owning property? ...... 187

5.6. How do organisation, property markets and the nature of the firm help us to understand property decision-making behaviours in firms as a part of resource allocation processes? ...... 191

5.7. Summary ...... 194

Chapter 6 Summary, Conclusion and Recommendations for Future Research ... 195

6.1. Introduction ...... 195

6.2. Review of the research ...... 196

6.2.1. Research question ...... 196

6.2.2. Research aim ...... 196

VIII

6.2.3. Research objectives...... 197

6.2.3.1. Objective 1 ...... 197

6.2.3.2. Objective 2 ...... 198

6.2.3.3. Objective 3 ...... 199

6.2.3.4. Objective 4 ...... 201

6.3. Conclusion ...... 202

6.3.1. Recommendations for future study ...... 204

References ...... 207

Appendix A: Questionnaire ...... 222

Appendix B: The Interview Schedule ...... 227

IX

List of Figures

Figure 1-1 A research outline road map ...... 13 Figure 2-1 The determination of decision-making ...... 39 Figure 2-2 Ownership and involvement ...... 53 Figure 3-1 An overview of the research stages ...... 76 Figure 3-2 A research flowchart ...... 76 Figure 3-3 Participant selection and questionnaire collection procedure ...... 91 Figure 4-1 Types of asset and property managers’ service ...... 99 Figure 4-2 Reasons for asset and property managers’ service ...... 100 Figure 4-3 Investment or factor of production ...... 101 Figure 4-4 Prioritising attributed values of property ...... 102 Figure 4-5 Percentage of owner-occupier clients of individual respondents ...... 104 Figure 4-6 Why firms own property ...... 106 Figure 4-7 Why firms do not own property ...... 106 Figure 4-8 General property decision-making process ...... 111 Figure 4-9 Foreign investment companies’ property decision process ...... 112 Figure 4-10 Property decision-making process of NG-9 ...... 113 Figure 4-11 Scope of property management ...... 115 Figure 4-12 Property inventory ...... 115 Figure 4-13 Property strategy ...... 118 Figure 4-14 Strategy characteristics ...... 120 Figure 4-15 Evaluating property productivity ...... 122 Figure 4-16 Role of property in G-1 ...... 126 Figure 4-17 Role of property in G-2 ...... 128 Figure 4-18 Role of property in G-3 ...... 129 Figure 4-19 Role of property in G-4 ...... 131 Figure 4-20 Role of property in G-5 ...... 133

X

Figure 4-21 Role of property in G-6 ...... 135 Figure 4-22 Role of property in NG-7 ...... 136 Figure 4-23 Role of property in NG-8 ...... 138 Figure 4-24 Role of property in NG-9 ...... 140 Figure 4-25 Role of property in NG-10 ...... 140 Figure 4-26 Role of property in NG-11 ...... 141 Figure 4-27 Property ownership ratio changes ...... 151 Figure 4-28 Attributed value of headquarters building ...... 157 Figure 4-29 Use of “the developer,” G-6 ...... 160 Figure 4-30 Property dealing behaviour styles ...... 165 Figure 5-1 Initial property position algorithm ...... 183 Figure 5-2 Market property position algorithm ...... 193

XI

List of Tables

Table 2-1 Organisational implications of behavioural assumptions ...... 28 Table 3-1 Comparison of the three schemata ...... 64 Table 3-2 A breakdown of theories introduced ...... 70 Table 3-3 Company selection criteria ...... 93 Table 3-4 Summary of the participating companies ...... 93 Table 4-1 Affiliation of property teams in corporate governance ...... 110 Table 4-2 The differences in the participating companies ...... 124 Table 4-3 Concepts and themes of property in individual corporations ...... 141 Table 4-4 Headquarters owned and leased ...... 153 Table 4-5 Attributed values of headquarters and headquarters holding status ...... 156 Table 6-1 Hypotheses test results ...... 201

XII

Chapter 1 Introduction

1.1. Background to the research

This thesis is about theoretically challenging neoclassical economics’ view on firms and firms’ behaviour, in property dealings. Neoclassical economic theory approaches firms as resource mechanisms which are assumed to be motivated to maximise profit. Firms also are expected to be rational and have perfect knowledge of prices and costs under a perfectly competitive market assumption according to the neoclassical economics. As one of the important resources for firms to produce goods and services, property is a long-term commitment for a firm as a factor of production and is assumed to be approached from costs, prices and returns perspectives.

With neoclassical economic theory, it is only natural to approach firms’ property decisions as governed solely by costs and prices. All firms are expected to have perfect knowledge of costs and prices involving property dealings and to be rational. Moreover, property dealings are assumed to help maximise profit. Firms with different behaviour and motivation should be forced out of the market, if they incur higher costs of transactions than their competitors.

The distinction between firms’ property dealing behaviours is clear in neoclassical economic theory. What motivates firms to take any resources allocation decisions should be explainable by costs, prices and returns. Firms make property decisions using rationality and perfect knowledge of cost, prices and returns. Therefore, the criteria of neoclassical economic theory in property-dealing behaviour rest on costs, prices and returns.

Rationality in microeconomics means that market participants are expected to be voracious in order to maximise profit. For microeconomics to work, all market 1 participants are expected to act rationality to survive in competitive markets (Simon, 1978). Market participants will want more of everything that adds to profit. The market participants do not need to be literally irrational to be considered as irrational in neoclassical economic theory. Irrational behaviour means only that they are not satisfying all the rationality assumptions in neoclassical economics. Irrationality is everything except this narrowly defined rational behaviour in microeconomic theory. Branches of institutional economics, where bounded rationality and opportunism originated, introduce more reality in the rationality assumption discussions. This new set of behavioural assumptions could be introduced as a further criticism on neoclassical economics theory.

Property is a ‘resource’ that market participants need to allocate to achieve their objectives (either to maximise profit or utility). Therefore, making property decisions are in principle the same as making allocation choices of any other scarce resources. The efficient use of resources, which primarily means the allocation of resources by costs and productivity, is also at the core of microeconomics. The allocative efficiency can only exist in perfectly competitive firms and it occurs when a firm in perfect competition set their price at the point where average cost equals to marginal cost and equals to marginal revenue (Frantz, 1997). For instance, because a monopolising firm could increase the price of its product above the marginal cost of production, they are often considered to be allocatively inefficient. Since firms are assumed to be efficient as a part of the neoclassical economics assumptions, efficiency means allocative efficiency.

Microeconomics focuses on allocative efficiency and excludes other types of efficiencies (Leibenstein, 1966, 1975; Shepherd, 1972; Alessi, 1983; Hansen and Wernerfelt, 1989; Frantz, 1992; Conlisk, 1996). Leibenstein (1966) who pioneered the concept of X-efficiency, which is the ‘undefined type of efficiency (1966:392)’, argued that X-efficiencies could be more significant than allocative efficiencies in some instances. He questioned the assumptions of microeconomics as he included ‘nonallocative efficiency’ as an important aspect of the process of the growth of the firm thus assuming the firm may maximise something other than profits. What

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Leibenstein and others shared is the belief that a firm maximise something other than profits without being irrational, thus having “a more complex objective function” than that used in conventional theory (Frantz, 1997:13).

Neoclassical economic theory provides unique opportunity for mathematical analyses to explain the outcome of firms’ action. However having a simple and clear assumption of firms’ behaviour sometimes prevents the theory from being flexible, enough to portray a more complex reality. The criticisms of the assumptions of neoclassical economic theory are that theory does not enable a wider reality to be a part of behavioural assumptions so that a broader range of actions could be deciphered.

1.2. Scope and importance of the research

The scope of the research is to challenge the traditional neoclassical economic theory approach to the nature of the firm and property. The research contributes to our understanding of the motivating force in corporate resource allocations in regards to property transactions by identifying an alternative set of assumptions for economic theories as a complement to the traditional costs and prices approach to property decisions in corporations.

Testing the profit maximisation assumption of neoclassical economics in corporate resource allocations in regards to property transactions is the first part of the research contribution. That the ultimate goal of firms’ decisions is only maximising profit and that alone will be reviewed because reality offers more interesting perspectives into firms’ behaviour. No firm in reality could fit exactly into the behavioural assumptions of traditional microeconomics, but the theory ensures that a broader spectrum of firms’ behaviours is largely excluded. The theory of the firm and institutional economics theories effectively contribute new and additional concepts to the nature of the firm. The corroboration of the theory of the firm and aspects of institutional economics could support the research to introduce new meanings to the existence of the firm as more than a resource allocation mechanism. Furthermore, the concept of the firm as an organic mechanism which involves people in resource allocations opens

3 the possibility that profit and profit alone may not be the only factor that a firm wants to maximise.

The second part of the research contribution is the identification of a set of behavioural assumption that can be included as an alternative to traditional neoclassical economics assumptions for the tested theories to work and also establish the nature of the relationship. The important point that must be made here is that the research does not reject neoclassical economic theory as a tool to understanding the nature of the firm. Rather the research attempts to add a set of empirically verified factors into the discussion on the reasons for and the aims of the firm in neoclassical economics. This will broaden the explanatory ability of microeconomics in the resource allocation processes regarding property. This discussion will start with a review of the neoclassical economic theory’s approach to corporate resource allocations followed by theories on the nature of the firm. Institutional economic theories will then be examined to introduce complimentary assumptions to cover broader aspects of the nature of the firm.

The research question is proposed as follows.

1.3. Research question

How can firms’ resource allocation decisions in terms of property transactions be theoretically explained?

Firstly, do firms make property decisions to maximise profit only?

Secondly, if not what is a relevant set of behavioural assumptions that explains the firms’ utility function with regards to property?

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1.4. Research aim

To derive empirically a mechanism that illustrates a theoretical model for how corporate resource allocation decisions are made regarding property transactions.

The research aims to theoretically explain property decisions as a part of resource allocation process in firms. The theoretical illustration of property decisions as a part of resource allocation process in firms will be achieved by,

Firstly reviewing firms’ resource allocation processes in neoclassical economic theory to learn the components of the behavioural assumptions under neoclassical economic theory.

Secondly testing the theory of the firm and a set of institutional economics theories which include transaction costs theory, principal agent theory and property rights theories to identify a set of behavioural assumptions for the tested theories to work.

Thirdly empirically identifying property decision behaviours which are not considered and cannot, therefore, be included as rational and efficient resource allocation behaviour under the behavioural assumptions of neoclassical economic theory.

Fourthly testing postulates that the utility function of the firm with regards to property leads to behaviour that would be deemed as irrational and inefficient under neoclassical economics’ behavioural assumption.

Fifthly synthesising the findings of the research analysis to verify that the identified set of assumption could indeed include behaviours which would be deem to be irrational under the behavioural assumptions of neoclassical economic theory.

Establishing the determinants of property decisions as a part of resource allocation process will enable the construction of a theoretical mechanism model that suggests possible a theoretical mechanism of firms’ property decisions as a part of resource 5 allocation processes will provide more explanatory power on the nature of the firm and property in microeconomics.

1.5. Research objectives

In order to elaborate the research question and the aim, the research objectives are established. The research objectives have been designed for each chapter and will provide a solid outline of the research.

1.5.1. Objective 1

To examine the nature of the firm and how resource allocation decisions regarding property transactions are made in the firm through multi-level theories in economics and on study of organisational behaviour

This objective will be reached through a literature review on the nature of the firm and property and provide the information necessary to construct a multi-theoretical framework for firms’ property decisions as a part of resource allocation processes. This objective will be dealt with in Chapter 2 of the thesis. This chapter approaches the research questions from an integrated multi-theoretical perspective to provide a theoretical framework for the research. It discusses the evolution of a theoretical framework for firms and property, starting from traditional economic theory to identifying applicable new approaches which have developed into modern ideas of firms and property. The theories will be evaluated for their contribution to our understanding of modern firms and property relationships. Reviewing firms’ resource allocation processes in neoclassical economic theory will allow the research to learn the components of the behavioural assumptions under neoclassical economic theory.

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The examination of the theory of the firm and a set of institutional economic theories which include transaction costs theory, principal agent theory and property rights theories will allow the research to identify a set of behavioural assumptions for the examined theories. The theories will provide a framework for resource allocation behaviours, which within neoclassical economic theory would be considered irrational and inefficient. This would give us a better understanding of the firms’ resource allocation mechanism.

1.5.2. Objective 2

To construct research philosophy and to establish an appropriate research methodology and methods which will facilitate answering the research question

The methodology and the method of research depend on the nature of the research aims. This objective requires the establishment of the methodology and the methods that best accommodate to the research question. This research is attempting to challenge behavioural assumptions on the nature of the firm under neoclassical economic theory. It initiates a behavioural study and introduces two new dimensions in investigating the nature of the firm and property: firstly an approach to conducting mixed theories and multilevel analyses, and secondly methods to analyse behavioural data (qualitative data). Qualitative data on firms’ experiences and policies enables the research to take in broader concepts of firms’ property decisions as a part of resource allocation processes.

This objective will be dealt with in Chapter3. After the research philosophy is presented, follows a discussion of the research design and methods to be used to collect data.

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1.5.3. Objective 3

To empirically investigate property decision behaviours in order to identify and categorise other behaviours (which are often deemed to be irrational behaviours in neoclassical economic theory) in property dealings other than that is assumed to be rational and efficient in neoclassical economic theory and,

To test hypotheses which will show a mechanism between a new set of behavioural assumptions and firms’ property decision making behaviours

Achieving objective 3 involves presenting two different sets of results from the analysis. First part of the results will entail empirically identifying and categorising of other property decision behaviours including these which cannot be included as rational behaviour and efficient resource allocation behaviour under the behavioural assumptions of neoclassical economic theory. Second part of the results will be realised by testing postulates about the relationships between a new set of behavioural assumptions. This will enable us to postulate a theoretical framework that includes property decision behaviour that under neoclassical economics theory would be deemed.

The data will be collected from two separate parts of a survey conducted in Korea. The first part of the survey will be a self-administrated questionnaire to asset and property managers who work in professional property and asset management companies. This part of the survey will be used for an interfirm-level analysis. The condition of the property markets which asset and property managers are currently experience are expected to provide some general information about Korean property markets where the firms are actively participating. Investigating the outcomes of the firms’ property- dealing behaviour and the characteristics of the outcomes observed from the property markets by asset and property managers, however, will be more important purpose of the first part of the survey. Findings from the first part of the survey are expected to

8 complement and reinforce what is going to be observed from the intrafirm level survey. The second part of the survey will enable an interfirm level analysis thus providing detailed and close up insight into actual firms’ resource allocation process and property decisions as a part of it. The data from the second part of the survey will be analysed to find patterns in firms’ decision-makings thus categorising participating firms based on their past and current experiences. A set of hypotheses derived from a theoretical framework will be tested with the data from both the interfirm and intrafirm level survey. The hypotheses are postulates that show mechanisms for how the theoretical framework works. Categorised decision-making behaviours, some of which would not be considered rational behaviours under the behavioural assumptions of neoclassical economic theory, are expected to be consistent with theories on the nature of the firm and property while other are not.

The followings are proposed hypotheses.

Hypothesis 1 : That a firm aims to reduce transaction costs from property transactions.

This hypothesis provides the first step to include other behaviours which are not included as a part of rational behaviour in traditional neoclassical micro economics by accepting the existence of transaction costs which may cause firms to internalise resource allocations. Internalising resource allocations rather than relying on markets means that the neoclassical price mechanism is not part of the resource allocation and therefore excluded as either rational or efficient under the behavioural assumptions of neoclassical economics. The hypothesis will be examined for both intra- and interfirm- level property decision behaviours to establish if the neoclassical price mechanism (motivated by the desire to maximise profit by reducing costs) is always supported. Alternatively, it may be that a new approach to firms’ motivations derived from the theory of the firm and various institutional economic theories could provide better explanations of firms’ property decision behaviour.

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Hypothesis 2 : That the greater the attributed values firms associated with property ownership, the more likely they are to be an owner-occupiers.

Hypothesis 2 will examine differences in utility which firms’ attaining from property ownership as a part of the resource allocation processes at the intrafirm level. Differences in the utility of property will be examined from property rights and asset specificity aspects. The word utility in economics can often be substituted the word ‘satisfaction’. Unlike profit, utility is not quantifiable. Because utility is interchangeable with ‘satisfaction’ suggested, definitions and measurements of utility are subjective and abstract. To identify utility of property, non monetary attributes of property will be investigated alongside monetary attributes to test this hypothesis.

The concept of utility of property being subjective, the research will also attempt to categorise firms’ property decision behaviours on how it affects the resource allocation processes. With this hypothesis, if a new set of behavioural assumption is affecting firms’ resource allocation processes.

Hypothesis 3 : That property decisions – as a part of resource allocation processes – are influenced by the growth of the firm.

This hypothesis will enable us to test how firms’ resource allocation systems affect its property decisions as a part of resource allocation processes. To reduce transaction costs, some firms choose to integrate vertically or horizontally with their suppliers or customers thus making these relationships internal and hierarchical rather than market relationships. In cases of resource allocations which involve asset specificity, property rights, opportunism and bounded rationality, the outcome is often vertical or horizontal integrations. Property decisions often involve asset specificity, property rights, opportunism and bounded rationality. This hypothesis will enable us to test if property decisions are also subject to the same forces towards vertical and horizontal integrations. 10

Hypothesis 4 : That a firm’s ownership structure affects the firm’s property decisions in their resource allocation processes.

This hypothesis will enable us to test if a firm’s resource allocation process is a mechanical or an organic mechanism which involves people with different perceptions of behaviour. Neoclassical economic theory views firms as a resource allocation mechanic that makes it is possible to have a narrow and strict approach on its behavioural assumptions. Principal agent theory and organisational hierarchy provide broader aspects of human behaviour which include other behaviours. This hypothesis approaches firms as an organic being involving people which implies behaviours that are not included as rational or efficient under neoclassical theory.

1.5.4. Objective 4

To synthesise the two sets of the findings and to present the synthesis as an illustration of a theoretical property decision mechanism as it forms a part of the resource allocation processes

Objective 4 consists of two parts. The first part is to synthesis the two sets of the findings with the existing theory of the firm to test if the findings are consistent with the existing theory. The second part is to present the synthesis as a representation of property decisions as a part of a theoretical resource allocation mechanism which includes other behaviours alongside what is considered as rational and efficient behaviour under neoclassical economics’ behavioural assumptions.

The synthesis of the findings with the existing theory will allow us to achieve two important parts of the research. Firstly the synthesis will provide a chance to verify the consistency of the findings with the existing theory. As previously discussed, one of the 11 aims of the research is to reinforce and complement existing theories rather than falsifying them by providing a new set of behavioural assumptions. This research is not about proving or disproving neoclassical economics approach to the nature of the firm. It is about broadening the explanatory power of the traditional view of the nature of the firm so it can provide more insight into reality.

Once newly identified and categorised behaviours which are not previously included as rational and efficient under neoclassical economics’ behavioural assumptions, and the mechanisms between the two sets of assumptions are verified. They will be presented as a representation of theoretical property decision mechanism as explaining a part of the resource allocation process. This representation will be a part of the achievement of the research objectives.

Objective 4 will be dealt with in Chapter 5 Discussion. This chapter will start with discussing the consistency of the findings with the existing theory on the nature of the firm followed by the presentation of the representation of property decisions as a part of theoretical resource allocation mechanism.

1.6. Research outline

Figure 1-1 is a road map for the research. The roadmap displays how the research question and aim associate with research objectives. It also shows how the individual objectives are linked to the each chapter and displays what is required in each chapter to achieve the objectives. The aims and objectives are also articulated to provide a step-by-step outline of the research and eventually to propose answers to the research question.

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Figure 1-1 A research outline road map

Research Question How can firms’ resource allocation decisions in terms of property transactions be theoretically explained?

Firstly, do firms make property decisions to maximise profit and that alone?

Secondly, if not what is a relevant set of behavioural assumptions that explains the firms utility function with regards to property?

Research Aim

To derive empirically a mechanism that illustrates a theoretical model for how corporate resource allocation decisions are made regarding property transactions. Theories introduced The theory of the firm Transaction costs theory Research Objective1: Chapter 2 Literature Review Asset specificity To examine the nature of the firm and how resource Property rights approach allocation decisions regarding property transaction are made Vertical/horizontal Integrations in firms through multi level theories in economics and on Principal agent theory study of organisational behaviour. Bounded rationality and opportunism Organisation and hierarchy Research Objective2: Chapter 3 Methodology and Methods To construct research philosophy and to establish an Putnam’s Schema II appropriate research methodology and methods which will facilitate answering the research question.

Research Objective3: Chapter 4 Analysis and Results To empirically investigate property decision behaviours in Facts to be explained order to identify and categorise other behaviours (which are Identify and categorise other often deemed to be irrational behaviours in neoclassical property behaviours as a part of

economics theory) in property dealings other than that is resource allocation processes Verify the consistency assumed to be rational and efficient in neoclassical economic theory and, with the existing A new set of behavioural To test hypotheses which will show a mechanism between a assumptions new set of behavioural assumptions and firms’ property H1 decision making behaviours H2 h H3 H4 Research Objective4: Chapter 5 Discussion An illustrated model of a To synthesise the two sets of the findings to present the theoretical property decision synthesis as an illustration of a theoretical property decision mechanism as a part of mechanism as it forms a part of the resource allocation resource allocation process process.

Chapter 2 Literature Review deals with the first objective of the research. The objective 1 includes constructing a theoretical framework for firms’ property decision-

13 making behaviour as a part of resource allocation processes from a review of the literature. The theoretical framework provides a review of the neoclassical view on the nature of the firm. Other theories on the nature of the firm which include firms’ resource allocation behaviours will be also reviewed in order to construct a new set of behavioural assumption on firms’ resource allocation process. It is suggested that firms have different utility functions which influence their resource allocation and this will be also reviewed.

Objective 2 will be achieved by examining methodological and analytical considerations to identify appropriate methodology, methods and analysis for the research. This objective will be dealt with in chapter 3 Methodology and Methods.

Objective 3 entail the categorisation of firms’ property decision-making behaviours as a part of resource allocation processes and testing a set of hypotheses. Objective 3 will be dealt with in chapter 4 Analysis and Results.

Chapter 5 Discussion will contain the fourth and last objective of the research. The theoretical framework and the findings will be synthesised to verify that findings are consistent with the existing theory. Special attention will be given to how the mechanisms identified through the testing of the hypotheses could be constructed to include various styles of firms’ property decision-making behaviours. The mechanisms and various styles of firms’ property decision-making behaviours will be synthesised as a representation of property decisions as a part of resource allocation mechanism in chapter 5 Discussion.

Each research objective and ultimately the research aim will be combined to answer the research question in chapter 6 Summary Conclusion and Recommendation to provide answers to the research question. The primary aim of the research is to examine neoclassical economics on the nature of the firm by constructing a set of behavioural assumption for the theory to reflect broader aspects of the nature of decision-making in the firm.

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Chapter 2 Literature Review

2.1. Introduction

This chapter discusses the evolution of economic theories for firms and their resource allocation decisions. The discussion starts with conventional microeconomics which shape a fundamental frame for the nature of the firm. In this chapter, conventional microeconomics approach to the nature of the firm will be dissected to review the postulate of neoclassical economics. Criticisms of neoclassical economics will be also discussed to give a fresh viewpoint alongside a traditional approach to the nature of the firm. Examining criticisms of neoclassical economics constitutes the first step towards including other behaviours in resource allocation behaviours which have not been seen previously as a part of rational behaviour. The existence of transaction costs could cause firms to internalise resource allocations which otherwise might rely on market price mechanisms. Internalised resource allocations are often excluded from rational or efficient behaviours because of behavioural assumptions which are postulated in neoclassical economic theories.

Additionally a set of institutional economic theories which include asset specificity, property rights, opportunism and bounded rationality, vertical and horizontal integrations will be reviewed. The review of these theories is expected to provide two theoretical perspectives towards understanding the nature of the firm and firms’ property decisions as a part of resource allocation processes. The first theoretical perspective is to identify and incorporate a new set of theoretical assumptions which could lead to improving the explanatory power of microeconomics on the nature of the firm and property decisions as a part of resource allocation processes. The new set

15 of theoretical assumptions will be drawn from the integrated multi-theoretical perspective of firms with respect to their resource allocation processes. The second theoretical perspective is to investigate a mechanism between firms as an organic mechanism which involve people and property decisions as a part of resource allocation processes. Broader aspects of human behaviours include aspects of behaviour not considered rational and efficient in neoclassical economics.

The utility which firms attain from property decisions will be reviewed to provide further explanations on what motivate firms’ resource allocation processes. Differences in perceived utility from property will examined using the property rights approach and asset specificity. Non monetary attributes of property will be investigated in addition to monetary attributes. Various attributes of property, especially non monetary attributes of property is expected to give firmer explanatory grounds to theories on the nature of the firm in this regard.

It is crucial to break down property decisions in firms as a part of resource allocation processes into appropriate units so that they can be investigated with adequate and relevant combinations of theories. Through the literature review, the relevance of various levels of economic and organisational theories are evaluated for their contribution to our understanding of modern firms and property relationships, to integrate them adequately, therefore providing more explanatory power1 to the theoretical framework.

It must be noted that where possible, original texts are reviewed for the research. Some of the later interpretations of various concepts were developed based on misconceptions of the original ideas, according to Coase, who opened up the initial idea on the nature of the firm, in his attempt to clarify the debate (Coase, 1988b). Therefore, in the interest of avoiding the ambiguity of certain institutional economics

1 According to Bromiley and others (2005, p. 26), an explanation includes a description of prior conditions and the underlying mechanism that connects prior conditions to predictions.

16 ideas which have grown widely ideological in contrast to the original concepts, as much as possible the original texts only are cited for the review.

2.2. Traditional economic theories and firms

Microeconomic theory explains the mechanism of price determination based on supply and demand. At the price where the quantity of the product provided by sellers equals the quantity of the product taken off the market by buyers, the market will be in equilibrium (Eaton and Eaton, 1995; Runeson, 2000; McTaggart, 2005). In the market, a firm functions as a set of feasible production plans, and produces goods and services in order to maximise profit (Hart, 1989; McTaggart, 2005). The allocation and use of resources is a prerequisite for producing services and goods. The market and technology constrain profit. The market restricts profit from the demand side by limiting the quantity consumed for each good and service, and additional goods and services will only be demanded at lower prices. In contrast, technology limits profit from the supply side. The quantity of production is determined by the quantity of factors of production employed by the firm, and firms must choose the production technology that maximises profit.

In the short term, at least one of the factors of production, usually capital, is fixed. The quantity of the other factors of production can be varied. However, in the long term, the quantities of all the inputs are varied (Prager, 1993; Runeson, 2000; McTaggart, 2005).

Total cost is the sum of the total fixed cost and the total variable cost. When output increases, total variable cost increases. Average fixed cost, which is total fixed cost per unit of output, decreases when output increases. One more type of cost to consider is marginal costs. This is the increase in total cost brought about by the production of the last unit. Understanding the level of marginal cost and average cost is important because these costs show productivity in the short run. When marginal cost is less than average cost, average cost is decreasing. When marginal cost equals average cost, average cost is at a minimum. Average cost is increasing when marginal cost exceeds

17 average cost. Long-run cost is the cost of production when a firm allocates all the inputs with economic efficiency. Depending on the firm’s production function, long-run costs differ from short-run costs. However, there is no distinction between fixed cost and variable cost in the long run. All inputs are variable, hence all costs are also variable (Eaton and Eaton, 1995; Runeson, 2000; McTaggart, 2005).

A firm achieves profit maximisation when marginal revenue is equal to marginal cost. However, this position does not necessarily represent a positive profit. Only if price equals or is greater than average total cost does a firm make a positive profit.

In a perfect competitive equilibrium, the market price is set where the quantity of supply and the quantity of demand are equal. In the short run, each firm can make an economic profit, a loss or it can break even. However, in the long run, firms make zero economic profit because if the firms in an industry make positive economic profits, new firms will keep entering the industry until the market reaches market equilibrium, when marginal cost equals marginal revenue equals price. Therefore, there is no more economic profit available in the market. Correspondingly, if firms make inadequate profits, they will leave the industry until equilibrium is restored.

2.3. Criticism of microeconomics

In the centre of the criticism of neoclassical microeconomics, three of the most prominent neoclassical microeconomics assumptions stand out. Neoclassical microeconomics is tightly built around profit maximisation, perfect knowledge and rationality of the economic actors. These behavioural assumptions are necessary in order to formulate deterministic models. Without these postulates, no predictions can be made. If any of these preconditions is not true, the theory loses its explanatory power and is not able to predict outcome of changes in the market, such as in the case of oligopolies.

Neoclassical economics has provided critical insight into the price mechanism in the market. Price mechanism is believed to determine the allocation of factors of production in traditional economic theory; however, in reality, markets rarely reach 18 perfectly competitive equilibrium. Therefore, there are many areas where the price mechanism does not apply as expected from the theory (Coase, 1937). In addition, neoclassical economics does not adequately explain how production is organised within a firm, how conflicts of interest between the firm’s various constituencies are resolved or more generally how the goal of profit maximisation is achieved (Milgrom and Roberts, 1988; Hart, 1989).

This may provide a window of opportunity for alternative theories such as the theory of the firm and new institutional economics to complement traditional microeconomics and strengthen our possibility of understanding aspects of behaviour outside the scope of neoclassical microeconomics.

2.3.1. Profit maximisation assumption The profit maximisation assumption is a crucial part of neoclassical economics settings. It is regarded as the sole objective of the firms (McTaggart, 2005). It is necessary to assume that the aim, motivation and goal of firms in the market are to maximise profit in order to explain why firms exist in the first place (Bain, 1968; Clarkson and Miller, 1982; Blaug, 1992; Runeson, 2000). This idea of profit maximisation seems to support and be supported by Darwinism, because if any firm does not aim to maximise its profit in the market, the firm will be forced out by competition. Only firms that are aiming to achieve maximum profit survive in the market (Alchian, 1950).

Perfect knowledge without uncertainty is crucial in the profit maximising model (Clarkson and Miller, 1982; Caplan, 1999). Perfect knowledge is perfect knowledge of prices and costs, which are known to all in a perfectly competitive market. However, no such perfect knowledge exists in reality. In reality, things are complicated by the number of products and divisions. This means that the operation of the firm is rarely as simple as employers giving orders, employees following orders and collecting returns, while the rest is taken care of by the invisible hand of the market.

Starting inside a modern firm, it is not likely that the employer will be able to control all employees, no matter how hard the employer monitors the operations. The profit maximisation goal requires not only that the owner set himself or herself a profit

19 maximisation goal but also that the employees (both managers and workers) are pursuing nothing but the same goal (Alchian and Demsetz, 1972; Hart, 1989; Penrose, 1995; McTaggart, 2005). Therefore, it is likely that in spite the employer’s efforts, individuals in the firm will work to achieve their own objectives, which could be quite different from those required for profit maximisation, depending on their affiliation and status within the firm. This wide range of agency relationships is one of the important parts of understanding the true nature of the firm. It leads to very different results from that of assuming the firm’s behaviour postulated in order to mathematically formulate the theory.

Various degrees of imperfect competition market structures makes it possible for a firm to set the price within a range bounded in the short run by the average variable cost and the demand function. This means that a firm has the ability to seek objectives other than profit maximisation, such as reputation, market share, or leadership in the market in technology, at a satisfactory level of profit rather than maximisation (Runeson, 2000). Furthermore, firms have to consider market competitors’ behaviour and how they are operating, because in imperfect markets, each competitor is large enough to affect the market through its actions. Even a monopoly will keep the price low by employing reduced operating costs in order to prevent new competitors entering the market. Whereas in perfect competition each competitor is too small to affect the market individually, in imperfect competition, the firm has to take account of competitors’ behaviours when it makes decisions on its own operations.

The requirement for profit maximisation coupled with perfect knowledge without uncertainty (Dequech, 2003) is necessary for neoclassical economic theory to work. But it throws a huge obstacle in the way of understanding the behaviour of the firm, as it does not necessarily describe realistically the nature of firms. Having these postulates also raises a question in testing theory and its explanatory power in general, due to its conditional prediction (Machlup, 1963; Nagel, 1963). Because neoclassical economic theory is only true under the postulated conditions, which can’t be tested independently, whether predictions of the proposed theory are true or not does not really test the theory. Issues about the ability of the theories to predict are not

20 discussed in this chapter but will be examined further in chapter 3, given the prominence of the theories’ ability to predict in the theory-testing process.

There have been extensive debates on the issue of traditional profit maximisation assumption on predicting firms’ behaviour in the field of the theory of the firm, organisational studies and institutional economics (Clarkson and Miller, 1982; Hart, 1989; Coase, 1998; Runeson, 2000; McTaggart, 2005). Some of the developments in the theory of the firm, organisational studies and institutional economics on the behaviour of the firm are examined in further detail below.

2.3.2. Rationality assumption Fundamentally, microeconomics assumes certain types of human behaviour in order to formulate the theories (Simon, 1978; Clarkson and Miller, 1982; Hart, 1989; Foss, 1995; Caplan, 1999; Runeson, 2000). The view of people as rational is universally used throughout the social sciences, not only in economics (Simon, 1978). Economic theories cannot be implied for every human’s behaviour that in fact is consistent with rational choice. There must also to be an assumption of an overriding motivation to generate a certain form of behaviour that we refer to as rational, i.e. the maximising behaviour, discussed in the section on neoclassical microeconomics. It is this fundamental determinant that generates the competitive forces that drives markets and market participants to behave in a rational manner in order to survive in the market; without this rationality, they would be forced out of competitive markets (North, 1990).

A human being as a market participant is expected to be voracious (Mankiw, 2009). People want more rather than less in order to maximise their personal satisfaction, more of everything they enjoy. However, the more they consume of a good, the less their added satisfaction for each new increment of consumption, the diminishing marginal utility contributing less and less to total utility (North, 1990; Frank, 2006; Mankiw, 2009) Advantage of having a simplified concept of human behaviours is that it makes it possible for neoclassical economics to be mathematically deterministic. With a given rationality assumption, a supply curve can always be represented as having a positive slope and a demand curve is always represented with a negative slope. 21

Difficulty with accepting only a particular human behaviour as rational as an assumption to construct the theory is that other behaviours which do not fit in with neoclassical microeconomics’ rationality assumption are excluded from what is rational behaviour. Thus any variations of behaviour which differ from rationality under neoclassical microeconomics’ behavioural assumption are considered irrational.

There are different concepts of rationality which can affect and radically alter the outcome of human behaviour in reality (Alchian, 1950; Sen, 1977; Simon, 1978; Williamson, 1981; North, 1990; Hands, 1993; Runeson, 2000). Altruism and self- imposed constraints (North, 1990), bounded rationality and opportunism (Williamson, 1981) are some of the concepts that have been introduced in order to close the gap between simplified economic human behaviour and complex and unpredictable human behaviour, therefore freeing traditional microeconomic theory from its own limit.

Having assumed economic actors’ rationality brings out yet another limitation to understand the real nature of the firm’s behaviour. As a static theory, neoclassical microeconomics does not show the process of change. It only shows the outcome (Simon, 1978; Runeson, 2000). Simon (1978) explains that economics has largely been preoccupied with the results of rational choice rather than the process of choice; it lacks explanatory power of the dynamics of the process of choice, especially under uncertainty. Uncertainty results from lack of information or technology or cognitive capabilities which are necessary for economic actors to make decisions and to pursue their objectivity with certain outcomes (Dequech, 2003). This limitation leaves a void in understanding the process of decision-making, an inability to explain the analysis of oligopolies and the dynamic process of growth and diversification of firms (Blaug, 1992; Runeson, 2000).

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2.4. Motivations for the behaviour of the firm

Neoclassical economics theory is undoubtedly handy when it comes down to theoretically determine future outcomes of the actions of market participants. However the assumptions for neoclassical economics to work are fundamentally not even remotely realistic. Thus outcomes from predictions made with neoclassical economics reflect only a little part of reality. The remaining parts open up floods of question regarding the nature of the firm. As discussed, it is the pre-composed parts of neoclassical microeconomics which constrain the unearthing of much broader and complex ideas about the behaviour of the firm. Then, away from neoclassical microeconomic understanding of the firm, how are firms perceived to behave in alternative economic theories? What are other motivations that make firms behave the way they do?

2.4.1. The nature of the firm The theory of the firm starts from the fundamental idea of wanting to understand the existence of the firm in the market. Why firms and markets exist in the first place and what motivates firms to form are the questions to explore in order to fill the void left by neoclassical microeconomics beyond the analytically convenient conception of the firm as a production function (Coase, 1974; Penrose, 1995; Williamson, 1998, 2000). The theory of the firm still remains, representing the forces determining the prices and quantities produced in the individual firm because it is a part of the wider theory of value, which is concerned with the factors determining the prices of particular products or services (Penrose, 1995). However, the perspective has changed from focusing on quantities of elements in the market to viewing the firm from the viewpoint of the firm. What is expected from new approaches to the nature of the firm is the consideration of the firm as a governance structure in which internal structure has economic purpose and effect (Williamson, 1998, 2000).

A firm is a complex institution affecting not only economic but also social life in many directions comprising numerous and diverse activities,

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Making a variety of significant decisions, influenced by miscellaneous and unpredictable human whims yet generally directed in the light of human reason (Penrose, 1995:9).

The most common concept of a firm is that it is a basic unit of the market institution which employs and allocates factors of production to produce and sell goods and services (Penrose, 1995; McTaggart, 2005). A firm can also be defined in various contexts. It can be any organisation in which there is a legally defined employer and one or more employees (Clarkson and Miller, 1982). A firm is the place where decisions regarding resource allocation are made (Penrose, 1995; McTaggart, 2005). Beside focusing on the internal structure of the firm, the theory of the firm explores external forces on the firm such as the dynamics between firms and markets which are often a part of debates (Coase, 1937; Ellig, 2001).

