International Journal of Management, Business, and Economics (IJMBE)

,QWHUQDWLRQDO-RXUQDORI Sripatum University, Thailand ,661 6ULSDWXP 8QLYHUVLW\ LV RQH RI WKH ROGHVW DQG PRVW SUHVWLJLRXV SULYDWH XQLYHUVLWLHV LQ¬ %DQJNRN¬ 7KDLODQG IJMBE Dr. Sook Pookayaporn established the university in 1970 under the name of "Thai Suriya College" in order Management, Business, and Economics WR FUHDWH RSSRUWXQLWLHV IRU 7KDL \RXWKV WR GHYHORS WKHLU SRWHQWLDO ,Q WKH FROOHJH ZDV SURPRWHG WR XQLYHUVLW\VWDWXVE\WKH0LQLVWU\RI8QLYHUVLW\$IIDLUVDQGKDVVLQFHEHHQNQRZQDV6ULSDWXP8QLYHUVLW\ Volume 2, Number 1, January - April 2015 ISSN: 2408-1914 "Sripatum" means the "Source of Knowledge Blooming Like a Lotus" and was graciously conferred on the FROOHJH E\ +HU 5R\DO +LJKQHVV WKH ODWH 3ULQFHVV 0RWKHU 6ULQDJDULQGUD¬ 6RPGHW 3KUD 6ULQDJDULQGUD ,QWHUQDWLRQDO-RXUQDORI0DQDJHPHQW%XVLQHVVDQG(FRQRPLFV Baromarajajanan). She presided over the official opening ceremony of SPU and awarded vocational certificates to the first three graduating classes. Sripatum University is therefore one of the first five private O A Comparative Analysis of Foreign Direct Investment and Firm Level Performance XQLYHUVLWLHV RI 7KDLODQG 7KH XQLYHUVLW\·V main goal is to create well-rounded students who can develop in Developing Economies themselves to their chosen fields of study and to instill students with correct attitudes towards education so Emilia Yarason...... 7 that they are enthusiastic in their pursuit of knowledge and self-development. This will provide students with a O Evaluating Motivational Levels of Employees at Malayan Railways Limited/ firm foundation for the future after graduation. The university's philosophy is "Education develops human Keretapi Tanah Melayu Berhad (KTMB) resources who enrich the nation" which focuses on characteristics of Wisdom, Skills, Cheerfulness and Ganakrishnan Gopalakrishnan ...... 17 Morality. O Ambush Marketing in Sports Gerd Nufer...... 33 University of Greenwich, United Kingdom O The Economic Value of Money Market Funds in and around the Financial Crisis The University of Greenwich is a British university with campuses in south-east London and north Kent. of 2008 These include the Greenwich Campus, located in the grounds of the Old Royal Naval College in the Royal John F.O. Bilson and Lalita Hongratanawong ...... 45 %RURXJKRI*UHHQZLFK/RQGRQ(QJODQG,WLVWKHODUJHVWXQLYHUVLW\LQ/RQGRQE\VWXGHQWQXPEHUVDQGWKH O Executive Duality and Corporate Entrepreneurial Innovation of Nigerian Listed JUHHQHVW LQ WKH 8. DV DVVHVVHG E\7KH 3HRSOH 3ODQHW *UHHQ /HDJXH7KH XQLYHUVLW\·V ZLGH UDQJH RI Corporations: An Impact Assessment subjects includes architecture, business, computing, education, engineering, humanities, natural sciences, 0DQVXU/XEDEDK.ZDQERDQG

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Supported by Sripatum University Editors: 2410/2 Phaholyothin Rd., Jatujak, Bangkok, 10900, Thailand Tel.: +66 2 579 1111, Fax.: +66 2 558 6868 Ungul Laptaned E-mail: [email protected] ,RDQQLV0DQLNDV Website: www.spu.ac.th Gilbert Nartea

,QWHUQDWLRQDO-RXUQDORI ¡ SRIPATUM UNIVERSITY IJMBE Management, Business, and Economics GRADUATE COLLEGE OF President Supported by Rutchaneeporn Pookayaporn Phukkamarn, Sripatum University, Thailand MANAGEMENT Dean of Graduate College of Management Vichit U-on, Sripatum University, Thailand |z~j}Ôjq}j

Advisory Board &KXQ3LQJ=HQJ1HZ

Copyright © 2015 Sripatum University Editor-In-Chief Ungul Laptaned, Sripatum University, Thailand All right reserved. No part of this publication may be reproduced, stored in a retrieval Associate Editor system, or transmitted in any form or by any means, electronic, ,RDQQLV0DQLNDV8QLYHUVLW\RI*UHHQZLFK8QLWHG.LQJGRP mechanical, photocopying, recording, or otherwise, without permission in writing from the editors. Guest Editor Gilbert Nartea, Lincoln University, New Zealand ,661

Secretariat Phongvitchulada Surakhan, Sripatum University, Thailand

Editorial Board Graduate College of Management $QEDODJDQ.ULVKQDQ&XUWLQ8QLYHUVLW\RI7HFKQRORJ\0DOD\VLD Sripatum University, Building 11, floor 11, 2410/2 Phaholyothin Road,Jatujak, Bangkok 10900, Thailand $QVRQ.D.HXQJ$X7KH8QLYHUVLW\RI+RQJ.RQJ+RQJ.RQJ Tel: (+66) 2579 1111 ext. 3000 - 4 Fax: (+66) 2579 1111 ext. 3011 E-Mail: [email protected] &6ZDUQDODWKD5DMX$QQD8QLYHUVLW\,QGLD Chian-Son Westerlund, Helsinki School of Economics, Finland &KX+XL6WHLQHU3URJUDP/HDGHU8QLYHUVLW\RI'HUE\,VUDHOL &KXQ+XZ(VFDODQWH8QLYHUVLW\RI*HRUJLD86$ 'DQLHO$ULI7KH%ULWLVK8QLYHUVLW\,Q'XEDL8$( +VXQ0LQJ/HH7H[DV6WDWH8QLYHUVLW\6DQ0DUFRV86$ Huei-Zhen Gu, Lungwa University of Science and Technology, Taiwan ,+XD%RQ8QLYHUVLW\HUVLWL7XQ+XVVHLQ2QQ0DOD\VLD0DOD\VLD Jaroslav Laukkanen, University of Kuopio, Finland -DVSHU-RKQVRQ1RUWK'DNRWD6WDWH8QLYHUVLW\86$ /\)LH6XJLDQWR0RQDVK8QLYHUVLW\$XVWUDOLD 0DKHVKD.DSXUXEDQGDUD8QLYHUVLW\RI:HVWHUQ6\GQH\$XVWUDOLD Marc Lindblom, Helsinki School of Economics, Finland 6WXDUW*DUQHU(GLWK&RZDQ8QLYHUVLW\$XVWUDOLD Takashi Koshida, Matsue National College of Technology, Japan Tingyang Lewis Quynh Nhu, Vaasa University, Finland, Finland Victoria Chen, National Chung Cheng University, Taiwan Vineet Yamada, Nakamura Gakuen University, Japan :DQ6KLRX+X8QLYHUVLW\RI:HVWHUQ6\GQH\$XVWUDOLD :HQ

Advisory Board &KXQ3LQJ=HQJ1HZ

Secretariat Phongvitchulada Surakhan, Sripatum University, Thailand

Welcome to the second issue of International Journal of Management, Business, and Economics (IJMBE). IJMBE is dedicated to increasing the depth of the subject across business disciplines with the ultimate aim of expanding knowledge of the subject. The IJMBE is a thrice peer-reviewed journal published by Graduate College of Management, Sripatum University; University of Greenwich; and Lincoln University.