Firms exist because it is cheaper to organise and utilise resources within them (Coase, 1937; Penrose, 1995; McTaggart, 2005; Clarkson and Miller, 1982). In principle, individuals could also produce goods and services, but firms can produce more (Clarkson and Miller, 1982). Firms’ collective result is larger than the sum of isolated individuals’ efforts (Coase, 1937; Clarkson and Miller, 1982). The difference between firms and individuals results from costs of organisation, monitoring and metering (Coase, 1937; Alchian and Demsetz, 1972; Clarkson and Miller, 1982). Firms are more efficient than markets as coordinators of economic activities, because of firms’ ability to diminish transaction costs. The fact that using specialisation and economies of scale, firms can drop costs of producing a unit of a good is also an advantage favouring the formation of firms. A firm is a group of people who are armed with specialty skills working towards the same goal, which (presumably) gives them an advantage as well (McTaggart, 2005).

As debate about the reason for the existence of the firm deepens, the distinction between firms and the market (Milgrom and Roberts, 1988) and the boundaries within the firms themselves became blurred (Penrose, 1995). The haziness of the boundaries of firms is drawn from the fact that the theory of the firm is not designed to answer questions regarding the growth of the firm. Rather, it is closely tied to the wider theory

24 of value, which is still an unchallenged general system for the economic analysis of price determination and resource allocation (Penrose, 1995). Instead of viewing the growth of a firm as just an increase in the output of products somewhere at the lowest part of the average cost curve, the size of the firm is limited by the use of its human assets, activities in the markets and uncertainty about future prospects (Milgrom and Roberts, 1988; Penrose, 1995; Hart, 2001).

In order to complete the discussion on the nature of the firm, it is important to comment on the motivation of the firm, “why they behave as they behave” (Penrose, 1995:26). The principle goal of firms under neoclassical economics’ assumptions is to make the greatest possible profit (McTaggart, 2005). However, information asymmetry and uncertainly make this principle goal rather unrealistic. Today’s firms being large multi-national and multi-product-producing public companies provide new perspectives to understanding what motivates firms. The different and sometimes conflicting motivations of those who are involved in running the firm are a key to understanding the firms’ motives. Inside or outside stakeholders’ individual motivations (owners, shareholders, managers, employees, competitors, government, community etc.) will contribute their share of motivation to make the firms act the way they do.

From the various perspectives which could comprise what the firm is, it could be drawn that the firm cannot be merely approached from clean-cut points of analytical idea. Needlessly to point out, it is these complexities of the entity of the firm that bring in various types of analysis from various points of views from psychology, sociology and organisational studies (Penrose, 1995). Further development of the theory of the firm branches outs in many different directions with one similar purpose in mind: to decipher what the firm is, why it exists and how it works.

2.4.2. Introduction to institutional economics Dissatisfaction with the traditional profit maximisation assumption in predicting the behaviour of the firm causes debate on the behaviour of the firm (Coase, 1937; Alchian, 1950; Alchian and Demsetz, 1972; Jensen and Meckling, 1976; Williamson, 1981; Clarkson and Miller, 1982; Coase, 1988a, b, c; Williamson, 1988; Hart, 1989; 25

North, 1990; Foss, 1995; Hart, 1995; Penrose, 1995; Williamson, 2000; McTaggart, 2005). These debates can be categorised into four major approaches. The first approach is that the theory investigates the existence of the firm in cost-effective ways of using the market, such as transaction costs theory. The second group of theories approaches the firm from inside the firm and looks into human capital. This approach looks into how agents in the firm can affect the outcome. An example of this theory is the so called principal agent theory. The firm can also be approached from different rights that govern the existence (or behaviour) of the firm. The property rights approach explores various rights in the firm and how the rights control the behaviour of the firm. The final approach sees the firm as a nexus of contracts. Arising from attention to individuals’ self-interested motivation, this approach investigates agreements between the firm and individuals from a contractual perspective. The existence of such a contractual arrangement between the firm and individuals helps to decipher the behaviour of the firm by monitoring and controlling motivations of self- interested economic actors. As a part of institutional economics, addressed theories provide tools to discover the much broader and realistic nature of the firm (Hart, 1989; Foss, 1995; McTaggart, 2005).

2.4.2.1. Transaction costs theory Starting from the often-referred-to 1937 Coase’s article, the theory of transaction costs has been used to explain the existence of firms, an issue which has been neglected by neoclassical economics. The main idea is that in some situations, costs of carrying out any transactions will be lower if a transaction is carried out within a firm rather than in the market (Coase, 1937, 1988c; Hart, 1989, 1995). Coase (1937) executed the idea of transaction costs while he tried to explain why all transactions are not carried out in the market. The main costs of a transaction in the market occur while economic actors learn about, organise and negotiate the terms of trade under uncertainty. In an attempt to explain the ‘within a firm’ element, transaction costs theory also explores various governance structures such as market, hierarchy in a firm and contracts (Williamson, 1979, 1981; Foss, 1995; Williamson, 2002).

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Transaction costs can be particularly significant if the transaction is long term and repeated frequently (Hart, 1989). A firm, therefore, will try to reduce transaction costs by carrying out the transactions internally, incorporating it into the firm through diversification, integration and growth of the firm itself (Foss, 1995). According to transaction costs theory, an authority will be given to a party rather than a fully specified contract, in order to reduce the costs (Coase, 1937, 1988b; Foss, 1995). Transactions are carried out as a result of instructions or orders issued by an authority, in most cases an entrepreneur, and the market price mechanism will be overridden (Coase, 1988b; Hart, 1989; Spulber, 2003).

2.4.2.2. Bounded rationality and opportunism Williamson’s contribution to transaction costs theory is especially valued in his development of behavioural assumptions, bounded rationality and opportunity (Foss, 1995). In neoclassical economics, the characteristic of economic actors is represented as voracious. Under neoclassical economic theory’s behavioural assumption, rational behaviour only include supply to take a position on a positive slop and demand on a negative slope till the market equilibrium can be reached. The market equilibrium is possible under neoclassical economics because market participants are assumed to have perfect knowledge of prices and costs, which are known to all in a perfectly competitive market.

In contrast, Economic actors with bounded rationality are assumed to be “intensely rational, but only limitedly” (Simon, 1947:xxiv; Williamson, 1988:67) early on (Williamson, 1988; Foss, 1995) (refer to Table2-1 Organisational implications of behavioural assumption). Only limited information is available for economic actors with limited ability to process it. In this assumption, limitations rise from two angles, internally and externally. Firstly, imperfect information is available from markets for economic actors, but also actors do not have perfect ability to process, and derive only limited results from imperfect information (Vázquez, 2004). People may make mistakes, and each actor may come to a different result (Alchian and Woodward, 1988; Williamson, 1988). Under bounded rationality, therefore, uncertainty about the behaviour of economic actors is unavoidable and may hold significant ramifications.

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As a result, the behaviour of economic actors may not be effectively controlled even by employing complex precautions, such as in the form of contracts.

Opportunism, then, relates to bounded rationality with the added behavioural assumption of “self-interest” (Alchian and Woodward, 1988; Williamson, 1988; Foss, 1995; Vázquez, 2004). When people face making a choice between conflicting decisions, what they want to do for themselves and what they have agreed to do for others, they choose what they want to do for themselves over what they have agreed to do for others, because of their self-interest. Therefore, others need protection from people’s self-interested choices, and it can be costly for others to keep informed about people’s behaviour and to monitor and to protect against opportunistic behaviour which is possibly not in line with others’ interests. In organisations, entrepreneurs (others or principals) apply the selecting, monitoring and contracting process in order to be certain about their employees’ (people or agents) behaviour and protect their organisations’ interests. Unlike bounded rationality, the consequences of opportunism on transactions can be critical when a transaction is carried through imperfect contracts (Vázquez, 2004).

Table 2-1 Organisational implications of behavioural assumptions

Behavioural assumptions Bounded rationality Opportunism Implication Comprehensive contracting Contract as promise is For contractual theory is infeasible naïve Exchange will be facilitated Trading requires the by modes that support support of spontaneous or For economic organisation adaptive, sequential crafted safeguards. decision-making. Source: Williamson (1988:69)

The introduction of different human behaviours might restrict neoclassical economic theory’s analytical ability. However it is also possible to integrate these differences in market participants’ behaviour into a theoretical framework to understand the nature of the firm. Notably the concept of utility is already established in neoclassical economics. Utility, a measure of satisfaction relative to each individual makes to quantify utility itself. The concept of utility in neoclassical economics allows individuals to make different choices. The behaviours of firms which assume a role of supply in

28 neoclassical economics are only to be ruled by profits and costs theoretically. A firm is a resource allocation mechanism but it is also a collection of individuals and their decisions. An advantage of discussing bounded rationality and opportunism is an introduction of individual differences of market participants to economic theories as well as accepting imperfect information. In addition to assuming one unified characteristic of firms, bounded rationality and opportunism allows individuals in firms to collect different level of information, to have different level of ability to process the collected information and to act differently based on their self interests.

2.4.2.3. Asset specificity Asset specificity is relevant to “the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value” (Williamson, 1988:70). The concept of asset specificity is important not because there is a large fixed investment but because such investments are specialized to a particular transaction (Williamson, 1981). Asset specificity is critical because once an investment has been made, buyers and sellers are effectively dependant on each other in operation processes (Williamson, 1981). These investments have a much greater value within the relationship than outside it. In order to carry out specific transactions which require a specific investment involving other parties, major contractual arrangements are essential to secure the long-term transactions against a hold-up by the other parties (Williamson, 1981; Alchian and Woodward, 1988; Vázquez, 2004). Therefore, premeditated and thoroughly arranged contracts are essential in order to lock in both parties for the specific investment they are committed to.

Asset specificity can be grouped into four categories: site specificity, physical asset specificity, human asset specificity and dedicated asset specificity (Williamson, 1985). Site and asset specificity hold an especially direct relation to the effect of holding and operating property in corporations (Williamson, 1981, 1985). Both site and physical specificity are expected to be fixed when a party is committed to investments, such as land, plant or machinery, which are dependent on the other party’s productions. Furthermore, the investment’s site is specific for a particular operation in order to minimise inventory and transaction costs (site specificity) or the investment no longer

29 holds value or only little value for its existing usage. If the operation of the production is discontinued (physical specificity), these investments are referred to as “specific” by Williamson (1985). Therefore, one party’s operation and survival is locked in to the other party’s behaviour. If the other party relies on one party or more than one party, then the lock-in effect may be the reverse.

A landowner with the unique quality of resource, in this case “land” or “property,” can be tempted to exploit the situation and extort profit from a lessee. If the unique quality that the land holds is valued greatly for the lessee’s operation of production, power between the landowner and the lessee becomes uneven. Then it becomes possible for a landowner to have control over the lessee’s operation or production. Carefully prearranged contracts can possibly protect both parties from exploiting each other; however, imperfect contracts have limits on preventing future disputes (Alchian and Woodward, 1988).

Asset specificity with uncertainty and opportunistic behaviour leads to a more complex arrangement to manage (Foss, 1995). Organising contracts is first and foremost costly. Executing contracts that are imperfect opens the possibility for opportunistic behaviour. Therefore, possible delay or opportunism problems must be dealt with by the parties at the contract-executing stage (Joskow, 1988). To obtain stable services free from disputes from asset specificity, a firm may seek more reliable options to obtain services. Alchian and Woodward (1988) proposed options. The first is that a firm may buy all services with the risk that the other party cause delays. The second option a firm has is to own the services (owning ownership over the other party) or lastly renting it from a within the firm structure (a department or a subsidiary) for self- use (Alchian and Woodward, 1988). The choice among options brings out new debates on the degree of integrated ownership of resources in a firm, as a tool of obtaining reliable services.

2.4.2.4. Vertical and horizontal integration A firm is a link between suppliers of resources and customers of final products. When a firm acquires suppliers or customers, it becomes a hierarchical rather than a market relationship. Therefore, a firm gains authority over suppliers or customers forming a

30 hierarchical relationship with them in the market. This situation is referred to as vertical integration (Foss, 1995). There is also horizontal integration, in which a firm diversifies into a related market and related products (Perry et al., 1992). It is considered a careful and risk-minimising way of diversification.

Williamson identifies transaction costs as the most important reason why firms choose vertical integration (Williamson, 1975). He explains that in order to minimise transaction costs, firms use vertical integration instead of relying on imperfect contracts (Williamson, 1975; Joskow, 1988; Foss, 1995; Khalil, 1997). As previously discussed, not only are the terms of contracts difficult to negotiate with suppliers and customers, but they are also costly to write and execute with suppliers and customers due to uncertainty, bounded rationality and opportunism. Vertically integrating specific suppliers and customers, when asset specificity is high, and internalising them as a part of a firm is only a logical implication for the firm, therefore reducing transaction costs in negotiating, executing and policing the contracts (Williamson, 1985; Foss, 1995).

2.4.2.5. Organisation and hierarchy A governance structure becomes equally important as a specific institutional arrangement to support internal transactions (Williamson, 1981). Any standard economic theory, not just neoclassical, starts from the existence of firms. Usually, the firm is a point or at any rate a black box. But firms are obviously not points. They have internal structure, and this internal structure must arise for some reason. There is a need to get beyond the analytically convenient conception of the firm as a production function to consider the firm as a governance structure in which the internal structure has economic purpose and effect. The need is to identify and explain the properties of alternative modes of governance which differ in discrete structural ways. Because each generic mode of governance possesses distinctive strengths and weaknesses, there is a place for each, yet each has to be kept in its place. The choice of governance structure moves from market to hierarchy through a sequence of moves. It is common knowledge between the parties that an exchange could induce a move from interfirm to intrafirm organisation (Coase, 1974; Williamson, 1998, 2000).

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There is a general recognition that there is a wide range of institutional arrangements that can be used to govern transactions between economic agents (Joskow, 1988; Williamson, 1975). Specific institutional arrangements emerge in response to various transactional considerations in order to minimise the total cost of making transactions. The boundary between a firm and a market provides a very rough distinction between the two primary institutional mechanisms for allocating resources (Joskow, 1988; Williamson, 1975).

2.4.3. Principal agent theory The principal agent theory was developed to explore some of the questions which neoclassical economics has left unanswered, and it is regarded as one of the important developments in microeconomics history (Milgrom and Roberts, 1988; Backhouse and Creedy, 1999; Carlton and Perloff, 2000; Screpanti and Zamagni, 2005). It recognises conflict of interest between different economic actors, especially when a principal contracts with an agent to perform tasks on behalf of the principal (Foss, 1995), formalising these conflicts through the inclusion of observability problems and asymmetries of information (Hart, 1989). The theory still views the firm as a production set but introduced a professional manager who makes production choice, such as investment or effort allocations that the firm’s owners do not observe. The theory began as a managerial theory of the firm and it is now agreed that it enriches neoclassical economics (Hart, 1995).

In order for a firm to operate, it requires two types of right. A right in things, firstly, is a right to make certain decisions about how things will be used as well as the correlative right to keep others from interfering with such uses. Most resources that a firm employs in order to operate productions carry this kind of right, and a firm must acquire the right in things for production. There is also a right in persons. This is a right to make someone do something for the holder of the right (Stinchcombe, 1968). In a firm the employer is the holder of the right in persons and wants employees to do something for him or her.

The main discussion of the principal agent theory is in each economic actor’s bounded rationality and opportunistic behaviour and incomplete contracts. In a firm, principal 32 agent relationship forms between employer and employees. In this relationship, an employee is often the one with skills and knowledge required to perform the tasks for the employer. The principal tends to lack those skills and knowledge or carrying out the tasks him or herself is simply inefficient; therefore, it is more productive to contract an agent or agents to do the tasks. Problems arise because the actions of the agent cannot be guaranteed to represent the best interest of the principal. When a firm is seen as a mere resource allocation mechanism in neoclassical economic theory, these individualities of agents are not theoretical considerations. A firm as a collection of individuals and their decisions, however, it is possible to introduce differences in behaviours into constructing a theoretical framework to understand the nature of the firm. Both the principal and the agent as opportunistic beings with bounded rationality are assumed to act in their own self-interest. Complex selecting processes, contracting, monitoring and motivating are employed to prevent possible opportunistic behaviour of the agent. Because of information asymmetry between economic actors, these preventions are only incomplete against self-interest motivated behaviour. Bounded rationality, however, while not rational in microeconomic theory, must not be mistaken for conventional irrationality. According to Williamson (1988:68), “as boundedly rational agents are attempting effectively to cope, irrationality is not contemplated.” It is a rational strategy to deal with the complexity of the real world.

The principal agent theory is an important part of understanding firms’ resource allocation mechanism if not the centre of studying decision-making processes in firms. From the perspective that the principal relies on the agent’s expertise to deal with tasks regarding the operation of the firm, the principal agent theory is as critical as any other member of the institutional economics “family”. Dealing with property requires specialised skills and information. As a part of assets in a firm, property is necessity to produce goods and services and consequently profits. Physical property attributes such as immobility and fixity increase natural uncertainty on firms’ resource allocation decisions regarding property. Typically, firms’ resource allocation decisions related to property tends to involve large sums of capital and overall business competency; therefore, for the principal, trustworthiness of the agent is essential. 33

Alchian and Demsetz’s approach to markets and organisations starts with the existence of residual power between economic actors, especially between the employer and the employees (Alchian and Demsetz, 1972). The employer can bind the employees to do what the employer wants them to do by contracting them in comprehensice terms. The employer cannot own the employees’ inputs by contracting but the employer can fire or sue the employees for failing to meet the exchange agreement. Therefore, the role of the contract is limited but important for the employer in order to manage, direct and assess employees. Monitoring and rewarding systems supplement the limitation of the contracts. Alchian and Demsetz’s 1972 article stresses the importance of a monitoring or metering and incentive system as well. In modern corporations, most business transactions are carried out as joint productions involving various individuals in teams within a firm and from outside the firm structure. In a team environment, the employer can only observe the performance of a team as a whole rather than of individuals in a team. Therefore, it is possible for each individual to choose not to contribute, because the individual contribution will not be identified. Alchian and Demsetz’s solution to monitoring the employee with appropriate incentives is to give each actor a bundle of rights, which effectively defined ownership of the capitalist firm. The rights are first of all to be a residual claimant, to observe input behaviour, to be the central party common to all contracts with inputs, to alter membership of the team and finally to sell the rights previously mentioned (Hart, 1989). However, Alchian and Demset’s theory faced criticism due to the ambiguity over why the problems of joint productions and monitoring must be solved through the firm and cannot be solved through the market (Coase, 1988a; Milgrom and Roberts, 1988; Hart, 1995).

2.4.4. Property rights approach The property rights approach has attempted to resolve the question of what is a firm, which started with Coase. Unlike the principal agent theory which looks into a firm’s right in persons, this theory approaches right over physical, nonhuman assets in a contractual relationship (Hart, 1989; Hart and Moore, 1990). In the property rights approach, “firm” is a collection of assets and “ownership” is the possession of residual rights of control over these assets. A firm can be identified with all the nonhuman 34 assets that belong to it and assets that firm’s owners possess by virtue of being owners of the firm (Demsetz, 1967; Grossman and Hart, 1986; Hart and Moore, 1990; Demsetz, 2002). Included in this category are machines, inventories, buildings or lands, cash, client lists, patents, copyrights, and the rights and obligations embodied in outstanding contracts to the extent that these are also transferred with ownership (Grossman and Hart, 1986). Because human assets cannot be bought or sold, only managed, directed and assessed, management, and workers presumably own their human capital both before and after any transaction.

The property rights approach shares much of the issues dealt with in transaction cost theory such as incentive issues (in the principal-agent approach), contracting costs (in the transaction cost approach), a firm as a standard form contract (in the nexus of contracts approach discussed below). The idea the property rights approach brings in is that a firm’s owner has the right to alter membership of the firm. The owner has the right to decide who uses the firm’s assets and who doesn’t. Most significant of all, the property rights approach has the capacity to explain both the costs and the benefits of integration, therefore achieving “a greater internalisation of externalities (Demsetz, 1967:348)” (Hart, 1989, 1995).

The property rights approach has developed to explain the boundary of the firm according to the optimal allocation of asset ownership. Firms are important when contracts are incomplete (Williamson, 1979, 1988). According to the property rights view, the owner of a nonhuman asset has residual rights of control over the asset. Also the owner of a nonhuman asset has the right to make all decisions concerning that asset that have been specified in a contract (Grossman and Hart, 1986). Residual control or decision rights are like any other good. There will be an optimal allocation of them (Hart, 2001). In a model in which private property rights are fully enforced and transaction costs are zero, resources will be used at their best valued usage. However, in reality, because the costs of carrying out transactions are positive, resources will not be allocated for the best valued use measured by the market. Outcomes depend on the details of the social and legal systems, and the rule of liability matters. Thus the

35 structure of property rights should reflect the interests, values and constraints of those who control the state (Eggertsson, 1990).

Unlike human assets, an ownership over a nonhuman asset, especially property, is regard as a bundle of rights and “without going into legal niceties, the greatest number of potentially available sticks is assembled for an estate owned as “fee simple absolute” (Whipple, 1995:4)”. Rights over any nonhuman asset are generally reserved with the rightful owner (it is also to note that “by Anglo-American land law, the owner of a superior interest may transfer inferior interests to another, absolutely subject to conditions for all or for a limited duration (Whipple, 1995:4)”). Asset specificity should be closely addressed in conjunction with the property rights approach. Because the higher the asset specificity of an asset, the more a firm wants to ‘integrate’ the asset into the firm and consequently the firm retains the ownership over the asset. When asset specificity of a certain property, for example a piece of land, is high so that it could affect a firm’s business activity significantly, a firm should secure its right by “integrating,” in other words ”buying,” the ownership over the land rather than relying on an imperfect contract to retain the power over the land. At the same time, a firm internalises costs and benefits of externalities, in this case externalities of owning a piece of land such as possible rental income, and capital gain or taxes along with gaining asset specificity they seek. Therefore, acquiring the ownership of some property by corporations can be viewed as the anticipation of return, but it can also be deciphered in relation to asset specificity of particular assets.

2.4.5. The firm as nexus of contract The members of transaction costs theory up to this point share one major unanswered question of how to reduce a firm’s contractual failure (Hart, 1989). Jesen and Meckling (1976) have given some explanations for the weakness. They see a firm simply as a nexus of contracts and therefore there is no point in distinguishing between transactions within a firm and those between firms (Jensen and Meckling, 1976). They recognise that both transactions within firms and those in the market are part of a continuum of types of contractual relations with different firms or organisations representing different points on this continuum (Jensen and Meckling, 1976). In Jensen

36 and Meckling’s account (1976), each type of business organisation represents nothing more than a particular “standard form” contract. For instance, a public corporation, one of standard form contracts, is characterised by limited liability, freely transferable shares and votes (Hart, 1989). In principle it would be possible to create a contract with these characteristics each time it is needed, but given that these characteristics are likely to be useful in many different contexts, it is much more convenient to be able to appeal to a standard form (Jensen and Meckling, 1976; Hart, 1989).

Approaching firms as a nexus of contracts has the advantage of proving that contractual relations with employees, suppliers, customers, creditors and others are an essential aspect of the firm (Jensen and Meckling, 1976; Hart, 1989). More importantly, their theory makes it clear that the firm is not an individual. Therefore, it is considered that the behaviour of the firm is the outcome of a complex equilibrium process just like the behaviour of a market (Jensen and Meckling, 1976).

In line with other theories of transaction costs theory, this approach requires some assumptions and theoretical premises (Foss, 1995). Contracting in transactions is important and difficult primarily for behavioural assumptions such as bounded rationality, opportunism, and information asymmetry between actors. Furthermore, transactions become more difficult if a transaction is identified with its asset specificity, uncertainty and infrequency. To survive under competitive conditions, organisations will seek a governance structure that can economize on transaction costs (Williamson, 1979; Foss, 1995). Williamson (1979) argues transactions which are relatively frequent with low asset specificity and uncertainty are likely to be governed by markets, but transactions with high asset specificity and uncertainty which are likely produce transaction difficulties have a tendency to be internalised within the firm.

Institutional economics contains wide areas of ideas in studying the nature of the firm that was not explored in neoclassical economics. A point to make in introducing institutional economics is that firms are not just a resource allocation mechanism to maximise profit and profit only. There are other, broader perspectives that could help explaining the existence of the firm, and in so doing explaining also broader aspects of the behaviour of the firm.

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2.5. Decision-making and corporations

Behavioural assumptions in economic theories were vastly simplified to ensure that theorems could be logically deducted from a small number of assumptions and be expressed mathematically but there has been a progress on making allowances for wider representation of human behaviour such as bounded rationality and opportunism in the organisational context (Johns and Saks, 2005). Consequently, understanding decision-making and behaviour became more complex than it used to be. However, as Simon (1992) proposed, if conditions are postulated and foreseen and predicted, the behaviour can be predicted without strict assumptions of optimality. Hence, “the study of human behaviour is not just a logical study of optimisation but an empirical study of the side conditions that place limits on the approach to the optimum” (Simon, 1992:157).

2.5.1. Decision-making model In modern society, it is a social decision-making structure which holds the most important powers rather than individuals (Stinchcombe, 1968). Decision-making is the process of developing a commitment to some course of action. Decision-making involves firstly making a choice among several alternatives, then knowing the process of how your choice can be achieved and finally, committing resources (Johns and Saks, 2005). Decision-making involves the means to be used, in other words, expectations from a choice as well (Barnard, 1968). Primarily it is the end (the expectations and the goals) which the decision maker is looking for to achieve that influences the decision- making process the most. Theoretically, if you identify your goal, it is a mere matter of figuring out how to get it using the resources you have. However, uncertainty and limitations of human behaviour bring complexity into the concept of decision-making.

According to Dequech (2003), when people make decisions, they behave depending on the end that they are “supposed” to pursue under uncertainty. Therefore, not only the end they are aiming at but also their decision depends on the state of expectation and the perception of constraints (refer to Figure 2-1 The determination of decision making). In order for decision-making to take place, a decision maker must perceive a gap between the existing state and the desired state and identify the end he or she 38 desires (Johns and Saks, 2005). A decision maker must then identify how to achieve the desirable end using available resources.

Figure 2-1 The determination of decision-making

State of Perception of End(s) expectation constraints pursued

Decision-making

Source: Dequech (2003:156)

For a perfect economic actor with perfect rationality in traditional economic theories, this decision-making process would be rather simple. Firstly, the perfect economic actor will be perfectly and completely informed about the situations. The perfect economic actor will be perfectly rational (again it does not mean literally rational. Rationality in neoclassical economics is discussed chapter 2.3.2. Rationality assumption), and his or her only ultimate expectation will be to maximise profits. For a perfect economic actor, decision-making is merely identifying what he or she wants. However, in reality, the decision-making of economic actors with bounded rationality under uncertainty requires more than figuring out what they want. The real economic actors would have only limited ability to collect, analyse and comprehend information to make a choice. They have more constraints and considerations such as time, money, others who are involved as well or social settings which keep them further away from the rationality of neoclassical economics.

For a firm, as a set of individuals and assets collaborating in order to allocate resources efficiently and therefore maximise profits or utility, decision-making is one of the basic parts of their activity. Every step of a firm’s daily activities, big or small, requires some level of decision-making. As complex as firms are, there are many complex levels and structures of individuals involved interdependently within an influential environmental

39 context. However, it is individuals that, in the end, behave and make decisions (St. John, 2005). Any given decision is only a result of the accumulated collaborations of individuals that are influenced by their shared context that operates a firm.

In order to understand any given decision which has been made, the actors’ goals and the alternative behaviour must be known in advance. In most real-choice situations for which there is a multiplicity of goals, often partly conflicting, relative priorities of the goals are also important to explain why such a decision is being made (Simon, 1992). A gap between the real environment of a decision and the environment the actors perceived makes it difficult to predict the result and at the same time to speculate why the actors behave the way they do and the reason behind the decisions (Simon, 1978; Johns and Saks, 2005). Understanding the decision in reality also requires the whole range of consequences, not always complete, that affected the decisions. Examples are the components of the situation which are likely to be taken into account by the decision makers and how the decision makers are likely to perceive the situation as a whole (Simon, 1978).

By repeating and learning and therefore setting up strategies, a gap between goals and environment, real and perceived, can be lessened. To understand behaviour, what the actors are capable of, because they only pose limited and unknown quantities of ability, is also crucial. In an organisational context, individuals are as much a part of organisational decision-making as they are individual decision makers for themselves. According to adaptive theory, if a given decision-making process is repeated as many of a firm’s activities are, humans are capable of adaptation and learning because human behaviour is highly flexible and variable; therefore, it can be altered by both circumstances and experience (Simon, 1992).

2.5.2. Strategy and corporate decision-making Different people, or the same people in different situations, can employ different strategies for performing a given task. A theory of their performance would describe their strategies and specify the circumstance under which each strategy will be used (Simon, 1992). Strategy is one course of decision-making, and it can be specifically referred to as knowing the process of how to achieve the goals. 40

There are many definitions of strategy. A strategy can be defined as “the determination of the basic long term goals and objectives of an enterprise, and the adaptation of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler, 1962:16). A strategy is also the way in which “a corporation endeavours to differentiate itself positively from its competitors using its relative corporate strengths to better satisfy customer needs” (Ohmae, 1983:92). Strategy is “a coherent, unifying and integrative pattern of decision” (Hax and Majluf, 1988:102) and “a conditional, comprehensive, coordinated series of actions” (MacCrimmon, 1993:114). Ultimately, strategy “as a comprehensive and consistent pattern of decisions and actions will be made to gain a sustainable competitive advantage” (Perry et al., 1992:3).

A strategy, therefore, can be summarised into three categories. Firstly it is series of comprehensive and integrative actions or decisions (Hax and Majluf, 1988; Perry et al., 1992; MacCrimmon, 1993). Secondly it determines and reveals the long-term objectives of corporations in how they allocate resources in order to carry out the objectives (Chandler, 1962; Ohmae, 1983). Lastly it is a corporate attempt to survive in the market corporations are in and satisfy the stakeholders by understanding their own strengths and weaknesses and responding to opportunities and threats in their environment (Ohmae, 1983; Hax and Majluf, 1988; Perry et al., 1992).

Examining strategy and the strategic management of the firm, therefore, could make explicit relationship between the firm’s behaviours in a course of action and the activity of the firm which evolves intended or unintended outcomes. Business people try to achieve various goals in addition to profits or “in place of profit” (Katona, 1953). Katona (1953) identifies these ranges of profits as non-pecuniary or psychic profit aside from monetary profit. According to Katona (1953), the worst business situation is expected to bring out more frequent striving for high immediate profits, but the better the business situation, the more frequent the striving for non-pecuniary goals. Empirical evidence suggests that the concept of long-run profit maximisation is virtually irrelevant to decision-making by managers in a business (Perry et al., 1992). It is rather specifying a set of short-run operating goals that can bring adequate long-run

41 profit. In this case, long-run profit would serve as a rationale for guiding decision- making (Cochrane and Zeleny, 1973).

Strategy does not guarantee the success of the firm. It strengthens the possibility of success by reducing the risks of failure and increasing the chances of success (Perry et al., 1992). Understanding a series of actions taking place in order to deliver a particular goal, whether it is monetary or non-monetary profit, can be approached from inside of the firm and from outside of it. Internally, strategy requires involvement of all the hierarchical levels of the firm (corporate, business, functional) (Hax and Majluf, 1988). Strategy also improves the chances of a firm’s success in dealing with environmental changes which cannot be accurately forecasted (Perry et al., 1992). Ability to deploy their capital accurately and rapidly to exploit the changes in their favour is an undoubtedly crucial element of success of corporations (Linneman, 1998b).

2.5.3. Culture in organisations Decision-making processes involving controlling resources and exercising authority seem to have a distinct set of values and distinct institutional attitudes (Stinchcombe, 1968). Culture is one basic framework which configures a set of values and attitudes in the course of organisational operations. In comparative management studies, culture is considered to be a background factor, an explanatory variable or a broad framework influencing the development and reinforcement of beliefs (Smircich, 1983). Approaching organisational culture from macro perspectives involves examining the relationship between culture and organisation structure (Smircich, 1983).

Organisations are seen as social instruments that produce goods and services and as a by-product that produces distinctive cultural artefacts such as rituals, legends and ceremonies. Research on the concept of culture in organisations is generally on theoretical framework concerning articulating patterns of contingent relationships among collections of variables, such as structure, size, technology and leadership patterns, which appear to figure in organisational survival (Smircich, 1983). Cultural studies of organisations serve especially well when differentiating organisations within a society by levels of effectiveness (Schein, 1990).

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The concept of culture in organisations is rather ambiguous. One way of perceiving culture in organisations is seeing it as social or normative glue that holds an organisation together. It expresses the values or social ideals and the beliefs that organisation members come to share (Smircich, 1983; Johns and Saks, 2005). Culture is also a system of shared cognitions or a system of knowledge and beliefs (Siehl and Martin, 1982; Johns and Saks, 2005). Rossi (1980) viewed culture as a unique system for perceiving and organising material phenomena, things, events, behaviours and emotions. Culture can be what a group learns over time through solving problems internally and externally (Schein, 1983, 1990; Johns and Saks, 2005). Now culture can be summed up as basic assumptions in shared beliefs, ideals and values which can be shared, learned and taught to old and new members of organisations in order to perceive, think and solve internal and external problems.

Culture often displays itself as observable artefacts such as the physical layout, dress code, products and annual reports. Culture in observable artefacts is evident yet hard to accurately read (Schein, 1983, 1990). Values, both espoused and documented, which are another manifestation of culture in organisations, can be studied through interviews, questionnaires or survey instruments. Because it is important to understand the underlying assumptions behind culture, open-ended interviews show better how people feel and think than do questionnaires and survey instruments, with which only prejudged dimensions can be studied. Understanding underlying assumptions which can be carried out through intensive observation is an important part of determining true perceptions, thought processes, feelings and behaviours past the surface (Schein, 1990).

Culture serves as a sense-making device that can guide and shape behaviour (Smircich, 1983). It helps to bond different parts of organisations in learning from each other because strong cultures work as glue between parts of organisations. Thus, culture resolves conflicts and coordinates parts of organisations (Johns and Saks, 2005). Not so surprisingly, it is also possible for culture, ultimately, to lead organisations to financial success through achieving organisational effectiveness, if the culture supports the mission, strategy and goals of the organisation (Smircich, 1983; Lorsch, 1986; Johns

43 and Saks, 2005). Schein (1990) identifies the stability of organisations, the length of time organisations have existed, the intensity of an organisation’s experiences of learning, the mechanism by which the learning has taken place and the strength and clarity of the assumptions held by the founders and leaders of organisations as a list of variables that can be affected by the internal consistency of a culture. Uncovering “taken-for-granted” rules of organisational action is also suggested to help organisations with employee selection, employee orientation, business strategising and change (Schall, quoted in Smircich, 1983:349).

Studying organisational culture also provides a conceptual bridge between micro and macro levels of analysis as well as a bridge between organisational behaviour and strategic management interests (Smircich, 1983). To carry out organisational analysis, an organisation has to be interpreted, read or deciphered because it is conceived as a pattern of symbolic discourse (Smircich, 1983). The focus of this form of analysis is on how individuals interpret and understand their experience and how these interpretations and understanding relate to action. By having this focus of interest, the creation and maintenance of organisations can be documented through symbolic action. Leadership can best be understood as the management of meaning and the shaping of interpretations (Smircich, 1983). Organisational analysis is also expected to penetrate beneath the surface level of appearance and experience, to uncover the objective foundations of social arrangements through separating underlying reality that gives rise to particular forms of social arrangements from the experience of the phenomena (Smircich, 1983).

2.5.4. Leaders and the behaviour of the firm Any organisational member can exert influence on other members. However, in practice, some members are in a better position to influence other members, and those individuals who can exert influence on the goal achievement of others in an organisational context are identified as leaders (Johns and Saks, 2005).

The resources are allocated by the price mechanism, and it is assumed that this allocation is dependent on the entrepreneur-co-ordinator (Coase, 1937). The entrepreneur-co-ordinator, or an owner of a firm or a top management team (when 44 there is not an entrepreneur-co-ordinator identifiable), has power over things as well as persons in the firm. Generally, the power held by the owner is defined as a capacity to get things done. Also a higher position in a firm means more power, which means what an owner want to get done, how an owner wants to allocate resources will be the code of conduct of the firm (Stinchcombe, 1968). For a individual’s power in modern societies, we usually mean personal capacity to influence the decision that will be the product of some decision-making apparatus (Stinchcombe, 1968).

When an organisation first forms, there are dominant figures known as founders. These founders provide the way the organisation should be structured and operated based on their beliefs, values and assumptions (Schein, 1983, 1990). The organisation as a whole will gradually learn and share some accepted beliefs of the founders, some modified and some rejected, through experiences. Entrepreneurial corporate culture based on the CEO’s personality (in a normally hierarchical business organisation) is especially important in companies that are without an inherently strong competitive position (Franke, 2007).

Schein (1983) identified ten mechanisms used by founders and key leaders to embed a value or assumptions they hold. Design of physical spaces, façades, buildings and organisational systems and procedures including especially the design of work, who reports to whom, degree of decentralisation, functional or other criteria for differentiation and mechanisms used for integration carry implicit messages of what leaders assume and value have been included as mechanisms through which founders’ and key leaders’ values and assumptions can be revealed. Companies that are still heavily influenced by founders and continuously run by a founder’s family members show distinctive characteristics by the founder’s values and assumptions (Schein, 1983).

One of most distinctive characteristics of the founder is higher likelihood of pursing non-economic objectives by virtue of being the founder. The founder is able to take a long-range point of view because he or she is building an identity through the enterprise (Schein, 1983). Using their positions as primary stakeholders, founders can be in a position to insist on doing things that may not be optimally efficient from a

45 short-term point of view but which reflect their own values and biases in how to build an effective organisation and how to maximize the benefits to themselves and their families (Schein, 1983). Katona (1953) ranks motivational patterns of businessmen from one extreme of striving for high immediate profits to the other extreme of striving for prestige or power.

Strategic behaviour and decision-making in organisational settings can also reflect not only value of the founder but also the values of executives and a top management team (Choi and Wang, 2007). In fact, managers do not own their company’s assets; as agents, they may hold control over their use (Bolton and Scharfstein, 1998). Managerial values also seem to have strong influence over organisational behaviour. A characteristic of the services of executives and a top management team is that they represent a specialisation of the process of making organisation decisions, and this is the essence of their functions (Barnard, 1968). Because of their position and the power to get things done, therefore, they are as influential as founders in an organisational context when it comes down to decision-making.