In retrospect, Sripatum University, one of the oldest and most prestigious private universities in Thailand, was established in 1970 by Dr. Sook Pookayaporn by the name ” Sripatum College.” The name “Sripatum” meaning “Source of Knowledge Blooming like a Lotus” was conferred on the college by Her Royal Highness the Princess Mother. In 1987, the college was promoted to university status by the Ministry of University Affairs, and has since been known as Sripatum University. The university’s main goal is to create well-rounded students who can develop themselves to their chosen fields of study and to instill the students with correct attitudes towards education so that they are enthusiastic in their pursuit of knowledge and self-development.

To strive to be among the best, this second issue of the IJMBE is therefore instrumental for the most important academic growths to extend a high quality tradition in the education field to the world. The journal welcomes the submission of manuscripts that meet the general criteria of significance and scientific excellence, and will publish original articles in basic and applied research, case studies, critical reviews, surveys, opinions, commentaries and essays. It is hoped that this inaugural issue will set a new benchmark in terms of academic publications. Through the support of our Editorial and Advisory Boards, I hope this journal could provide academic articles of the highest quality to all readers.

Dr. Rutchaneeporn Pookayaporn Phukkamarn President, Sripatum University

International Journal of IJMBE Management, Business, and Economics 1 Welcome Address from Dean, Sripatum University

It is appropriate to celebrate the continuity of an exciting and esteemed journal. The IJMBE will serve and provide a forum for exchange of ideas among business executives and academicians concerned with Management, Business, and Economics issues. With the rapid evolution of corporate business from international to global in recent years, general business has been one of the areas of greatest added complexity and concern for corporate managers. The IJMBE will be an academic journal combining academic inquiry and informed business practices. It will publish empirical, analytical, review, and survey articles, as well as case studies related to all areas of Management, Business, and Economics. A sentiment often expressed by practitioners is that academic research in general may not be addressing the most relevant questions in the real world.

It is fair to say that the IJMBE will publish high-quality applied-research papers. Nevertheless, studies that test important theoretical works and shed additional light on the issue with some business implications will also be solicited. Each submitted paper has been reviewed by several members of the IJMBE international editorial board and external referees. On the basis, we would like to thank all of them for their support with review process of submitted papers.

I cordially invite papers with theoretical research/conceptual work or applied research/applications on topics related to research, practice, and teaching in all subject areas of Management, Business, and Economics, or related subjects. I welcome paper submissions on the basis that the material has not been published elsewhere. The ultimate goal is to develop a journal that will appeal to both management and business practitioners. I expect the IJMBE to be an outstanding international forum for the exchange of ideas and results, and provide a baseline of further progress in the aforementioned areas.

Dr. Vichit U-on Dean, Graduate College of Management, Sripatum University

International Journal of 2 IJMBE Management, Business, and Economics The Editors

Editor-In-Chief Dr. Ungul Laptaned is an Assistant Professor in the Graduate College of Management, Sripatum University. He graduated with a Ph.D. in 2003 from the University of Nottingham, United Kingdom in the field of Manufacturing Engineering and Operations Management. Ungul has published over 60 proceedings and journal papers; for instances, Industrial Engineering Network, Asia Pacific Industrial Engineering and Management, International Association of Science and Technology for Development, Operations and Supply Chain Management, Intelligent Manufacturing System, Business and Information, etc. He served as a program chair and a steering committee for several domestic and international conferences. He was a journal editor of International Journal of Logistics and Transport, and Thai Researchers’ Consortium of Value Chain Management and Logistics Journal, and has consulted for several public organizations and industrial firms on logistics and supply chain management such as Thailand Research Fund, Phitsanulok Province, Public Warehouse Organization, Amatanakorn Industrial Estate, Wyncoast Industrial Park, Iron and Steel Institute of Thailand, Chacheongsao Province, JWD Infologistics Co., Ltd., Kerry Distribution (Thailand) Co., Ltd., TKL Logistics and Supply Chain Co., Ltd., and Ministry of Transport (Thailand).

Associate Editor Dr Ioannis Manikas holds a Bachelor in Agriculture and a Master of Science in the field of logistics from Cranfield University. He holds a PhD from the Department of Agricultural Economics in AUTH and his primary interest includes supply chain management, logistics and agribusiness management. Dr Manikas has conducted research for projects regarding supply chain modelling, development of IT solutions for agrifood supply chain management and traceability both in Greece and the UK. He has a wide experience in the elaboration of research proposals under FP6, FP7, and Eurostars-Eureka funding mechanisms; lifelong learning oriented programmes such as Leonardo; and Interregional development programmes such as Interreg III and Interreg IV. His work as a self employed project manager and consultant in the agrifood sector includes the design and development of regional operational programmes; analysis of regional needs and respective development policies focused on rural and food production; definition of funding areas and financing resources; definition of strategic goals for regional development and formulation of respective performance monitoring systems; and assessment (ex-ante, on-going, ex-post) of the implementation of EC and national funding mechanisms in national and regional levels. Guest Editor Dr. Gilbert Nartea is an Associate Professor in the Faculty of Commerce, Lincoln University, New Zealand. Dr. Nartea graduated a Master’s Degree from New England and a Ph.D. from Illinois, USA. He is a senior lecturer in Finance. His teaching interests are in the area of investments, futures and options, and finance, futures and options. The area of research interests area asset pricing, investment management, decision-analysis and risk management, and microfinance and poverty alleviation. He has published several papers in such journals as of Property Investment and Finance, International Journal of Managerial Finance, Asian Journal of Business and Accounting, Australian Journal of Agricultural and Resource Economics, Pacific Rim Property Research Journal, Review of Applied Economics, Review of Development Cooperation, American Journal of Agricultural Economics, and Journal of the American Society of Farm Managers and Rural Appraisers.

International Journal of IJMBE Management, Business, and Economics 3 Foreword

Foreword

Welcome to the 1st issue of the 2nd volume of International Journal of Management, Business, and Economics (IJMBE), the Editors received a number of papers from different countries such as Australia, Germany, India, Malaysia, Nigeria, Saudi Arabia, Thailand, United States of America, and Vietnam. The received papers encompassed many areas of marketing, banking, economics, insurance and risk management, industrial and operation management, strategic management, and international and global business management. After the review process, a total of ten manuscripts were selected for publication.

In the first article, entitled “A Comparative Analysis of Foreign Direct Investment and Firm Level Performance in Developing Economies” conducted by Emilia Yarason. This study attempts to investigate if the high level of FDI plays any significant role in curbing unemployment in Nigeria. By employing an ARDL bound testing approach to Cointegration and the ECM-ARDL on time series data for a span of twenty years (1984-2013), the research work reveals that FDI and unemployment in Nigeria have no cointegrating relationship in the long run.

The second article is authored by Ganakrishnan Gopalakrishnan, and is entitled “Evaluating Motivational Levels of Employees at Malayan Railways Limited/ Keretapi Tanah Melayu Berhad (KTMB)”. This research paper is an evaluative study analysis of the motivational levels of employees at Malayan Railways Limited/ Keretapi Tanah Melayu Berhad (KTMB), the main rail operator in Peninsular Malaysia. Research done in both psychology and business literature over the past three decades has recorded that motivation varies as a function of different factors in the work environment, including evaluation expectation, actual performance feedback, reward, autonomy, and the nature of the work itself.

The third article deals with marketing issues. This paper is authored by Gerd Nufer, and is entitled “Ambush Marketing in Sports”. The paper describes and structures the phenomenon of ambush marketing. It is fine line between creative marketing communication and infringing on sponsorship rights. From the perspective of the event organizers and sports sponsors it represents an understandable threat, while from the perspective of the ambushers it offers the opportunity to reach the target audience in an attractive environment and at affordable cost.

The fourth paper is examined by John F.O. Bilson and Lalita Hongratanawong. Their paper is entitled “The Economic Value of Money Market Funds in and Around the Financial Crisis of 2008”. The study illustrates that the supply curves are considered “elastic” or changes in the yields of MMFs have a relatively large effect on the quantity of the assets that the investors want to invest. Whereas the demand curves are considered “inelastic” or change in the yields of MMFs have a relatively small effect on the quantity of the assets that borrowers demanded.

In the fifth article, entitled “Executive Duality and Corporate Entrepreneurial Innovation of Nigerian Listed Corporations: An Impact Assessment”, is written by Mansur Lubabah Kwanbo and Yusha’u Ibrahim Ango. The authors investigate the bifurcation of executive duality, which implies the power and centrality of the lead entrepreneur has been redefined in the light of corporate entrepreneurial innovation. The objective of this paper was premise in this context, to know whether executive duality significantly relates and impacts on corporate entrepreneurial innovation.

International Journal of 4 IJMBE Management, Business, and Economics Article number six is entitled “Convergence with IFRSSin India: Prospects and Challenges”, and is examined by Sankar Thappa. This paper tries to examine the need and importance of IFRSs in India, the various phases of implementation of IFRSs in India. The paper also highlights on the challenges ahead in the implementation of IFRS in India and the possible ways to address the challenges.

The seventh article is conducted by Saud A. Almutair, and is entitled “The Dynamics of Relationship between Exports and Economic Growth in Saudi Arabia”. The objective of this study is to find the dynamics of relationship between the growth rate of real export (RX) and the growth rate of real gross domestic product (RGDP) in one side and between the growth rate of (RX) and the growth rate of non-oil real gross domestic product (NORGDP) in Saudi Arabia in the other side.

Article number eight is written by Supin Chaisiripibool, and is entitled “Personal Credit Scoring Guideline for Nano Finance in Thailand”. This article argues that a within-case analysis of the causes and patterns of the Guideline for Nano Finance in Thailand. Using the method of systematic process analysis, the article explores the expansion of credit rating in Nano Finance in Thailand from three perspectives: historical (power), sociological (diffusion) and behavioral institutionalism (prospect theory).

The ninth article is conducted by Tarryn Kille, Paul Bates, and Patrick S. Murray and is entitled “Aviation Infrastructure and Regional Economic Development: Understanding the Importance of Integration in Regional Airfreight Networks”. The purpose of this article is to investigate the infrastructure challenges for regional communities with regards to the provision of regional airfreight services. Through a critical discourse analysis, the findings assist in realising the latent meanings that have the effect of shaping policy, impacting on the regional airfreight sector.

Last but not the least, the article entitled “Revisiting Mercantilism and Keynesian J-W –Hicks Hansen Synthesis in the Case of Malaysia from 1960 To 2009: The Dynamics of Saving, Investment and Trade Openness” is examined by Vignes Gopal Krishna. This study has supported mercantilism tenet on trade surplus in capturing the flow of investment. The research follows the theory that postulates the transition from old innovation to new innovation may enhance the level of knowledge and technological spillovers.

It is hoped that you will enjoy reading these articles and that they will generate responses and discussions that will help advance our knowledge of the field of Management, Business, and Economics. The Editors and the Editorial Board of the IJMBE would like to welcome your future submissions to make this journal your forum for sharing ideas and research work with all interested parties.

Ungul Laptaned Editor-In-Chief

Ioannis Manikas Associate Editor

Gilbert Nartea Guest Editor

International Journal of IJMBE Management, Business, and Economics 5 Contents

A Comparative Analysis of Foreign Direct Investment and Firm Level Performance in Developing Economies Emilia Yarason...... 7

Evaluating Motivational Levels of Employees at Malayan Railways Limited/ Keretapi Tanah Melayu Berhad (KTMB) Ganakrishnan Gopalakrishnan...... 17

Ambush Marketing in Sports Gerd Nufer...... 33

The Economic Value of Money Market Funds in and Around the Financial Crisis of 2008 John F.O. Bilson and Lalita Hongratanawong...... 45

Executive Duality and Corporate Entrepreneurial Innovation of Nigerian Listed Corporations: An Impact Assessment Mansur Lubabah Kwanbo and Yusha’u Ibrahim Ango...... 71

Convergence with IFRSSin India: Prospects and Challenges Sankar Thappa...... 89

The Dynamics of Relationship between Exports and Economic Growth in Saudi Arabia Saud A. Almutair...... 107

Personal Credit Scoring Guideline for Nano Finance in Thailand Supin Chaisiripibool...... 127

Aviation Infrastructure and Regional Economic Development: Understanding the Importance of Integration in Regional Airfreight Networks Tarryn Kille, Paul Bates, and Patrick S. Murray...... 139

Revisiting Mercantilism and Keynesian J-W –Hicks Hansen Synthesis in the Case of Malaysia from 1960 To 2009: The Dynamics of Saving, Investment and Trade Openness Vignes Gopal Krishna...... 163

Guide for Authors...... 179

International Journal of 6 IJMBE Management, Business, and Economics A Comparative Analysis of Foreign Direct Investment and Firm Level Performance in Developing Economies

Emilia Yarason Department of Business Administration, Kaduna State University, Nigeria E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 7

A Comparative Analysis of Foreign Direct Investment and Firm Level Performance in Developing Economies

Emilia Yarason Department of Business Administration, Kaduna State University, Nigeria E-mail: [email protected]

Abstract

Although there are several studies that posit a positive and significant relationship between FDI and employment generation in host countries, Nigeria still battles with high rate of unemployment in spite of its high foreign direct inflows. This study therefore attempts to investigate if the high level of FDI plays any significant role in curbing unemployment in Nigeria. By employing an ARDL bound testing approach to Cointegration and the ECM-ARDL on time series data for a span of twenty years (1984-2013), the research work reveals that FDI and unemployment in Nigeria have no cointegrating relationship in the long run. Nevertheless, there is a unidirectional causal relationship running from FDI to unemployment. It is therefore pertinent to note that though FDI aids in curbing the problems of unemployment in Nigeria, it is usually for a short time and does not have any impact what so ever in the long term. As such further research has to be carried out to investigate why the impact of FDI on unemployment doesn’t have a lasting impact.