However, they are only the agents in the occasion, leaving possibilities for bounded rationality and opportunism when there are conflicts of interest in their actions on decision-making. One appropriate assumption about the agents’ choice is that the agents choose what they perceive to be best. Aside from the fact that the agents’ perception of what is best is correct or incorrect, it is important because it is what determines the agents’ choice. Therefore, the agents are only limitedly rational and choose optimally given their limitations (Barton, 1991).

2.5.5. Asset specificity and property Theoretically a firm deals with all resources in the same repeated manner when they make resource allocation decisions under rationality assumptions in neoclassical economics. Neoclassical economics’ assumptions are the basic elements for the whole theory to be mathematically deterministic. The highly deterministic quality of neoclassical economics also enables traditional financial evaluation techniques such as net present value, the internal rate of return and various uses of discount cash flow method (including lease versus own analysis) to be handy tools upon firms’ decision- 46 making processes (Geltner, 2007; Brueggeman and Fisher, 2008). Financial evaluation techniques best deliver firms technically objective results on a dollar base. The results from financial evaluations provide a strong and very explicit reference to firms’ property decisions.

By nature, financial evaluation techniques require stability of any prediction of future outcomes of firms and markets. In order to carry out, for instance, net present value, the internal rate of return or discounted cash flow methods, estimates of various future values, prices and rates, are essential. Estimating future values is statistically computing outcomes of expected behaviours of individuals and firms in markets. Behavioural assumptions in neoclassical economics, especially rationality assumptions and profit maximisation assumption thus also become inseparable in accepting financial evaluation techniques in property decisions.

Institutional economics’ approach to assets, particularly physical assets, and the nature of the firm could bring in broadened understanding of decision-making behaviours of firms limited with rationality and profit maximisation assumption. Assets of high specificity which are crucial to accomplish the firm’s strategic goals represent “the strategic core of a firm” (Foss, 1995). Assets with high specificity should be integrated to make the full range of organisational incentives available. Any asset, whether it is visible like physical assets and investments, or invisible like human assets and knowledge, exhibits the best of the firm’s rationale in an industry and is incorporated with organisational routines and culture (Foss, 1995). Property is a large part of assets held by the firm, which means that how the firm identifies the degree of the asset specificity over their pool of assets is highly related to the firm’s core and goals.

Property is often valued as a part of corporate strategy in sustaining the performance of the firm (French and Wiseman, 2003). As to align property and business strategies, therefore dealing with property, is more than a mere factor of production but helps to achieve a higher level of capital efficiency, reduced level of market exposure and lower cost of business initiatives (French and Wiseman, 2003). Managing property proactively as an integrated part of the firm’s strategic plan brings out positiveness in gaining a competitive advantage in their industry (Ball et al., 1993; Nourse and Roulac,

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1993; Manning and Roulac, 1996; Manning et al., 1997). In the past, “We are not in the real estate business” was often easily claimed by some corporations (Nourse and Roulac, 1993; Rodriguez and Sirmans, 1996; Manning et al., 1997). Considering that a portion of assets held by corporations and the high level of occupancy costs of space, “we are not in the real estate business” statement was easier to say then to do in reality.

In the case of non property companies, as evidence of having a committed interest in property as a part of corporate strategy, formation of a real estate unit or department in a firm could be examined, even if corporations claimed they were not in the real estate business. In the early 1980s, the majority of corporations had already formed a separate department, whether centralised, decentralised or a wholly owned subsidiary, dedicated to real estate activities in corporations in the United States (Zeckhauser and Silverman, 1983; Rutherford and Stone, 1989).

Because of where the idea of corporate real estate was starting to form, early corporate real estate literature is heavily focused on how to integrate property decision-making with business decision-making and strategy (Zeckhauser and Silverman, 1983; Gale and Case, 1989; Rutherford and Stone, 1989; Manning, 1991; Roulac and Friedman, 1993; Roulac, 1995; Manning et al., 1997; Edwards and Ellison, 2003).

Research on a real estate department in firms and motivation of the department formation in the US conducted by Rutherford and Stone (1989) found that profit and cost forms separated rationale for property management in corporations. Profit is consistent with property development, but cost is consistent with asset and property management, risk reduction and contracting efficiency. They also found that efforts to achieve the efficient use of real estate are consistent with the goals of the business (Rutherford and Stone, 1989). In the same year, Gale and Case’s (1989) research found that a significantly greater number of corporations considered and dealt with property as a cost centre by corporate management rather than a profit centre, therefore employing rather lower levels of management and hardly evaluating their holdings as an investment basis. Corporate real estate executives were identified as a significant

48 factor in determining how corporations perceived the importance of corporate real estate management and the performance of corporate real estate (Pittman and Parker, 1989).

It is rather debatable if the cost and profit is the sole motivation of property decisions of firms. Teoh (1993) conducted a survey in New Zealand on corporate real estate management functions in non-real-estate companies listed in the New Zealand Stock Exchange. Teoh (1993) found that whether a corporate real estate department was a profit centre or a cost centre in managing property activities, there were no significant beneficial differences. Having a corporate real estate department proved to be a factor of the likelihood of performing better. Teoh also said that the attitudes of corporate executives influence the perception of the importance of the corporate real estate management function and consequently influence the performance of the corporate real estate management function.

Gibler and others’ (2002) finding of a survey conducted in Australia, Hong Kong, the US and the United Kingdom said that most real estate managers still perceive their main role to be procuring space at the lowest possible cost focusing on the short term. Moreover, most corporate real estate departments were found to be operating separate from other business functional areas. The corporate real estate manager’s knowledge might have been advanced to accept the need for developing strategic planning and management, yet integrated property decision-making into the overall corporate strategy was found in a minority of companies.

Other research conducted by Lindholm and others (2006) in Finland, the Netherlands, the UK and the US and by Wills (2008) in Australia drew a similar conclusion. The research concluded that a majority of corporate real estate managers viewed and emphasised corporate real estate as a cost of production, which therefore must be minimised, rather than as a strategic resource.

Not all researchers are heavily focused on costs in approaching property decisions in firms. Ali (2008b) showed an apparent sign of corporations moving away from a cost centre approach to corporate real estate department but also corporate viewing property as means of giving a company a commercial advantage that can add value to 49 corporations. Park and Glascock (2010) found corporate real estate ownership contributes the positive returns for firms in the franchise industry. This research is particularly interesting because it focused on the franchise industry and theoretically approached the problem from the agent cost theory. Appel-Meulenbroek and others (2010) examined corporate real estate in branding strategies. The research especially concluded the size of the companies matters when it comes down to awareness and intention of corporate real estate in branding. Although the bigger companies are more deliberately consider corporate real estate in branding, smaller companies tend to consider it unconsciously.

2.6. Attributed values of property and the firm

Property can be approached from the way it fits into a corporate structure and balance sheet, and the impact on its core competency. It is important to constantly assess the appropriateness of real estate utilisation in the firm, whether it serves the current attributed values of property identified (Linneman, 1995). The role of property should be not only right for now but for the future of the firm. Considering the nature of property development which takes a relatively long time to deliver, it must be admitted, having a clear definition of the role of property is not easy to foresee. The attributed values of property in the firm and its consequential management must reflect both the very nature of property and the core business of the firm. In this chapter, the meaning of property is discussed with various aspects of the nature of the firm in order to derive different attributed values of property beside the conventional monetary value of property.

2.6.1. Utility of property The value of property is derived from the utility of property. When a property purchaser considers buying a particular property, the purchaser evaluates the utility of the property with other utilities derived from other properties (Australian Institute of Valuers and Land Administrators, 1997). The heterogeneity of property means each property possesses a unique set of attributes (Miller and Geltner, 2005). Property

50 consumers derive the utility of property not from the quantity of property they consume but from the set of attributes that each property can uniquely offer. A property purchaser seeks to maximise his/her utility2 when he or she acquires property. A property purchaser seeks out a satisfying level of the set of attributes in order to maximise the utility when he or she acquires property. Therefore, differences in individual property attributes and consequently differences in the utility of property are significant contributing factors to deciding the value of property.

For a corporate consumer, the utility of property is derived from the characteristics and types of property itself. Any space will do for an office; however, a greater level of utility can be achieved by a permanent and purpose-built structure. There are also different types of property which offer different ranges of attributes and hence determine the value of property differently. A purchaser seeking a distribution centre in a certain area will be able to maximise utility by acquiring a distribution centre in the preferred area rather than other types of property in the same area or elsewhere. It is important for maximising the utility perspective. Knowing the required attributes of property and acquiring property that offers the most suitable attributes is a crucial part of maximising of the utility in property trading.

Physical characteristics of property also contribute to the attributes of property. Property lacking mobility and liquidity (Ring and Dasso, 1985) forces corporations to fix where they carry out their business physically. The fixity of specific property which is generated from committing to a specific property brings out various aspects of uncertainty for corporations. Uncertainty comes from more than being physically stranded at that specific locality and localised competition. It also comes from committing to a certain property that involves a huge sum of money sunk into the property. Once corporations are committed to a certain property, it is also hard to convert the existing type of property to suit the new purpose of the property. The durability of property provides grounds for the long-term commitment of indispensable funds and the necessity of structured management.

2 Net utility where cost of purchase is included as a negative utilities 51

If it is as simple as the quantity of property—meaning more space to carry out their business—corporations are after, financial evaluation techniques could easily provide answers to corporations to build or buy or lease property.

2.6.2. Property as a profit booster The ultimate goal of property decisions are creating wealth for the corporation and consequently creating wealth for shareholders. Property decisions have impact on creating wealth for the corporation and their shareholders directly. The direct impact comes from costs and profits such as capital gains and incomes from operating and selling of properties. These incomes, if positive, directly increase the value of corporations consequently directly link to the share price in the share market. Investment properties are included as they contribute to profit.

Identifying and evaluating property with attributed values as a profit booster is simple. The costs and profits generated from the investment dominate how this kind of property is identified and evaluated. The motivation of firms to make decisions on property with attributed value as a profit booster is clear as well. Firms are motivated by a positive net present value on an investment and higher internal rate of return and net present value if it is between investment choices of ‘own’ and ‘lease’.

2.6.3. Property as means of control In reality, because of various transaction costs, ex-post-residual rights of control will be important, because through their influence on asset usage, they will affect ex-post bargaining power and the division of ex-post surplus in a relationship, affecting the level of the incentives between actors who invest in that relationship. Hence, when contracts are incomplete, who owns and controls assets becomes crucial (Demsetz, 1967, 2002; Hart and Moore, 1990).

Occasionally, firms have to purchase or build property for their specific purposes if their specific needs cannot be satisfied with available property in the market. If the local property market is not sufficient to meet their required space, they have to purchase or build even general-purpose buildings. Mostly, acquiring necessary space

52 for their business is a force behind property decisions, but securing the stable use of space for the duration of business activity is equally essential.

Property ownership promises the best protection for the stable access to space of any duration. Holding ownership would provide absolute protection; however, it also has its own drawbacks such as a large sum of capital sunk into real estate and then left vulnerable to market changes due to illiquidity and the inflexible nature of property (Edwards and Ellison, 2003). Long-term, in some cases short-term, lease contracts are able to provide some protection but only incomplete protection compared to having ownership. The introduction of alternatives of property ownership using advanced financial methods broadens the whole concept of ownership and new development to the efficient operation of existing assets (Linneman, 1998a).

The greater the control over a property is, the bigger the cost of initial outlay and responsibilities of owning and managing the property is. Owner occupation clearly being the most expensive form of occupying property (refer to Figure 2-2), a firm’s decision to commit to occupying a self-owned property should be explained by its specificity or a particular attribute or attributes of the property that a firm strives for.

Figure 2-2 Ownership and involvement Cost of initial outlay of initial Cost outlay Owner occupation of Owner occupation of Sales and Virtual a freehold property a freehold property leaseback assignment with a mortgage

Owner occupation of Owner occupation of a leasehold property a leasehold property Serviced with a mortgage office

Operating lease Financial lease

How much of the responsibility for owning and managing the property does the occupier bear?

Source: Capital Economics (2002:43)

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2.6.3.1. Reasons for owning property Reasons to own property include the following.

x To achieve a sense of security (Weatherhead, 1997; Tempelmans-Plat and Heynick, 2001; Edwards and Ellison, 2003; Ali et al., 2008a) x To take sole advantage of a unique location (Ring and Dasso, 1985; DiPasquale, 1996; Weatherhead, 1997; Tempelmans-Plat and Heynick, 2001; Edwards and Ellison, 2003; Ali et al., 2008a) x To take an advantage of a uniquely tailor-made building (Weatherhead, 1997; Tempelmans-Plat and Heynick, 2001; Edwards and Ellison, 2003; Ali et al., 2008a) x To have freedom to alter and expand space (Ring and Dasso, 1985; Weatherhead, 1997; Tempelmans-Plat and Heynick, 2001; Edwards and Ellison, 2003; Ali et al., 2008a) x No rental property is available in the area (Weatherhead, 1997; Tempelmans- Plat and Heynick, 2001; Edwards and Ellison, 2003; Ali et al., 2008a) x Prevent risks of rental increase or lease contract (Ring and Dasso, 1985; Jaffe and Sirmans, 1995; Weatherhead, 1997; Edwards and Ellison, 2003; Brueggeman and Fisher, 2008) x To have possible capital gain (Ring and Dasso, 1985; Jaffe and Sirmans, 1995; Weatherhead, 1997; Edwards and Ellison, 2003; Brueggeman and Fisher, 2008) x To have possible long-term development potential (Ring and Dasso, 1985; Jaffe and Sirmans, 1995; Weatherhead, 1997; Edwards and Ellison, 2003; Brueggeman and Fisher, 2008)

2.6.3.2. Reasons for leasing property Reasons to rent property include the following.

x Requires less capital (Ring and Dasso, 1985; Jaffe and Sirmans, 1995; Weatherhead, 1997; Edwards and Ellison, 2003; Miller and Geltner, 2005; Ali et al., 2008a; Brueggeman and Fisher, 2008)

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x Easy to relocate or reduce required space to suit (flexibility) (Ring and Dasso, 1985; DiPasquale, 1996; Weatherhead, 1997; Tempelmans-Plat and Heynick, 2001; Edwards and Ellison, 2003; Miller and Geltner, 2005; Ali et al., 2008a) x Less illiquidity problem (Ring and Dasso, 1985; Jaffe and Sirmans, 1995; Weatherhead, 1997; Edwards and Ellison, 2003; Miller and Geltner, 2005; Ali et al., 2008a; Brueggeman and Fisher, 2008) x Reduced risk of being stuck with unproved locality (Ring and Dasso, 1985; DiPasquale, 1996; Weatherhead, 1997; Edwards and Ellison, 2003; Ali et al., 2008a) x No burden of maintaining the whole property (Jaffe and Sirmans, 1995; Weatherhead, 1997; Tempelmans-Plat and Heynick, 2001; Edwards and Ellison, 2003; Ali et al., 2008a; Brueggeman and Fisher, 2008)

2.6.4. Property as a supporting tool for business activities Property as space is dedicated for current and anticipated growth of business activities, external environments such as industry dynamics and the availability of property (Linneman, 1998b). In comparison with directly creating wealth from prices, rents and consequential costs generated from developing, operating and disposing of property, property affects companies’ wealth creation indirectly, subsequently affecting the survival and success of corporations.

This aspect of property has less to do with cost or profit directed from property itself but more to do with continuity of production and service of business. As companies increase in volume, expansion into larger or newer premises is inevitable. Recently taking advantage of the effect of globalisation and moving offshore in order to utilise access to cheaper resources and to broaden the market share internationally often involves international real estate deployment (Linneman, 1995)

Early-stage property decisions are shorter commitments and lack long-range planning and are preferably reluctant to invest in facilities or furnishings until current settings cannot support the level of business activities required (O'Mara, 1999). It is an appropriate approach for firms which are facing uncertain demands in future, and

55 hence are unable to predict future space requirements. Property decisions are made when an immediate business requirement occurs.

Standardising follows shorter property commitments directly linked to an immediate business requirement (O'Mara, 1999). By standardising physical appearances of property required, such as design and materials, as well as the property decision- making administrative process, firms attempt to integrate property decision-making processes into the formal management process. Standardisation is often preferred by larger and mature companies with a larger holding of property because standardisation enables control of not only property itself but also behaviour within the organisation towards property.

Firms reach places they seek in which not only functions of buildings but also the values that comes with or can be created, which O’Mara (O'Mara, 1999) identified as the value-based approach. Using the value-based approach, firms create an abstract means of property which embodies human behaviour, organisational values, organisational culture, and organisational hierarchy and therefore supports their organisational goals. The value-based approach enables justifying property decisions with symbolic, therefore not tangible, intentions rather than concrete economic justifications.

2.6.4.1. Property and the growth of the firm Vertical integration as a form of growth of the firm (Perry et al., 1992; Foss, 1995; Penrose, 1995; Weatherhead, 1997; Porter, 1998) carries a certain amount of choice in property about whether to ‘own’ or to ‘lease.’ Changes from leasing a property to owning a property internalise the periodic transfer of property service; therefore, purchasing a property or having a leasing contract is vertical integration (Nourse, 1990). In this case, property decisions are often less about taking a chance of financial gain but more about strategic movements (Weatherhead, 1997; Porter, 1998). An example of McDonald’s Corporation in the United States (Nourse, 1990) provides insight into the issue. According to Nourse’s research (1990), McDonald’s Corporation, which owns the property its franchisees occupy and leases the property to the

56 franchisees, specifies its contracts with franchisees so that it may cancel the relationship with a franchisee if their operations do not follow McDonald’s guidelines.

Owning property can also be used as a barrier to entry of competitors into a certain market. Acquiring properties in strategic positions, especially for retailers (Nourse, 1990; Weatherhead, 1997; Edwards and Ellison, 2003), can mean gaining the upper hand by gaining suitable premises as well as dominating the market share, therefore increasing the cost of entry for competitors and so controlling competitors entering the market.

Taking both the advantages and disadvantages of owning or leasing property, this issue is hard to quantify. The worth of property ownership cannot be expressed in the monetary value of the property alone. In the case of McDonald’s leasing policy (Nourse, 1990), McDonald’s does not just ‘own’ a building, therefore having full advantage of the value of the property and ‘collecting’ rent from the franchisees. They also hold power over the franchisees’ business activities, a power which can even put the franchisees out of business.

Vertical integration in real estate is often associated with the high level of capital investment which often accompanies a lower return than the returns from the core business. It also calls for the provision of corporate real estate management in corporations in order to achieve the intended complexity of the strategic goal. Because of the huge capital and business that is at stake, taking the right management position with ‘appropriate’ attributes of property in mind in the process of property decision is crucial.

2.6.4.2. Property and external environments Timing or time normally plays an unfavourable role in property management for corporations due to the illiquid nature of property, as discussed. It is easier for corporations to allow for what they need rather than for when they need, even though this may make property traders vulnerable to the environment. The market environment, legal environment, legal system at all levels of government including land title system, land use control, environmental control, financial environment such as capital markets and financial methods and tax system also influence as constraints, 57 therefore shaping corporations’ behaviour and attitude towards property (Jaffe and Sirmans, 1995; DiPasquale, 1996).

Markets are social structures among specific groups of firms, and economic actors in the market evolve from observations of each other’s behaviour. Hence economic actors reproduce their own course of action (Harrison, 1981). Often buyers and sellers of property are in the same industry. Thus, not only will the forces that affect the property decision of one firm affect other firms in the same industry but also competitors in the same industry are closely affected by each other’s property decisions (Linneman, 1998b).

Market institutions, as a set of rules, form the way corporations deal with property in general. Institutional arrangements govern the way economic actors behave and therefore the demand and supply of property. In the past, large-scale corporate owners were often more efficient property developers, even of general-purpose buildings, simply because they had better access to capital than small property developers and owners (Linneman, 1998a). When there were not enough real estate companies capable of providing competitive rental rates and uniformed services for leased property, it was also an unavoidable choice for corporations to build their own buildings. Typically for general-purpose buildings, the emergence of the service sector and the explosion of professional jobs and increasing availability in competitive leasing markets have shifted the nature of property use drastically (Linneman, 1998a).

Market externalities generated from surrounding property owned by business are also a factor that governs the attributes of property for corporations (Nourse and Roulac, 1993). For instance, a shopping centre can attract new business as suppliers or customers, therefore increasing the value of the surrounding land. A retailer then has a choice of owning a shopping centre internalising profits from the increase value or of leasing space at specially discounted rent as an anchor tenant taking advantage of the externality of the profits of a shopping centre owner.

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2.6.5. Property as a symbol Separation of ownership and control in a firm allows agents to take an opportunity to authorise resources and cash flow for their desires at the expense of shareholders (Jensen and Meckling, 1976). Corporate executives traditionally treat property as a cost of operation and, after initial ‘own’ or ‘lease’ decisions taken place, ignore property as a mere fixture on their balance sheet (Miles et al., 1989; Roulac, 2001). Often executives are reluctant to return their capital to shareholders even when they lack value-enhancing investment opportunities. Instead they frequently choose to build corporate facilities as architectural monuments to themselves at the expense of shareholders rather than choose general-purpose spaces (Linneman, 1998a).

Corporations’ decisions about buildings for corporate headquarters, supposedly being a general-purpose building explicitly, can suggest the implicit meaning of property for corporations as well as issues associated with agency costs. The relocation of a corporate headquarters building is often prompted by the self-interest of a company’s executives to accommodate their special desire for a new building (Alli et al., 1991; Ghosh et al., 1995; Rodriguez and Sirmans, 1996). Especially headquarters building relocations without apparent reasons are hardly justifiable for property investment purposes. This also can bring about conflict between principal and agents, shareholders and managers (Rodriguez and Sirmans, 1996). Research conducted in the United States also concluded that relocating firms were financially larger and less profitable than non-relocating firms in the same industry (Alli et al., 1991). Agency- motivated relocations were negatively received in the share market, but cost- motivated relocation announcements experienced a positive market reaction (Ghosh et al., 1995).

For asset and property managers in corporations, general reduction of the scale of corporations’ property pool by sales means losing their own bottom line, aside from corporations increased possibility by freeing capital to generate greater return elsewhere (Linneman, 1998a). Possible opportunistic behaviour of agents and agency costs relating to property management seems concerned with the following three issues. Those are firstly the level of authorities held by asset and property managers in

59 the firm, secondly the status of the real estate department in the firm’s hierarchy and finally the involvement of leaders in an organisation which include the founder of a corporation in decision-making process.

Property can also be used to develop a unique characteristic accepted across the industry, thus differentiating a firm from competitors (Nourse and Roulac, 1993; Weatherhead, 1997; Porter, 1998). Branding, which is a significant part of differentiation strategy, can be easily achieved by having to show the name of the brand in front of retailers. Not only retailers but even general-purpose space such as an office building can be used to improve both branding and the image of a corporation itself. Offices in which all visitors including clients, employees, consumers and service providers gather to meet can convey an image and statement which the corporation wishes to identify with (Nourse and Roulac, 1993; O'Mara, 1999). Decisions associating property can also send out unappealing signs. Companies often fear that a large quantity of property transactions might wrongly mark them as financially challenged companies (Linneman, 1998a).

Even though individual office space occupied has a less direct link to the actual business activity, individual offices can help to add value to the business by providing the optimum environment to generate productivity from the occupiers (O'Mara, 1999; Edwards and Ellison, 2003). Office space which reflect companies’ values can provide a source of competitive advantage by appealing to people already working for the company and people the company wants to attract (Kao, 1996; Roulac, 2001). Office space which is stimulating and encourages learning and innovation among employees certainly contributes to the performance of the organisation as well as to the employees (Roulac, 2001). Employee satisfaction with a work environment is also identified as an important criterion when assessing the performance of a property (O'Mara, 1999; Edwards and Ellison, 2003; Johns and Saks, 2005; Appel-Meulenbroek and Feijts, 2007).

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2.7. Summary

In this chapter, the literature related to the research questions is reviewed in order to provide theoretical grounds for the research. Starting from traditional economic theory to organisational studies, a firm’s decision-making behaviour and various perspectives of the attributes of property were examined.

Evolving from firms’ traditional attitude toward property being an investment instrument and costs of the operation, this chapter reviewed modern economic approaches to organisations and institutions. Why a firm exists and how transaction costs shape the behaviour of the firms and the market are discussed, in order to identify the fundamental nature of the firm. Organisational behaviour in the decision- making process is also reviewed. It provides various elements of decision-making behaviour, thus identifying the configurations of property decisions as a part of resource allocation processes. Nevertheless, it is attributed values of property that cater to the explanation of the phenomenon of the organisational property decisions. Evaluating attributed values of property in the firm from integrated multi-theoretical perspectives presents a framework for understanding modern firms and property relationship.

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Chapter 3 Methodology and Methods

3.1. Introduction

The methodology and the method of research depend on the nature of the research. For many studies in real estate focusing on price, quantitative approaches to research with quantitative methods are often used. Initiating a behavioural study with institutional economic theories requires two new dimensions in the field of property research: firstly an approach to conducting mixed theories and multilevel of analyses, and secondly methods to analyse behavioural data (qualitative data). Institutional economic theories are a group of theories which deal with a broad area of issues relating to economic events and situations. Individual institutional economic theory tends to include the core of each event and situation. However, in many cases, these economic events and situations occur where there is not just one but a number of factors which can only be explained by individual theories separately, affecting the whole situation at the same time.

Bringing a fresh methodological approach and methods to the area is part of the purpose of the study. The broad concepts of a firm’s decision-making behaviours have been well studied across the areas of financial studies, organisational studies and economics. The cases of firms making decisions regarding property are less well explained or rather left out. A configuration of mechanisms of already well-established conceptions of firms’ behaviour to the level which can explain very specific phenomenon, firms’ property management and decision-making behaviours is the objective.

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3.2. Research philosophy

3.2.1. Methodology Formulating theories and deriving their consequences is a theoretical task. Methodology and methods are techniques that researchers use to carry out their research. Methodology is the study of methods that are used for the research. It contains the logical nature of principles and processes of the research and application of such principles and processes of the research to a particular discipline of research (Runeson and Skitmore, 1999). Methods are instruments of data collection, tools for analysis and aspects of research processes (Bryman, 2008). Therefore, it is responsible for uncovering the practices and assumptions of those who use methods of different kinds (Bryman, 2008).

“For many of us in the social sciences, our epistemological training was in the positivist tradition and included an introduction to Popper’s notions of falsification” (Carlson et al., 2004:275). Popperian falsification argues that science progresses by conducting research studies that severely challenge current explanatory hypotheses in hopes of falsifying them (Popper, 1972; Blaug, 1992; Boland, 2003; Carlson et al., 2004). For Popperians, failing to falsify a hypothesis does not mean that the hypothesis is supported. It only means that other tests might falsify it. Therefore, knowledge accumulated now is developed through the ongoing identification of falsified hypotheses to provide certainty from ignorance (Blaug, 1992; Carlson et al., 2004). “Science can advance more closely to the truth that we all are looking for, if we can explicitly eliminate the most likely alternative theories (Stinchcombe, 1968:149)”.

Popper stated that falsifiability and testability are matters of degrees between a more or less continuous spectrum of knowledge (Popper, 1972). Natural sciences such as physics and chemistry are positioned at the end, and at the other end of the spectrum are art and history. Social sciences placed between the two ends of the spectrum depending on their “degree” (Blaug, 1992). The theory plays a central role in the Popperian approach. The method of research inquiry is to validate theories by comparing hypotheses based on theory with the outcome of experimental or empirical

63 observations. Hence, theory is the centre of research inquiry (Carlson et al., 2004; Duane Ireland et al., 2005). Although Popper denies the view that scientific explanations are simply “inference tickets” for making predictions, he insists that scientific explanations cannot be appraised except by the predictions which they imply (Blaug, 1992).

Motivational assumptions in neoclassical microeconomics preclude Popper’s falsification; however, Popper does allow some space for verification through corroboration of theories (Suppe, 1977). Putnam suggested how theory could be corroborated by investigating the validity of its auxiliary statements, which he refers to as schema II as illustrated in Table 3-1 (Suppe, 1977; Runeson, 1997; Runeson and Skitmore, 1999, 2008). Schema I is Popper’s attempted falsification of the theory, when auxiliary statements are known, and the test is whether the prediction derived is true or false. Schema III is when the theory and some auxiliary statements are known, and the research is to establish the facts.

Table 3-1 Comparison of the three schemata

Schemata Employing theories and auxiliary statements Schema I Theory Auxiliary Statements ______Prediction to be verified or falsified(?????) Schema II Theory Auxiliary Statements to be found (?????) ______Facts to be explained Schema III Theory Auxiliary Statements ______Fact to be discovered (?????) Source: Runeson and Skitmore (2008) adopted Suppe (1977:428)

With Putnam’s schema II, it becomes possible to examine auxiliary statements rather than the expected outcome (predictions) of theory which explain the known outcome (facts) best. Although this logical deduction will not allow falsifying the theory, with appropriate corroboration of the theory, auxiliary assumptions can be identified which 64 explain the phenomenon best; therefore, it could lead to accepting theory (Suppe, 1977; Runeson and Skitmore, 2008).

3.2.2. Explanations and mechanisms Empirical research is carried out in order to test theories. Bromiley and Johnson (2005) argue that empirical research means or should mean testing underlying explanations. By testing an explanation, it is expected that we will know more about whether or not the mechanism that the theory postulates actually operates in the empirical world rather than whether or not just the simple theory’s primary predictions fit the data (Hempel and Oppenheim, 1948; Bromiley et al., 2005). The empirical world can be understood with casual explanations, meaning understanding the mechanisms creating the observed phenomena (Bromiley et al., 2005). The phenomenon is explained by two forms of scientific explanation: means of general laws, and emphasis on the mechanisms of the phenomenon (Hempel and Oppenheim, 1948; Salmon, 1998; Bromiley et al., 2005). Although ultimately the two forms of explanation might converge, they offer very different practical approaches to research (Bromiley et al., 2005).

The primary purpose of explanatory research is to explain why events occur and to build, elaborate, extend or test theory. Multiple strategies are often employed for explanatory research. For example, a novel explanation is developed and then empirical evidence is provided to support it or disprove it, or two or more competing explanations are outlined and then evidence for each in a type of head-to-head comparison could be provided to see which is the strongest (Neuman, 2006).

An explanation consists of prior conditions and mechanisms or laws that operate on those prior conditions to generate predictions of new situations (Salmon, 1998; Bromiley et al., 2005). The quality of explanations depends on features of the preconditions, mechanisms and prediction. Firstly the preconditions must fit the facts (Bromiley et al., 2005). If a proposed explanation is to be sound, its constituents have to satisfy certain conditions of adequacy, which may be divided into logical and empirical conditions (Hempel and Oppenheim, 1948).

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The explanation of a phenomenon consists in its subsumption under laws or under a theory (Hempel and Oppenheim, 1948). When the meaning of shared experiences of individuals is described, it is referred to as a phenomenological study. Carrying out the identifying of a phenomenon is the first step of phenomenological research. Then researchers collect data from persons who have experienced the phenomenon, in order to develop a composite description of the essence of the experience for all of the individuals (Creswell, 2007). This description consists of what they experienced and how they experienced it (Van Manen, 1990; Moustakas, 1994; Creswell, 2007).

A phenomenon may often be explained by sets of laws of different degrees of generality. Hempel and Oppenheim (1948) provided the changing positions of a planet as an example which may be explained by assumption under Kepler’s laws, or derivation from the far more comprehensive general law of gravitation in combination with the laws of motions, or finally by deduction from the general theory of relativity which explains and slightly modifies the preceding set of laws. Scientific laws, whether descriptive or explanatory, are supposed to capture the invariants of the phenomena, those underlying regularities that do not change from moment to moment (Simon, 1992). It is this potential predictive force which gives scientific explanation its importance. Only to the extent that we are able to explain empirical facts can we attain the major objective of scientific research, namely, to record the phenomena of our experience but also to learn from them, by basing upon them theoretical generalisations which enable us to anticipate new occurrences and to control, at least to some extent, the changes in our environment (Hempel and Oppenheim, 1948).

Explanation began with the study of the natural world and spread to the study of social life. Social sciences frequently offer explanations based on mechanisms (Hempel and Oppenheim, 1948; Salmon, 1998; Neuman, 2006). Explanation and prediction share the same logical structure which is a deductive systematisation (Hempel and Oppenheim, 1948). Finally, when the mechanisms combine with the preconditions, it is possible to falsify predictions (Bromiley et al., 2005). The quality of an explanation depends on the correctness of the preconditions, the generality of the mechanisms

66 and the accuracy of the prediction. A good empirical test of an explanation should test all three as directly as possible (Bromiley et al., 2005).

Bromiley and Johnson (2005) went further, claiming that empirical work on transaction cost economics seldom differentiates between these explanations. Rather than testing the casual mechanism, the studies look for associations between the difficulty of the contracting problem and the organisational arrangements.

3.2.3. Explanations in organisational study The diversity could affect performance through multiple mechanisms. An information- based explanation argues team heterogeneity increases the amount of information a team has, and thus heterogeneous teams should have more information than homogeneous teams (Bromiley et al., 2005).

Research often finds that related diversified companies perform better than unrelated ones. The results are mixed, and many diversified companies perform better than less- diversified ones. Prahalad and Bettis (1986) proposed an additional explanation for the link between the pattern of diversification and performance. They argued that the concept of dominant general management logic and the role of top managers in understanding and managing the logics are important aspects to consider in the research on diversity and performance (Prahalad and Bettis, 1986; Bromiley et al., 2005).

It is also suggested that firms, at least large firms, confront knowledge dispersal problems similar to those that real economies confront. Moreover, firms may be seen as structures of complementary knowledge assets, and their particular constellations of complementarities may be determinative of sustained competitive advantage (Foss and Christensen, 2001).

Strategic group research was originally motivated by the observation that firms were not uniform in their strategy or structure within industries. In the field of strategic management, the strategic group concept suggested an influence on the impact of managerial choice of strategic behaviours at the level of the firm, and researchers conducted studies to determine whether there may be some intra-industry mechanism

67 that guides the strategic behaviour of organisations (Hatten and Schendel, 1977; Barr et al., 1992). Research on strategic groups thus seeks to identify and understand both the mechanisms that cause clustering among firms in strategic behaviour and the patterns of subsequent firm performance (Barr et al., 1992).

More recent research has viewed strategic groups as a cognitive construct. Bounded rationality limits attention to a few relevant competitors, and learning from competitive interactions with those others creates similarities in belief structures that create cognitive groups that result in the types of clustering of strategic behaviour that were identified by early strategic group theorists (Barr et al., 1992). Thus, although cognitive group research supports the existence of groups within an industry, there has been little consistent evidence to suggest that they provide predictive power. Qualitative methods may provide a more complete picture of the relative effects of multi-forces on firm behaviour. To date, much of the literature on economic-based strategic groups ignores the influence of the research on cognition, and cognitive groups’ reliance on social construction as a guiding framework ignores the influences of economic forces (Barr et al., 1992; Johnson and Hoopes, 2003). This suggests that groups are dynamic artefacts of interactions between the cognitive and economic forces (Barr et al., 1992; Short et al., 2008).

3.3. Research Design

Scientific discovery starts with a theoretical statement. As a part of a theory, a theoretical statement delivers “how a class of phenomena will be connected in a certain way with another class of phenomena” (Stinchcombe, 1968:149). The importance of a theory is that it simply makes it possible for a researcher to construct a story about the operation of the social world with what researchers observe when they test it systematically (Neuman, 2006), and it means that predictions raised by researchers can be tested empirically (Runeson and Skitmore, 1999). An empirical statement is derived from a theoretical statement by logical reasoning and operational definitions of the concepts (Stinchcombe, 1968). Empirical statements then can be tested through observations on a specific phenomenon. 68

3.3.1. Concepts and scope Setting up concepts is one of the steps to construct a theory, but relationships among concepts must be specified from theoretical concepts into semantic language (Runeson and Skitmore, 1999). Theories often include specifications of relationships among assumptions and concepts. These specifications contain characteristics of relationships and relativeness between concepts. Different forms of theoretical explanations also can identify particular forms of a relationship (Neuman, 2006). Often concepts, as a part of a theory, can directly correspond to the practical and theoretical aspects of measurements and observations (Stinchcombe, 1968). Consequences of theory testing are dependent on the methods and analytical techniques applied, but its fundamental difference originates from the way concepts are defined by researchers (Runeson and Skitmore, 1999).

A concept with various values determines the kind of analysis which researchers can subject the data to (Stinchcombe, 1968; Runeson and Skitmore, 1999; Neuman, 2006). It must accurately reflect the forces actually operating the phenomenon we are interested in. A researcher has a specific idea about what he or she wants to explain and a certain kind of condition will produce such phenomena as effects (Stinchcombe, 1968). Consequently, whether implicitly or explicitly, every concept must be specified by a certain phenomenon. Therefore, concepts are constantly changing as long as casual theories are in the process of development. Science, to advance progressively, redefines its concepts until they accurately represent the phenomena in the world (Stinchcombe, 1968).

The majority of property research approaches property markets from their performance and factors of performance using a single level of theory and analysis. Studying the property marks from their performance provides what is happening currently in the markets, but its predictive power as an explanatory theory is rather minimal. To better understand a phenomenon and to improve its predictive power as an explanation, preconditions must be identified, and mechanisms of how identified preconditions are postulated have to be tested, possibly empirically. This thesis distinguishes its research concepts by enhancing specification and explication of

69 theories in property studies in order to improve the explanatory power of existing multilevel theories which explain firms, property and the property market. The main objective of the thesis is investigating behaviours of firms when they trade property and working out configurations of mechanisms between firms and property markets.

Table 3-2 A breakdown of theories introduced

Theory Concept perspective Level x Transaction cost A firm aims to reduce transaction Intrafirm level economics costs from property trading, Interfirm level therefore maximising the firm’s wealth, if optimisation theory works in any situation. x The theory of the A firm will carry out all activities Intrafirm level firm within the firm unless it is cheaper Interfirm level to do so in the market. x Property rights Attributed values of property Intrafirm level approach associates more with holding a x Asset specific property ownership, hence a firm investment enjoys full rights of property without any disturbance or means of ownership challenges and enjoys full residual and monetary value of the property. x Vertical and A firm can increase its mass by Intrafirm level horizontal merger and acquisition of integration of a firm business. Why does a firm go into x Diversification of a the property business when it is firm not one of its core business x Growth of a firm objectives? x Principal agent A firm’s ownership structure and Intrafirm level theory decision-making process can affect the firm’s behaviour.

A synthesis of a few new institutional economics ideas is used to form the core concept of the study. Interfirm and intrafirm levels of surveys were selected to test the mechanisms of firms’ decision-making behaviours for property trading as a part of the multilevel approach. Approaching the phenomenon by synthesis of a set of theories has been argued by a number of researchers for studies of organisational management (Klein et al., 1999; Kostova, 1999; Doh et al., 2004). To test a theory empirically, the preconditions and their mechanisms must be tested. Then a theory can be used to 70 predict the performance of a firm in the property market. Table 3-2 provides a breakdown of new institutional economics, which have been introduced as part of the core concept.

3.3.2. Aspects of theory Theory gives a framework for researchers on how a topic should be looked at. Concepts, fundamental assumptions, guidance to the core research questions of a topic and how to make sense of collected data set are included in theory (Neuman, 2006). Explanation involves a different level of analysis, shifting from questions of how subcultures are distributed across a social space, to the questions of how individuals experience situations and form attitudes. Thus, explanatory statements involve analysis of processes at a lower level. First we look at the distribution of phenomena across types of condition and structure, and then the processes whereby behaviours or events changes (Reed, 1997).

In order to improve the explanatory power of prediction of existing theories involving new institutional economics, agent theory, property rights approaches, transaction cost economics and strategic management in a given phenomenon where firms make decisions regarding property trading, mechanisms of firms’ property decision-making behaviours within firms and in the property markets are empirically tested. Then the empirical result will be used to reinforce the theoretical framework in and about a firm’s decision-making behaviours regarding property trading, subsequently providing a mixed-level and integrated theoretical framework for a firm’s decision-making behaviours in property markets.

An organisation is a complex system. It is a group of individuals who are gathered into interdependent subsystems and levels, motivated to purposeful action and existing within a larger influential environmental context (St. John, 2005). Even though it is an organisation which is at the front of every activity carried out in the marketplace, it is people who are actually making decisions and behaving behind the face of a firm (Klein et al., 1999; St. John, 2005). A collective action of individuals or groups of individuals influenced by contexts and processes involved in making decisions determines the strategies of firms and related value of those choices in the markets. Due to the 71 complexity of the form of an organisation, highly integrated contributions from multi- theoretical and mixed-levels of analysis is required. Theories from various aspects of economics are integrated in order to provide a good understanding of complex levels of the units of analysis.

Levels of analysis are fundamental to developing any theoretical model, because they affect most of parts of social theory: the conceptual framework, research methods and eventually the full measure of a theoretical and empirical approach to a phenomenon (Drazin et al., 1999). Theory rests upon its foundations of levels of analysis, and theory can only constrain further theory development by studying assumptions on levels of analysis. Identifying assumptions on levels of analysis allows for their modification and thus for new and alternative ways of theorising a firm’s property decision-making behaviours (Drazin et al., 1999).

Various multilevel theory research has been carried out. Yammarino and Markham (1992) conducted multilevel research into personality, affect and absence behaviour as group-level phenomena and concluded that personality, affect and absence behaviour appear to be based on individual rather than group differences. Using a multilevel framework, Mossholder and others (1998) studied associations between both employee perceptions of procedural justice and a work-unit-level measure of procedural justice context with employee reports on job satisfaction and organisational commitment. Doh and others (2004) extended multilevel approach to the level of analysis by identifying three levels of factors which influence the balance of state versus private ownership of newly accomplished telecommunications projects in an emerging market. The finding supported the insight from transaction cost economics that potential gains from internalisation ate greatest at intermediate levels of uncertainty.

The collecting and analysing of multilevel data have been often referred to as daunting (Yammarino and Markham, 1992; George and James, 1993; Klein et al., 1999). Using mixed theory for multilevel analysis means changes of constructs and relationships of original concepts of individual theories. Individual conceptualisation in a single theory level is reasonable. Each concept in multi-theory-level analysis induces a different

72 explanatory mechanism. Hence, implication of a different strategy for data collection and analysis is called for (Klein et al., 1994).

3.3.3. Units of analysis A unit of analysis is a fundamental and specified element that researchers wish to analyse. Units of analysis equipped with theoretical concepts can be used to design measurement concepts and their implications (Neuman, 2006).

Studying firms’ property decision-making behaviour involves multi-perspectives from various different theoretical contributions from a range of social science disciplines. As Williamson (1999:1087) stated, “business strategy is an expansive enterprise… Strategy is, by nature, interdisciplinary. All of the social sciences especially economics and organisation theory…are implicated”. St. John (2005:198) went further to say that “Strategic management research is concerned with individual decision makers, management teams, departments, divisions, firms populations of like firms, and whole industries and the organisation field.

To understand individuals, in general, psychology will be better. For studying large- scale market forces, economics theories are preferable, and for studying social forces, sociology is better at providing deeper knowledge. However, what studying firms from an organisational level can do is address them effectively (House et al., 2005). Explicitly clarified multiple units of analysis are required for studying multi- theoretical concepts to tailor the concepts and prepare for the next level of research (Neuman, 2006).

Identified units of analysis are not profoundly contextually influenced, as often found in strategy research which considers its units of analysis within a larger context (St. John, 2005). Two major units of analysis were identified for this research. These are individuals within firms for an intrafirm level of analysis and firms with in industries for an interfirm level of analysis.

Major units can be broken down into substantial units of analysis. Groups of individuals known as departments or divisions within firms can be divided into employees (agents) and owners (employers or principals). Organisational units were chosen over individuals as units of analysis. This move is theoretically supported by

73 research undertaken by George and James (1993) and Deery and Iverson (2005). The researchers found that organisational units tend to share similar attitudes due to their common experiences, and these attitudes become increasingly homogeneous over time (George and James, 1993; Klein et al., 1994; Deery and Iverson, 2005). The same is true for cases of a group company in which there are a number of subsidiary companies under one parent or holding company. Even though subsidiary companies are considered separate entities, not only do they receive uniform training and introduction as a part of a group but also highly similar, if not the same, organisational practices and processes are put in place across subsidiary companies in a group company. Hence, individuals in firms for this research are categorised into two units of analysis, employees and employers for an intrafirm level of analysis (Refer to Figure 3- 1 An overview of the research stages and Figure 3-2 A research flowchart). Furthermore, members of each group are characterised as having similar attitudes towards a given phenomenon due to their shared training and experiences over the years. It must be pointed out where two groups — employer and employees — in a firm are assumed to show homogeneity towards a given phenomenon. Here it is the firm’s decision-making and behaviour regarding property trading in the property markets. It is unlikely that employers in a large firm are open for observation or interview, not to mention the difficulty contacting them in the first place. Consequently, employees with positions in a higher management team make more appropriate potential participants for the research. Employees’ answers will cover firms’ perceptions of property and property trading, firms’ property decision-making processes and their property trading experiences in property markets. There is a possibility that employees’ interpretation of employers’ behaviour can be biased and misleading. Carefully selecting a range of questions regarding decision-making procedures can be discouraged in order to keep serious errors to a minimum. However, it must be admitted that this is one of the greatest limitations of the research. In small-sized firms which were introduced as a contrast group, top management teams tended to be the owners themselves. Therefore, the employers’ thoughts and decisions are shown in the property markets. Accordingly, the

74 heterogeneity of a group in a firm was not subjected to significant problems with selecting a unit of analysis and conducting interviews for units of analysis.

However, firms are characterised as being heterogeneous when they carry out business activities regarding property in a market, provided they are not monopolising a market. A firm’s competitive advantage is relative to that of its competitors (Klein et al., 1994; St. John, 2005). Firms have some degree of competitiveness towards property in the property markets when they trade property due to scarcity of land. A degree of competitiveness and its influence over firms’ decision-making processes and behaviour in the property market can be measured from inside the firms and from the market. As discussed, employees were interviewed as a unit of analysis to cover the issues regarding embodied valued attributes of property in firms, market and environmental factors affecting firms’ property decision-making behaviours and firms’ experiences with other firms in the property market. A survey from market real asset managers (property agents in property markets) in the property markets emerges in order to reinforce (complement) the discovery of firms’ property market behaviours. Market real asset managers were selected to be a complementary unit of analysis for an interfirm level of analysis. Market real asset managers’ experiences with both sellers and buyers in the property market to carry out property trading increases the reliability of findings from individual firms, as they can also be biased against their competitors.

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Figure 3-1 An overview of the research stages

Objectives Aims Methods

Part 1 Identifying Providing decision-making Literature review a theoretical framework behavioural assumptions of the firm and attributed values of property of the firm A framework

Part 2 - 1 Identifying interfirm level Examining interfirm level Self-administered market constraints for market constraints for questionnaires property decision-making property decision-making

of the firm of the firm and attributed

values of property Qualitative data

Part 2 - Identifying intrafirm level Examining decision-making Face-to-face interviews property attributes and behaviour of the firm and decision-making behaviour attributed values of of the firm property of the firm Qualitative data

Figure 3-2 A research flowchart

Part 1

A theoretical framework

Part 2-1 Part 2-2 Interfirm level survey Intrafirm level survey (Face-to- (Self-administered questionnaires) face in–depth interviews

A property decision model for a firm

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This study wants to establish the reasons that firms make choices regarding property the way they do and how they come to effect. Property market performance indicators are not the only factors that influence firms’ behaviours. Preconditions (postulates or institutions) and mechanisms (structures) which are set up in and around firms and the property market also influence firms’ behaviours and their courses of action towards property trading.

The precise mechanisms of theories have to be classified to prevent theories from being ill formed. Because explanations include a description of prior conditions and the underlying mechanism that connects prior conditions to predictions, any theorising should be seriously defended with an actual mechanism (Bromiley et al., 2005). Empirical studies on transaction cost economics research which explore the association between the difficulty of the contracting problems and organisational arrangement can only deliver some explanations of why the organisational arrangement works. Casual preconditions and mechanisms also have to be investigated and analysed in order to address more fully why the organisational arrangement works.

3.4. Surveys

This study is about how firms behave in order to gain and maintain a current status in the property market. It involves an examination of strategies that make firms behave in the property market as they have been. Strategy is an inherently social creation which develops through the interactions of people with each other and with the environment Although we may know that unique and complex resources can be used to create a competitive advantage in the market, we do not know enough of how those resources evolve, what makes them unique or how they are integrated into strategy to create a sustainable advantage (Barr et al., 2004).

Qualitative methods are a set of data collection and analysis techniques that emphasize the fine grained, the process oriented and the experiential and that provide a means for developing an understanding of complex phenomena from the

77 perspectives of those who are living it (Barr et al., 2004; Liamputtong and Ezzy, 2005). A qualitative researcher analyses data by organising it into categories on the basis of themes, concepts or similar features. The researcher develops new concepts, formulates conceptual definitions, and examines the relationships among concepts. Eventually, the researcher links concepts to each other in a sequence, as sets of similar categories that the researcher interweaves into theoretical statements (Neuman, 2006).

Qualitative methods allow us to discover new variables and linkages to reveal new processes (Lee, 1999; Barr et al., 2004). Qualitative methods provide the opportunity to identify and explain complex relationships without having to pre-specify either the variables involved or the nature of the relationship between them. Further, in the event that the results of the study are inconsistent with established theory, it could go beyond simply speculating what may have led to unexpected results such as non- significance or reversed signs, often attributed to misspecification errors or deficiencies in the sample in quantitative studies, to look at antecedent actions or contextual effects that might explain the findings (Barr et al., 2004).

The decision to use qualitative methods is determined by the nature of the research questions themselves (Patton, 1990; Barr et al., 2004; Liamputtong and Ezzy, 2005). Descriptive, interpretative and explanative and most often the perspective of the organisation members under study are among the most appropriate for qualitative methods (Barr et al., 1992; Sapsford and Jupp, 1996; Lee, 1999; Neuman, 2006).

Although qualitative methods are most often used for theory-building purposes, qualitative methods can also be used to test theory (Patton, 1990; Barr et al., 1992; Molina-Azorín et al., 2007). Barr and others (1992) conducted a qualitative analysis of archival documents from two companies to test their hypotheses about the relationship between environmental changes, management beliefs and the timing of strategic change and managerial cognition. The qualitative analysis of the documents was undertaken to capture specific indicators of change in the mental models of organisational leaders over a period of 25 years as they faced significant changes in their operating environments. An interesting point from Barr et al (1992)’s research is

78 that their results did support their hypothesis, but also unexpected results were revealed. This unexpected finding pointed to the importance of experimentation and continuous learning to strategic change and raised several implications for future research on the relationship between learning and change in organisations (Barr et al., 1992; Barr et al., 2004).

Qualitative methods are often sought as alternative methods by researchers who are getting the sense that their research questions were not being answered as thoroughly as they could be (Giorgi, 1994). Because capturing the phenomenon as clearly as possible is a criterion to conduct good research, qualitative methods which can deliver the richness and complexities of reality can be useful.

The demanding nature and labour intensiveness of conducting qualitative research is often pointed out (Giorgi, 1994; Moustakas, 1994; Neuman, 2006). Providing theoretically sound and justifiable evidence is more important in order to carry out good science. As Giorgi (1994:208) put it, “if more efficient strategies do not emerge later, then at least one knows the price to be paid in order to understand complex, rich phenomena well.”

3.4.1. Surveys design The choice of which implementation of methods to use depends on the purpose and the practical limitations of a research project. The crucial issue is not which form is best (Neuman, 2006). Phenomenologically, it is important to capture the meaning of the participants, but it is equally important that the meanings are carefully taken up and re-expressed in the researcher’s own language with his or her knowledge of the discipline. Thus the scientific contribution to qualitative research is that forming the concepts accounts for the way participants meaningfully relate to their situations (Giorgi, 1994).

3.4.1.1. Asking questions There are two ways of asking research participants a series of questions. Fixed responses can be provided for respondents to choose from, or respondents can decide what they want to talk about.

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Giving respondents fixed answers so they can choose one or more makes it easier and quicker for the respondents and the researcher. Respondents can easily compare the answers and choose the appropriate responses with low risk of confusion. Data collected from fixed answers provide clearer and more easily handled answers for analysis. However, it has its own problems. Given that answers might provide ideas that respondents would not have otherwise, it could make respondents with no opinion or no knowledge answer questions anyway. They might not be able to read. Respondents might not find the appropriate answer they are looking for among the given answers (Neuman, 2006).

Respondents can give any answer to an open-ended question (Neuman, 2006). Researchers might employ a schedule in which the interviewers’ notes on a respondent’s reply for later use to create a set of codes (Sapsford and Jupp, 1996). There is no possible limit on respondents’ answers. They can answer in detail as thoroughly as possible. Therefore, it is possible that unexpected findings can be discovered (Neuman, 2006), as Barr and others experienced (1992). Because questions are not strictly priority coded, or possibly less structured, researchers can explore the full range of responses before reducing these to a set of categories (Sapsford and Jupp, 1996; Neuman, 2006).

Open-ended questions are mostly appreciated for their ability to deliver creative, self- expressed and richly detailed answers to complex issues. These can reveal in-depth information about respondents’ logic and thinking processes (Neuman, 2006). However, open-ended questions have disadvantages. The degree of detail in replies may vary by respondents. Responses might be irrelevant or buried in useless information. Difficulties in analysis are by far significant issues in open-ended questions. Comparison and statistical analysis is difficult because answers are not unified. Coding of collected information is also difficult for the same reason. Open- ended questions and close-ended questions are often mixed in order to reduce the disadvantages of asking questions in conducting a survey (Neuman, 2006). Researchers can also ask retrospective questions in order to obtain factual information on respondents’ past behaviours and opinions, such as income and occupation. This kind

80 of question can appear to be straightforward but could serve as a question which can classify respondents’ social class (Sapsford and Jupp, 1996).

There are two main highly structured forms of asking questions: the interview schedule and the self-administered questionnaire. Although they have many points in common, the interviewer-administered questionnaire, or the interviewer-administered schedule allows for more control over the interview than does the self-administered questionnaire, which is either sent by post or administered to a group such as a class in a school (Sapsford and Jupp, 1996). The method chosen depends on the nature of the research questions posed and the specific questions to ask respondents. The aim of all methods is to obtain valid and reliable data which can be used as the basis for credible conclusions. The methods differ to strengthen their claim to validity (Sapsford and Jupp, 1996; Gavin, 2008).

3.4.1.2. Questionnaire: Self-administered questionnaires Researchers can give questionnaires directly to respondents or mail them to respondents, who read the instructions and questions then record their answers. This type of survey is by far the cheapest and can be conducted by a single researcher. A researcher can send questionnaires to people over a wide geographical area. The respondent can complete the questionnaire when it is convenient and can check personal records if necessary. Mail questionnaires offer anonymity and avoid interviewer bias. They are very effective, and response rates may be high for a target population that is well educated or has a strong interest in the topic or the survey organisation (Sapsford and Jupp, 1996; Silverman, 2004; Neuman, 2006; Silverman and Marvasti, 2008)

The conducting of questionnaires is subject to approval of the faculty of human research ethics advisory. The human research ethics approval application for the questionnaire was approved 29 July 2008 for twelve months by the Faculty of Built Environment human research ethics advisory (approval number 95029; previous application number 85030).

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3.4.1.3. Interviews: Face- to-face interviews employing an interview schedule Face-to-face interviews have the highest response rates and permit the longest questionnaires. Interviewers also can observe the surroundings and can use nonverbal communication and visual aids (Neuman, 2006).

Developing the interview as a research method involves a challenge to renew, broaden and enrich the conceptions of knowledge and research in the social sciences. The research interview is not merely a method yielding qualitative texts rather than quantitative data but reflects alternative conceptions of the subject matter in the social sciences. Many apparently methodological problems do not stem from the relative newness of the interview methods or from insufficiently developed techniques but are the consequences of unclarified theoretical assumptions (Runeson and Skitmore, 1999).

In order for the questions to have the same wording and be asked in the same order, a standard schedule is used for each respondent (Sapsford and Jupp, 1996; Creswell, 2007). Having a strict interview schedule can establish the much-needed structure of the questions. A highly structured method of asking questions can be used in order for the individual interviews not to depart from each other in any way. Structured questions with an interview schedule are worded in the same way and should be asked as written in the same order, and the responses should be categorised according to the response categories which the research designer has provided (Sapsford and Jupp, 1996). The demands of using open-ended questions followed by time-consuming coding which make the interview method impractical can also be helped by using structured questions with the interview schedule (Neuman, 2006).

An interviewer could also indirectly and involuntarily influence the quality of responses of the interviewees. Non-verbal prompting, such as smiling and nodding, and verbal prompting bring a variation between the interviewer and the individual interviewees, therefore introducing an unknown source of bias into the recorded responses (Sapsford and Jupp, 1996). This bias can be controlled by the interviewer following the interview schedule and carefully rephrasing questions so that they do not seem to invite one sort of response rather than another (Neuman, 2006).

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Interviews with the individuals making the decisions of interest can inform both theorising and tests of mechanisms. Such interviews can tell us what the individuals do and do not know, what they think they do and often what factors the individuals consider in making such decisions. Although such interview data cannot stand as a final test, interviews offer important information for theory building and testing (Bromiley et al., 2005).

The conducting of interviews is subject to approval by the faculty of human research ethics advisory. The human research ethics approval application for the interview was approved 29 July 2008 for twelve months by the Faculty of Built Environment human research ethics advisory (approval number 95030; previous application number 85031).

3.4.2. Data sampling Most discussions of sampling come from researchers who use the quantitative style. Their primary goal is to get a representative sample or a small collection of units from a much larger collection or population. Researchers are motivated to use sampling firstly because of time and cost (Neuman, 2006). But it is also pursued to obtain consistent and unbiased estimates of the population status in the topic being researched (Sapsford and Jupp, 1996).

Because the survey was staged to be conducted in two levels (questionnaires and interviews), every step of the conducting survey involves estimating for both levels. For both the interviews and the questionnaires, it was crucial to find suitable potential participants. Given the vast range of the population for the interviews and the officially unknown size of the population for the questionnaires, deciding where to start could greatly affect the outcome of the survey.

3.4.2.1. Sampling units For the purposes of sampling, populations can be thought of as consisting of sampling units. These are collections of elements which do not overlap and which exhaust the entire population (Sapsford and Jupp, 1996).

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Asset and property managers working for property asset management companies in Korea were identified to take part in the questionnaires. To provide accurate knowledge required for the survey, manager level and above employees in asset and property specialised management companies were asked to participate. Also, asset and property managers who work in only asset and property specialised management companies were asked to participate in the survey in order to investigate their experiences in property markets in Korea.

Various sorts of companies in Korea which best represent the Korean economy were identified to be part of the interviews. Representing differences in industry classification (asset-specific investment and property rights approach), ownership structures (property rights approach and agent costs theory), the size of the company, and property holding status (by taxation; operational, investment and business purposes) (theory of firms and growth of firms) is fundamental to selecting sample firms. To provide accurate knowledge required for the survey, high level manager and above employees in companies were asked to participate.

3.4.2.2. Snowball sampling In snowball sampling, the researcher begins by sampling a small number of people who satisfy the criteria for inclusion in the study (i.e., known members of the target population). The researcher then asks these initial respondents to identify other people who meet the criteria. These subsequent respondents in turn identify others, and so on. The intent is that the initial small sample will “snowball” into a larger one. Snowball sampling is particularly appropriate when the target population is rare and inaccessible (Tharenou et al., 2007). Snowball sampling (also called network, chain referrals, or reputational sampling) is an especially useful method for sampling in a network (Neuman, 2006). Often it takes a single breakthrough with one individual for a “snowball” effect to be set in motion, so the researcher is gradually introduced to a variety of important contacts (Giles, 2002)

Snowball sampling was found to be an effective method for this research. Potential participants are not public figures who can be found freely. However, they are most likely known to each other in the industry. Therefore, other potential participants or

84 people to distribute a questionnaire can be approached through one of the participants. This proved to be time- and cost-effective. Moreover, it was crucial to work out the network between participants because the research involves what is happening at the intrafirm and interfirm levels; for instance, when one of the competitor’s property decisions in the property market influences its competitors’ property decision-making behaviours. The competitors’ behaviours in the market should be examined in order to get a better understanding of the subject firm’s behaviours. In this case, they are the only ones who know who to talk to. Strategic decision-making is one of the most important variables for parties in an imperfect competitive market such as oligopoly, because if your competitor wins, you lose. Therefore, it is important to select participants with consideration of their network.

3.4.2.3. Contacting respondents and response rate Because data were sampled using the snowball effect, it is not possible to calculate the response rate in general. Selecting and contacting potential participants using the snowball effect with strict limitation on time and funds leaves a rather slim chance of getting a large number of responses. Professional knowledge of property trading and management on behalf of corporations in property markets are required to answer the interview and questionnaire questions. Identifying, contacting and then persuading potential participants with the above qualities were considered more important in this research than the number of surveys completed.

Asset managers working for asset management companies were asked to provide unbiased opinions on property markets in Korea from companies they were working for. Consequently, the number of returned questionnaires from a number of companies is not the issue for the research. It is more about how much their experience as asset managers can reflect the real status of corporations in property markets.

Neither the number of property managers nor the number of asset management companies is officially known. Therefore, it is not possible to estimate the size of the population. However, three out of five participating companies claim that together they have at least 40% of the total market share in the property management market.

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Even though the number of completed questionnaires is relatively small, the collected questionnaires well represent property trading of corporations in property markets.

Questionnaires were distributed primarily to two people in two asset management companies in Korea in August 2008 via email. Two initial contacts were identified as potential participants, and the questionnaire sent by email. By June 2009, 18 questionnaires from five asset management companies were completed for analysis.

With primarily three companies contacted, it was snowballed to twenty companies that met the selection criteria and initially contacted for interviews. Nine large-sized companies (group-companies) and two small-sized companies, in total 11 companies, agreed to participate in the research in the end. Interviews were primarily conducted during August 2008 in Korea. Follow-up questions were asked throughout September 2008 and May 2009 via email.

3.4.3. Data analysis

3.4.3.1. Mode of collected data Sets of qualitative data are expected to be collected from open-ended questions (interviews and questionnaires). Qualitative data are in the form of text, written words, phrases or symbols describing or representing people, actions and events in social life (Neuman, 2006).

Qualitative data are often collected to develop explanations or generalisations that are close to concrete data and contexts. Explanations tend to be rich in detail, sensitive to context and capable of showing the complex process or sequences of social life. The explanations may be casual, but this is not always the case. The researcher’s goal is to organise specific details into a coherent picture, model, or set of interlocked concepts. Qualitative explanations can be either highly unlikely or plausible. The researcher supplies supportive evidence to eliminate some theoretical explanations from consideration and to increase the plausibility of others (Neuman, 2006).

In order to analyse qualitative data, a qualitative analytical method is employed. Qualitative analysis seeks to understand relationships and patterns of interaction. Anecdotal accounts are used to describe the world of those being investigated (Royse, 86

1991). Qualitative data and unstructured data are often confused. It is important not to be misled by the term “unstructured.” It does not mean that the data lack structure (Sapsford and Jupp, 1996).

There are methodological and epistemological arguments that differentiate qualitative research from quantitative research (Sapsford and Jupp, 1996; Neuman, 2006; Gavin, 2008). However, it is also argued that deciding whether to use the qualitative or quantitative approach should depend in large part on the goals of the research and the circumstances in which these are to be pursued. Often, the two sorts of data may have to be combined (Sapsford and Jupp, 1996).

3.4.3.2. Thematic analysis Thematic analysis is a popular analytical technique whereby a researcher analyses qualitative data from interviews. Thematic analysis is considered a process of making explicit the structures and meanings that the interview participants embody in a text (Gavin, 2008). It allows a researcher to identify, analyse and report patterns within data (Braun and Clarke, 2006). It appears to be a poorly branded method and often does not exist as a named analysis (Boyatzis, 1998; Attride-Stirling, 2001). Nonetheless, thematic analysis can be distinctively useful over other analytical methods such as narrative analysis, when a researcher seeks to describe patterns across qualitative data in order to gain an understanding of the phenomenon in question (McLeod, 2001; Braun and Clarke, 2006).

Themes or patterns within data are identified more frequently in an inductive thematic analysis, but they can also be identified in a theoretical or deductive way (Boyatzis, 1998; Braun and Clarke, 2006; Gavin, 2008). An inductive thematic analysis will use themes which are strongly linked to the data themselves, and those data will be collected specifically for the research. Those data and themes are not driven by the researcher’s theoretical interest but by the data and themes themselves (Braun and Clarke, 2006).

However, for this research, thematic analysis was approached in a theoretical and deductive way. Employing theoretical interest-driven thematic analysis tends to

87 provide less rich description of the data overall but more explicit analysis of the data (Braun and Clarke, 2006).

Thematic analysis was carried out following the fundamental steps below. There are some variations in steps, for example, including transcription of verbal data or several theme-reviewing phases (Boyatzis, 1998; Attride-Stirling, 2001; Braun and Clarke, 2006). However, the following steps of thematic analysis seem to form the most fundamentals.

First step: Coding material

Coding material involves producing codes from the data (Attride-Stirling, 2001; Braun and Clarke, 2006). This is done on the basis of the theoretical framework in the theory- driven thematic analysis approach (Attride-Stirling, 2001), which can be also assessed in a meaningful way regarding the phenomenon that the researcher is looking into (Boyatzis, 1998). This step is regarded as an important part of analysis (Miles and Huberman, 1994; Neuman, 2006) because through this process, the researcher sets quite explicit boundaries, scope and focus for the next part of the data analysis (Attride-Stirling, 2001; Neuman, 2006).

Second step: Identifying themes

Using coded data based on the researcher’s theoretical interests, in identifying themes, the researcher focuses on the analysis on various levels of themes, which involves sorting codes into potential themes (Braun and Clarke, 2006). Identifying themes reduces the data into a more manageable set of significant themes (Attride- Stirling, 2001). At the end of this process, the researcher generates a set of themes and the extracts of data that have been coded in relation to the themes (Braun and Clarke, 2006).

Third step: Organising themes

In organising themes, the identified themes are processed into categorises and then placed in a structure through arranging, reviewing and refining the themes. This step is important to check the validity and accuracy of the identified themes in this stage of

88 the analytic process (Braun and Clarke, 2006). It is also important to check if the identified themes are working with the data set and the researcher’s research questions (Attride-Stirling, 2001). Coherent patterns should emerge by the end of this process of the analysis.

Final step: Interpreting patterns of identified themes

The researcher brings patterns of the identified themes together with the relevant theoretical interests in the final stage of the analysis (Attride-Stirling, 2001). Deeper meaning than what seemed to be on the surface level of the data should be explored, asked and answered in order to produce explication and exploration of the content and the theoretical grounds of the research.

There are some advantages and disadvantages to thematic analysis. The fact that qualitative data are relatively unstructured means that there is great flexibility in processing and interpreting the data, even for a researcher with little or no experience (Boyatzis, 1998; Braun and Clarke, 2006). Because of this flexibility, it is possible to generate unanticipated insights into the sample. However, this flexibility also carries some disadvantages. If the data collected cover too wide an area, it could potentially paralyse the researcher trying to decide what aspects of the data to focus on (Boyatzis, 1998; Attride-Stirling, 2001).

3.5. Description of the collected data

3.5.1. Part 2-1 Survey: Self-administrated questionnaire Property and asset managers, who are specialized in property and asset management and working in professional property and asset management companies, were chosen in order to cover a corporation’s behaviour in actual property market settings. Initially two people in two asset and property management companies were contacted to participate in the research. From there, 18 asset and property managers in five asset and property management companies participated in the survey.

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Because there is no official registration system specified for asset and property managers in Korea, it is not possible to approach managers individually through official channels. Initially two people in two companies were identified and contacted, and using the snowball effect, the next participants were identified and contacted. For the survey, two cases of asset and property management companies affiliated with large corporations and two cases of local offices of global asset and property management companies participated.

Firstly, a potential participant was identified and contacted by one of the existing participants (Figure 3-3). The introduction of a potential participant to the researcher was carried out directly and informally via email and telephone. After an informal initial introduction to each potential participant, if people showed an interest in participating in the survey and had an adequate level of background in asset and property management, then the questionnaires were sent out rather than randomly distributed to an unknown group of samples. The reason is that the contents of the questionnaire require a specific and certain level of experience in the Korean property market as asset and property managers. “Informal initial introduction” was utilised to ensure that the potential participants were in fact suitable for answering the questionnaire. Some potential participants were rejected3 in this process due to their lack of experience. Some potential participants declined to be part of the research themselves4. The rejected potential participants had not been working in the industry long enough to have the required experiences and had too limited experience to answer the broader scope of the questions. Once the potential participants were determined as “suitable” through “individual initial introduction,” they self- administrated the questionnaire and returned the finished questionnaire to the researcher.

3 Often official title of potential participants on their business cards did not match their actual experiences in property industry. It was also found that even if two potential participants had the same title on their business cards, the scope of their work may vary. 4 A reason (or reasons) for their decline was not asked further. 90

Figure 3-3 Participant selection and questionnaire collection procedure

An existing questionnaire participant

Reference to

a potential questionnaire participant

The researcher Initial introduction

Suitable and agreed Rejected Returned to

Self-administrated

questionnaire

The questionnaire contains a mixture of open-ended questions and closed questions with the intention to process the answers as qualitative data in order to reinforce and complement the data from the interviews. The questionnaires were sent out and returned via email from August 2008 unto May 2009.

3.5.2. Part 2-2 Survey: Face-to-face interviews Using snowballing sampling, the researcher attempted to achieve two objectives. Firstly, snowball sampling was employed to improve the chances of contacting appropriate staff in possible subject corporations. Randomly approaching corporations was considered likely to result in a less number of satisfactory samples and be a more time-consuming and costly process. Being introduced to the next potential interviewees by already established contacts was considered the most efficient way to contact higher level managers in corporations who were otherwise hard to approach. Secondly, it was also important to work out the network between market competitors. In order to survive in competitive industries, corporations must know as much about their competitors as they know about themselves. Corporations’ knowledge of

91 property trading includes their experiences in property markets and their experiences with their counterparts in property markets. Snowball sampling was expected to provide a platform to work out a network of buyers and sellers in property markets.

The subject firms were selected to illustrate the overall Korean economy and industry structure in order to provide reliability of the sample. The fact that business group types of companies dominates the top 200 market capitalisation companies5 suggests a large part of the Korean economy and industries are relying on a business group6 type of companies, which includes chaebols7 in Korean, conglomerates owned and controlled by members of the founding family and operated in highly diversified markets (Lee, 2002; Choe and Pattnaik, 2007; Choi et al., 2008). According to market structure analysis report 2006 (2008), Korea Fair Trading Commission found that business groups account for 37.3% of the total concentration ratio for all industries in Korea. Conglomerates dominate the economy and the influence over the economy. They own the most, they consume the most and they generate the most. Therefore, learning from five of the participating companies which are included in the top 30 business groups could provide greater insight into behaviours of firms regarding property trading in Korea.

Primarily three of companies were identified. One business group company publicly owned, one small company privately owned and one company with alternative property ownership structure. Twenty companies were contacted in the end but only eleven firms (which include the initial three companies) agreed to participate in the interviews. Five participating companies are conglomerates. Two companies are foreign direct investment corporations. One financial institution, one company with alternative property holding structures and two small and medium business companies

5 Based on the top 200 market capitalisation companies’ list, only 18 companies identified themselves as not being part of business groups. Other companies are parts of business groups which have been listed by the Fair Trading Commission in Korea. 6 The term “business group” pertains to a group of companies whose businesses are substantially controlled by the same person or a company or a group (Monopoly Regulation and Fair Trade Act 1990, Article 2 Definition 2, 2-A and 2-B). 7 Not all chaebols are group companies nor all group companies are chaebols. The term business group is legally defined. The term Chaebol is accepted as custom rather than legally defined. 92

were also selected to provide some comparisons. Selection criteria can be disaggregated as in Table 3-3 and Table 3-4.

Table 3-3 Company selection criteria

Major categories Sub-categories A Governance 1 Publicly owned/Privately owned: public or private structure 2 Foreign direct investment: foreign 3 Influence of members or associates of founder family (major shareholder): yes or no 4 Parent company, subsidiary and affiliated companies: yes or no B Size of companies 1 Number of affiliated companies and subsidiary: number 2 Business group/Small and medium business: BG or SMB C Industry 1 Property activity included in the purpose of the structure organisation8: yes or no 2 Core business: M: Manufacturing C: Construction and Engineering management R: Retail B: Banking and insurance L: Leisure S: Service 3 Market share (rank in their respective industry) Table 3-4 Summary of the participating companies

Company Code G-1 G-2 G-3 G-4 G-5 G-6 NG-7 NG-8 NG-9 NG-10 NG-11 A 1 Public Public Public Public Public Public Private Private Private 2 Foreign Foreign 3 No Yes Yes Yes Yes No No Yes No Yes Yes 4 Yes Yes Yes Yes Yes Yes No No No No No B 1 6 66 9 46 14 2 0 0 0 0 0 2 BG BG BG BG BG BG N/A Top SMB SMB SMB 200 C 1 Yes Yes Yes Yes Yes No No Yes Yes No No 2 M M M M and C R R B L S M R 3 1 1~2 1 2~3 Top 2 2 Top N/A N/A N/A 10 10

If the purpose had been to establish the frequencies of certain behaviours, a larger sample would have been desirable, but for establishing the range of different approaches, this sample seems adequate. Initial Interviews were conducted in August

8 In order to do as small as renting a spare space in a headquarter building and receiving rental income from it requires a corporation to address property activity in the purpose of the organisation in the corporations’ articles of incorporation for tax reasons. Having property activity in the purpose of the organisation in the corporations’ articles of incorporation is unrelated to if a corporation actively buy and sell property as a part of their business activity. The core business of the individual companies is stated as C-2 in table 3-4. 93 of 2008 and follow-up email correspondences were carried out from November 2008 to May 2009.

All the interviews were recorded with the consent of the interviewees and then transcribed to analyse thematically. In order to preserve the accuracy and meaning of the original transcript of the interview, the findings are presented in a descriptive and conversational style from the transcripts.

For the interviews, a couple of factual questions regarding their occupational status were first asked to build up a platform to more serious questions and to make sure that the respondents were suitable for the interview. Several more factual questions also involved finding out a firm’s current property holdings, trading and management status and general information about the firm. Retrospective questions which the respondents were required to answer about their decision-making behaviours of past in property holdings, trading and management status were also included.

Especially for retrospective questions, two major problems were found. Firstly the respondents may not accurately remember the specific figures regarding questions because the figures are constantly changing over the years. Secondly the respondents may not be in a position long enough that allows them to provide the right information. The former can be easily controlled by email follow-ups. The latter can be avoided by selecting potential respondents prior to the interviews; however, in most cases it was possible to get more information provided after the interviews via email follow-ups as long as the participants held the right position for answering the questions.

3.6. Summary

In this chapter, first the research philosophy is presented. It is followed by the description of the research design and methods used to collect data. Two parts of data collection were used in order to cover two different levels of units of analysis. For part one, a self-administered questionnaire, and for part two face-to-face in-depth interviews were conducted. In order to maximise the efficiency and effectiveness of 94 data collection, snowball sampling was employed to find participants for both the questionnaires and the interviews. Eventually, 18 asset and property managers in five asset and property management companies completed the questionnaire, and 11 firms participated in the interview. Structured open-ended questions were asked for both parts of the survey, and structured qualitative data have been collected. These data were recorded in the form of text for the questionnaires and transcript for the interviews. Thematic analysis is employed to process the collected data, in Chapter 4.

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Chapter 4 Analysis and Results

4.1. Introduction

Two different types of survey for two levels of analysis were simultaneously carried out in Korea from July 2008 to May 2009. The first type used for the research is self- administrated questionnaires. These questionnaires were distributed via email and in person to asset and property managers in property markets, to cover an interfirm level of analysis. The interfirm level of analysis is firstly to describe property markets asset and property managers are experiencing and secondly to examine asset and property managers observes any different behaviours of their corporate clients from other types of clients.