Keywords: FDI, Unemployment, Nigeria

1. Introduction

Current incidences in economic globalization has measured FDI as one of the most secure elements of capital flow (Bénassy-Quéré et al 2007) and a major stimulant of economic performance through saving accumulation, foreign exchange enhancing competition, developing of local manpower and access to foreign markets (Akinlo,2004; Rodrik ,1998;Anyawu 2007; Dunning 2001; Borensztein et al, 1998; Dupasquier and Osakwe, 2003; Anyanwu, 2003).

There has also been an extensive appreciation of FDI as an important source of domestic growth and improved standard of living through technology transfer especially in developed economies (Görg and Strobl 2001), Evidence that technology transfer from Multinational Corporation (MNC) to domestic firms in transition and developing economies however remains inconclusive (Smarzynska, 2003; Koinings, 2000). The absorption capacity often described as technological gap between source and host country has been attributed to education, skills or capital intensity of the host country.In recent times though, institutional arrangements that govern economic activities of both foreign and domestic firms in the host countries has been recognized as a major determinant of absorption rate. Although researchers have tried to examine the relationship between these variables, (Globerman and Shapiro, 2003; Kaufmann, 1999; Driffel et al 2010) the effect institutions have on the benefits of FDI have not been fully examined particularly in transition economies and Sub-Saharan Africa economies.

International Journal of IJMBE Management, Business, and Economics 9 Hence this research hopes to fill a gap in the literature by examining and making comparative analysis in three major areas; the role of institutions on location, ownership structure and efficiency gains of FDI projects in transition economies and economies in sub-Saharan Africa, by accounting for the whole network of the affiliates of each MNC from a source country over a period of 1998- 2010.

There has been no comparison to the best of my knowledge of the economic performance of economies in transition and economies in sub-Saharan Africa. These economies according to the IMF (2000) are classified as developing economies and the recent waves of globalization coupled with the collapse of the eastern bloc in the 90’s has seen increase in the flow of FDI to these economies. One significant difference though between the two set of economies is the ascension of the Central and Eastern Europe states into the EU. This criterion is particularly important as institutional quality is a precondition for entry into the EU. The dimensions of institutional quality include protection of property rights, lack of administrative corruption and overall effectiveness of business regulation and financial regulation.

In the light of the foregoing, the following questions are posed:

Research Questions

•What effect does national governance structure have on firm level FDI in developing economies?

• To what extent does the national governance structure determine the mode of FDI in developing economies? x Do the governance structures in transition economies differ from that of economies in sub- Saharan Africa? If they do how do these differences affect firm level FDI in these economies.

•Do weak governance structures have any effect on the size of the parent company holdings in foreign subsidiaries.

Research Objectives

The main objective of this study is to integrate firm level data and national level data with an outlook to compare and contrast the pattern and effects of FDI in transition economies and sub- Saharan Africa which are characterized by different institutional structures and practices. Other objectives includes with:

1.To ascertain the significance of national governance structure on the firm level FDI in developing economies

2.To determine the extent to which national governance structures determine the mode of operation of FDI.

3. To determine whether governance structures have any impact on the size of parent company holdings in foreign subsidiaries.

4. To examine the national governance structures of FDI in transition economies and economies in sub-Saharan Africa.

International Journal of 10 IJMBE Management, Business, and Economics Scope of the Study

The study hopes to cover a sample period 1998 -2010 for 16 countries in sub-Saharan Africa (particularly West Africa) and 20 countries in central and Eastern Europe (CEEC) .This research follows the group classification as defined by the IMF and the choice of sample period is based on the availability of data and the comparative nature of research.

Significance of the Study

This study will be significant for the following reasons:

1. Available literature in this regard, rely on mostly macro level analysis that does not permit for firm or industry level effects, or differences in the way that firms seek to enter foreign markets. Since this research is based on firm level data, this gap hopes to be filled.

2. Existing literature also usually focuses on small scope of firms in one country, this research aims to carry out a comparative analysis of the way firms enter countries in transition and West African countries based on the level of national governance structure.

3. The research aims to include all sectors of the economy as most existing literature on FDI center mainly on the manufacturing sector.

4. More so, the scope of this research covers the recent economic meltdowns which have not been taking into consideration by past studies.

Limitations of the Study

The major aim of this research is to compare the impact the institutional quality has on firms’ decisions to enter foreign markets. Since this research hopes to integrate qualitative analysis at macro level and qualitative analysis at micro level, making comparisons between findings a bit problematic. More so, getting access to qualitative data may stand as a challenge.

2. Literature Review

Several theories exist in an attempt to rationalize the decisions for MNC to invest in a foreign market, but Dunning (1988, 1993) is notable for his exposition on the criteria that determines investment in foreign markets as well as the motives for such investments. Explaining that a firms decision to invest abroad is based on one or all of these major motives; resources; market size, efficiency and strategy of the host country.

Considerable amount of empirical literature also exist elucidating that economies with poor institutions impede FDI. These studies are usually concentrated on low income or developing economies and the data employed are at times very spurious (Kim, 2010). Another strand of literature which focuses on FDI inflow explores the mode of entry of foreign firms into host countries particularly distinguishing between joint ventures and sole proprietorship.

But this strand of literature totally ignores the role of institutions in context. Similarly, firm level data have been used to study FDI flows in a number of contexts, but much of this is limited to case study analysis of issues such as mode of entry, or in the vast literature on the impacts of FDI in

International Journal of IJMBE Management, Business, and Economics 11 developed countries. The major problem with these studies is that most of these studies employ macro level data and the results produced are inconclusive. For instance, Hakro and Omezzini(2011) explored the impact governance infrastructure has on FDI flows in Middle east and North African countries. They employed governance indices developed by Kauffman et al(2005)for a period of 10 years. The results presented reveal that governance in the region does really matter concluding that even if regulatory qualities of the institutions are high and the governance of the region are improved, the government of the region still require policies and institutions to promote or create conditions which can attract tangible FDI. The major shortfall in this study is the failure to account for special traits in the firm’s decision to invest in the region. Also, Meyer (1998) and Brenton et al. (1999)have used several firm level variables such as, the form of privatization, capital market development and the legal framework; and country level variable such as country risk factor and corruption index to analyze the institutional characteristics of transitional economies.

Similarly, a study carried out by Globerman &Shapiro(2002)on the determinants of both inward and outward FDI for twenty emerging and transition economies in Europe (ETEE) over the period 1995-2001 with particular reference to measures of governance and institutional change including privatization reveal that political integration into developed Europe provides longer-term assurances to foreign investors that institutional changes undertaken by transition economies will not be reversed. Bevan & Estrin (2000), in examining the determinants of FDI in transitional economies between 1994 and 1998,whilst controlling for political risk and the influence of the prospects of becoming an EU member by the host country, find that foreign direct investments are determined by unit labor cost, host economy market size and EU membership prospects. Their findings are in consonance with Janicki and Wunnava (2004); Globberman &Shappiro (2004).The shortfalls with these research is their concentration on FDI flows primarily and the use mainly country-level data- sets, hence there is no direct explanation of how firms are motivated to engage in FDI in a given location.

There are limited papers that investigate institutional quality and firms traits. One of the first studies includes Hines (1995) who examined corruption and foreign direct investment of a sample of U.S. Multinational corporations. The report provided showed a negative effect of corruption on foreign investment the problem here is that, the U.S. firms employed may not be a good representation of foreign firms’ worldwide.

With particular reference to sub-Saharan Africa, Asiedu (2002) compared the determinants of FDI in sub-Saharan Africa to other developing economies in the world. The results provided showed that while the return on investment within the region is high, the risky business environment and poor infrastructural facilities neutralizes the effect of FDI within the region, In spite of the substantial deposit of world natural resources. `

In addition, Dupasquier and Osakwe (2005) in assessing the performance, promotion and prospects of FDI in Africa, explain that developing economies are largely characterized by political and macroeconomic instability, stumpy growth, fragile infrastructure, poor governance, inhospitable regulatory environments, and ill conceived investment promotion strategies. As such, these economies find it difficult to attract FDI to the region and suggest the need to improve corporate governance at the macro level.

The problem with these studies is that they failed to address issues relating to the effect governance institutions had on the entry of foreign firms to the host country, the impact institutional quality had on the ownership structure.

International Journal of 12 IJMBE Management, Business, and Economics This study therefore hopes to address these shortfalls by developing three main themes which include:

1: The effect governance institutions have on entry and location of foreign firms. These effects could be complex and would depend on the interaction between quality of institutions in the investor’s country of origin and host country as Foreign ownership may enable firms to import some aspects of good corporate governance into a country that does not have it which may result in a lower cost of capital (Denis and Huizinga (2004); Filatotchev et al. (2007). This could lead to a rather high foreign ownership share in countries with low quality institutions or Foreign investors may decide to invest in a country with a poor institutional environment in order to exploit this to their own advantage and to escape the tighter corporate governance constraints of the home country.

2. Effects of institutions on ownership structure It is also important to understand the ownership structure of FDI projects because the latter affects the incentives of the investors to apply their resources to the project.

3. Effects of FDI on efficiency: this is based on the premise that foreign firms are more efficient in the use of capital and labor. Although, little evidence exist as to how the efficiency of foreign firms in host countries could be linked to the quality of institutions, or ownership structure or to factors like market size or natural endowments.

Hence the aim of this theme is to examine the interaction between ownership and institutional quality.

3. Empirical Research Methods

Data Sources

The major sources of data for this research work would be the Amadeus database, which houses firm level data for over 52,000 firms from all sectors of the economy across European countries and this database permits us to identify assets ownership. With these data it is possible to also classify firms that have invested in for example developing countries, as well as the ability to identify capital structures of the parent firm. The data source will also compliment data from Osiris database for the remaining part of the world.

This research will also collect data from ICRG's database which provides data on world business-oriented risk model and a breakdown of the risk of investing time and money in each country; it also provides data for government stability, Socioeconomic Conditions; Investment conditions, Internal and External Conflict; Corruption; level of Bureaucracy, Religious/ethnic Tensions; Law and Order. The level of trade openness and corruption level for each country will be derived from World Bank database and transparency International corruption perception index respectively. Finally for institutional quality indices the research will rely on the World Governance Indicators (WGI) by Kaufmann et al, 2006.

Initial investigation will be to collect data of parent companies who have invested in central and Eastern Europe and sub-Saharan Africa from 1998- 2010 set them up in a panel.

International Journal of IJMBE Management, Business, and Economics 13 Methodology

This research will make use of panel data to answer the questions posed. This will permit the study to account for variation in the behaviors of firms in different countries and also over time an approach to the first research theme is to adopt a two step model developed by Pal (2007) and augmented by Driffield et al (2008; 2010).this is because entry and location of foreign firms operating in a host country at a point depends on either of two things whether to invest at home or abroad and how to chose a location to invest. The two step model to be employed will be a bivariate probit model of FDI location choice with a decision on whether to invest abroad. The decision to invest abroad will depend on the firm’s profitability, share of intangibles, corporate and financial link of the foreign firm with the host country and some country- level attributes like physical distance and the diplomatic relationship with the host country, language spoken, infrastructural facilities, labor market flexibility, labor market regulations and other institutions in the host country.

The second research theme will focus on determining foreign ownership structure. An ownership variable will be constructed to identify the fraction of equity held by foreign subsidiaries operating in a host country at a given time. Then analysis will be carried out using panel data.here, the study will control for simultaneity bias and heterogeity. Ownership structure of a given MNE across countries and over time could be a reflection of institutional environment (corruption, minority protection, investor’s rights, judicial independence) in both host and investor’s country of origin, investment need of the particular sector (utility, infrastructure or industrial), among other firm-specific factors (e.g., efficiency, share of intangible) in the source country. Analysis will make use of panel data regression models, after controlling for simultaneity bias (arising, e.g., from the inclusion of efficiency) and unobserved firm and country-level heterogeneity (e.g., see Makepeace and Pal, 2007).

Finally to analyze the firm’s efficiency advantage the study will employ profitability and productivity as a proxy for efficiency .the paper will also control for ownership structure and institutional quality.

References

Adelopo, I. et al (2009): Impact of corporate governance on Foreign Direct Investment in Nigeria. Journal of social science research, Electronic copy available at:http://ssrn.com/abstract=1514982.

Adeoye, A.(2009): Macro-economic level corporate governance and FDI in emerging markets: Is there a close relationship? Journal of Economics and International Finance, Vol. 1(2), pp. 030-043, July, Available online at http://www.academicjournals.org/JEIF.

Akinlo, A.(2004): Foreign Direct Investment and Growth in Nigeria: An Empirical Investigation. Journal of Policy Modeling 26: 627-39.

Ajayi, I.S. (2006), Foreign Direct Investment in Sub-Saharan Africa: Origins, Targets, Impact and Potentials. African Economic Research Consortium, Kenya.

Anyanwu, J.C. (2012), Why Does Foreign Direct Investment Go Where It Goes?: New Evidence from African Countries, Annals of Economics and Finance, Vol. 13(2), 425 -462.

International Journal of 14 IJMBE Management, Business, and Economics Asiedu, E. (2002), On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different? World Development 30(1) pp. 107-119.