Face-to-face in-depth interviews with corporate employees were carried out. The interviews with corporations cover both an intra- and an interfirm level of analysis. The interviews with corporate employees is to examine property decisions as a part of resource allocation processes in intrafirm level and to investigate property decision- making behaviours of corporations in property markets in interfirm level.

A set of questions are asked in questionnaires and interviews, however, the questions are only a starting point to get more information on property activities. For example, ‘which types of property were acquired’ and ‘which types of property were disposed’ were asked separately but were not asked to find out what was recent acquisition or disposal. Those questions were asked to examine all aspects of theories of the firm (refer to Table 3-2 A breakdown of theories introduced) and institutional economics and then identify concepts and themes accordingly (refer to Table 4-3 Concepts and themes of property in individual corporations). 96

Thematic analysis allows a researcher to identify, analyse and report patterns within data (Braun and Clarke, 2006). It can be distinctively useful over other analytical methods such as narrative analysis, when a researcher seeks to describe patterns across qualitative data in order to gain an understanding of the phenomenon in question (McLeod, 2001; Braun and Clarke, 2006). As discussed in the previous chapter, for the research, thematic analysis will be approached in a theoretical and deductive way to provide less rich description of the data overall but more explicit analysis of the data (Braun and Clarke, 2006).

In this chapter thematic analysis is carried out with the assistance of NVivo version 8 (which is a computer-based qualitative data analysis software). NVivo 8 assists to manage the data by supporting to organise and keep track of raw qualitative data and also provide support in the form of data displaying. The two types of survey were thematically coded and analysed. NVivo 8 supported the research to developed ideas and make connections between ideas while coding the data, identifying and organising themes and finding patterns of identified themes. NVivo was also used to generate graphical models showing ideas and themes being built from the data and the relationships between them (Bazeley, 2007).

4.2. Part 2-1 Self-administrated questionnaires

This interfirm level of analysis is expected to provide two levels of descriptive understanding of property markets where asset and property managers and their corporate clients meet. It is to describe what asset and property managers working for asset and property management companies are experiencing in property markets. It is also to examine if asset and property managers in property markets observes any different behaviours of their corporate clients from other types of clients or between them.

4.2.1. The property market participants The respondents are asked questions regarding the characteristics of their clients such as the types of client of asset and property managers and the levels of the employees

97 in the client organisations. These were asked to identify the general characteristics of the participants in property markets in Korea. The clients of asset and property managers in property markets seem to be diversified rather than focused on one particular type of clients. The clients of asset and property managers working for property management companies were identified as a mixture of institutional investors and corporations. Institutional investors were found to be mostly after investment properties which generate rental incomes and capital gains rather than buildings with specifics in physical characteristics and purposes. Corporations were described as often seeking properties with specifics because they were looking for property for a specific purpose.

When asset and property managers were asked which levels of employees in corporations they normally work with, all respondents except four replied that they work with manager-level employees in the client company. Four respondents, however, identified executive-level employees with instant decision-making authority as their normal client level. This can be understood from two perspectives. Firstly, the size of a client company was small; therefore, there were not many levels of employees. Secondly, asset and property managers who said that they deal with executive-level employees in the client company were relatively high-level employees in their own terms.

How asset and property managers working for property management companies establish their client list unfortunately failed to show any predominant response. The questions regarding how asset and property managers establish their client list were designed to discover the dynamics between market agents and their clients, especially when they are competitors. It was found that mostly asset and property managers rely on intra-databases, which are lists of existing clients they had been in contact with. If they were not able to find their potential clients from the intra-database, then asset and property managers said they used “personal contacts,” which were also fundamentally based on a contact pool of former and current clients.

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4.2.2. Scope of asset and property management companies’ service The scope of services that asset and property management companies provide is examined. Services are categorised into two types (Figure 4-1). Advisory, research and supporting services for property trading, property investment and development management is one part of services that the participating asset and property management companies provide for their clients. Asset management involving property acquisitions and disposals, property investment and property development requires depth of information and professional skills. Asset and property managers’ independent opinions - thus expected to be unbiased - and professional knowledge are also requested. The advisory services are expected to play supporting role only and asset management companies are not a directly part of the clients’ property activities.

The second type of service is technical services in property management, including property brokerage, property leasing management and total relocation service. Asset and property management companies were most likely a direct part the clients’ property activities to provide this category of services. For instance, an asset and property management company could have an exclusive contract with a client to provide a list of leases every time the client requires leasing or to provide complete lease management from letting space to collecting rent and maintaining property itself.

Figure 4-1 Types of asset and property managers’ service

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The participating asset and property managers were asked why they think their services were being requested (Figure 4-2). It was noticed that the clients wanted to utilise time and money effectively by using the participating asset and property management companies. In also dealing with property, asset and property management companies were expected to provide their professional knowledge in order to obtain knowledge that the client companies do not possess. Asset and property management companies’ professional knowledge was also expected to provide objectivity for otherwise internal and subjective property dealings of the client companies.

Figure 4-2 Reasons for asset and property managers’ service

4.2.3. Role of property as seen from the property market Asset and property managers were asked to choose how property was seen in the clients’ organisations. It is important to note that clients that asset and property managers working for asset and property management companies are not limited with a particular type of clients. Property as investment and property as a factor of production were given as two opposite ends of a scale. Property seen mostly as investment and property seen mostly as a factor of production were also given as choices.

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Figure 4-3 Investment or factor of production

12

10

8

6

4

2

0 Investment Mostly Investment Mostly a factor of A factor of production production

Most respondents saw property as having a mixture of meanings as investment and a factor of production rather than a single meaning (Figure 4-3). Asset and property managers saw the role of property more as investment more than did half of the respondents choosing “mostly investment.” Some chose “mostly a factor of production,” but significantly fewer than “mostly investment.” Interestingly no respondent chose property having as a single meaning investment, and two respondents considered property a factor of production.

Asset and property managers were asked to prioritise attributed values of property in general. They were also asked to prioritise attributed values of property (but) if the client were an owner-occupier. To clarify the term an ‘owner-occupier’, regardless who the clients were, if their clients were looking for a property to buy and occupy it themselves, they were identified as an owner-occupier. For instance, one of the interview participating companies performs as an institutional investor in property markets and capital markets in Korea. This company is an institutional investor, but it is still a firm in nature. It enters property markets in Korea to look for an investment opportunity. It also enters property market to seek property to sustain its core business.

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This question is to determine whether there was any difference in attributed values if the client were an owner-occupier. The respondents were given five choices of attributed value: “investment (emphasis on future potential),” “location,” “collateral,” “economic value (emphasis on current incomes and costs)” and “prestige.” They were asked to rank each proposed attributed value on a scale of 1 (most important) to 5 (least important). Then the priorities of each respondent were given points from a maximum of 5 points for an attributed value ranked 1 (most important) to 1 point for an attributed value ranked 5 (least important). The total points of each attributed value from the 18 respondents were added. Each attributed value could be awarded a maximum of 90 points (5 points from all 18 respondents) to a minimum of 18 points (1 point from all 18 respondents). Thus the more added points were awarded for an attributed value, the higher the priority of the attributed value is.

Figure 4-4 Prioritising attributed values of property

Investment (Future potential) 100 80 60 40 Prestige Location 20 0

Current economic value Collateral (Current incomes and costs)

In general Owner-occupiers

In general, property was most valued because of its location, followed by its value as investment and current economic value. Property was least valued for its prestige. For owner-occupier clients, asset and property managers identified location as most valued, which was the same as in general. Current economic value of property ranked second most important for owner-occupier clients.

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The difference in determining the attributed value of property of owner-occupier clients is most significantly noticed when these two sets of prioritised attributed values were compared (Figure 4-4). It was found that prestige ranked meaningfully higher for owner-occupier clients than in general, yet rank for investment in general outweighed that of owner-occupier clients. Location value also found to be ranked slighly higher for owner-occupier clients than it was for in general by asset and property managers.

4.2.4. Owner-occupiers as seen from the property market If owner-occupier clients’ behaviour differs in the property market, it was explored further. Asset and property managers were asked whether there was any difference in owner-occupiers’ behaviours and to describe how they were different. All 18 respondents agreed that investors and owner-occupiers behave differently. The challenge here was identifying how they were different. Asset and property managers were given a series of questions associated with the behaviour of owner-occupier clients in property dealings.

Firstly, who were owner-occupiers? As previously explained, for the research an ‘owner-occupier’ is defined as a client looking for a property to buy and occupy it themselves regardless what kinds of core businesses they are formally in. A company can be an institutional investor, but it is still a firm in nature. It could also enter property markets to seek property to sustain its core business. It is also possible for asset property managers in property markets in Korea to encounter one company acting both an owner-occupier and an institutional investor. The majority of asset and property managers indicated “corporations” as the most likely owner-occupiers. A small number of respondents also chose “domestic institutional investors” and “individual investors” as likely owner-occupiers. Domestic institutional investors are mostly corporations themselves, and individual investors need space of their own to give as much reason as corporations for being owner-occupiers.

How often do asset and property managers encounter owner-occupiers? The asset and property managers were asked what percentage of their clients were owner-occupiers. Twelve respondents said that only between 10 and 20% of their clients were owner- occupiers (Figure 4-5). Four respondents said that just over half of their clients were 103 owner-occupiers, and two respondents identified 90% of their clients as owner- occupiers.

Figure 4-5 Percentage of owner-occupier clients of individual respondents

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% A B C D E F G H I J K L M N O P Q R

The reasons, for some respondents, that they have more owner-occupier clients seemed to relate to the fact that asset and property managers were allocated particular clients rather than that they were randomly selected by clients or that they freely chose their own clients.

Asset and property managers were also asked if they experienced more or less owner- occupier clients’ property trading if the property market changed. All 18 respondents agreed that property market changes did strongly affect the number of owner- occupiers encountered. However, how the property market changes affected them was found to produce interesting responses from asset and property managers. They explained that as the property market changed, they often experienced owner- occupier clients selling or buying the buildings of their headquarters. It was also said that the conditions of the economy in general affected owner-occupiers’ financial situations and the property market situation influenced owner-occupiers the most strongly.

Which types of property were owner-occupiers partial to owning? Asset and property managers’ answers were strictly clustered around “office buildings” and “industrial buildings” away from other options such as “retail property” and “others.” This is not particularly due to the fact that office buildings and industrial buildings were 104 distinctively preferred by owner-occupiers but rather to the nature of retail property in Korea. Retail properties were normally developed to be subdivided and sold individually rather than built and kept to generate income or to be occupied by the owner.

Is there difference in owner-occupiers’ property decision-making behaviour? Asset and property managers all agreed to one thing: that there is a difference in behaviour they experienced between investors and owner-occupier clients. Differences identified by the respondents can be categorised into four types. Respondents said that investors showed a tendency of being more interested in capital gain and higher rate of returns. In contrast, asset and property managers said that owner-occupiers showed more interest in location of property, and management and maintenance of property. Asset and property managers also identified differences in property decision-making processes between investors and owner-occupiers. The latter, respondents indicated, showed greater prudence before the property decisions, and when owner-occupiers buy property, it would be most likely when they need it for a certain use.

What asset and property managers experienced with owner-occupier clients was discussed further. Respondents were asked to choose whether owner-occupier clients would buy their headquarters or build their own headquarters. It seemed insignificant to acknowledge, though slightly more respondents said that owner-occupier clients would build their own headquarters (10 respondents out of 18). To the question of whether owner-occupier clients would buy property other than their own headquarters or lease property other than their own headquarters, 14 out of the 18 respondents also replied the owner-occupiers were more likely to lease property for other purposes rather than buying it.

4.2.5. Property ownership as seen from the property market Why do owner-occupier clients of asset and property managers own property or not own property was asked, to investigate what property ownership means to owner- occupier clients of asset and property managers.

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Figure 4-6 Why firms own property

Asset and property managers were asked to describe why firms own property (Figure 4-6). They indicated that firms own property to operate a business, to provide future business opportunity, to increase the value of a firm, to improve their image, to reduce operational cost, to provide stability and finally to invest.

Figure 4-7 Why firms do not own property

Asset and property managers were also asked to describe why firms do not own property (Figure 4-7). They said that firms do not own property to concentrate on core 106 business, to reduce operational cost, to avoid uncertainty (from property market changes, market area and economy in general), to obtain liquidity (not to have huge capital tied to property) and simply because renting is a cheaper option than owning property.

4.2.6. Costs of using market agents For the services of asset and property managers, there were no officially agreed fees, except for the property brokerage services and fees which were regulated by the government; thus, a maximum charge on property disposal was less than 0.9% of the property sales price. Depending on asset and property managers’ services that the clients requested, agent fees varied. However, fees seemed to fall between 5 and 10% of the “project value,” as asset and property managers referred to it.

Agent fees and taxes were typical costs of property dealings that asset and property managers were associated with. Other costs (not pecuniary) identified by asset and property managers were “time,” “labour” and “opportunities.” A number of respondents added that if their property dealing cost them more than the typical costs they expected, the dealing would not have gone through. Therefore, there would not be any cost other than the “typical costs” to be seen from the property market. The level of agent fees and taxes also varied depending on who the clients were and the type of property in question. Having an exclusive contract with an asset and property management firm could cost the client firms more, but the exclusive level of services would be guaranteed in return. One-off contracts could be cheaper, but the clients would receive a limited level of services, according to the respondents. The level of taxes payable varies, the respondents said. However, taxes on property being part of corporate taxes made unnecessary for the respondents to be informed, it seemed.

The experiences of asset and property managers in property markets with corporations were examined from the questionnaires. This purpose was to see how corporations behave in property markets when they trade property and how they utilise market institutions. Noticeable differences were found between asset and property managers’ experiences and those of owner-occupier corporations. It seems to asset and property managers that owner-occupiers pursue different sets of 107 attributed values of property which differ from those in general. The distinction comes from owner-occupier corporations tending to value “prestige” and “location” when they look for property for their own use, while generally “investment (future potential)” value replaces “prestige” value.

The questionnaires were given to investigate corporations’ interfirm-level property behaviour. The purpose is to see if there is a commonly observed phenomenon in corporations’ property behaviour among asset and property managers who are market agents and if the phenomenon includes differences between corporations with different characteristics. The findings from the questionnaires provide a base. It is expected that the intrafirm-level survey, face-to-face interviews, will provide the way differences in a corporation’s property behaviour in property markets comes about and why the phenomenon is observed.

4.3. Part 2-2 Face-to-face interviews

This part of analysis is to cover both an intra- and an interfirm level of analysis. The interviews with corporate employees is to examine property decisions as a part of resource allocation processes in intrafirm level and to investigate property decision- making behaviour of firms in property markets in interfirm level.

In this chapter, the qualitative data collected from interviews will be thematically analysed to identify, analyse and report patterns within data (Braun and Clarke, 2006) in order to gain an understanding of the phenomenon in question (McLeod, 2001; Braun and Clarke, 2006). For the research thematic analysis will be theoretical interest- driven thematic provide more explicit analysis of the data (Braun and Clarke, 2006). Thematic analysis will be carried out by transcription of verbal data and several theme- reviewing phases (Boyatzis, 1998; Attride-Stirling, 2001; Braun and Clarke, 2006).

The currency exchange rate used here is AUD1: KRW1064.54 (Australian Dollar against South Korean Won) on 4, August, 2010 (Reserve Bank of Australia, 2010).

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4.3.1. The property decision-making process The corporate by-laws of individual companies rule how corporations should be operated and managed, which includes the decision-making process. It is a formality for a corporation to have corporate by-laws which are approved by the original stockholders and adopted by the board of directors (Bonham, 2001). It is not often but property decisions, especially a property transaction above the certain level of worth, can be subject to corporate by-laws.

Property decision-making processes can also vary depending on the corporate governance structure. What is different between companies is, in divisions and departments, who the team that deals with property decision is affiliated with. Property teams are either independent from any specific division and report directly to the CEO or are under the business administration division as a business supporting team (Table 4-1). G-6 and NG-7 are in retail and are developing a new store as a constant business activity. Both companies have more than one property development department dedicated to site searching and developing a new store. NG-9 and NG-10 are privately owned and claimed that they are too small to formalise a governance structure.

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Table 4-1 Affiliation of property teams in corporate governance

Company Team Department Division Code G-1 Business Report directly to development CEO department G-2 Real estate Business Business investment team development administration department division

G-3 Real estate Management Management management planning and supporting division team finance department G-4 Property Report directly to management and the chair of the development business group, department who is the founder of the company G-5 General affairs Business department administration division G-6 Property development department NG-7 Real estate department NG-8 Real estate Business management administration department division NG-9 Asset management team under real estate investment division in the fund Business and administration team in the operational company NG-10 No apparent division and department exist. Property is dealt with as finance and general affairs. NG-11 No apparent division and department exist. Property is dealt with as finance and general affairs.

G-1, G-2, G-3, G-4, G-5 and NG-8 follow a general decision-making process (Figure 4-8). All participating companies state that authority levels differ depending on the “priority” of each property. “Priority” is defined by companies this way: “there are no standard criteria.” However, it often depends on the value of property and the importance of property and it differs “case by case.”

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Figure 4-8 General property decision-making process

The Board

The chair of the business group (if any)

CEO

Other division Division director

Department director

Property team manager

G-1: for leasing management, the department director approves and reports to the division director. All disposal and acquisitions over KRW 10 billion (approx. AUD$10 million) the division director approves and reports to the CEO.

G-2: for leasing management, the department director approves and reports to the division director. All disposal and acquisitions over KRW 20 billion (approx. AUD$20 million) the division director approves and reports to the CEO. However, a low-value property can have a high priority if it is an important business operation which requires approval from the chair of the business group, who is the founder of the company.

G-3: reports all disposal and acquisitions to the CEO, who is also the chair of the business group and the founder of the company and requires approval from the CEO except leasing, which requires only the division director’s approval.

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G-4: reports all disposal and acquisition to the management (where the chair of the business group and the founder of the company are) and requires consent from management.

G-5: division director approves and reports to the CEO.

Any transaction with a value over 10% of market capitalisation requires approval from the board (G-1, G-2, G-3, G-4 and NG-8). G-3 and G-4 stated that the founder of the company is an influential part of property decisions. Leasing decisions have very low priority and are mostly dealt with by the department director.

Two foreign investment companies, G-6 and NG-7, showed two distinct differences from other companies (Figure 4-9). Firstly, every manager and director is part of the decision-making process; that is, all managers and directors actually “see” and “assess” all the property under consideration rather than a certain level of managers and directors being just in a position of hearing reports depending on the “priority” of the subject property. Moreover, being a foreign investment company places the company with one more level of authority, which for both companies holds the final and absolute authority regarding property decisions.

Figure 4-9 Foreign investment companies’ property decision process

Headquarters

CEO in Korean office

Other department Department director

Manager

Because operation and ownership of the property in NG-9 is separate using an alternative financial method, the company has a unique property decision-making procedure (Figure 4-10). The subject property is operated by the operating company; therefore, property management is the operating company’s responsibility. However, 112 because it is owned by the fund which is a paper company managed by the asset management company, all property decisions must be approved by the director of the asset management company.

Figure 4-10 Property decision-making process of NG-9

Director of property management department

in asset management company of the fund

The operating company The property fund (SPC) managed by asset management company Administration team

Asset management team

NG-10 and NG-11, which are privately owned, identified themselves as too small to have a formal procedure. Both of them rely on the entrepreneur’s sole decision.

4.3.2. Property management The participants were asked to identify the scope of their job. The participating companies expressed various levels of activities involving property (refer to Figure 4-11 scope of property management).

Business groups, with a relatively large pool of property, reported they manage property for all affiliated companies and subsidiaries from headquarters, either the parent company or the holding company. They claim that “everything regarding property” is in the scope of the job of their property management.

“Mainly asset management relating to disposal and acquisition of property, but I have to say any job about real estate, it is my team’s job.” (G-1)

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“Managing property for the business group as a whole” and “that includes property acquisition and disposal, leasing and leasing management, property development management and construction management, and any project regarding property.” (G- 2 and G-3)

G-4 emphasizes its role as “a consent authority” in property management.

“As management of the whole business group, we oversee the whole business group’s property decisions. You could say we are sort of a consent authority for the whole business group. We do not look into the details but the individual affiliated companies and subsidiaries are required to report their activities regularly to the management. Some activity (especially property acquisition and disposal) they actually require consent from the management.” (G-4)

Aside from “We take care of everything about real estate, asset management, property management and construction management, the whole a lot,” NG-8 stated “we also study the property market very closely in order to stay up-to-date because a big part of the job for my team is to provide advice when the company invests in property.”

The participating companies in the retail industry defined their job as specified in developing new stores. “Opening of a new store is the main job” and “the procedure that comes with opening of a new store” (G-6 and NG-7), “but we do not manage stores individually once they are opened. Also, we do deal with property disposal for non-performing property” (G-6). “We mainly lease our stores. The stores are managed by paying rent and managing the leasing schedule” (NG-7).

G-5 said, “We do not have property except for several office buildings and some non- performing property which has to be disposed of.” However, G-5 added “we maintain the existing buildings and look after non-performing property (leasing management) and try to sell it.”

NG-9 reported their role is the property fund which is a special purpose company to hold the specific pool of property; therefore, the property fund as an owner of the

114 property, does not perform any management functions. However, the fund managing company takes charge of “managing the property as an investment.”

NG-10 and NG-11 declared that they do not manage property because they do not own any.

Figure 4-11 Scope of property management

Figure 4-12 Property inventory

It is essential to have an inventory of a property portfolio in order to manage property and for accounting and auditing purposes. Figure 4-12 shows items on company’s property inventory. What they know about their own property can also reveal their 115 attitude towards property in general. The participating companies which own and occupy more than one piece of property keep track of their property portfolio and have some form of the property inventory (G-1, G-2, G-3, G-4, G-5, G-6, NG-7 NG-8 and NG-9). For NG-10 and NG-11, the premises they currently occupy is the only property they hold and use, thus no formal inventory exists or is required.

The level of details of the property inventory varies. “Location,” “current use,” “size,” “book value,” and “depreciation” for accounting purposes, “purchasing price” and “leasing schedule” were identified as common items of the property inventory. Particularly for retail property, “details of current market area” were identified as one of the main items by G-6 and NG-7. G-3 said that they have employed an “advanced property database” and are currently working on it under the CEO’s recent order.

4.3.3. Property strategies and other company missions The current level of property management in a firm and the relationship with company objectives were examined. Property strategies were mainly considered a part of the operational management and financial management side of the company mission rather than as independent missions.

The participating companies stated that property strategies were a new concept. Even property management was considered very new to the company structure.

“I was the first and only one who was doing property work in this company and I was a part of the accounting team, about eleven years ago. It was just few years back that it became a separate team.” (NG-8)

“You could say three to four years ago, the company started to get serious about property management. I was recruited to work for this company because they set up a property management team then. Before, it was a part of the general administration team. But the property management team is still run by a small number of employees and property is not the core of our business.” (G-1)

“Property was managed by the accounting team. Then the land which one of our factories was on was included in an urban renewal plan by the local government. We

116 moved the factory and developed the land as a residential estate. The company actually made a lot of money from the project. The CEO, who is also the founder of the company, was really impressed and realised managing property is serious business and can be profitable.” (G-3)

Property management was emphasised as a mediating role in departments and between affiliated companies and the parent company or holding company. Therefore, it was also centralised to headquarters in all participating companies.

“When other teams request that land be found, or a building or a space, we start working. Our role is to find what teams in business operation and production need within the boundary which is set by financial department. A big part of property management in the company is negotiating and supporting.” (G-2)

“Each individual affiliated company and subsidiaries have their own property management team, even if it is not called a property management team. They do have freedom to make their own property decisions but it must be reported, before they take an action, to the management.” (G-4)

“The property team is directly under the CEO in the company structure. The team leader, who is at the department director level, reports to the CEO directly.” (G-3)

“We directly manage some property owned by offices in other cities. They own the property but only the management has the right to manage the property.” (G-1)

Some property strategies showed a tendency to be ad hoc management because property decisions are mostly initiated by operation and production departments or divisions which are actual users of property. Moreover, the initiating departments and divisions request property decisions in order to cope with changes under uncertainty, which are mostly initiated from outside the firm.

“We only look to buy and try to sell when operation management departments request it. Recently we had to look for a site because one of our distribution centres had to be relocated; local government rezoned the land to be included in an urban

117 area in which a distribution centre cannot be located. We did not plan to move that particular one, but it has to be done.” (G-3)

“Acquisition is mostly planned as the work of several departments and divisions in a company. A department or division requests a need for property first, unless it is an investment property.” (NG-8)

“It is not possible to have a property portfolio planned ahead for the sake of the property portfolio itself. A property portfolio exists because we need property to produce and sell our product and carry out the business.” (G-2)

The themes identified from examining the current level of property management in a firm and the relationship with company objectives are shown as Figure 4-13 property strategy below.

Figure 4-13 Property strategy

The attitude of the top management team, including the founder of the company and the entrepreneur, and employees in the property management team, significantly influences property decisions.

“We do not sell property. That is the company’s property strategy. A request for property disposal is hardly ever approved by the management. The founder does not 118 like to sell property. For any proposal to dispose of property, we send out an official document checking whether the subject property can be used for any other affiliated companies and subsidiaries. Last month the management approved the disposal of a residential property, an apartment unit, which is no longer used by one of our affiliated companies. The management returned the request twice previously, but the affiliated company really wanted to liquidate it. So, finally it was approved to sell under the condition of selling it above a certain percentage of the market price.” (G-4)

“Property that we are managing is mostly non-performing property because the company does not hold property except for several office buildings for office space. We are managing the rest of them because we not have disposed of them yet.” (G-5)

“The CEO is eager to advance property management functions for the company. He ordered us to form a property management team and to report directly to him. We are also updating the property database in order to manage property efficiently.” (G-3)

The property management team was formed under a direct order from the founder of the company. He has been very interested in property. So far he is quite happy with the performance of the team.” (NG-8)

Holding property is divided into three categories. Operational property is described as “property which is required to produce and sell products and to carry out the business.” This is then subcategorized by property types in order to be strategically managed. Income-producing property is “owned by the company but not occupied by the company and generating profits for the company.” Non-performing property is “owned by the company but neither occupied by the company nor generating profits for the company.” The strategy for the current property portfolio remains in maintaining it until there is a need for disposal. Thus current property is mostly approached and managed as costs and monetary value of property.

The themes identified from examining the attitude of the top management team, including the founder of the company and the entrepreneur, and employees in the property management team are shown as Figure 4-14 property strategy below.

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Figure 4-14 Strategy characteristics

All participants denied that property decisions are investment motivated except for two companies, G-1 and NG-8. NG-8 is a non-business group in the banking and insurance industry. For NG-8, only office buildings can be categorised as operational assets, and owning other types of property is considered investment outside of business purposes and therefore heavily taxed. G-1 stated, “we have a very good cash flow. A single unit price of our product may be very small, but it is always an instant cash transaction. Since we hold more than half the market share, we do not have a cash problem. We can build property for ourselves, and the rest of the space after we occupy it can generate profit for use.”

Disposal of non-performing property is an ongoing project. All participants commonly claimed, “if it is not useful, it is useless for others because buyers would be mostly competitors or very small and specific potential buyers.” Disposal of non-performing property is not a major part of the property function in a firm. All participating companies stated that they “would wait until a buyer approached the firm.” Employees’ attitudes towards non-performing property are simple. “Do whatever has been done previously.” They claimed that they do not have time and they do not want the risk that comes with doing something with it and failing. Not doing anything would not get employees anything, but trying something and consequently failing is not preferable. 120

“Every several years, the employee in charge changes because we rotate the position. We do not want to take the risk of doing something about the non-performing property. The management will like it if we sell one, so we do try to sell it. Other than that we do not want to spend money on the non-performing property. No one would like to take responsibility for the money spent if it fails. We all will be moved on to other parts of the company and some other employees will be here. Then it will be their problem.” (G-5)

“We do have non-performing property. That is normally in cities other than Seoul and several major cities. The ownership and responsibility of managing that property remains with local offices rather than centralised. We only take care of performing property.” (G-1)

“We often ended up having non-performing property especially when we acquire an already subdivided lot of land. We have a typical lot size for a store, but subdivided lots of land which is zoned suitable for retail property is normally bigger than a typical lot size for a store. Because of the zoning, only other types of commercial property can be built. But normally what is left is not big enough to be profitable. You could build another retail property on it, but who would want to build another retail property right next to our store?” (G-6)

As to employing the structure of a property fund to use and own property alternatively, NG-9 showed a very strict property management plan on its boundary because property activities are strictly limited by articles of incorporation. NG-9 identified “raising funds” as the sole reason for the operation company to take on the alternative way of owning property. It also specified that the investors of the fund are purely after “long-term investment.” For the investor, the fund being a property fund does not mean it is special. Therefore, the function of property management remains a basic level of maintenance.

Internal leasing is regulated by law (Monopoly Regulation and Fair Trade Act) in Korea. Therefore, all companies that accommodate their own affiliated companies or family companies as tenants of their own building are required to charge market rents. The level of market rents identified with the participating companies is different. Most 121 companies identified themselves as charging a reasonable level of market rent to their family companies. G-1 charges a strict level of market rent, and G-4 identified the lowest possible level of market rent by law.

NG- 10 and NG-11 identified themselves as too small to have any kind of property strategy.

4.3.4. The participating companies’ current property portfolio Participants were asked to define how to evaluate property productivity and describe current property productivity evaluation in their firm. Currently, unless it is an income- producing property which can be easily evaluated with rent, running costs and capital gain, companies said that they do not have a property productivity evaluation system. They recognized property as a vessel to carry out their business activities. Figure 4-15 shows themes related to evaluating property productivity and describing current property productivity evaluation in their firm.

Figure 4-15 Evaluating property productivity

Operation property, even though it cannot be measured with rent and capital gain, can be organised by its “priority.” “Priority” entails “how important the property is to the company” and it is not a uniform concept in general. It is rather flexible and uniquely formed for the needs of individual companies at any given time. 122

“It is not about how much the property is or the size of the property.” (G-1)

“A very shabby building with relatively low value like the current headquarters has a high priority.” (G-3)

“It changes depending on the focus of the business; currently the company is heavily focused on moving production lines overseas. The property which has to be (or can be) relocated overseas regardless of its value, property type and location has “priority’.”(G-2)

They also stated that “operational property does not require evaluation, as long as the use continues” (G-1, G-4 and NG-8) and added “it only requires evaluation when it has to be disposed of” (G-1, G-2 and NG-8). Some of the companies simply do not see the necessity of evaluating running operational property. G-1 stated, “property is not the core of the business. It is not important at all. The corporate management team is busy as it is. We do not sell any property. We will find a use for it somehow. As long as it is used, we presume it is fully utilised” (G-4). NG-8 emphasised that “You certainly want to know what the subject property is expected to be worth in the current property market, if you are planning to list the property for sale.”

The participants were asked how operation property can be evaluated to give them “priority” for their companies currently. G-1, G-2, G-3, G-4 and NG-11 which own mostly the producing products-related property such as factories and distribution centres said, “how effectively the production is carried out,” “the volume of production” and “logistics costs.” G-4, G-6, NG-7 and NG-9, which own predominately Retail property and leisure property, identified “how much clients who enter the premises spend”. G-5, NG-8 and NG-10, which property portfolio mainly focused office buildings, simply declared “it is not possible to evaluate them” and added further “only guessing or checking with a real estate agent on the potential market price at any given moment.”

The differences in the participating corporations are discussed according to company structure and decision-making process, scope of property management and property strategies and company property portfolio. Table 4-2 is a brief summary of each issue.

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Table 4-2 The differences in the participating companies

Issues Summary Company structure Only two participating companies have a designated team for property and decision- activities. Most participating companies handle property activities as a making process part of business, finance or general affairs department which is responsible for general management. Participating companies which are in business which involves constant property development as a part of their business tend to have a separate property development team or department. The participating companies have a set of priorities in order to categorise their property portfolio. However, the criteria for the priority are not universal and are often approached “case by case.” Scope of property It seems that, regardless of the size of the property team or department management in the participating companies, all activities involving property are handled by the property team or department. This means that many activities are outsourced, leaving internal managers to work on “managing” contractors. Property strategies Property strategies tend to be part of greater operational and financial strategies. Having strategies is a very recently introduced “concept” along with the concept of having a property management team or department. Property strategies are often “ad-hoc” management, having “supporting” roles and strongly influenced by “the owner’s” preference in the participating companies. Acquisition and disposal of property are not associated with property investment which includes rate of return, and income and costs. Property strategies are not associated with investment unless a participating company is an institutional investor. Company property What the participating companies know about their current assets is portfolio very limited. The property portfolio is only evaluated for “accounting” and “auditing” purposes. Most owner-occupier property cannot be conventionally evaluated because it does not generate income. Participating companies in the retail industry, however, evaluate their property portfolio more deeply, including information on market area and changes.

4.3.5. Attributed values of property Following is a deeper discussion of the attributed values of property in individual participating corporations. Each participant was asked to assess the current role of property in his or her company and describe and evaluate recent property acquisition and disposal to identify concepts and themes. A diagram of relevant concepts and themes identified from participating companies and produced with Nvivo 8 will be presented at the end of examination of each participating company and then later summarised and compared.

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The currency exchange rate used here is AUD1: KRW1064.54 (Australian Dollar against South Korean Won) on 4, August, 2010 (Reserve Bank of Australia, 2010)

4.3.5.1. G-1: A publicly owned business group without a significant major individual shareholder in the manufacturing industry G-1 stated that “It is most important as a factor of production and the second most important as investment. We have cash lying all around; why not invest and profit from it?” and added “It can also be useful as a tool in branding of course, since we cannot openly ‘advertise’ our product (Figure 4-16).9 In fact, we own several theatres. Most recent theatre acquisitions cost us KRW 25 billion (approx. AUD$25 million) and KRW 4 billion (approx. AUD$4 million). We rent those out for free and we put advertisements and run marketing campaigns in return.”

“We own estimating KRW 3 trillion (approx. AUD$3 billion) in book value of property. It is hard to guess how much it is worth in the market, though,” stated G-1. Despite the size of the property portfolio, G-1 pointed out “Property is not important for us, though. A lot of property that we own has been a part of the company so long and we still own it because we have always owned it. Strange as it sounds, it is what it is.”

Property acquisitions in G-1 march along with the role of property in the company identified previously. “There are two reasons we decide to acquire property. When we need space to support the core business, we buy property like a distribution centre and a factory. Or, it is all about investment,” stated G-1.

When G-1 decides to dispose of property they own, “We regularly clear non- performing property. Once any given property is identified as non-performing, it will be listed as non-performing property. Those properties are firstly no longer needed for our business and do not make rent and capital gain. We regularly advertise them for tenders.”

However, G-1 expressed the difficulties relating to property disposal. “We cannot sell non-performing property below the purchasing value, because the loss occurs on the

9 One of their products is very well known and cannot be advertised by law using any form of mass media. 125 balance sheet, when noncurrent assets become current assets. Then someone in charge, most likely the directors in the department and the division, are responsible for the losses. They clearly would not want to take the blame for that. We end up holding those, as we always have done,” said G-1.

G-1 emphasised, “We don’t even know what happens to current non-performing properties. Not important. We are busy enough dealing with performing property as it is.” G-1 added what constitutes the “not important” status of property in the company. “Most land we own and occupy is zoned for commercial usage in an urban area. It is not small either, at least 1650 square metres. Buildings on that land are built with a low floor space ratio. The land has good development potential even though we have underused the potential”, G-1 stated. G-1 enthusiastically stated that “We have recently developed several discontinued factories into residential property estates. Those factories were in a good position to develop as residential property estates. We are the developer in those cases and contributed the land. We got a construction company to venture into the project with us and we split the profit from the project accordingly.”

The themes identified from examining the attributed values of property in G-1 are shown as Figure 4-16 Role of property in G-1 below.

Figure 4-16 Role of property in G-1

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4.3.5.2. G-2: A publicly owned business group with a strong major individual shareholder in the manufacturing industry As the most important role of property in G-2, G-2 identified property “unarguably as a factor of production” (Figure 4-17). It was emphasised that property is “the foundation of the company’s business.” Ultimately every property disposal and acquisition decision is directly linked to production because “we buy when need space for production and we sell because we no longer need the particular property for production.”

“In the long run, investment purposes cannot be ignored.” However, G-2 does not mean simple “property investment” investment. “Often we invest in property for the future business activity as a part of the long-term company plan. Then we would buy a piece of land or a building even though we would not use all of it use it only partially immediately.”

G-2 added, “We have a particular corporate image that we want to show to consumers from as small as the corporate emblem to as big as the buildings that are presented to the public.”

Coming to terms with attributed values, these values comes from someone in a high position in G-2. “The top managerial team directs the big picture of how the company property structure is organised. They are strongly in favour of property ownership.”

G-2 made an interesting point about disposal of property. “From the recent disposal of property, the assets held by the company were reduced. In return, the company secured extra cash and therefore more chances for new investments. However for my team, well, more properties mean more jobs and more privileges. One less property means just the opposite.”

The themes identified from examining the attributed values of property in G-2 are shown as Figure 4-17 Role of property in G-2 below.

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Figure 4-17 Role of property in G-2

4.3.5.3. G-3: A publicly owned business group with a strong major individual shareholder in the manufacturing industry Property “supports production,” G-3 declared. G-3 emphasised that “If we purchase any property then production requires more ‘support’.” When they seek a new property, G-3 stated, “the location of the land is the most important factor when we buy land. How much money we are going to get as a capital gain, if we ever decide to sell, is not pertinent.”

G-3 property acquisition and disposal strategy supported the previous claim. “We deal with properties which are no longer needed for production and which have to be relocated; therefore, disposal of the old property and acquisition of the new site occur simultaneously”, G-3 stated. G-3 added that “We will most definitely not invest in property just for investment purposes. We have an image to maintain.”

Keeping an “image” was discussed broadly with G-3. “As a part of launching into the global top ten, we are not only branding our products but also relaunching the image of the company. Property, especially the headquarters we are planning, is going to be the centre of the new image. The owner wants to build a landmark and has been

128 showing a strong bond towards the company’s assets. So that is how it should be done.”

In the decision-making process, the direction of the owner plays a major role. G-3 often referred to the CEO and his attributes. “The CEO, who is also the owner, is determined to make the company enter global top ten companies in the industry. To achieve it, we as a team need to provide a strong support.” Interestingly enough, employees in the property team in G-3 expressed this opinion: “as a member of the property team, I would like to see the team grow. The company going for a bolder approach to property management would be encouraging.” It is still the CEO’s attitude that influences heavily the ultimate decisions. However, because it is also employees who execute the actual practice, their attitudes as employees could also leave further disparity in property decisions.

The themes identified from examining the attributed values of property in G-3 are shown as Figure 4-18 Role of property in G-3 below.

Figure 4-18 Role of property in G-3

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4.3.5.4. G-4: Publicly owned business group with a strong major individual shareholder in manufacturing and in the retail industry G-4 associated their property with being “equally important as a factor of production and a basis of sales activity” and as “absolutely fundamental to the business that is for production and sales.” G-4 estimated the total value of their property is roughly KRW 18 trillion (AUD$18 billion) in book value.

Property being “investment” was also discussed with G-4. However, “investment” was defined to parallel “future business activity.” “We do buy and sell property as we need, but we often invest in property in anticipation of future business activities.” G-4 stated in fact that this type of “investment” is “the company principal.” To make the term “investment” very clear, it was also added that they are not after “capital gains” because they “seldom sell property they own.”

The founder of the company, who is also the major shareholder of the company, and who G-4 refers to as “the owner,” seems to be significantly influential in G-4. The founder was often credited with G-4’s property decisions. G-4 stated that “It is also the owner’s wish that we invest in property first if any property is valued to be ‘potentially’ important for the future business even if it will take long time to commence. We will find a use for the property eventually, within the business group.”

G-4 stated the founder’s partiality to property ownership and property investment for future business activities prior to decisive purposes is due to the experiences that the founder and the company have had. G-4 recounted, “Much of the property we own was obtained in the 1970s and ’80s. That property has been lucrative. Thinking of it this way, because we have obtained the property for our business early, we have secured properties that can provide bases for our production and sales activity in a stable way at a bargain price. The owner and the company have these positive experiences and it has worked for the company, as long as we stay alert to market area changes and as long as we work to make the environment favourable for us. The owner regards it working for the company the best.”

The owner’s strong will and preference influence G-4 property strategy best described as “We do not sell property we own, as we repeatedly discussed. It is due to the 130 owner’s partiality” “even if one affiliated company identifies a property as no longer necessary and therefore expresses a need to dispose of it, unless management approves, they cannot dispose of it. And getting approval to sell is close to impossible.” G-4 explained how difficult the property disposal approval procedure is. “Once an affiliated company expresses an interest in selling the particular property and requests the approval to sell, management circulates an official document to see if the property in question can be used for any other affiliated companies or subsidiaries within the business group. If a use is found for the property, then, of course, it cannot be sold. If a use is not found for the property within the business group, however, the subject is a performing property. Then it is generating income. Of course that would be why the affiliated company wants to dispose the property in the first place. Management normally recommends the affiliated company keep the property and returns the requests to them. Any determined affiliated company could re-request, of course. Some might actually have their request approved but rarely.”

The themes identified from examining the attributed values of property in G-4 are shown as Figure 4-19 Role of property in G-4 below.

Figure 4-19 Role of property in G-4

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4.3.5.5. G-5: Publicly owned business group with a strong major individual shareholder in the construction management industry G-5 shared the straightforward idea of property being “a factor of production,” even comparing it with “ what flour is for a baker. Otherwise it is non-performing property.” However, it is worth noting that what they were referring to as “what flour is for a baker” is purely a matter of land they acquire and hold to build a construction project and to sell. The land is not related to their corporate assets unless it became a “non- performing property” only after G-5 failed to dispose of it in the property market. G-5 defined “non-performing property” as “any property that is held as a part of the company asset except a handful of office buildings and those are normally leftovers from business and sales activities.” Emphasising “getting rid of,” G-5 explained that “we own them because we could not have disposed of them and definitely need to get rid of them. We are not in the real estate business.”

Towards non-performing property, G-5 employed a rather direct and unsophisticated solution: “We do not normally do anything with those non-performing properties. “We certainly try to sell them, of course, but I must admit that those non-performing properties are only occasionally sold.” Non-performing property not performing for a reason is only a part of the story. There is also shared corporate culture and employees’ attitudes. “No one wants to be blamed for any failure to profit after spending money on non-performing property. There are always reasons why those non-performing properties are not performing,” G-5 acknowledged. G-5 further confided that “we, as employees, get rotated from one position to another within the company every few years. We do what the previous employee did till we get rotated to some other part of the company. This is not a privileged position among us.”

The themes identified from examining the attributed values of property in G-5 are shown as Figure 4-20 Role of property in G-5 below.

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Figure 4-20 Role of property in G-5

4.3.5.6. G-6: Foreign direct invesment business group in retail industry Property being foremost “a factor of production,” G-6 summed things up with “we need a store to profit.” G-6 also identified their property as important for “branding.” “When we select land for a store, we want land with specific conditions such as exposure to the main roads and visibility of the potential building because once the store is built, we want the building noticed for its affiliation to our brand,” G-6 explained. The size of the property portfolio in G-6 is currently estimated at approximately “KRW 6 trillion (approx. AUD$6 billion) in market value.” Regarding the size of their property portfolio, G-6 declared “as a corporation, we are not assessed for the size of the asset. We are evaluated for the profit we make from running our stores.”

G-6 emphasised their concept of property being “fundamental to their business activity” in length. G-6 lamented “in fact, we prefer to lease a store rather than own a store ourselves because it is more profitable.” “The outcome of owning and leasing a store is the same. We will get profit from operating the store, nothing more or nothing less, but because of the huge gap in initial investment costs, you do the math, you will want the lease,” G-6 added. However, G-6 concluded, “The difficulties we face in finding appropriate stores for lease is the factor in our owning a lot of retail properties.”

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How little property as property itself is a matter that was discussed. “Capital gains are not pertinent. If we ever, we haven’t disposed any of existing stores so far, dispose any of existing stores and make capital gains, then it will be only extra income which will be appreciated of course.”

The circumstances that come with G-6 being a foreign direct investment company attribute their partiality to property being strictly a factor of production and that alone. G-6 explained, “We do not know how long the company is going to stay in the Korean market. Unlike our Korean competitors who can plan another future with their stores, if those stores are no longer appropriate. In contrast, we can gather things up and leave the country at once if the head office decides that is what they are going to do. Property ownership is irrelevant as long as we can run a store soundly.”

G-6 added an interesting point on utilising property which supports their claim on property being important for the operation of their stores. G-6 provided a comprehensive explanation. “We do not fully utilise the potential of the land we develop for our store. We need specifically zoned land, normally land zoned for commercial purposes, so we can build retail property, a store. For that kind of land, you could build a twenty-storey office building to fully utilise the development potential of the land. For instance, we could build a store with offices above it, if we want to maximise the development potential of the land. We need only five or six storeys for a store, and then more than ten storeys are left to generate rental income. But we do not even consider the possibility. Because we are a retailer, not a property developer, profit generated from retailing is only for business purposes, and it will be harder to get the development approval through.” Land will not be fully utilised as long as they can build their store, regardless of how much potential the site holds, and that is exactly what their property values are.

The themes identified from examining the attributed values of property in G-6 are shown as Figure 4-21 Role of property in G-6 below.

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Figure 4-21 Role of property in G-6

4.3.5.7. NG-7: Foreign direct investment company in the retail industry NG-7 indicated property is valued as “a factor of production” for them. NG-7 explained, “We profit from running stores. Fundamentally to carry out the business, we need stores.” It was emphasised that “it is strictly the only role of property for us.”

Regarding property ownership, NG-7 stated, “we prefer leasing to property ownership. Actually we haven’t done any property acquisition for four years. We haven’t had any problem finding appropriate stores to rent though, so far. Leased stores account for over 70% of the total number of stores.” NG-7 indicated that their partiality to leasing property comes from two different sources.

Firstly it originates from their necessity to react to market area changes. NG-7 stated, “We need to change as fast as we can if the market area changes. Leasing lets us be effective in market area changes. If we owned a store, then it would take longer to relocate the store in respect to the market area changes.” It also comes from the fact that NG-7 is “only one of many overseas offices.” Because all the policies and decisions come directly from the head office in the US, the office in Korea does not have the authority to make property decisions. NG-7 said, “The head office in the US makes it

135 clear that they are not knowledgeable enough to take a risk in the property market in Korea.”

The decision-making authority being clearly not comfortable with the property market in Korea came from their recent experience involving both their aggressive business expansion and consequent property leasing and acquisition. NG-9 recounted their experience of a troublesome situation caused by their aggressive business expansion involving the opening of numerous stores. “We had a massive non-performing store clean-up between 2004 and 2006. As a result of a stiff competition which we countered with opening stores that should not have opened but to expend the market share, we had some badly performing stores. The head office in the US took control of all their stores in Korea and closed the non-performing ones. It took the company two years to tidy up the mess, and by the end of 2006 the number of stores was halved. Since then it has been very straightforward in opening a new store as well as in property ownership of stores.”

The themes identified from examining the attributed values of property in NG-7 are shown as Figure 4-22 Role of property in NG-7 below.

Figure 4-22 Role of property in NG-7

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4.3.5.8. NG-8: Publicly owned company with a strong major individual shareholder in the banking and insurance industry NG-8 defined the role of property for them as “investment.” NG-9 stated that they want “income-producing properties,” income in “rental incomes and capital gains.”

NG-8 also identified the importance of property as a part of the company’s branding. NG-8 believed “having a good-looking building with the company’s name on it makes a lot of difference in sales,” because having “a good-looking” building improves “brand awareness” and “credibility.”

Their idea of the role of property is reflected in their property disposal and acquisition behaviour. Properties that NG-8 disposes of are identified as “not efficient”. NG-8 explained, “Much property investment was carried out in the ’80s. The property has been with the company quite a long time and there are rather old buildings with low income level. If efficiency is low, especially smallish properties, and if we cannot redevelop them for the size we want, we sell them. No point holding on to underperforming property.”

NG-8 identified themselves as “investors”. “We monitor the property market very closely to look for investment opportunities, so property acquisition happens rather irregularly,” NG-8 stated. They added, “We need to invest anyway, because that is what we do for profit.”

Their partiality to land also supports their idea of property being an “investment” and a tool for “branding.” NG-8 said, “we mostly acquire land because we like to build ourselves” because “we want a monument which will generate high income”.

The themes identified from examining the attributed values of property in NG-8 are shown as Figure 4-23 Role of property in NG-8 below.

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Figure 4-23 Role of property in NG-8

4.3.5.9. NG-9: The property fund and the operating company NG-9 was specially selected in order to illustrate the separation of property ownership and the right to use the property. NG-9 being the first of this kind in Korea certainly provides a taste of the alternatives.

The operating company rents the subject property from the property fund which is a special-purpose company, existing only on a paper. The property fund, which is managed by an asset management company, profits from investing in the property which the operating company leases.

Because property ownership and the right to use the property is severed, even though the subject property is the same, the attributed values of the same property for each party are distinguished.

For the operation company, property is “a factor of production”. It is only meaningful because NG-7 “can operate property so people can come, enjoy and spend money. Therefore we make profits”. They are focusing on the right to use the property. However, it is purely “investment” for the property fund. The property fund is only interested in “rental income and capital gain” held by the property ownership.

The operating company explained that employing the alternative method of property ownership was to “raise capital to relaunch the business”. Property being the most valuable asset of the operating company that can be capitalised, the operating

138 company said that they “utilised best means of resources they possessed”, provided the operating company secures their right to use the property for their business purposes. However, the separation of property ownership and the right to use the property means not only the operating company giving up the entitlements, capital gains and rental income that comes with property ownership, but also their right to use the property is not completely protected. To minimise any chance that the operating company’s right to use the property is refused or interrupted, the operating company is a part of major shareholders of the property fund. NG-9 claimed that “the operating company being a major shareholder of the property fund will provide some safety net but only to limited extent”.

NG-9 admitted more uncertainties regarding the separation of property ownership and the right to use the property. “The lifetime of the property fund is limited. It is fixed at ten years with the condition to be renewed for longer, if the performance of the property fund exceeds the expectation of the property fund investors.” Therefore, if the property fund investors are not satisfied with the performance of the property fund, in this case it is the performance of the operating company as well, the property fund investors might want to terminate the property fund.

The investment in property is subject to approval from the asset management company which manages the property fund. The operating company holds the right to use the property and operate their business, but they do not have an authority to physically alter, improve or expand the property and the fixtures. NG-9 indicated that the future growth of the operating company is tightly linked with “having newer and improved facilities to attract more people.” NG-9 has “plans in place for the improvement and possible expansion involving development and acquisition of extra land”; however, it is subject to approval from the asset management company.

The themes identified from examining the attributed values of property in NG-9 are shown as Figure 4-24 Role of property in NG-9 below.

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Figure 4-24 Role of property in NG-9

4.3.5.10. NG-10: Privately owned company in the service industry NG-10 said “it is a factor of production, of course. We need an office for the employees.” A twist in the property policy in NG-10 is that “it is also an investment for the owner. Even though it is little known knowledge to the most of the employees, we are renting this office from the family member of the entrepreneur of the company.”

The themes identified from examining the attributed values of property in NG-10 are shown as Figure 4-25 Role of property in NG-10 below.

Figure 4-25 Role of property in NG-10

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4.3.5.11. NG-11: Privately owned company in the manufacturing industry For NG-11, the role of property in the company could not be clearer. “We need the factory to produce the product. Without this factory, it is not possible to produce the product, which means no profit for the company,” stated NG-11 (Figure 4-26).

The themes identified from examining the attributed values of property in NG-11 are shown as Figure 4-26 Role of property in NG-11 below.

Figure 4-26 Role of property in NG-11

4.3.5.12. Summary of concepts and themes The way individual participating companies see the role of property in their corporation was examined. Their descriptions and evaluations of recent property acquisition and disposal are the bases for categorising their attributed values of property in individual corporations. Table 4-3 is a summary of the concepts and themes of the role of property and the attributed values of property.

Table 4-3 Concepts and themes of property in individual corporations

Company Concepts Themes Themes Code (roles of property) (attributed values) (cultural values) G-1 x Production x Branding x Investment type 1 x Supporting G-2 x Foundation of business activity x Corporate image x Owner preference x Production x Investment type 2 G-3 x Production x Corporate image x Owner preference x Branding x Supporting G-4 x Foundation of business activity x Owner preference x Production x Investment type 2 G-5 x Production 141

G-6 x Foundation of business activity x Branding x Production NG-7 x Foundation of business activity x Production NG-8 x Investment type 1 x Branding NG-9 x Foundation of business activity x Production for operating company x Investment for the property fund NG-10 x Investment type 1 x Owner preference x Production NG-11 x Foundation of business activity x Production

From identifying concepts and themes it is found that the term ‘investment’ is often used two different meanings in property decisions of firms as a part of their resource allocation processes. The first concept of investment, refer to ‘investment type 1’, is relevant to meanings of costs, incomes, prices and returns. The second type of concept of investment, refer to ‘investment type 2’ relevant to investment for the future growth of the firm but not directly link to direct profit maximisation of the firm by selling or buying of property. The different concepts of “investment” will be further discussed in the next section of this chapter.

4.3.6. Attributed values of property ownership

4.3.6.1. Protecting property rights Property ownership is closely related to protecting property rights, therefore preventing the uncertainty involving securing and protecting the right to use property without any interruption, by internalising any potential residues. G-2, G-3 and G-4 related property ownership mainly with “securing production stability.” Considering G- 2, G-3 and G-4 identified the main role of property as “a factor of production” (Figure 4-17, Figure 4-18 and Figure 4-19) to produce their product, and their primary business functions are in manufacturing, having secure property rights of their property for the production goes along with the existence of the companies themselves. G-2 and G-4 especially expressed their property as “a foundation of their business activity” recognising the importance of property and property ownership, but G-3 expressed as “supporting” which is rather soft expression than “a foundation” but it does not mean G-3 considers its property lightly. In fact the owner of G-3 showed enthusiasm for 142 advancing their own property management and partiality to property ownership no less than G-2 and G-4. G-3 was very careful to maintain their current image as well as future image which the owner of the company sees that the future of the company depends on. G-3 did not include an image as “a property addict” in their current or future image.

The separation of property ownership and the right to use the property using an alternative method of property ownership structure provides a comprehensive comparison. NG-9 ventured to utilise the method because they must raise a substantial amount of money to get back into the business, and the property they own is their most valuable possession (Figure 4-24). Using the property fund in the form of a special-purpose company, NG-9 severed the property ownership and the right to use the property, but not without a safeguard for their property rights to the subject property. By separating property ownership and the right to use the property, the right to enjoy rental incomes, and any potential capital gains and development potential which are attached to the property ownership are transferred to the property fund which holds the ownership of the subject property. The right to use the property, instead, remains in the operating company which formerly owned the freehold right of the property. Because now the operating company holds the right to use it as a lessee, the business activity of the operating company could be severely restricted. Any business expansion and improvement involving physical alteration of the property does not belong to the operating company, but it is subject to the approval of the property fund. Because NG-9 clearly identified differences in the attributed values of the same property between the two parties, they saw the possibility of conflict of interest between two parties as inevitable. NG-9 adopted a straightforward and practical solution to this possibility of a conflict of interest. The solution was the operating company sharing a part of the ownership of the property fund, thus acquiring the same percentage of property rights and hence having some control over their property rights. NG-9 admitted it is a costly and complicated way of running a business and a structuring investment vehicle for both parties. However, NG-9 declined to make a further assessment for their venture, but because their business

143 had been in motion only for a few months at the time of the interview, it was too early to make any judgement.

Property ownership is also relevant to dealing with the uncertainty of the future. “Investments” (investment type 2), G-2, G-3 and G-4 referred to are not pertinent to the idea of rental incomes and capital gains. Their concept of “investments” is not “investment” with income, capital gains and rate of returns but “investment for the future growth” of the firm. The distinctive difference here between two concepts of investment is that the purpose of the former “investment” concept (investment type 1) is justified for rental incomes and capital gains. However, the later “investment” concept (investment type 2) is not pertinent to rental incomes and capital gains. Property decisions in G-2, G-3 and G-4 show little reference to monetary gains following property decisions. Not only was a disposal of a property irrelevant to an expected capital gain, but to some extent they do not even sell the property they own, unless they absolutely have to. In other words, they were driven to sell it by an external force, mainly local government. G-2, G-3 and G-4 also would acquire property at higher than the market price, if they need it. According to their statements, the property price is often no object for their property as long as they obtain what they were after; consequently, no rate of return of the investment in the property is pertinent to their property “investments.” Property decisions are relevant to the current and future business of the companies.

Moreover, types of property do not seem to affect the behaviour of G-2, G-3 and G-4 in their difference in the concept of “investment.” All three participating companies hold property pools with various types of property, although the differences in the portion of the property types were found in each company. Whether it was a factory or an office building, their attributed values were not associated with rental incomes and capital gains but related to business activities, corporate image and branding.

G-1 and NG-8 regarded property strongly as “investment” which is relevant to the latter “investment” concept (Figure 4-16 and Figure 4-23). This “investment” concept is associated with attributed values of income-producing properties. Other attributed values of property were also identified in G-1 and NG-8 but were inconsequential

144 compared to rental incomes and capital gains, which were regarded as the first and foremost attributed values in their behaviour.

It is also noted that even though G-6’s and NG-7’s retail properties are regarded as a factor of production, their property rights of ownership are not as strong as G-2’s, G- 3’s and G-4’s. They consider that properties are replaceable and are constantly on the lookout for new retail property in order to catch up with market changes. Furthermore, having more retail properties is preferable as a part of revenue growth, and it is considered safer: their sales as a whole can be stabilised because the revenue of their stores can offset each other. The fact that it is possible to effectively protect their business activities in a leased store with a long-term contract means G-6 and NG- 7 are partial to leasing rather than property ownership, which is more costly because of initial property acquisition costs. It is also important to acknowledge that G-6 and NG-7 are foreign investments; thus, the property decision-making authorities are not as comfortable in their knowledge and experiences in the Korean property market as are G-2, G-3 and G-4.

G-5 expressed little interest in property ownership and property rights, although they own several office buildings as corporate assets. Their general attitude towards property was rather detached, even though of the 11 participating companies they were most closely related to the property industry and the property market. It is only possible to read a little from the interviewee’s reaction that, regardless of the closeness of the company to the property industry and the property market, when it comes down to their own “asset” it is not very relevant to their business activity, at least not like the land they hold for development and sales.

NG-10 and NG-11 did not relate their situations with property ownership and property rights because for one thing they do not own any and for another they cannot afford to own any kind of property anytime soon. Both participating companies agreed that it is costly to relocate their premises, but if the situation requires it there is no problem except for an anticipated couple of days of a little disruption of their business.

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4.3.6.2. Vertical and horizontal integration G-2 and G-4 were selected to demonstrate the property decision-making behaviour of vertically integrated companies. Both companies are a business group with a large number of affiliated companies under the business groups, having 66 and 46 affiliated companies respectively. Traditionally as manufacturers, both companies have been strong in producing food and beverages, and both now own affiliated companies in retailing and logistics. They also own some primary resource suppliers for their own product, especially G-2, making G-2 and G-4 backward vertically integrated companies. G-2 diversified in the entertainment industry and G-4 in the construction industry later, which was irrelevant to their traditional core business. That made them vertically integrated companies as well.

Vertical integration, especially backward vertical integration, often involves acquiring the property rights of particular property in order to secure their main business activities. G-2 recounted their recent experiences in reducing production costs. “We wanted to find a source that we can obtain ‘A’ which is a major resource that is necessary for our business. We decided to move to ‘B’ country where we can resource ‘A’ at less cost. We could have had just a contract with one of the companies over there. However, stability in volume, quality and cost is too important to rely on a contract. We had some bad experiences in the past, so we do not solely rely on external suppliers.” To produce ‘A’, G-2 needs primarily the use of farmland with a substantial supply of labour. As a foreign investor, G-2 considered leasing property alone or having a local office alone would not be secure enough in ‘B’ country. The solution was obtaining the ownership of farmland as well as part ownership of the company which owns and operates the farmland. G-2 thought that, as a result of gaining property rights over farmland and the company which owns the farmland, they would benefit from obtaining ‘A’ at lower costs than previously and securing the stability and quality of resource ‘A’ at the same time.

G-4’s approach to rather aggressive investment in property, as means of “investment for future growth,” is also seen as vertical integration in obtaining power over their supply. Vertical integration, therefore internalising property rights, provides a greater

146 chance to internalise externalities. Because of G-4’s positive past experiences from which they have greatly benefited from through owning property, G-4 showed very strong (far stronger than other participating companies) partiality to property ownership. Here, property ownership is associated with internalising externalities. In fact property ownership and property rights entail property development potential; that is, property can be developed into something more valuable in the future than what it is for now because of market area changes. G-4’s narrative on properties acquired in the ’70s and ’80s that “have been lucrative” tells how they successively internalised externalities by owning property, therefore benefitting from these externalities in the form of property developments. Because the area surrounding land changes as time goes by, after a few decades, the use of land may not be suitable and of course it might not be suitable for the future. Being able to obtain property ownership and therefore property rights over land early gave them an advantage in obtaining rights to develop land at a bargain price without any competition. G-4 did not hesitate to admit that they do “need to stay alert about market area changes” and “work to make the environment favourable” for them in order to take advantage of internalising externalities. In fact, one drawback is that this strategy could also leave G- 4 with a considerable amount of non-performing property. Again, the anticipation of future development prevents G-4 from dealing with their non-performing property, thus holding on to it until they find the right use for it in the future.

G-4 and G-6 provide a comparison between a vertically integrated company and a horizontally integrated one. Both in the retail industry, in fact very tight competitors, the former is, as discussed, highly vertically integrated and the later horizontally integrated, especially globally. They cover a large number of countries with their stores and focus on retail only. Most apparently their partiality to property ownership sets them on opposite sides of a scale from each other, G-4 being in favour of property ownership and G-6 being partial to leasing.

G-4 sees obtaining property as a part of future investment. Having owned property and therefore having property rights, which include a right to use, a right to profit and most importantly a right over future potential over property has been “lucrative” and

147 is expected to work “best” for them. Even if a particular piece of land may not work for one affiliated company, it may well suit others. Having a large number of affiliated companies in a vastly diversified industry, in other words vertically integrated, makes it relatively handy.

Even though G-6 owns a rather large amount of property, they are clearly not in favour of property ownership. The characteristics of G-6’s property portfolio represent what they explained as a mixture of “market availability” and “market rules” rather than partiality to property ownership. They even analysed at length the reasons G-4 is partial to property ownership and had answers ready. G-6 believed that because G-4 have so many affiliated companies and have the attitude of “helping out members of the family,” it is easier for them to obtain property in a tough development approval process for a new store. Considering property as “investment for future growth,” therefore anticipating the potential of any particular stores because it could be well suited for other affiliated companies rather than strictly focusing on one function as a store and that alone was identified as another difference that characterises G-4’s property portfolio, according to the G-6 interviewee.

Also, another part of property owned by G-6 currently originated from a recent takeover of one of the competitors in the retail industry. They wanted their market shares in order to grow further. They did not want to take over the competitor completely. They wanted strategic stores which could bring them the growth they were aiming for. If they wanted property rights over those strategic stores, however, they had to take over the whole company, even though it meant taking over a lot of baggage involving unnecessary underperforming stores and employees who were upset and ready to fight not to be laid off. As G-6 repeated previously, as a foreign investor that is not comfortable about investing in property in the Korean property market and that may leave the country completely, owning property is not desirable, let alone taking over the competitor. However, G-6 wanted growth in a highly competitive market, also because public aversion to the large corporate retailers (which include G-4 and G-6) is growing. Consequently, local governments refuse the large corporate retailers’ development proposals. All this circumstance contributed to

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G-6’s bid to take over the competitor despite its partiality towards not to own property. They did so because G-6 did not want to lose the takeover to the other competitors in the market, which would put them even further behind in market share ranks. They wanted to obtain strategic stores without the bother of development approvals with local governments.

4.3.6.3. Image: Prestige, branding, stability and credibility G-2 and G-3 wanted property that can represent the unique corporate images they want to project. Using property as a tool for exposing their brands to the public was found important in G-1, G-3, G-6 and NG-8. Using property as a tool for exposing their brands to the public is associated with the physical characteristics of a building which are related to property rights for use without interruption. Even though leasing gives the right to use property, extensive and exclusive rights to use it uninterruptedly can only be claimed with property ownership. All agreed that creating a particular concept, whether it is a corporation projected from a building or making the corporation noticed by the public, involves alteration and improvement in existing properties and it is hard to carry out if they are “a lessee.” It becomes considerably easier, of course, if they build their own and are owner-occupiers, which G-1, G-2, G-3, G-6, and NG-8 all claimed to be. With the exception of G-6, which owns large property portfolio actually against its preference not to own property in order to deal with constraints from the Korean property market, G-1, G-2, G-3 and NG-8 showed strong preference to be owner-occupiers and use their own property to represent their company and brand. G- 6 emphasised that their stores being able to represent their own brand is “as important as stores being a factor of production.” Evidently having a very strict set of criteria for location and physical appearance of stores makes it challenging for G-6 to find an adequate new store to lease in the property market in Korea. Therefore, against their partiality to leasing, G-6 obtained property ownership to ensure extensive and exclusive rights to use their stores uninterruptedly.

Property ownership represents the stability and credibility of a company as well, G-3, G-6 and NG-8 found. All three of these companies admitted using property ownership in some way to convince the public of their stability and credibility. That property

149 ownership comes with a relatively large amount of capital investment and that capital tied to a property for any length of time sends out particular ideas to the public, G-3, G-6 and NG-8 explained. Firstly a company which owns the building must have financial stability or be stable enough to be able to fund the building. Secondly the company is credible because it is determined to stay in business by making a commitment to own the building.

G-4, G-5, NG-7, NG-9 and NG-11 found no meaningful link between corporate image or branding and having property. It is interesting to note though, NG-7, prior to a massive clean-up (followed by the Korean office being taken over by the head office in the US between 2004 and 2006), considered both corporate image and exposure of their brand to the public important, hence they expanded a number of their stores. However, opening stores which would not have qualified for the current criteria turned out to be troublesome enough for the head office in the US to take back control. After the experience, NG-7 has not been allowed to open a store just to obtain a corporate image or exposure of the brand to the public, under any circumstances.

4.3.6.4. Accumulated property A rather significant number of participating companies with a long history said that their property portfolio has been “accumulated over a long time” (G-1, G-2, G-3, G-4, G-5 and NG-8). G-1, G-2, G-3, G-4, G-5 and NG-8 said that between the ’70s and ’80s, a large portion of their property portfolio was obtained. Because the property market in Korea did not fail them until the 1998 Asian financial crisis, and the market has successfully recovered from the crisis, their positive experiences in the property market planted the idea of “holding on to it and somewhat finding a use for it till it is subject to redevelopment following urban restructuring by local governments” (G-1, G- 2, G-3, G-4 and G-5).

4.3.6.5. From an owner-occupier to a lessee When the participating companies choose to be a lessee, they are firstly looking for additional space, especially office space. “When just a part of the office space is required, we tend to go for leases,” four companies reported (G-1, G-2, NG-8 and NG- 10). If there is a need to be effective against external environments, in market

150 availability, market area changes and market competition, companies tend to lease property. G-2 reported that they prefer leasing “when we need space which can be easily relocated when we need to.” G-6 linked the partiality to leasing with market availability, “when it is available and if we can have a leasing contract which suits us.” NG-7, which explained their vulnerability to market area changes, stated “We have to be able to catch up with market changes as quickly as possible. Leasing a store is definitely a handier choice than owning property.” (NG-7)

In fact, leasing is “a cheaper option” (G-6 and NG-7) than owner-occupying, because no large amount of capital is required for leasing. Therefore, G-6 and NG-7 concluded that being a lessee can be more profitable. G-6 emphasised that the company prefers leasing to ownership. However, “it is not available, in the Korean property market.” NG-7 was particularly responsive to market area changes.

Of course, if you cannot afford your own property, you are a lessee, like NG-11. “We cannot afford to have our own factory” (NG-11) or if “currently we are able to accommodate all the companies which are affiliated with the parent company in one of our own buildings” like G-3 and G-5, there is no need to consider becoming a lessee.

Figure 4-27 Property ownership ratio changes

The themes identified from examining the Property ownership ratio changes are shown as Figure 4-27 Property ownership ratio changes above.

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Two of the participating companies (G-1 and NG-8) stated that they frequently dispose of property. “Continuously, we dispose of property for which use is discontinued” (G- 1) and “we dispose of economically inefficient property especially smallish property with small development potential” (NG-8). However, their disposals do not associate with them reducing the property ownership ratio, and then becoming lessees. For G-1 and NG-8, it is more a matter of getting rid of no longer needed “investments.”

Property market changes, especially property prices, also do not affect companies’ property disposal and acquisitions. G-2 recounted “When we were hit by the 1998 financial crisis, we had to dispose of quite a lot of property, because we needed to liquidate as many companies had to do. I think that was the time we had the most changes. But it was not about the property market. If it had been only about property market, we would not have tried to sell.” G-3 agreed. “We do not sell our property just because the property market is good. What happens in the property market is not relevant to the company’s property portfolio.” G-2 added, “We often have to buy a particular property at higher price, just because we need it.” Particularly, for G-4, no matter what happens in the property market, “We do not sell property.”

4.3.7. Headquarters, the symbol of non-monetary-value-related property The practical use of headquarters is as an office building for the management of the firm. A space for headquarters for management can be arranged in any form, as long as it means only “space.” Of course, if you cannot afford to own, you do not have a choice but to lease. Even if you can afford to buy, if it is only “space” a company wants, that is exactly what they are after. NG-7, NG-9 and NG-11 clearly stated that it is not necessary to own headquarters. “Headquarters does not mean anything to us. We are in the food service industry. We need stores to generate profit. The number of employees who are part of the headquarters management is not that many and most of us spend a lot of time outside doing business. Furthermore, the parent company, which is actually an overseas company, would not approve it” (NG-7). “Having headquarters is simply not a part of the purpose of the fund” (NG-9). “First of all we cannot afford to buy a building. If we have that kind of money, we will have our own

152 factory instead of leasing it. The number of employees working in the actual production line is far greater than the number of white collar workers here. The management office can be arranged in the back room of the factory quite easily” (NG- 11).

Table 4-4 Headquarters owned and leased

Owned Leased G-1 G-6 G-2 NG-7 G-3 NG-9 G-4 NG-10 G-5 NG-11 NG-8

Even though the headquarters for the management of G-6 occupies leased property, G-6 expressed a strong desire to own a building and stated that they have set up a plan to own one and have been working on it. “We want to show that we are here to do business for sure. We have been doing business for about ten years now but still there is a kind of fear that we might pack up and go.” G-6 described being a foreign investment company. “The management are working on the way to send some kind of message to show how committed we are to the market. And having decent headquarters is one of them.” The way G-6 presents themselves to public was also found, for example, to be by the name of the company, even though they no longer have an affiliation with the former joint venture partner (one of the top 10 business groups). G-6, which is not a Korean national company, pays a license fee to keep the name of the former joint venture partner.

It is not only the foreign company that uses headquarters to show the commitment of the company. A Korean national company, NG-8, also said, “We also have sub- headquarters in other cities in Korea. Consumers feel secure seeing proper headquarters in their city. Consumers take notice of the building when they pass by.

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Having those headquarter buildings helps the sales representatives to convince consumers that we are reliable and secure.”

“It is not easy to find suitable headquarters. It is harder than finding a lot for our store!” G-6 described the different qualities of property they are looking for in their own headquarters. The following are values that companies are looking for in headquarters, categorised into three types.

Values related to aesthetics and amenities of headquarters

“It must look decent. It must have some sort of ‘show-off’ effect.” (G-6)

“It has not been that long that we moved into this building. We wanted a monument on a prime location.” (NG-8)

“It is also a place to meet clients. You want to make a good impression in a certain way.” (G-6)

“We are reforming the whole concept of the company to one which produces and sells high-end luxury goods, and the headquarters should represent the new concept.” (G-3)

“As a business group, we have a particular image that we are using consistently across the businesses that we have. The headquarters, as it is, is the image and identity of the company.”(G-2)

Values related to employee satisfaction

“We need headquarters for employees to work. A nice place to work in would be good for motivating the employees.” (G-6)

“The employees feel proud of the new building. For an employee, it looks better to enter a nice-looking building than a shabby building.” (NG-8)

“This building is much too old, built in the 1970s. It is very uncomfortable and much too small for the current level of employees to occupy.” (G-3)

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Values related to business operations

“Having closely related affiliated companies and subsidiaries in the same building is expected to enhance co-operation. It certainly helps the employees to communicate better, as you see them around and to minimise all those travelling from this office to that office!” (C-2)

“‘Synergy’ is the word that the founder used to describe a need for a new headquarter building. He wants all subsidiaries under the same roof. All subsidiaries are deeply interconnected with and interdependent on each other. We need to work together and work together well.” (C-3)

“Building security is also important. We occupy almost all the space in the current building, but still we are sharing the building.”(G-6)

“These days it is all about security. We spend a lot of money and energy for research and development and we want to protect our products.” (G-3)

There are also constraints that come from the property market itself.

“The location of the headquarters is also important. The work of many of the employees involves working outside, on site. It is ideal if we can cover all the sites within a certain time frame from headquarters.”(G-6)

“We have been looking for a site for some time now, but it is very hard. We want a certain size of land in a certain area and there is a limit on the budget. We first wanted to build one for ourselves; now we also are looking at the possibility of buying an existing building as well, if there is one that meets our criteria.” (G-2)

“The land which the current headquarters is on now has recently been included in the urban renewal plan. It is necessary now to rebuild it.” (G-3)

How does the top management team, such as the founder of the company or the entrepreneur, influence property decisions, especially headquarters?

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“We are aiming at entering the top ten corporations worldwide in the industry we are in, in ten years. As a part of the company growth plan, the founder of the company wants to have new headquarters of our own.” (G-3)

“The founder makes it clear that it is operation and production property which is more important than headquarters. So if any affiliated companies and subsidiaries want to buy or build headquarters for white-collar employees, that are never going to be approved by the management. However, as a business group with a lot of affiliated companies and subsidiaries, we need a lot of space, and we have a lot of space that is not used for some reason at the any given moment. Any request for more space will be handled within the company property portfolio.” (G-4)

“The space we are using is leased. Well, frankly, we are renting it from the family member of the entrepreneur of the company. Lower-level employees are not aware of it, though.” (NG-10)

For some, their headquarters is simply an investment.

“This is our second headquarters. As I said, we never have a cash problem. We rather have cash that needs to be invested for the company, so we decided to build the second headquarters. We occupy only thirty percent and it is making good money!” (G-1)

“We are in the financial industry. We invest to profit. Although we have a restriction in how much we can invest in property, we invest in it as much as we can. So, why rent?” (NG-8)

Table 4-5 Attributed values of headquarters and headquarters holding status

Owned Leased Investment G-1 NG-8 Only space NG-7 NG-9 NG-11 Other values G-2 G-6 G-3 NG-10 G-4 G-5 156

Comparing the previous Table 4-4 Headquarters owned and leased and Table 4-5 Attributed values of headquarters and headquarters holding status, G-6 and NG-10 regarding headquarters holding status have more chance to move to owning headquarter buildings even if currently they are leasing their headquarter buildings than other companies. It is because that the utility of G-6 and NG-10 also include other attributed values along with space that headquarter buildings can provide.

The themes identified from examining attributed values of headquarter buildings are shown as Figure 4-28 attributed value of headquarters building.

Figure 4-28 Attributed value of headquarters building

4.3.8. Alternative method of protecting property rights NG-9 was selected as a sample which employed a financial method “property fund” to separate the ownership of the property from the right to use it. The operating company of the subject property needs control over the property fund, because the operating company relies on the subject property to carry out the business. This was managed by the operating company as one of major shareholders of the property fund.