Bevan, A.A. and Estrin, S. (2000), the Determinants of Foreign Direct Investments in Transitional Economies, William Davidson Institute Working Paper 342.

Dupasquier, C. & Osakwe, P.N.(2005), Foreign Direct Investment in Africa: Performance, Challenges and Responsibilities Economic Commission for Africa, African Trade Policy Centre Working Paper no.21 Conference for Africa: AERC.

Driffield, N. and M. Henry (2007). “Trade, FDI and technology diffusion in developing countries: The role of human capital and institutions”. Aston Business School. Mimeo

Dunning, J. (1988) Explaining International Production: Unwin Hyman.

Dunning J. (1993), Multinational Enterprises and the Global Economy, Reading, Mass: Addison- Wesley.

Estrin, S. and Meyer, K., eds. (2004). Investment Strategies in Emerging Markets, Aldershot, UK and Northampton, MA, USA: Edward Elgar.

Filatotchev, I., Isachenkova, N., Mickiewicz, T. (2007b). Ownership Structure and Investment Finance in Transition Economies. Economics of Transition. 16 (3). Forthcoming. . Filatotchev, I., N. Isachenkova And T. Mickiewicz (2007a). “Corporate Governance, Managers’ Independence, Exporting And Performance Of Firms In Transition Economies”. Emerging Markets Trade and Finance. Forthcoming.

Globerman, S, and D. Shapiro (2003). “Governance Infrastructure and U.S. Foreign Direct Investment”, Journal of International Business Studies, 34, 19-39. . Görg H. and Strobl E. (2001) ‘Multinational Companies and Productivity Spillovers: A Metaanalysis’,Economic Journal 111, F723-739.

Kaufman, D, A. Kraay and P. Zoido-Lobaton (1999), “Aggregating Government Indicators”, Policy Research Working Paper No 2195, World Bank.

Kaufmann, D., A. Kraay and M. Mastruzzi (2006), ‘Governance Matters V: Aggregate and Smarzynska Javorcik, B. and Spatareanu, M. (2005). “Do Foreign Investors Care About Labour Market Regulations?," CEPR Discussion Papers 4839.

Kim, H.(2010). Does Corporate Governance or Transparency affect Foreign Direct Investment? International Journal of Human and Social Sciences, Vol. 5(13).

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Knack, S. (2006) “Measuring Corruption in Eastern Europe and Central Asia: A Critique of the Cross-Country Indicators”, Policy Research Working Paper 3968, World Bank.

International Journal of IJMBE Management, Business, and Economics 15 Lambsdorff, J. (2005) “Methodology of the 2005 Corruption Perceptions Index”, Transparency International and University of Passau, mimeo.

Makepeace, G. and S.Pal. (2007). ‘Understanding the Effects of Siblings on Child Mortality: Evidence from India’ (with G. Makepeace, Cardiff) Journal of Population Economics 2007 (online first).

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Pal, S. (2007). ‘Public Infrastructure, Locations of Private Schools and Quality of Schooling in an Emerging Economy’, paper presented at the 4th Minnesotal International Development Conference, 4-5 May, and submitted to Economic Development and Cultural Change.

Petrin, A. and J. Levinsohn (2005). “Measuring Aggregate Productivity Growth Using Plant-Level Data”, NBER Working Paper No. W11887.

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Nonnemberg, M.B. & Mendonca, M.J.C. (2004). The Determinants of Foreign Direct Investment in Developing Countries, Instituto de Pesquisa Economica Aplicada (IPEA), Rio de Janeiro.

International Journal of 16 IJMBE Management, Business, and Economics Evaluating Motivational Levels of Employees at Malayan Railways Limited/ Keretapi Tanah Melayu Berhad (KTMB)

Ganakrishnan Gopalakrishnan Centre of Commerce and Management, Royal Melbourne Institute of Technology (RMIT) University Vietnam, Hồ Chí Minh, Vietnam E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 17

Evaluating Motivational Levels of Employees at Malayan Railways Limited/ Keretapi Tanah Melayu Berhad (KTMB)

Ganakrishnan Gopalakrishnan Centre of Commerce and Management, Royal Melbourne Institute of Technology (RMIT) University Vietnam, Hӗ Chí Minh, Vietnam E-mail: [email protected]

Abstract

This research paper is an evaluative study analysis of the motivational levels of employees at Malayan Railways Limited/ Keretapi Tanah Melayu Berhad (KTMB), the main rail operator in Peninsular Malaysia. Research done in both psychology and business literature over the past three decades has recorded that motivation varies as a function of different factors in the work environment, including evaluation expectation, actual performance feedback, reward, autonomy, and the nature of the work itself. This paper investigates these factors and reveals what it is that motivates all employees to perform at their best and achieve optimal business results at all times. Self-administered questionnaires collected data and review. A total of 50 employees participated in the survey. 19 motivation dimensions were identified: activity; achievement; competition; fear of failure; power; recognition; status; ethics; interest; flexibility; progression; pressure; teamwork; management; customers; remuneration; job security; autonomy; and growth. The main focus of this research is an evaluative analysis of the motivational levels of employees of a railway company. The Malayan Railways Limited (KTMB) was chosen as the railway company. The research findings are based on a sample size of one company and as such, they are restrictive for purposes of generalising. This article provides an analytical assessment of the employees’ perspective of factors affecting their motivational levels as employees of KTMB. The main recommendation of this research is for the management to correlate management theories with motivation theories and apply them to motivate all their employees instead of just focusing on a cluster group of senior and long-serving employees.

Keywords: Motivation, Management Theories, Motivation Theories, Motivation Dimensions, Management

1. Significance of the problem

For years organizations have been studying employee’s pattern for better work performance yet they have not really come to a full understanding of what is necessary for good performance, how to measure successful performance, and the different levels of motivation to do their job (Lewis, Goodman and Fandt, 2004, p. 460).

Employees are considered to be the most important asset of any organization, then the impact of employees on the organizational performance must be crucial “but still we see organizations that differ in their performance from others depending on the employee’s level of performance”

International Journal of IJMBE Management, Business, and Economics 19 Even with the best strategy in place and an appropriate organizational architecture, an organization will be effective only if its members are motivated to perform at a high level (Jones and George, 2003, p. 405).

A question must be asked here “what contributes to the level of performance of individuals in a working environment?”, “how to measure the level of performance?” and last but not least “what are the factors that affect the motivational level?”

According to Lewis, Goodman and Fandt (2004) in their book of Management, “Challenges for tomorrow’s leaders” Chapter 14 and 15, we can say that employees work performance is made of two elements:

First, their ability to work, perform and focus on achieving a common goal and second, the motivation they perceive to inspire them to work to accomplish the organization’s goals.

Thus the relationship between motivation and performance can be stated in the formula M*A=P, where P refers to performance, M refers to motivation, A refers to ability. Note: Ability is an existing capacity to perform various tasks, needed in a given situation and that abilities may include mental, mechanical, and psychomotor skills.

Example, (goal and desire) * (Education, Knowledge) = Project Manager.