G-3 has planned to employ a financial method “project financing vehicle” in their project to build their new headquarters. However, “the headquarters itself is not part 157 of the fund. We will have full ownership” (G-3). G-3 added that “the land which the exiting headquarters is on has been rezoned, and now it can accommodate two buildings even taller than the current one. The CEO decided to maximise the potential of the land and to build two office buildings, one for headquarters and the other one for investment purposes. However, it is not possible to fund all costs of the project by ourselves. We are setting up a project financing vehicle to fund the costs of constructing an investment-purpose office building.” In explaining why they are using a project financing vehicle, G-3 emphasised that “the unit price of individual products we produce and sell is pretty low. To make a profit, we need to work hard. The CEO wants to spend the profit carefully, which we all work hard to make.”

G-4 also is reviewing the possibility of using an alternative property-owning structure. “We recently set up our own asset management company in order to try out the possibility, seriously,” said G-4. But this trial is only limited to non-performing property. “If it works with a pool of non-performing property, it will work with any other property and we do not lose anything because it is not performing anyway” (G- 4). G-4 added that “the owner will eventually decide how to employ the new method into the company after a trial, but it is sure that it still will be only a fraction of the property portfolio. It will never be practiced for the entire property portfolio.”

NG-8, an investor, expressed that there is no need to employ such a structure. They asked, “Why share profit? Organising the structure would cost more than just simply owning the property.”

G-1, G-2, G-5 and G-6 stated they are not interested in using an alternative property- owning structure and do not plan to use it.

“Firstly we are not interested in doing so and second we do not have property which is suitable for setting up a property fund or an REIT” (G-1). “I think that a property fund or an REIT is employed to liquidate your asset because you need cash badly. As I said, we do not have a cash problem. So, we do not see the necessity of liquidating our perfectly acceptable assets.”

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“We did review alternative financial methods such as a property fund or an REIT, but we prefer ownership internally. We will consider a property fund or an REIT if there is a chance, but it will have a low preference.” (G-2)

“It has been reviewed. Because we develop and construct real estate as a business, we use it as a part of business activity. But we do not have property to set up any kind of funds or REITs with our assets.” (G-5)

“We do not do it ourselves with our own stores. We do not have the know-how and that is not part of our business purpose. But, retail property development is getting bigger in size, and we have been a long-term lessee of retail property development using property funds and project finance vehicles.” (G-6)

Most of NG-7 and all property occupied by NG-10 and NG-11 is leased. They simply stated that the matter with the alternative property-owning structures is not relevant to their situation.

4.3.9. Property market as constraints

4.3.9.1. Use of market agents G-6 expressed a special feeling about current market constraints. Their aggressive expansion of the number of their stores is due to the competitiveness of the retail industry. They have increased the number of stores almost 95% in ten years. Considering G-6’s status as one of the top three in their industry, rapid expansion of this particular category of retail stores caused an outcry from local small businesses and the wider community which have already lost a market share and are on the verge of losing their businesses. G-6’s development applications to construct new retail property has been refused by a significant number of local governments pressured from existing local small businesses, and the number of development applications that have been refused is rising.

The current situation that G-6 says is “a strong local aversion of local small businesses and local government to large retail companies entering the local economy” drives them to take strong measures when it comes to development approvals. A course of action of G-6 towards “a local aversion” is using a market agent which they call “the 159 developer.” Figure 4-29 shows how does “the developer” work into property decisions in G-6.

–Figuremaking 4-29 Use of “the developer,”process G -6 of G-6.

Local government

Development Development application approval and fees Transfer of property ownership

The developer G-6 Commission

G-6 describes the role of the developer as “an agent that can clear development approval on behalf of G-6; therefore, without G-6 itself having to “risk making it public that they are in fact entering the particular market area until the development approval process is through, they can obtain the position (a store) in the particular market area.”

Use of this kind of agent is also found in G-4. G-4 as a business group, which includes a major retail company as an affiliated company, also admitted using “the developer” in order to remain inconspicuous. However, their status as a business group with a large number of affiliated companies (just under 50, which includes real estate development and construction management companies) gives them some advantage in opening up new stores as a part of “helping out members of the family.”

There are also real estate agents (or realtors) who help property selling and buying between sellers and buyers. The participating companies consider using real estate agents for property trading “relatively cheap, only a maximum of 0.9 percent of the sales price and it is negotiable. What they do is not essential, but there is no reason not to use them when possible.” The participating companies commonly choose

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“obtaining local information” and “having better things to do with our time and energy” as the main reasons why they prefer to use real estate agents.

The role of real estate agents becomes especially serious when corporations want to “buy” property from the “public.” G-1, G-2, G-3, G-4 and G-6, which have experience acquiring property from the public, emphasise the importance of having a real estate agent to represent their company, therefore the concealing company’s identity.

“When the public knows we need their property and we try to approach them, it becomes difficult to deal with them. They often demand an outrageous price for their land.” (G-1, G-2, G-3, G-4 and G-6)

“Even if only the fact got out that we were considering buying property in a certain area, it often ended up increasing price of surrounding property even before we approached them.” (G-2, G-3 and G-4)

“It gets more complicated if we have to deal with more than one owner. Some may be co-operative, but others may not be co-operative or even against us. We could easily end up with bits and pieces of land which are useless individually. It could get really ugly if we try to do it ourselves.” (G-2, G-3 and G-4)

Preventing disruptions concerning the public in the property “acquiring” procedure is easily controllable by using a real estate agent as a representative who can provide knowledge on locality, locals and local government. G-1, G-2, G-3, G-4 and G-6 all admitted that there are all sorts of possibilities of “things going horribly wrong” at any stage. Yet utilising real estate agents effectively was identified as a “cheap and rather effective” step for the property-acquiring procedure.

4.3.9.2. Market availability What is available at the time in the given area also constrains property decisions of the firm. “It is already saturated in Seoul,” or “even if we find a piece of land, it is just too expensive,” or “money is not the object here; it is simply very hard to find what we want” are common statements by all participants. Being lessees means relying on someone to supply space; therefore, what is available in the market constrains lessees’

161 decisions. Not being able to find spaces — specific or not very specific — to rent from the market, of course, is one of the factors which direct companies’ property decisions.

“It is very hard to find what we want” extends to the times G-1, G-2, G-3 and G-4 look for factories and distribution centres which accounts for a large portion (approximately 70% on average) of their property portfolio. G-1, G-2, G-3 and G-4, which includes affiliated companies and subsidiaries in more than one manufacturing industry, therefore require places to produce their products and to distribute them through sales routes. The ownership ratio of factories is especially high (100% owner-occupied from all four participants), and for distribution centres approximately 90% on average are owner-occupied. One of the major reasons why they own them rather than lease is that this type of property is simply not available in the current market. Not only are there not many factories and distribution centres to rent, but also G-1, G-2, G-3 and G- 4 described the difficulties of finding factories and distribution centres suitable for the specifics required by their companies.

“We have to provide plenty of showers for sales persons in our distribution centres, and it has to be up to certain standard. Also required is a certain kind of zoning of distribution centre to separate spaces for the product and for the sales persons. They are very fussy and we need to keep them happy,” said G-1. “Because we also produce glassware such as jars and bottles for our other product, the place these two different kinds of factories are located is important. Not many choices are actually available,” said G-3. “It is hard to encounter available property where we want it and when we want it,” said G-2.

G-6 declared that “leasing is preferable over owning because it is more profitable, as we have seen from the comparison between our existing stores.” However, G-6 added that “because we prefer leasing to owning stores that is certainly not what we get. And that is why we still have far more owner-occupied stores.” The way the retail property market in Korea works against their preference and directs their property strategy differently was expressed strongly. “A large-size retail property development is a relatively new concept in Korea. When we started late in the last century, there were not any. Now there are available spaces for us to lease and about thirty percent of our

162 stores are now on leasing contracts.” G-6 emphasized how a strong retail market in Korea influences their property decisions by adding, “I do not think it is going to change much, I mean the percentage of owner-occupied stores, because those who develop retail property do not want the risk of holding retail property and managing and operating it. They want to develop, sell and profit from the development and move on to the next development project. They are not investors. They are developers. As long as we are working with developers, we have to play by the rules whether we like it or not.”

4.3.9.3. Importance of lawyers and contracts Internalising possible residue by owning property reduces a firm’s chance of facing uncertainty in incomplete contracts. However, it is a part of the standard decision- making process to consult with an internal legal team because it still is “a contract” as most of the participating companies claimed. Especially for office building trading, participating firms identified legal costs and uncertainty with incomplete contracts as not very significant and rather standard procedures. However, having a contract and legal aid become significant when uncertainty regarding property rights and human behaviour rises.

G-6 and NG-9 emphasized the importance of using lawyers in the property decision- making process. Two companies identified different types of uncertainty involving agents. G-6 said, “Using a standard property contract is not possible because for us property trading involves development approval from local government, which is becoming tough to get.” Land which can be approved to be developed for its retail property is only meaningful for their property transactions. The current market condition, which makes obtaining development approval from local government difficult, drives G-6 property decisions and their behaviour in the property market.

As discussed, in order to complete their goal of obtaining the property they require, G- 6 often employed one or more market agents between them and the market. Property trading between the market agents, which they call “the developer,” and G-6 brought up the necessity of a certain level of protection over the developer’s behaviour and their commitment to deliver a product. In this case, that is the land approved for the

163 development of retail property for G-6. Here, G-6 identified problems that could occur and must be prevented with a contract. “They could sell it to the competitors for a higher price,” it “may fail to get approval,” and “confidentiality is what it is all about!” were major concerns. Costs relating to development approval were also items on a contract between the developer and the retailer, because those can be a significant part of total development costs and very unpredictable, G-6 explained.

The role of a lawyer and a contract in NG-9 is that of mediating between the operating company and the fund which owns the property. NG-9 expressed sensitivity about making decisions, even though the operating company as part of the major shareholders provides some protection for the operating company to carry out the business without disruption. NG-9 added differences in purpose of the two parties in interest. “The fund is a special-purpose company, and its only purpose is investing in the property which the operating company runs and profits from in the property investment, in rent and capital gain. However for the operating company, it is revenue from running the business.” In order to maintain transparency and prevent conflict between parties, “every decision regarding the property from as small as improvements and installing new fixtures to planning the next round of investments must be reviewed by the lawyer to see whether it is an activity which upholds the purpose of the fund.” It was described as “one of the most important procedures between the operating company and the fund.”

4.4. Results

In this chapter, collected data from part 2-1, survey questionnaires, and part 2-2, survey interviews, were organised and analysed using NVivo 8 and presented. An interfirm level of analysis was carried out by conducting a questionnaire survey of asset and property managers in the property market. From the intrafirm level of analysis, corporate behaviour in property dealings was investigated.

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4.4.1. Property decision-making behaviour styles Firms take more than one position when they make property decisions in property markets depend on attributed value of property they are after or market constraints. What is observed in this research is that it is possible to find patters of property decision-making behaviour of the firm. The patters of property decision-making behaviours of the firm include neoclassical economics approach to resource allocation behaviour of the firm but also behaviour that theoretically does not fit with neoclassical economics assumption of rationality.

As observed from the property market, owner-occupier clients valued property ownership differently (Figure 4-4) at the interfirm level of analysis. Owner-occupiers were known to be partial to “prestige” and the “location” value of property by asset and property managers, but others were strongly in favour of “investment (emphasis on future potential).”

The findings from an intralevel analysis can be summed up in categories of six different behaviour styles of the participating companies’ property dealing. Figure 4-30 is a summary of property dealing behaviour styles.

Figure 4-30 Property dealing behaviour styles

Owner-occupier style G-2 G-3 G-4 G-5 G-1 G-6

NG-7 NG-11 NG-9 NG-8

Lessee style NG-10 Investor style

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Owner-occupier style, Lessee style and investor style are names of property decision- making tendency of the firm. A firm included in the above diagram can take any of the give styles which also include overlaps between the circles. What the styles represent is tendency of the firm to more frequently take one course of action over others.

Owner-occupier style firms see property as a factor of production. Their revenue is generated from products which are produced from utilising the fundamental purpose of the property (space); thus, their business existence depends on the utility of property as space. The degree of “importance” of the utility of the property as space may vary from “support to business activity” to “fundamental to business activity” (asset specificity).

Owner-occupier style firms also find very little or almost no interest in monetary values of property such as rental incomes and capital gains. Their property dealings intended no monetary value-seeking behaviours. Rather, they approach property from costs. Therefore, they try to reduce costs of property dealings which include property purchasing prices along with transaction costs. Regardless of property purchasing prices, owner-occupier style firms will acquire a property if it is necessary for their business activity. In the case of property disposal, owner-occupier style firms take a similar kind of position; that is, “do not sell” property unless it is necessary. Property no longer needed for their business activity (intrafirm-level environment change) and location of property no longer feasible for the use of their business activity (interfirm- level environment change) define owner-occupier style firms’ necessity to dispose of property. Owner-occupier style firms are strongly in favour of keeping their property, because they tend to be highly vertically and horizontally integrated companies. Even if one type of the property use was discarded for one of the affiliated companies in one business group, the discarded property could be useful for other affiliated companies in the business group. Having a substantial number of affiliated companies through the broad area of industries would certainly bring up various needs for various types of property.

What makes owner-occupier style firms include more than the utility of property as space? Owner-occupier style firms strongly associate “image,” which comes from

166 property ownership rather than the actual utility of property itself as space, with their attributed values of their property. Corporate prestige, branding, corporate stability and corporate credibility were attributed values that owner-occupiers associated with their property. These values are all non-monetary and non-tangible concepts which indicate the prestigious status of the firms. These attributed values of property regarding “image” do not directly affect their business activities nor directly link to the utility of property as space. However, the idea of owning property gives owner- occupier style firms “image” that includes a certain corporate image, branding, corporate stability and credibility. Projecting a certain image and branding to clients, public, competitors and the market helps owner-occupier style firms to sell their product. However stable and credible the companies are, they can be helped by owning a building with significant architectural values on a premium location because owning such property seems to send a message to the public, employees, clients, competitors and the market that their business is strong enough to own such prestigious property. It may as well be employees, clients, the public, competitors and the market that are expecting to see such a building owned by firms to help them make a justification for the stability and credibility of firms.

Investor style firms see property as investment. They are interested in the monetary value of property in rental incomes and capital gains. Investor style firms focus on generating revenue from income-producing property rather than utilising the property as space. The whole purpose of owning property for investor style firms is generating a rate of return; therefore, investor style firms are not expected to acquire any property on the grounds of “necessity of using space.” Their property dealings are expected to be justifiable by the level of rate of return.

The most significant differences between investor style firms and owner-occupier style firms are that they are after different parts of property rights, and therefore their definition of the term “investment” is different. Property rights associated with property ownership include an exclusive and extensive right to utilise property, a right to profit from property and a right over the future potential of property. Investor style firms associate “investment” with rate of return, rental income and capital gains

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(Investment Type 1). Investor style firms’ “investment” is related to a right to profit from property and a right over future potential of property but only in profiting from the potential of property. Owner-occupier style firms associate the term “investment” with the future growth of the firm (Investment Type 2). Owner-occupier style firms’ “investment” is relevant to an exclusive and extensive right to utilise property and a right over the future potential of property but only in internalising the future potential property usage.

For lessee style firms, property is also a factor of production. They need to utilise the property only as space. They allow no nonsense about non-monetary values of property. However, it is worth noting that there is a distinction between a voluntary lessee style firm and an involuntary lessee style firm. This distinction is the financial ability to afford their own property. In the case of a voluntary lessee, their attributed values of property are strictly concentrated on the utility of the property as space and especially the location of property and thus market area of property. It seems that monetary and non-monetary values of property ownership are not pertinent to a voluntary lessee style firms’ business or their property-dealing behaviour. Being a lessee style firms could be used as a part of business strategy, because a lessee style firm can take advantage of not being tied to property ownership, meaning they can be relocated faster than if they were owner-occupier style firms, if the location and the market area are no long feasible for their business.

There are firms which take a mixed position as well. When they take a mixed position (owner-occupier-investor style, investor-lessee style and owner-occupier-lessee style), the reason is that some other factors have triggered them to choose this position, against their initial tendency to become either an owner-occupier style firm, or an investor style firm and a lessee style firm. These other factors come from both the intrafirm level and interfirm level.

Intrafirm-level factors which influence firms to take a mixed position are cultural. Culture as learnt and shared experiences in an organisation and predominantly influenced by the top management team, what the firms have experienced and the attitude of their top management team could drive the firms to take mixed positions.

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Cultural factors rather strongly affect property dealings because they seem to come from a high level of the hierarchy of firms. Major shareholders, including the founder of a company, members of the founder’s family and executive level managers’ attitudes, rule the culture of the companies which they own or operate. Culture, which is established from a high level of the hierarchy of firms, is learnt and shared among employees to practice in business dealings which include property and property dealings. Therefore, cultural factors are close to the core of firms’ tendency and expected to steadily influence firms’ behaviour.

Cultural factors could drive a lessee style firm to an owner-occupier style firm and therefore into owner-occupier-lessee style (G-5). It is also possible to drive an owner- occupier style firm to an investor style firm and therefore into an owner-occupier- investor style (G-1). A top management team could also will a lessee style firm to an investor style firm and therefore into an investor-lessee style firm (NG-10). The separation of property ownership and the right to use property make an owner- occupier firm take a mixed position, into a lessee-investor style firm (NG-9). By separating property ownership and the right to use the property, NG-9 achieved two objectives. Firstly the operating company that relied on the use property in order to carry out their business secured the right to use the property. Secondly the property fund, which is an “investment vehicle” for investors, gained the property ownership especially a right to profit from property and its future potential.

Interfirm-level factors work as market constraints in market institutions and market availability; therefore, firms take a mixed position against their initial tendency. G-6 demonstrated how they were needed to reposition their property strategy against their tendency in order to adapt to market institutions and market availability. It is also worth noting that this kind of adaptation does not seem to completely penetrate to the core of an organisational tendency, thus possibly affecting future behaviour. Firms react to market constraints to survive at the time, however, only to cope with the market constraints because they are variable. Market constraints can be strongly influential only when they are associated with property rights involving the right to utilise property exclusively and extensively for current and future potential. Market

169 constraints fundamentally affect property more physically, for instance development approvals, zoning, volume of particular types of building supply etc.

4.4.2. Results of hypotheses tested

4.4.2.1. Hypothesis 1

Hypothesis 1 : That a firm aims to reduce transaction costs from property transactions. This hypothesis is partially supported. This hypothesis tested the first step to include other behaviours which are not included as a part of rational behaviour in traditional neoclassical micro economics. Reducing transaction costs means that the firm is maximising its wealth through maximising its income or minimising its costs. Property is, as a factor of production, definably a part of corporations’ wealth maximisation motivation. There may be differences in degree of relevance that identify the participating corporation from having a ‘supporting’ role to ‘fundamental’ role. However, it is equally importantly noticed that wealth maximisation does not relate to an instant boost of profit through leasing, owning, acquiring, or disposing of property, with the exception of the investor- style firm. Investor-style firms seek direct profit (rental income and capital gains) from owning property, therefore achieving profit maximisation. However, owner-occupier-style firms seek a significant level of non-monetary values of property which are associated with property ownership. Being an owner-occupier-style firm does not guarantee reduced costs. Initial costs of being an owner-occupier style firm are higher than those of being a lessee. There is no direct link to profit maximisation found for owner-occupier-style firms, but leasing, owning, acquiring and disposing of property are often related to core business activity, therefore affecting firms’ wealth indirectly, or so companies participating in the research believed. However, there are no evident measurements identified to directly link property leasing, owning, acquiring and disposing of property with firms’ wealth creation. Individual firms seem to have a set of attributes that determine the values of individual 170 properties in their property portfolio, though. It is possible for this style firm to sometimes behave irrationally, which includes acquiring property above the market price and not disposing of financially underperforming property because of a set of attributes that determines values of property with internally agreed reasons. There seems no universal set of attributes that determine the values of property. These seemingly irrational behaviours internally are rationalised with a set of attributes and normally and often repeated over and over. Lessee-style firms seek fundamental utility of property of using space. There is no hidden value in leasing property. Lessee-style firms need space to carry out their business. This style firm requires just enough space to accommodate its need within budget. Property as costs bases from neoclassical economics approaches best suit this style firm.

Investor-lessee style, owner-occupier-lessee style and owner-occupier-investor style are overlaps of initial positions; therefore, possibly this overlap seems to have no relation with the optimisation of a firm’s wealth. Companies which position themselves in overlaps of initial positions are most likely to have a separate optimum property position in order to achieve companies’ expectations (also these are not necessarily relevant to reducing transaction costs, therefore achieving wealth maximisation). It is also possible these positions in overlap areas are temporary positions or geographically isolated incidents. These overlaps of initial positions only appear when forces from the market have a strong influence. Cultural determinants mainly from the company founder or family members of the company founder from the intrafirm level and market institutions and behaviours of competitors in the market from interfirm level are the forces that could alter initial positioning, therefore forcing individual firms to position in one of the overlaps.

4.4.2.2. Hypothesis 2

That the greater the attributed values firms associated with property ownership, the more likely they are to be owner-occupiers.

This hypothesis is supported. 171

The attributed values can be also described as a set of expectations when a firm pursues the goal(s), here property trading. Differences in attributed values of property are one of the factors that cause a firm to take a certain property position.

The attributed values of property consist of two major sources of values, which are monetary values and non-monetary values. From an examination of property-decision behaviour of the companies that participated in the research, categorised as owner- occupier-style firms G-2, G-3 and G-4, it is observed that owner-occupier-style firms see property as a factor of production with different degree of ‘importance’ of the utility of property as space and show very little or almost no interest in monetary values of property such as rental incomes and capital gains. Regardless of property purchasing prices, owner-occupier-style firms often acquire property for their business activity, convinced that they are reducing costs by owning property. Owner-occupier- style firms often strongly take a ‘do not sell’ property position, confident that they will eventually find a use for the property.

Owner-occupier style firms seem to attribute certain non-monetary values instead when they pursue property trading. ‘Image’, which comes from property ownership, was identified to explain the attribute of the non-monetary values of property. These attributed values of property regarding ‘image’ are not directly associated with profit maximisation. However, it seems that having property with appropriate qualities, which could increase companies’ image, could assist companies in carrying out their business positively. ‘Image’ includes prestige, branding, credibility and stability. These ideas are relevant to what owner-occupier-style firms want to project with their property. The fact that an owner-occupier-style firm ‘owns’ and not ‘uses’ certain properties helps the firm to establish prestige, branding, credibility and stability, therefore improving business opportunities, which could lead to increased profits. It also seems that developing and owning certain property by themselves, instead of choosing what is available in property markets, could be justified with the very same idea of wanting to project a certain ‘image’. It may as well be employees, clients, the public, competitors and the market are expecting to see such a building owned by

172 firms and this help firms make their own justification for the stability and credibility of firms.

4.4.2.3. Hypothesis 3

That property decisions – as a part of resource allocation processes – are influenced by the growth of the firm.

This hypothesis is supported.

This hypothesis tested how firms’ resource allocation systems affect its property decision as a part of resource allocation processes. This hypothesis is to reinforce the idea of property rights and asset specificity in property trading and firms. Asset specificity is associated with how flexible a large fixed investment with specialised use and user can be without losing the original productive value (Williamson, 1988). When a transaction which involves such investment with high asset specificity is made between two parties — a buyer and a seller — the two parties’ operations become dependent on each other’s operation. In this case, a major contractual arrangement is essential in order to protect each party from possible delay by the other party (Williamson, 1981; Alchian and Woodward, 1988; Vázquez, 2004).

Highly integrated companies, or at least a company with a tendency to become one, are often involved with a large fixed investment, property investment, with special use and user. The experience of one of the participating companies in property dealing says it well. G-2’s quest to secure and supply the raw material of ‘A’, by internalising the production of ‘A’, led G-2 to moving to a foreign country and acquire the land and the ownership of a local company, which initially owned the land and operated the production on the land. G-2’s initial consideration of being a lessee to reduce investment costs was eventually quashed, ending by acquiring ownership over not only the land but also the local company which owned and operated the land.

In order for a firm to grow beyond what is expected with its current capability requirements pushes the current boundary of the firm. Involving other parties in high- asset specificity investment calls for a contractual arrangement to protect all parties 173 involved in the investment. However, a contractual arrangement cannot protect all parties involved, unlike when one party take full ownership over the investment and possibly also the other party. By assuming ownership, a firm can make sure all residuals are reserved within, for now and in the future.

Owning a large portfolio of property and allocating the use of property internally rather than relying on the market seems to be part of reducing costs of frequent property trading, as G-2, G-3 and G-4 practice. These three participating companies are capable of internalising property resources allocation because G-2, G-3 and G-4 are highly integrated companies which manufacture many products. In order to produce a number of products and cater to the constant sizable demand on property from a substantial number of affiliated companies, owner-occupier-style firms often centralise the property decision-making process, forming a self-administered and internalised property market within a corporate structure. In fact, owner-occupiers sometimes acquire property ownership with the anticipation to utilise it in the future. Such a property transaction is often explained with internalising property to reserve future possibility within the firm now, which can only be realised by assuming property ownership.

4.4.2.4. Hypothesis 4

That a firm’s ownership structure affects the firm’s property decisions in their resource allocation processes.

This hypothesis is supported.

This hypothesis tested if a firm’s resource allocation process is a mechanical or an organic mechanism which involves people with different perceptions of behaviour. Five different types of companies were investigated. Publicly owned companies with no significant shareholding individual(s), publicly owned companies with strongly influencing shareholding individual(s), privately owned companies, foreign invested companies and one alternative structure were examined. These participating

174 companies include competitors in their own industry which allow them to employ the best possible strategy for their own company.

For publicly owned companies with no significant shareholding individual(s), G-1, takes the investor-style position. As a company in the manufacturing industry, G-1 considers property providing a supporting role. However, G-1 identified the role of property as an investment involving actually relatively frequent acquisition and disposal of income- producing property investments. The top management’s decision to investment in property was a part of increased profit; consequently, the company’s share price and eventually the top managers themselves were rewarded. Investment in property in the company is assessed only in projects to prove its effectiveness. The impact of investing in property on the company’s business was not assessed by efficiency of capital resources allocation, leaving doubts about the efficiency of capital allocation if the capital used for property investment had been allocated otherwise.

In privately owned companies, NG-10, and publicly owned companies with strongly influencing shareholding individual(s) G-2, G-3, G-4, G-5 and NG-8, satisfy the owner/founder and family members of the owner/founder with significant shareholdings that are key to property decisions. The authority, which comes from the number of shares held in the corporate structure, is given to the owner/founder and family members of the owner/founder, allowing them to influence the company culturally and financially. The cultural configuration, which is already heavily influenced by the authority figure in the firm, will go on forming a unifying attitude of employees in property dealing as well.

Foreign invested companies G-6 and NG-7 showed cautious behaviour compared to national companies. Both companies’ initial preference to not own property is related to valuing property only as space where their business activities and operations are carried out. It is important to utilise space but not important enough to reserve all residuals by owning property. Property market availability constrains the behaviour of G-6, forcing it to own a large portfolio of property, but it is considered internally as only a geographically enforced.

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NG-9 employed an alternative structure which intentionally separated the right to use and the right to own property. Two companies were involved in this case, the operating company and the property fund. The property fund is an investor and considers the property used and operated by the operating company as an investment. The operating company, however, is on a contractual arrangement in which, despite high asset specificity over the property the operating company occupies, it is necessary to transfer property rights to the property fund to raise capital.

The size of the company is a key to understanding NG-11’s property behaviour. It is too small to organise the necessary funds to acquire operational property, if it was even necessary to own it in the first place.

4.5. Summary

A new theoretical approach to evaluating property decisions as a part of resource allocation processes in firms is discussed with the proposed property decision-making behavioural patterns for a firm. Evaluating property decisions along with prices and costs is made possible because this research concluded that property decisions are made to maximise the ‘utility’ rather than profit. Maximising utility may lead to increased profit (not profit maximisation), or so it is believed, but no measurable direct link was found. Individual firms seem to have (or at least act on without formalising) a set of attributed values that they expect from each property dealing. A set of attributed values is the utility that the firms seek. It is also what they are expecting from the goal which is property dealing: acquiring or disposing or leasing.

There was not a universal set of attributed values found towards property trading. Property trading in each firm requires newly arranged attributed values of property but not entirely. The reason is that the outline of determinants is identified with theories, but the degree of importance of each determinant has not been quantified for individual property trading in this research.

The meanings of property ownership also were dissected in order to explain what motivates firms to own property. By separating property ownership and the right to 176 use property as a space, a separate set of attributed values of property ownership exist and they differ from the right to use property as a space. These values are property as means of control and property as a symbol. These values are identified but have not been quantified in this research.

The culture in firms, which seems to be strongly ruled by the authority figure(s) in the corporate structure, also affect the property decisions of firms, consequently defining the property positioning of firms in property markets. In this research, it is observed that culture seems to influence the previously defined values of property ownership and attributed values of property. Culture is also often influenced by the authority figures in the corporate structure and what motivates the authority figures in the corporate structure.

These results were drawn from thematically analysing qualitative data using interviews and a questionnaire as a part of a study to find patters of the property behaviour styles of firms and find what motivates firms to take one of the styles of property decision- making behaviour. The research concluded that there are determinants which affect firms when they make property decisions. That the determinants are not quantified leaves open the chance for future study and provides more deterministic power to the proposed model of how property decisions are made and what motivates firms to make property decisions as a part of their resource allocation processes.

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Chapter 5 Discussion

5.1. Introduction

In the previous chapter, intrafirm-level data and interfirm-level data were analysed, and the findings from both levels presented. In this chapter, the two levels of results as well as the theoretical framework from Chapter 2 the literature review, are synthesised, in order to reinforce and complement the results from the two levels of analysis. The synthesis will be presented as an illustration of a theoretical property decision mechanism. It is expected that the synthesis of the literature review and the results will provide arguments for the research questions and eventually improve the explanatory power of the existing theories of firms and property.

5.2. Property positioning of corporations

All firms are expected to behave equally in neoclassical microeconomic theory, or they will be forced out of the market by incurring higher costs than their rivals (McTaggart, 2005; Frank, 2006; Mankiw, 2009). The profit maximisation assumption coupled with perfect knowledge and no uncertainty about prices and costs in a perfectly competitive market is behind the reason all firms are expected to behave equally (Dequech, 2003). However, reality is far from neoclassical economic theory’s assumptions, as is the view of neoclassical economic theory of firms and markets. Having a clearly established set of assumptions helps neoclassical microeconomics to be mathematically formulated. However, it also puts restrictions on firms’ behaviour as equally mathematical and therefore is unrealistic.

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The results from the research do not support equal property behaviour of firms. Firms tend to have a mixture of styles when they make property decisions as a part of the resource allocation processes. Some are more towards one of styles, yet others take a position in one of the overlaps of styles. The differences in property-dealing behaviour can be explained by introducing the view of institutional economics on the nature of the firm. Institutional economics approaches to the nature of the firm provide a window of opportunity to establish better understanding of the behaviour of firms. The principal agent theory of transaction costs and property rights approaches suggest alternative views on firms’ property decision-making behaviours. Institutional economics view on the nature of the firm can bring a new perspective in terms of differences in evaluating utility of property. Differences in evaluating property, specifically differences in attributed values of property, is brought about by differences in culture that is influenced by the authority figures in the corporate structure.

In traditional economic theory, property is dealt with merely as one resource and a factor of production in order to produce a product or products. From the microeconomics points of view, which provides a foundation or understanding firms’ behaviour, firms utilise property as a resource, and produce products and profits from selling the products. The higher the volume of products they produce, the more resources they require. Because most of the resources they require in order to produce the products, which include property, are scarce and have costs, it is crucial for them to be rational when they allocate their resources, in order to maximise their profit. Resources’ being scarce brings out the importance of resource allocation. Firms constantly have to make choices regarding their resource allocation; therefore, they make the most profit utilising resources the most efficiently.

If the scarcity of resources puts firms in the situation of being forced to make choices, how an individual firm makes choices is relevant to firms’ behaviour. Economic theories cannot be implied for every human’s behaviour that in fact is consistent with rational choice. There must also to be an overriding motivation to generate a certain form of behaviour, maximising behaviour, as discussed in the previous section on neoclassical microeconomics. Rationality in neoclassical economics strictly means that

179 market participants want more rather than less in order to maximise their personal satisfaction, more of everything they enjoy. However, the more they consume of a good, the less their added satisfaction for each new increment of consumption, the diminishing marginal utility contributing less and less to total utility (North, 1990; Frank, 2006; Mankiw, 2009). With this simplified concept of human behaviour, neoclassical economics could thrive to be mathematically deterministic.

Having assumed economic actors are rational-which does not mean literally being rational, all the firms in any given market in a perfectly competitive market are supposed to behave in the same way towards any given economic event, and behave in order to maximise profit. Any difference in behaviour will instantly result in either falling out of the competition (if the difference had a negative impact) or quickly being caught up by others, thus no being longer different if the difference had a positive impact.

Property is one of three major factors of production, which are capital, labour and property. Firms need to utilise property in various degrees. From occupying a property to planting crops on a vast farmland, utilising property is a part of economic activities. If a firm needs to utilise property for its own use, it must obtain the right to use the property. A right to use is constituted by obtaining a lease contract or ownership of the property. Here, the firm faces the first dilemma: does it lease the property or does it own the property? As a factor of production, the firm must decide how it is going to budget costs of obtaining either option of utilising a right to use property in order to achieve the highest utility (satisfaction). Property is considered an input and measured as costs in the process of constructing microeconomics. This sounds almost too simple to predict how firms would act in the property market to obtain their factor of production. This kind of lease or own dilemma can be easily analysed with one of financial evaluation techniques. They will budget the capital and, given how much utility they will receive, they will decide how much money they will spend on the utility of property and find suitable property and obtain the right to use it. It is matter of getting a right to use a suitable property and paying for the right within budget, so

180 making decisions between leasing a property and owning a property become rather apparent. Firms choose whichever option costs less and returns greater utility.

However, the indifference in firms’ behaviour illustrates limited views on firms’ behaviour. Given assumptions in neoclassical economics that economic actors are rational, the firms’ behaviour discussed above is expected to be repeated and consistent. As rational beings in neoclassical economics - again does not mean literally rational-, firms will assume others in the market would do the same in order to survive. Measuring an input as costs and then an output as utility (meaning satisfaction in economics), which is only an abstract concept or non-monetary values not being measured, is another obstacle with traditional microeconomic theories.

The behaviour of global scale multi-products firms, as we have observed them growing in reality, does not seem to fit with what a firm in traditional economics applies, because of the complexity of the governance structure and decision-making structure global scale multi-products firms carry.

Inconsistency between firms’ behaviour in the property market and their supposed behaviour according to traditional microeconomic theories was first noticed when some firms had tendency to own property while they also claim that they are not in the real estate business (Rutherford and Stone, 1989; Linneman, 1998a). It was also investigated that for non-property companies, having owned property has a statistically negative impact on firms’ returns (Deng, 1999; Dirk and Piet, 2005).

The above research opens a window of opportunity to consider if there are other reasons that non-property companies want to own property If firms have the experience that owning property does not provide wealth and furthermore owning property has a statistically negative impact on firms’ returns as has been investigated, as rational beings, firms in traditional microeconomic theories must have made a theoretically rational decision not to own property, at least more property. Why some companies still prefer property ownership does not seem to be clearly explained with neoclassical economics.

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Differences in property dealing in different companies have been investigated in two levels of units of analysis, intrafirm and interfirm levels. Questionnaires with asset and property manager in property markets were conducted in order to investigate interfirm level property dealing behaviour in different companies. As asset and property managers in property markets observed, owner-occupier clients compared to general clients showed differences in property dealing behaviour. Most apparent was how owner-occupier clients prioritise their attributed values of property (Figure 4-4). Owner-occupier clients were seen to prioritise prestige value and location value over investment value, yet other clients showed investment value was more important than prestige value and location value.

To reinforce the differences observed by asset and property managers in property markets, the results from interviews with 11 companies was conducted to identify patters of property decision-making behaviours of the firm and to illustrate a mechanism of property decision-making behaviours as a part of resource allocation processes. Firms’ partiality towards a particular property dealing is distinguished and initially identified as one of owner-occupier style firms, investing style firms and leasing style firms. This difference in firms’ partiality originates from each firm weighting a set of attributed values and property rights.

Figure 5-1, initial property position algorithm, shows how a firm initially positions its preference for property. This initial preferable position is solely a result of the internal evaluation of a firm. Individual firms take their own preferable positions to obtain what they want when they enter the property market and look for property which could achieve their goal as well as satisfy what they are anticipating.

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Figure 5-1 Initial property position algorithm

Property need Investor style Owner Occupier style Investment For Investment? Lessee style or For production? Production

Investment Factor of production

Property rights No Important?

Yes

No Specific attributed values of property more important?

Yes

Property Ownership Property Leasing

Owner- Investor style Lessee style occupier style

5.3. What motivates property decisions of firms?

The corporate decision-making process has three components. The goal(s) being pursed is the first of the four components. When the necessity to trade property arises in a firm, depending on what is expected, the goal is set. If a firm wants more space for its business operation, the goal will be either to buy appropriate space or lease it. A firm would also want to invest in property and therefore acquire a building or land as an investor. Space that is no longer wanted could be disposed of. Even if the goal appears to be clear as acquisition, disposal or lease, it is possible that what a firm 183 would expect from the goal(s) can vary. Differences in expectations are the second part of the decision-making process. Primarily it is the goal(s) often observed from the market. However, the goal(s) is only what appears on the surface. Internally, it is also a matter of why they want to achieve the goal when they seek it. The third component a firm has to identify in order to make a decision is constraints. Constraints come from the market. Market institutions such as regulations, customary rules and market systems, constrain how firms can achieve their goal. How market counterparts behave also seems to constrain firms’ decision-making, especially in some property trading where either a firm gets a particular property and therefore all the exclusive rights or it loses everything. There are also internal constraints. In a corporate structure where authority depends on the number of shares held, internal constraints come mostly from authority figures in a corporate structure such as the board of directors for a publicly owned company, and the owner, founder and members of the owner/founder’s family with substantial stock holdings. The last component of the decision-making process is strategy, which is a course of action that is going to be taken by a firm in order to achieve the goal(s). Strategy is an important part of the decision-making process because in reality, making decisions involves a lot more than what a firm wants to achieve internally. This is when a firm associates itself with markets, market institutions and others who may be involved in the property-trading process, such as market agents, counterparts and competitors, in addition to what they want and why they want it. Introducing others beside what they want and why they want it brings out the concept of uncertainty in decision-making and differences in the concept of utility and rationality in individual firms.