On the other hand according to Jones and George (2003) in their book of Contemporary Management, Chapter 12, organizations hire people to obtain important inputs that contribute to the job or organization, such as time, effort, education, experience, skills, knowledge, and actual work behaviors which are necessary to achieve organizational goals. They describe motivation as an outcome which is anything a person gets from a job or organization. Some outcomes, such as autonomy, responsibility, and feeling of accomplishment, and the pleasure of doing interesting or enjoyable work, result in intrinsically motivated behavior. While other outcomes, such as pay, job security, benefits, and vacation time, result in extrinsically motivated behavior.

This alignment between employees and organizational goals as a whole can be described by the motivation equation:

Inputs (from organizational members) * Performance = Outcomes (received by organizational members) (Jones and George, 2003, pp. 406-407).

Now that we have described the importance of motivation and its relationship to performance and outcomes let us briefly define motivation. Motivation can be defined as the psychological forces that determine the direction of a person’s level of effort, and a person’s level of persistence in the face of obstacles. Motivation can come from intrinsic or extrinsic sources. Intrinsic motivated behavior is behavior that is performed for its own sake; the source of motivation is actually performing the behavior, and motivation comes from doing the work itself. Whereas, extrinsically motivated behavior is behavior that is performed to acquire material or social rewards or to avoid punishment; the source of motivation is the consequences of the behavior, not the behavior itself (Jones and George, 2003, pp.405-406).

It is important for managers to study, understand and know how to apply different sets of motivational standards according to the situation or working environment in order to promote higher levels of employee motivation.

International Journal of 20 IJMBE Management, Business, and Economics This paper aims to address the problem as the factors affecting the motivational level of Malayan Railways Limited (KTMB) staff that insures an effective level of performance in the organization. Effective in this case would mean that when managers are effective, the outcome of the leading process is a highly motivated workforce.

The Managerial Implications

Managers seek to ensure that people are motivated to contribute important inputs to the organization, that these inputs are put to good use or focused in the direction of high performance, and that high performance results in workers obtaining the outcomes they desire (Jones and George, 2003, p. 407).

Some of the managerial implications that must be considered include the recruiting of the right people with right motives towards working whether individually or as a group, the monitoring of the turn over rate which can indicate the level of satisfaction employees have towards their work, communicating clearly to employees about tasks and organizational goals, enabling employees to be high performers, rewarding employees in multiple ways, creating a fair and stimulating work environment, and last but not least treating employees like highly capable individuals only then can the organization develop a culture surrounded by honesty, openness, and trust (Jones and George, 2003, pp 403-404).

This part of the report is aimed at analyzing the implications for managers in building an essential and motivated work force environment.

The Manager as a Strategic Human Resource

Every manager in an organization is directly or indirectly involved in all aspects of Strategic Human Resource Management (Lewis, Goodman, Fandt, 2004, p.315).

In order to achieve the strategy of an organization, a certain set of actions, behaviors, and attitudes from the employees are necessary. To ensure that these norms exist, an organization must have the right people who are guided by proper human resource policies and operations (Wright, Dunford, 2001, pp.701-721).

If this is done well, an organization will have people with the right skills and motivation to make the organizational successful.

Therefore managers must posses the necessary concepts and tools that are needed to guide the overall management of human resources (Lewis, Goodman, Fandt, 2004, p.316).

The strategic human resource management process involves: Job Analysis which involves studying the job to understand what knowledge, skills, abilities, and attitudes are required for successful performance. Forecasting (Demand Forecasting) to determine the number of employees that the organization will need in the future as well as the knowledge, skills, and abilities these employees must posses. (Supply Forecasting) to determine what human resources will be available both inside and outside the organization. Recruitment Issues in finding and attracting qualified job candidates, which can be internal or external and involves selection methods.

International Journal of IJMBE Management, Business, and Economics 21 Training a planned effort to assist employees in learning job-related behaviors that will improve their performance. Performance Appraisal used to asses a person’s performance on the job. Compensation which involves pay and incentives, benefits and reward systems.

The implications that may face managers here are: Recognize that strategic human resource management is a critical element of the strategic planning process and is essential for long-term organizational success. Keep in mind that job analysis is essential in order to understand what knowledge, skills, abilities, and attitudes each job requires. Carefully evaluate both internal and external sources for recruiting people. Base all SHRM decisions on job-related criteria and not on racial, gender, or other unjustified biases. To keep pace with rapid changes in technology, be sure to upgrade the knowledge and skill base of employees though training programs. Develop equitable pay systems, unbiased performance appraisals, and equal access to training opportunities. Be innovative in scheduling work, designing jobs, and rewarding employees so that you can respond effectively to the changing composition and needs of the workforce.

By managing human resources well, the organization will have the right people in the right jobs. The right people, guided and motivated to achieve the organization’s overall strategy, are the most important assets of the organization (Lewis, Goodman, Fandt, 2004, pp.316-338).

Theories of Motivation

Expectancy Theory

Posits that motivation is high when workers believe that high levels of effort lead to high performance and high performance leads to the attainment of desired outcomes. It identifies three major factors that determine a person’s motivation: expectancy, instrumentality, and valence.

Expectancy is a person’s perception about the extent to which effort (an input) results in a certain level of performance. It determines whether he or she believes that a high level of effort results in high level of performance.

Instrumentality is a person’s perception about the extent to which performance at a certain level results in the attainment of outcomes.

Whereby, valence refers to how desirable each of the outcomes available from a job or organization is to a person. According to the expectancy theory, high motivation results from high levels of expectancy, instrumentality, and valence. If any one of these factors is low, motivation is likely to be low.

The implications that may face managers here are: Making sure that their subordinates believe that if they do try hard they can actually succeed. Making a clear link between performance and desired outcomes and clearly communicating this linkage to subordinates. Determine which outcomes have high valence for subordinates, is highly desired and make sure that those outcomes are provided when members perform at a high level.

International Journal of 22 IJMBE Management, Business, and Economics One way managers can boost expectancy is through expressing confidence in their subordinates’ capabilities. Another way for managers to boost subordinates expectancy levels and motivation is by providing training so that people have all the expertise needed for high performance.

To promote high instrumentality and motivation managers must make sure that outcomes available in an organization are distributed to organizational members on the basis of their performance (Jones, George, 2003, pp.407-409).

Need Theories A need is a requirement or necessity for survival and people are motivated to obtain outcomes at work that will satisfy their needs.

A manager must determine what needs the person is trying to satisfy at work and ensure that the person receives outcomes that help to satisfy those needs when the person performs at a high level and helps the organization achieve its goals.

Maslow’s Hierarchy of Needs proposed that all people seek to satisfy five basic kinds of needs: physiological needs, safety needs, belongingness needs, esteem needs and self-actualization needs.

The implications that may face managers here are: Managers must determine which needs employees are trying to satisfy in organizations and then make sure that individuals receive outcomes that satisfy their needs when they perform at a high level and contribute to organizational effectiveness. Managers must realize that citizens of different countries might differ in the needs they seek to satisfy through work.