The basis of the utility that having property or purchasing property or disposing of property could bring a firm that is merely using space to produce goods or services; and therefore, the firm profits from property, but it is only that the firm expects from the property. This utility, which comes from using space, is related to costs of production when a firm allocates inputs internally. In this case, from the neoclassical economics view, a firm achieves profit maximisation when marginal revenue is equal to the marginal cost of employing one more unit of property to produce one more unit of goods and services. Because the basis of the utility of property is related to costs of 184 production, a firm would make a long-term costs allocating decision based on its rationality by considering marginal cost and marginal revenue when it trades property.

It is also possible that incomes produced directly from property are a part of a firm’s profit. Therefore, it is direct profit that the firm expects from property. In this case, property is not a part of resources that require the internal allocation in order for the firm to produce goods and services. The utility of property here comes from the level of rental income during the ownership and capital income at the end of the ownership. The capital will be allocated to acquire property ownership in order to generate the income from property; therefore, the firm could achieve profit maximisation.

The utility of property, which originates from using property as space, can be achieved without acquiring formal property ownership. It can be more the efficient allocation of resources as a factor of production. Owning, purchasing, and disposing of property as space is a matter of achieving a reduction in costs of production, thus achieving profit maximisation. The other utility of property can only be achieved by fully obtaining property ownership. It is the property ownership which promises the full range of residual rights to a firm exclusively and extensively.

The cases of investor style corporations which want property for their income are isolated, and some questions remain about when and why some corporations become property owner-occupiers whereas others prefer to be lessees. The explanation of neoclassical economics economically efficient resources allocation and rationality backs some property decisions that can be evaluated with common financial evaluation methods. The view of neoclassical economics on minimising costs of production in order for corporations to maximise profit answers only a part of property decision-making behaviours of firms. What is left out here is what if firms are motivated to maximise a kind of utility which is both an abstract and unquantifiable concept of satisfaction. What motivates corporations to be property owner-occupiers or lessees can be broadly elaborated with the introduction of the view of institutional economics on corporate behaviour.

The ideas of institutional economics bring in the concept of the market institution in corporate decisions. In the past, a market was only a conceptual place where supply 185 and demand of resources and goods and services were met and the price and the quantity was decided. Institutional economics introduced transaction costs, which are inevitable when transaction occurs in a market; therefore, it defined the boundary between a firm and a market. Institutional economics also conveyed the idea of humans with limited and incomplete ability in a firm’s resources allocation decisions. Along with the rationality assumption which neoclassical economics was firmly founded on (consequently giving up analytical convenience as theories), institutional economics introduced a sense of realism in studying the nature of the firm. As discussed previously, various branches of institutional economics constitute what motivates firms to be owner-occupiers or lessees (Table 3-2). The concepts are derived from each of the institutional economic theories are empirically tested. Property rights and differences in attributions of property in firms are identified.

5.4. What is property ownership in the firm?

Property rights in property transaction are not completely explored with neoclassical economics, and it is often assumed that the consequence of having a lease contract and having full ownership is the same, but this involves different costs. The anatomy of property rights is required in order to understand the meaning of property ownership in the firm. The reason is that there are not only different costs involved but also different responsibilities and rights involved between leasing and owning.

Two components of property rights are assumed in property ownership. The first component of property rights relates to right to use. The right to use associates its attributed values with using property as space. Leasing contracts are based on the right to use. A lessee will gain privileges stated on the contract, and the lessee’s right to use abides by the contract drawn by both the lessee and the lessor. The second component of property rights relates to property ownership. It includes utilising property exclusively and extensively for now and in the future and to profiting from property, accumulating the profit from property and investing further.

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By observing the separation between the right to use and property ownership in the case of NG-9, it was noticed that there is a clear distinction between two components of property rights with different ranges of responsibility and rights attached. It is possible to separate those responsibilities and rights into components if necessary. If the right to use and property ownership are separated and given to two different entities, the two property rights holders of the same property will most definitely have different expectations about the property and seek different sets of attributed values of the property for the property.

With the right to use, a lessee obtains privileges and responsibilities which include enjoying the utility of the property as space within the limit of the contract between the lessee and lessor. In return, the lessee has an obligation to pay the agreed amount of rent to the lessor. Property ownership comes with the right to use plus additional rights which include utilising property exclusively and extensively for now and in the future, profiting from property, and accumulating the profit from property and investing further. Although corporations universally expect the utility of property as space when they become lessees, a more complex and individually distinctive set of attributes of the value of property is expected for the owner-occupier style firms with both the right to use and the property ownership.

5.5. What attributes determine the utility of owning property?

Attributes that determine the utility of property fundamentally consist of firstly monetary vales and secondly non-monetary values. Monetary values of owning property are easily identifiable and quantifiable, as property generates various sources of income. Profiting from property and accumulating and investing the generated profit are qualities of property ownership. These qualities are often used as measurements in quantifying the values of property.

Non-monetary attributed values of property are not easy to numerically quantify to compare with monetary attributed values of property. It is also not easy to propose a 187 universal priority of non-monetary attributed values of property for a firm across companies in general. The reason is that values with many attributes, rather than a single significant attributed value, are integrated to determine property decisions. There are several values identified from the data analysis. These non-monetary values are commonly associated with protecting property rights, the growth of the firm and the image of the firm.

Property is identified as an important part of production and business operations. Property ownership attributes are protection of property rights and taking control. Without much expectation of income and capital gains, firms often acquire ownership or partial ownership of property occupied by their own subsidiaries or affiliated companies. Property ownership provides a sense of security over production and business stability. Having owned or partially owned property used by subsidiaries or affiliated companies serve companies, not income, but provide protection against possible obstruction caused by their associates.

Larger firms seem to prefer internalising possible residual property rights by owning property. Highly integrated companies, both vertically integrated and horizontally integrated companies, showed diversified tastes in their property holdings. For highly integrated companies, any internalised residue, no matter how small or insignificant it seems, can be found useful. It may be useless for one but it may find a function in the other company under a group company. Property ownership is preferred for integrated companies which are after internalising residual property rights. The reason is that only with acquiring property ownership are all property rights reserved within. The term ‘investment’ becomes a matter of confusion. When participating companies were interviewed, the term ‘investment’ was broadly and universally used. However, it was noticed that using the term does not necessarily constitute income and returns.

As previously discussed, investor-style firms have a clear-cut measurement for their property investment. This measurement includes income, costs and returns. These are bases of judgement when it comes down to ‘investment’. This is identified as ‘investment in property’ (investment type 1). The investor-style firms are in for a profit boost when they make property decisions. Their property decisions can be easily

188 evaluated with levels of returns that an investment is generating. Therefore, decisions on acquisition and disposal of property are made and explained in a straightforward way. There is a distinctive difference in the term ‘investment’ for owner-occupier-style firms. Owner-occupier-style firms often use the term ‘investment‘, regardless of whether they expect profit from property trading or not. What owner-occupier-style firms really mean for ‘investment’ is ‘investment for the future’ (investment type 2). What owner-occupier-style firms expect from their ‘investment’ is associated with no or very few returns. For owner-occupier-style firms, property transactions seem to be a part of future development. Meaning investment as ‘investment for the future’ (investment type 2) is more often found in owner-occupier-style firms which are highly integrated companies. Property ownership renders a favourable commission for integrated firms to achieve the growth of the firm. By obtaining property ownership, firms secure full property rights for now and in the future, thus securing future business activities even if any particular property acquisition is not financially feasible for now. Property will not be disposed either, just because it is not financially productive now in that particular situation. It will be circulated between associated companies and given other purposes of use until all else is exhausted internally.

Owning a property with grandeur often indicates social and financial status to the public. In fact, property can be used to project a wanted ‘image’. ‘Prestige’ is one of the images that corporations seek from owning property. Headquarters are often used as an artefact representing the prestigious status of a company. Headquarters as an office building does not serve a major role as a factor of production. It is not particularly important to own headquarters to protect property rights, therefore securing the stability of a firm’s production and business activities. The purpose of owner-occupied headquarters is normally not about producing incomes in general. It is observed that having an owner-occupied headquarters seems to include the idea of being an exclusive user of the building; therefore, an owner-occupier of the building can achieve a maximum level of security. Prestige is not just projected to the public but also aimed at employees. Owner-occupier-style firms which are normally highly integrated companies that consist of large numbers of affiliated companies and consequently a large number of employees. Headquarters seems to provide a chance 189 to unify a large number of employees in various corporate structures. At the same time, employees share a sense of pride which comes from the fact they belong to the one group company which can own such headquarters. The companies that participated in the research claimed that providing an environment where their affiliated companies can work closely physically brings out synergy. It is not only employees that like to feel proud of having prestigious buildings, but buildings also seem to have the ability to impress clients when they come in for business, therefore affecting the result of their business activity.

Consumers can also be affected by a particular image that corporations project. Instead of helping consumers to remember a large number of individual products, reminding consumers of a clear and unified ‘brand’ is more efficient and effective. In order to project the corporate image as one ‘brand’, various tools can be utilised. Interestingly, the companies that participated in the research identified how they employ the buildings they own, in order to send the desired image to the public. A building is exposed to the public and shows social and financial status. A headquarters can also deliver an iconic image of the company which owns it.

Sales-based businesses and foreign invested companies find that owning property provides ‘credibility’ and ‘stability’ to the public and the industry they are in. Owning property seems to project a sense that a firm has enough money to buy and own buildings. Having a large portfolio of property means a large amount of money is invested, but it also seems to be perceived that a company with a large portfolio is not likely to go out of business. The bigger the size of the property portfolio, the longer the firm has been in business, because properties are accumulated over a long time. The fact that the size of the property portfolio is growing is often perceived as meaning that the firm has gained financial stability and is growing.

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5.6. How do organisation, property markets and the nature of the firm help us to understand property decision-making behaviours in firms as a part of resource allocation processes?

So far, how corporations’ property decisions as a part of resource allocation processes reached at the intrafirm level has been examined, therefore identifying initial property positions: investor-style, owner-occupier-style and lessee-style initial property positioning. With these initial positions in mind, corporations enter property markets. The goal(s) and what a firm expects from achieving the goal(s) have been discussed. The last two components involve a firm actually entering property markets.

An initial property position can be significantly altered while a firm is carrying out property transactions. Constraints in achieving the goal(s) and strategy to achieve the goal(s) have to be considered before a firm enters the property market, but constraints and strategy are only guessed at. However, when a firm faces constraints in property markets firsthand, the constraints are fully revealed, therefore forcing a firm to change a course of action to achieve its goal(s).

According to neoclassical economics, a market is the place the quantity of the product is provided by sellers and the quantity of the product is taken off the market by buyers (Eaton and Eaton, 1995; Runeson, 2000; McTaggart, 2005). A firm serves as a set of feasible production plans in order to maximise profit (Hart, 1989; McTaggart, 2005). The fundamental idea of wanting to understand the existence of the firm in the market provides a chance to explore why firms and markets exist in the first place and what motivates firms to form beyond the analytically convenient conception of the firm as a production function in neoclassical microeconomics (Coase, 1974; Penrose, 1995; Williamson, 1998, 2000).

A new idea in approaching the nature of the firm is to consider the firm as a governance structure in which the internal structure has an economic purpose and 191 effect (Williamson, 1998, 2000). A firm is a basic unit of the market institution which employs and allocates factors of production to produce and sell goods and services (Penrose, 1995; McTaggart, 2005). The theory of the firm also explores external forces such as the dynamics between firms and markets (Coase, 1937; Ellig, 2001). The main idea in institutional economics is that there are costs involving utilising the market, which are called transaction costs, and the existence of transaction costs could alter the behaviour of the firm by either forcing it to carry out transactions within the firm or in the market (Coase, 1937, 1988c; Hart, 1989, 1995).

Figure 5-2 shows how the initial property position can be altered in the property market. The most important constraint put on firms is whether it is possible to get what they seek. For investor-style firms, it is an easily identifiable issue because their expectation and goal can be clearly explained with returns from property. Investor- style firms seek property which can generate their required rate of return before anything else. Their behaviour will be either they find property that satisfies their expectation and goal or they will not find a property that satisfies their required rate of return.

When a lessee-style firm or owner-occupier style firm with a set of expected attributed values is forced to make a compromise with what is currently available in the market, the firm will be forced to take a position in an overlap between being a lessee style and an owner-occupier. Distinctions between lessee-style firms and owner-occupier-style firms come from the level of assets specifically required, level of property rights pursued and how they attribute the value of the property. However, what is available and allowed in the property market can force them to abandon their initial position temporarily and to reposition their standings. A lessee-style firm could buy and own property. Owner-occupier-style firms could become lessees. The reason is that is the only option in the property markets currently and the only way to achieve parts of attributed values required, consequently adapting to current market systems. However, market availability and system affects firms’ behaviour only temporarily, and firms will constantly seek chances to achieve a full set of attributes.

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Figure 5-2 Market property position algorithm

Owner- Investor style Lessee style occupier style

Investor style Yes Market No Owner- Influences occupier style Lessee style Owner- Owner- Investor style Lessee style occupier- occupier style lessee style

Organisational Influences

Owner- Lessee- occupier- investor style investor style

Being an investor-style firm means that a firm is after a rate of return from property as an investment (in this case clearly investment type 1). When an owner-occupier or a lessee-style firm is after a rate of return, what motivates them to take a position in overlaps between being the investor style and the owner-occupier style, and between being the investor style and the lessee style.

Culture is a set of values and attitudes in a course of organisational operations and serves as a sense-making device that can guide and shape behaviour (Smircich, 1983). Culture provides a configuration that individuals and decisions made by individuals in a corporate structure can be based on. In corporate a structure, the ideas, attitude and faith of top management (which includes executives, a board of directors, owner/founder and members of the owner/founder’s family) dominate culture in the organisational structure (Franke, 2007). What motivates top management, therefore, could alter a corporation so that it strives for high immediate profits or for prestige (Katona, 1953).

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After all considerations with the necessary attributed values for a firm’s business, what motivates the top management to carry out a particular property transactions seems to override the initial property positioning, therefore forcing a firm to take a position in overlaps between being an investor style and owner-occupier style, and between being investor style and lessee style. These behaviours are mostly to satisfy the top management’s expectation rather than maximise the firm’s utility.

5.7. Summary

The results from the two parts of data analyses and theoretical framework extended from Chapter 2 were synthesised; therefore, how the firm and property are to be understood is discussed. A property decision model for a firm is proposed which enables us to understand what motivates firms’ property decisions and how the firms initially and eventually position themselves in property markets.

The initial property positions are based on intrafirm-level considerations on property values involving what firms expect. Property rights with a consideration of asset specificity and a set of attributed values of property are keys to what motivates firms to take an initial property position. The market property positions influence the positionings at both intra- and interfirm levels. What is available and allowed in property markets forces firms to reposition themselves in one of the overlapping positions but only temporarily. However, what motivates authority figures or the top management in a firm seems to override any prior property positioning.

Chapter 6 concludes and summarises what has been carried out in this research so far.

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Chapter 6 Summary, Conclusion and Recommendations for Future Research

6.1. Introduction

The findings from intra- and inter-firm level analysis are discussed with the literature in Chapter 5. Theoretical ideas from neoclassical economics, the nature of the firm, and institutional economics were synthesised and highlighted to formulate a theoretical framework (which includes hypotheses to be tested) of how and why property decisions are made in the firm. The synthesis of the theoretical framework and the analysis results are used to illustrate a mechanism of property decision-makings in firms as a part of resource allocation processes

In this chapter, the research is concluded, starting by reviewing the research question, the aim of the research and the objectives. The review of the research is accompanied with a short summary of each relevant chapter. The implication of the research is followed by a review of the research. A discussion of the limitations and future study is carried out before the conclusion of the research.

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6.2. Review of the research

6.2.1. Research question

How can firms’ resource allocation decisions in terms of property transactions be theoretically explained?

This research started with an observation that some firms in property markets behave differently. The view of neoclassical economics on the nature of the firm only provides a limited level of explanation for why some firms behave differently. With the rationality assumption in neoclassical economics, all firms are expected to behave equally because they are assumed to have perfect knowledge of prices and costs and are motivated to maximise profit (McTaggart, 2005; Frank, 2006; Mankiw, 2009). Any companies incurring higher costs than their competitors may be a result of differences in behaviours as a resource allocation mechanism, and those competitors will force firms that incur higher costs out of the competition eventually (Dequech, 2003). This research has demonstrated that this concept of the impact of competition is not strictly true, and this has provided a chance to investigate how property decisions as a part of resource allocation processes in firms are really made in a firm and what motivates the firm to behave in a certain way in property markets. The research question was answered as the aim and objectives of the research were achieved, as follows.

6.2.2. Research aim

To derive empirically a mechanism that illustrates a theoretical model for how corporate resource allocation decisions are made regarding property transactions.

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An illustration of a property decision-making mechanism in firms as a part of resource allocation processes was presented in Chapter 5. This illustration of a mechanism is to graphically display how property decisions as a part of the resource allocation process in firms are made and what motivates a firm to take certain positions in property markets. In order to achieve the research aim, the following objectives were established. By achieving the proposed individual objectives, the research aim was achieved and a theoretical model of the mechanism was proposed in Chapter 5.

Firms’ property dealing behaviours were categorised into three initial positions: investor-style firm, owner-occupier-style firm and lessee style firm. These initial positions were determined by the internal evaluation of property in a firm, which includes a set of attributed values of property such as the attributed values of property ownership and non-monetary attributed values. Some firms appeared to be forced to take a temporary position, a mixture of original style positions, against their initially preferred property positions in property markets. This is caused by inefficiencies in property markets and also by organisational influences such as culture in organisations and what motivates authority figures in corporate governance structures; therefore, they were not able to find what they internally desired.

6.2.3. Research objectives

6.2.3.1. Objective 1

To examine the nature of the firm and how resource allocation decisions regarding property transactions are made in the firm through multi-level theories in economics and on study of organisational behaviour

Multilevel theories in economics and organisational behaviour study the nature of the firm, and how property decisions are carried out. Aside from the firm as a resource- allocating mechanism, the literature review revealed a theoretical framework of how firms’ property decisions are made and what constitutes the differences in property decisions, especially property ownership, between individual firms. 197

Firms’ traditional costs and prices approach toward property are broadened and modern economic approaches to organisations and market institutions were reviewed. Why a firm exists and how transaction costs shape the behaviour of the firm and the market was discussed, in order to identify the fundamental nature of the firm. Organisational behaviour in the decision-making process was also reviewed. Reviewing organisational behaviour shows various elements of decision-making behaviour, thus identifying the configurations of property decisions as a part of resource allocation processes. It is attributed values of property that cater to the explanation of the phenomenon of property decision makings as a part of resource allocation processes in firms. Evaluating the attributed values of property in the firm from integrated multi- theoretical perspectives presents a framework for understanding modern firms and property relationships.

6.2.3.2. Objective 2

To construct research philosophy and to establish an appropriate research methodology and methods which will facilitate answering the research question

Initiating a behavioural study with institutional economic theories required two new dimensions in the property research field: firstly an approach to conducting mixed theories and multilevel of analyses, and secondly methods to analyse behavioural data (qualitative data). Institutional economic theories are a group of theories which deal with a broad area of events and situations relating to the nature of the firm. Individual institutional economics theory tends to include one core of each event and situation. However, in many cases, these economic events and situations occur when there is not just one but a number of factors, which can only be explained by individual theories separately, are affecting the whole situation at the same time, in situations where Ceteris Paribus assumptions are not appropriate.

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Bringing a new methodological idea and methods to this area of study is part of the purpose of the study. The broad concepts of a firm’s decision-making behaviours have been well studied in the areas of financial studies, organisational studies and economics. This objective enables the research to set up a new configuration of mechanisms of already well-established conceptions of firms’ decision making behaviours so the new configuration of mechanism could explain very specific phenomenon, property decision-making behaviours in firms as a part of resource allocation processes.

In this chapter, first the research philosophy was presented. This is followed by a description of the research design and methods used to collect data. Two parts of data collection were used in order to cover two different levels of analysis. For the part one, a self-administered questionnaire was used, and for the part two face-to-face in-depth interviews were conducted. In order to maximise the efficiency and effectiveness of data collection, snowball sampling was employed to find participants for both the questionnaires and the interviews. Eventually, 18 asset and property managers in five asset and property management companies completed the questionnaire, and 11 firms participated in the interview. Structured open-ended questions were asked for both parts of the survey, and structured qualitative data have been collected. These data were collected in the form of text for the questionnaires and voice recordings and transcripts of the voice recordings for the interviews. Thematic analysis was employed to process the collected data, in Chapter 4.

6.2.3.3. Objective 3

To empirically investigate property decision behaviours in order to identify and categorise other behaviours (which are often deemed to be irrational behaviours in neoclassical economics) in property dealings other than that is assumed to be rational and efficient in neoclassical economic theory and,

To test hypotheses which will show a mechanism between a new set of behavioural assumptions and firms’ property decision making behaviours.

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The collected data was managed and analysed with the assistance of NVivo version 8. The two types of survey were thematically coded and analysed. The thematic analysis process included identifying, analysing and reporting patterns within data. For the research, thematic analysis was used a theoretical and deductive way to provide more explicit analysis of the data. While thematic analysis is carried, NVivo 8 provided important support in developing ideas and making connections between ideas while coding the data, identifying and organising themes and finding patterns of identified themes. NVivo8 was also used to generate graphical models showing ideas and themes being built from the data and the relationships between them.

From the analysis, two parts of the results were presented. Firstly the companies that participated in the research were categorised into initial three styles and an additional three styles of positions which were overlaps between the initial styles. These initial styles have been termed investor style, owner-occupier style and lessee style.

What causes the firms to take different styles was also discussed in Chapter 4.4. The results revealed that differences in attributed values of property and attributed values of property ownership cause the firms to select different styles. Furthermore, organisational influences, which often are shaped by the authority figures in the corporate governance structure with significant holdings in shares, and market influences such as market availability and market institutions seem to affect firms to take positions in the overlapped style positions of the initial three styles.

The second tier of the results was testing hypotheses which were derived from the theoretical framework as constructed, in order to investigate if this new framework represented an increase in the explanatory power of the theories which deal with property and the nature of firms. Hypotheses testing were expected to explain further theoretical mechanisms in property decision-makings in firms as a part of resource allocation processes.

The results of the hypotheses are presented in Table 6-1.

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Table 6-1 Hypotheses test results

Hypotheses Test result That a firm aims to reduce transaction costs from property Partially transactions. supported

That the greater the attributed values firms associated with property Supported ownership, the more likely they are to be owner-occupiers.

That property decisions – as a part of resource allocation processes – Supported are influenced by the growth of the firm

That a firm’s ownership structure affects the firm’s behaviour. Supported

6.2.3.4. Objective 4

To synthesise the two sets of the findings and to present the synthesis as an illustration of a theoretical property decision mechanism as it forms a part of the resource allocation processes.

Property decision-making behaviours, which were not previously included as rational and efficient under the behavioural assumptions of neoclassical economics, were identified and categorised in Chapter 4. The relationships between the new set of behavioural assumptions were verified by the hypotheses testing, also in Chapter 4. Objective 4 was achieved by synthesising the two sets of the findings and the existing theoretical framework of decision makings in the resource allocation processes. The mechanisms of property decision-making processes as a part of resource allocation processes were also illustrated as a two parts algorithm to achieve the objective 4 in Chapter 5.

What causes the firms to position themselves as such was also discussed with the results from the data analysis. The results of the analysis revealed first of all that, indeed, some firms behave differently in property markets. The differences in property decision-making behaviours were discussed in relation with the synthesis of the theoretical framework and the result of the analysis.

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Some explanation of the difference in property decision-making behaviours was provided with asset specificity and a set of attributed values of property. How firms prioritise their property individually showed what really motivates firms to behave the way they do. The other part of the difference in property-dealing behaviours was explained firstly by market influences such as inefficiency in property markets and market institutions where firms sought alternatives position in order to satisfy what they expect. Organisational influences such as Culture in corporations and influences of the authority figures in the corporate governance structure also could prompt differences in the property decision-making behaviour s of the firm.

Illustrated mechanisms of property decision-making behaviours in firms as a part of resource allocation processes (Figure 5-1 and Figure 5-2) were presented to graphically display how the firm initially and eventually positions themselves in property markets. The initial property positions are based on intrafirm level considerations of the attributed values of property ownership and a set of attributed values of property. After internal evaluation of property decision-makings, firms take one of the initial three positions, the investor style, the owner-occupier style and the lessee style. These initial positions are pursued, but it is also possible that they might be forced to shift their positions to one of the overlaps between the initial three positions. These moves, identified as the market property positions, seemed influenced by market influences such as inefficiency of market and market institutions and by organisational influences such as culture in organisations and authority figures in corporate governance structure.

6.3. Conclusion

This research aimed to investigate how property decisions are made and what motivates firms to behave in certain ways in property markets. The results were presented by categorising corporations’ property decision behaviours into three initial styles, the investor style, the owner-occupier style and the lessee style, and three additional styles which were styles in overlaps between the initial three styles. As a part of categorising property decision-making behaviours in firms as a part of the 202 resource allocation processes, the proposed hypotheses were also tested to provide a set of configurations of property decision making mechanisms.

Hypothesis 1: That a firm aims to reduce transaction costs from property transactions was partially supported, as owner-occupier style firms did seek to reduce transaction costs from property trading but not always. Moreover, this reduction of costs, not just transaction costs but any costs does not always motivate owner-occupier-style firms to behave the way they do, which shows a clear distinction between an owner-occupier- style firm and the other two style firms.

Hypothesis 2: That the greater the attributed values firms associated with property ownership, the more likely they are to be owner-occupiers was supported. This hypothesis provides further explanation of the behaviour of owner occupier style firms.

Hypothesis 3: That property decisions – as a part of resource allocation processes – are influenced by the growth of the firm was supported.

Hypothesis 4: That a firm’s ownership structure affects the firm’s behaviour was supported.

Hypotheses 2, 3 and 4 provide an explanation for what motivates owner-occupier-style firms in order to complement the partially supported Hypothesis 1. Hypothesis 2, 3 and 4 form a new set of behavioural assumptions about why certain property behaviour cannot be explained with neoclassical economic theory on the nature of the firm.

Finally, on basis of the behaviour established by the testing of these hypotheses, a model was constructed that can predict the behaviour of firms in their property dealings. By synthesising a theoretical framework of the assumptions of firms’ behaviour and the results, which include categorising property decision styles and hypotheses from the analysis, two levels of property positioning algorithms were presented. The first level illustrates how property decisions are made internally and what motivates firms to take one of the initial property-decision styles as the internal position. Non-monetary values of property, which include values of property 203 ownership and attributed values of property, were identified to motivate firms to take one of the three proposed initial positions.

The second level is the market property positioning of firms. The results of the algorithm included three additional positions in overlaps between the initial property decision styles. Market influences such as inefficiency of market and market institutions and organisational influences such as culture in organisations and authority figures in corporate governance structure were identified as factors that influence firms to take one of the market property positions.

6.3.1. Recommendations for future study

x Increase the deterministic power of the illustrated theoretical mechanisms of property decision-making behaviours in firms as a part of resource allocation processes

The proposed illustration of theoretical mechanisms includes explanations, which were not possible when property-decision behaviour was approached with neoclassical microeconomic theory assumptions. However, the deterministic ability is yet to come, and the proposed illustration of theoretical mechanisms heavily relies on an explanatory power of the mechanisms on property decision behaviour. Quantification of the determinants of property-decision behaviour is needed to increase the proposed theoretical mechanism model’s deterministic power. It is revealed that individual firms indeed have a set of priorities of individual property, but when it comes down to evaluating property, most firms stick to the old way, which is the costs approach. Evaluating the attributed values of property to suit individual firms can be enabled to deliver the quantified priority of determinants for the theoretical mechanism model.

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x Application of the proposed model in a different cultural context

It was concluded that culture in firms influences their property decisions. Not only the culture in organisations but also customs in property markets can provide uncertainty to globalised multinational multi-product-producing companies. Although the data, including data from two multinational foreign invested companies, has been collected in Korea, the fact that the proposed theoretical mechanism model includes the idea of culture in decision-making processes of firms gives the proposed theoretical mechanism model a chance to work effectively in a different cultural context. However, because the proposed recognised culture is one of the factors that influences property decisions, it also opens up the chance to see if there is any variation found in a different cultural context, therefore improving the deterministic power of the proposed theoretical mechanism model.

x Application of the proposed model to other resources which are ‘durable’ and where ‘ownership’ and ‘right to use’ can be separated

The proposed property decision model is formulated based on existing theories of how firms make decisions on resources allocation and what motivates firms to make such decisions from institutional economics and study on organisational behaviour. By testing other resources with similar characteristics, the explanatory power of not only the proposed model but also theories employed to formulate the model could be strengthened. The fact that any durable resources in which ownership and right to use can be separated theoretically leaves a chance for firms to reduce costs. Therefore, the proposed ‘decision’ model can be tested for any durable resources of production which can be either ‘owned’ or ‘rented’ with a discussion of the attributes of the value of testable resources of production.

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x Utility maximisation and evaluating property productivity as a part of resource allocation processes

This research concluded that property decisions are made to maximise ‘utility’ rather than profit. Maximising utility may lead to increased profit (not profit maximisation), or so it is believed, but no measurable direct link was found. The link between property decisions and maximising utility can be deciphered further by investigating how all types of property decision styles are influenced in the long-run and the short-run. Brining in ideas on long-run and short-run investment could provide a base for evaluating property productivity, if there is any link between property decisions, maximising utility and profit.

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Appendix A: Questionnaire

Questionnaire Recruiting advertisement letter for investigating real asset manager’s experiences with firms in the property market FACULTY OF THE BUILT ENVIRONMENT Faculty of Built Environment Human Research Ethics Advisory

Approval Number 95029 (previous application number 85030)

Dear Sir and Madam,

This survey is designed to investigate real asset managers’ experiences with corporations. Experiences mainly involving followings,

- Transaction costs - Specialised assets - Corporations’ decision-making behaviour toward property, especially in cases of owner occupier firms

The survey will not ask any of questions which could identify individual’s identity. The responses are expected to reflect the whole corporate real estate market rather than that of a particular asset management companies’ Therefore, you are encouraged to freely answer the questions based on your expertise and experiences rather than your firms’ property strategies.

This questionnaire contains 25 questions including 8 open-ended questions. It is expected to take about 20 minutes to finish the questionnaire. Your participation is highly appreciated and the result will be used as a part of the PhD thesis as well as further academic conference papers and journal papers.

Should you have any inquiries about the survey, please do not hesitate to contact Hyemi Hwang ([email protected]; in Korea 010-3140-2866; in Australia 61-2-9385-5661).

Thank you very much for participation.

Yours respectfully,

Hyemi Hwang

PhD Candidate, FBE, UNSW 222

Questionnaire:

Real asset managers’ experiences with firms in the property market

1) What kinds of property do you normally deal with?

Office Retail Property

Industrial Property Other (Please specify  )

2) Are there differences in dealing with different types of properties?

Yes (reason)

No (reason)

3) With what level of the client’s organisation are you involved?

Board of director Level Executives Level

Middle Managers Other (Please Specify)

4) In which types of property, are you more likely to encounter owner-occupiers firms?

Office Retail Property

Industrial Property Other (Please specify  )

5) What are important reasons why firms own property?



6) What are important reasons why firms DO NOT own property?



223

7) Property seen as a factor of production or an Investment

Factor of Production Mostly Factor of Production

Investment Mostly Investment

8) Your clients who trade property are mostly

Corporations Individual Investors

Korean Institutional Investors International Institutional Investors

9) Owner- occupier clients who trade property are mostly

Corporations Individual Investors

Korean Institutional Investors International Institutional Investors

10) What are the monetary costs associated with property transactions?



11) What are the NON-monetary costs associated with property transactions?



12) What percentage of total costs is transaction costs?

%

13) What percentage of total building trading is accounted for owner-occupier building trading?

%

14) Does this percentage changes when the property market situation changes?

Yes (reason)

No (reason) 224

15) Do the costs of trading a building vary depending on the type of PROPERTY?

Yes (reason)

No (reason)

16) Do the costs of trading a building vary depending on the type of CLIENTS?

Yes (reason)

No (reason)

17) How do you find the potential clients?



18) Why do they use you?



19) For what kind of services do clients ask?



20) Do investors and owner occupiers behave differently?

Yes (how?)

No (how?)

21) What are the differences in decisions-making?



225

22) Place rank the importance of the characteristics of property when property is acquired(Please click grey area and select an appropriate rank from Items in drop-down list and place the selected rank on top of the list using the arrows).

1Location 1Prestige 1Economic Value

1Investment opportunity 1Collaterality

1Other (Please Specify: )

23) Place rank the importance of the characteristics of property when property is acquired by OWNER-OCCUPIER(Please click grey area and select an appropriate rank from Items in drop-down list and place the selected rank on top of the list using the arrows)?

1Location 1Prestige 1Economic Value

1Investment opportunity 1Collaterality

1Other (Please Specify: )

24) In your opinion, are owner occupiers likely to

Build a new building for their head quarter

Buy an existing building for their head quarter

25) In your opinion, are owner occupiers more likely to

Buy or Build a building for other purpose buildings than other firms

Lease an existing building for other purpose buildings than other firms

--This is the end of the questionnaire--

226

Appendix B: The Interview Schedule

Structured Interview Questions for Investigating firms’ decision-making behaviour in the property market

FACULTY OF THE BUILT ENVIRONMENT

Faculty of Built Environment Human Research Ethics Advisory

Approval Number 95030 (previous application number 85031)

Introduction Thank you for sharing your time for the interview. (5mins) Main Questions Sub Questions Demographic 1) Describe your job Questions 2) How long have you been doing it? (2mins;7mins) Ownership structure 3) Describe property decision-making process in your and decision-making organisation. hierarchy 4) Compare it with other decision-making process in your (5mins;12mins) organisation. 5) Who are involved in property decision-making process in your organisation? Founder/ Founder family Board of director Executives Middle manager Asset/property/facility manager 6) Who’s got the immediate power to make decisions? Founder/ Founder family Board of director Chief executives Middle manager Asset/property/facility manager Current firm’s 7) The composition of Fixed – Asset property portfolio Property % (5mins;17mins) Machinery % others % 8) the composition of property types ? Office % Retail property % Industrial property % Others % 9) The composition of property tenure ? Leased % 227

Owned % 10) What are important reasons why your firm owns property? 11) What are important reasons why your firm do not owns property? 12) Does this percentage changes when the property market situation changes? Firms strategies 13) Do you have a plan/strategy for property? towards property 14) Is it written? 15) Is this a part of financial strategy? 1. What portion of 16) Is it a part of production strategy? asset is property? 17) Is it a part of operation strategy? 18) How often is this plan revised? 2. How important 19) Do you have an inventory for property? the property is in 20) Does your organisation evaluate the performance of terms of achieving property often and how often? your 21) What would be the criteria for the property performance organisation’s evaluation(rank)? objectives? Performance evaluation Physical – building itself with 3. How important Financial – value and rent the property is in Operational - Any dead space? Efficiently used? terms of the Running cost growth of the Others organisation? 22) Do you have different strategies for different types of property? (10mins;27mins) 23) Do you apply strategies differently depending on types of property? 24) Could you give me an example how those are different? 25) When to decide to buy property? 26) When to decide to build property? 27) When to decide to lease property? Role of property in 28) In your opinion, the current priority is the mostsuitable for firms your organisation? 4. What is the main Yes, Why? role of property in No, Why? your organisation? Factor of production Investment

Advertisement prestige collateral others (please, specify) (3mins;30mins)

Role of a head if yes, quarter building in 29) Do you solely own and occupy? firms 30) Is the property collateralised? 228

5. Do you own your 31) How much equity do you have on the property(percentage own over the value of the property headquarter?/Are 32) Are divisions of the organisation paying full market rent(if you an owner- no, why and how)? occupier? 33) What are the advantages of owning one? (5mins;35mins) 34) What are the disadvantages of owning one? 35) How important to own the head quarter? 36) If your firm need a new head quarter building, do your firm buy an existing building? 37) If your firm need a new head quarter building, do your firm build a new building? 38) If your firm need a new head quarter building, do your firm use one of alternative method to find a new head quarter building? (5mins;35mins) if no, 39) Have you ever considered owning one? 40) Do you have a plan to own one? 41) Are you satisfied with the decision? 42) What are the advantages of not owning one? 43) What are the disadvantages of not owning one? 44) If your firm need a new head quarter building, do your firm buy an existing building? 45) If your firm need a new head quarter building, do your firm build a new building? 46) If your firm need a new head quarter building, do your firm use one of alternative method to find a new head quarter building? Alternatives if yes, 6. Have you 47) which of below? considered having Sales and lease back property any REITs other way? Others(Please specify) (3mins;38mins) if no, 48) what is the reason of not considering other options? Property disposing 49) Which types of property were disposed? 7. How often do you Office dispose Retail property property?/how Industrial property often do property Others trading occur ? 50) What was the reason for disposing of the property? (5mins;43mins) 51) What are the monetary costs associated with property disposing? 52) What are the non-monetary costs associated with property disposing? 53) What percentage of total costs are transaction costs? 54) Are you satisfied with the result? 55) What did you gain from disposing of the property? 56) What did you lost from disposing of the property? 57) Do you use asset management companies to dispose property? 58) Why do you use asset management companies to dispose 229

property? 59) For what kind of services do you ask? Property acquiring 60) Which types of property were acquired? 8. How often do you Office acquire property? Retail property Industrial property (5mins;48mins) Others 61) What was the reason for acquiring of the property? 62) What are the monetary costs associated with property acquiring? 63) What are the non-monetary costs associated with property acquiring? 64) What percentage of total costs are transaction costs? 65) Are you satisfied with the result? 66) What did you gain from acquiring of the property? 67) What did you lost from acquiring of the property? 68) Do you use asset management companies to acquire property? 69) Why do you use asset management companies to acquire property? 70) For what kind of services do you ask? Closing This is the end of the interview. Thank you for your co-operation. (5mins;53mins) If you want the report on the finding of this research, Please do not hesitate to contact the interviewer (Hyemi Hwang).

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