Clayton Alderfer’s ERG theory collapses the five categories of needs into three universal categories which are existence, relatedness, and growth. Alderfer believed that a person can be motivated by needs at more than one level at the same time, unlike Maslow who believed that basic needs must be satisfied to proceed to the next level.

The implications that may face managers here are: To determine what needs your subordinates are trying to satisfy at work, and make sure that they receive outcomes that satisfy these needs when they perform at a high level to help the organization achieve its goals.

Herzberg’s Motivator-Hygiene Theory people have two sets of needs or requirements: motivator needs and hygiene needs. Motivator needs are related to the nature of the work it self and how challenging it is. Hygiene needs are related to the physical and psychological context in which the work is performed.

The implications that may face managers here are: Managers should study how jobs could be designed or redesigned so that they are intrinsically motivating (Jones, George, 2003, pp.407-412).

The Equity Model focuses on an individual’s feeling about how fairly he or she is treated in comparison with others.

International Journal of IJMBE Management, Business, and Economics 23 The implications that may face managers here are: People should be rewarded according to their contributions Managers should make every effort possible to ensure that employees feel equitably treated Managers should be patient and either corrects the problem of feelings toward inequity, if it’s real, or helps people recognize that things are not as inequitable as they seem.

Goal Setting as a motivation model is a process of increasing efficiency and effectiveness by specifying the desired outcomes toward which individuals, groups, departments, and organizations should work. Goal setting can be a powerful tool to motivate employees.

The implications that may face managers here are: Meet regularly with subordinates Work with subordinates to set goals jointly Set goals that are specific and appropriate Provide feedback about performance

Reinforcement Theory is based on the idea that people learn to repeat behaviors that are positively rewarded (reinforced positively) and avoid behaviors that are punished (not reinforced, or reinforced to avoid).

The implications that may face managers here are:

Managers need to observe and manage the consequences of work-related behaviors carefully because individuals have different perceptions of what is reward and what is punishment depending on their values and needs.

Money as a motivator- people perceive it as a means to acquire other things they want.

The implications that may face managers here are: Consider the importance of money to motivate employees and its direct link to performance (Lewis, Goodman, Fandt, 2004, pp.467-476).

Communication is a challenging role for managers to be able to communicate the plan in advance so that everyone can understand the role he or she plays. Employees feel more empowered and motivated if the plan is communicated clearly to them in advance and their performance is rewarded.

Effective managers motivate employees to excel by instilling confidence in staff members abilities to meet and exceed expectations. Employee recognition should be in every manager’s tool kit. Public recognitions show employees that they are valued and that their contributions to the organization make a difference.

The implications that may face managers here are: Managers tend to miss the positives if they are busy searching for the negatives Deliver reward and recognition in an open and publicized way, if not publicizing looses its impact and defeats much of the purpose for which it was provided. Deliver recognition in a personal and honest manner; avoid providing recognition that is too slick or overproduced. Tailor your recognition and reward to the people’s need. Timing for recognition is crucial, avoid delaying it.

International Journal of 24 IJMBE Management, Business, and Economics Make it clear, unambiguous, and a well-communicated connection between accomplishments and rewards. Recognize recognition. That is recognizing people who recognize others for doing what is best for the organization.

2. Literature Review

Defining motivation accurately is difficult. However it is well agreed that the process of motivation is complex and can be generally defined as the forces acting upon or within a person that cause that person to expand effort to behave in a specific, goal –directed manner (Steers and Porter, 1983). There are arguments that it is a psychological process that gives purpose and direction to behavior (Lewis, Goodman and Fandt, 2004). To help us understand what motivates people at work, management scholars have developed a number of different models on motivation.

Whilst organizations recognize the importance and value of motivation as there is a positive correlation between motivation and performance, there is some amount of disagreement among management writers over the level of importance of motivation based on the premise that it forms only one of the many explanations of human behavior. For instance, Lewis, Goodman and Fandt (2004) disagree to view motivation as a personal trait, and emphasize differences in motivational drive of individuals and argue that motivation is the result of interaction between the individuals in the situation. In today’s competitive business environment, global competition forces organizations to value their employees and to perpetually find factors that enable it to motivate its employees to improve their performance and productivity.

Against this scenario of lack of specific approaches to a person’s motivation levels, we study some general approaches. These writers explore a premise that the level of motivation of people in organizations varies both between individuals and within individuals of different times, and explain motivational levels using two approaches that is need and process models. The difference in the approaches is that in need-based models we look at a person’s motivation from the point of view of his or her needs as motivators. We pay attention to studying and analyzing actions that are within a person that control their behavior to energize, direct, motivate and stop behavior. This approach gives leads and clues on what to look for to motivate a person to perform. Maslow (1943) argues that using this approach for motivation pays attention to a person’s physiological, security, affiliation, esteem and self-actualization.

Hertzberg (1968) in his two- factor modal explains that managers separate factors leading to job satisfactions as motivator factors from those leading to job dissatisfaction or hygiene factors. Motivator factors include the work itself, recognition, advancement, a sense of achievement and responsibilities. Hygiene factors are those related to job content or environment such as company policy, administration, salary, interpersonal relationship and working conditions. In the acquired needs by McClelland (1861) model, we examine three needs in work environment that is achievement, affiliation, and power. Here managers examine for when a need is strong, and use it to motivate a person to engage in behaviors to satisfy that needs. On the other hand in the process models we approach the motivation by trying to understand factors that influence the thought process that takes place within the person’s mind that influence his or her motivation levels.

In the expectancy model under the process approach, Vroom (1964) argues that work motivation is determined by an individual’s perceptions about the relationship between effort and performance, the relationship between performance and outcomes. Vroom emphasizes that for

International Journal of IJMBE Management, Business, and Economics 25 individuals rewards are the most important motivating factor. However Adams (1963) argues that equity or fairness in the workplace as a major factor in determining employee motivation. Employee feelings of inequity in rewards can damage key work results and cause employees to become frustrated.

Locks and Latham (1984) emphasize goal setting as a powerful tool to motivate employees to guide and direct behavior towards supportive organizational goals and provide challenges and standards against which the individual can be assessed. Pinchof (1996) identifies participative management and money as a means of motivating employees as contemporary issues offering challenges to today’s managers. The argument is that by participative management, subordinates share a significant degree of decision making power with their immediate superiors and motivates workers by providing more opportunities for growth, responsibility and commitment to the work itself. Lawler (2002) points out that to motivate employees with money, it must be important to them and must be perceived as a reward for performance.

Whilst the theories and approaches to motivation discussed so far offer useful guidance to identify factors influencing employee motivation, there are arguments that over the years the corporate world has given up on some of them and pay importance to newer workable strategic models based on career motivation (Andriopoulos, 200l). King (1997) explains that the crescendo effect in career motivation is the driving force behind employee participation, involvement and lasting value of commitment.

Efforts of motivation for employees go beyond performance. It is a central element when going through the process of human learning (Osteraker, 1999). Motivation becomes the aim of every successful learning organization to find the factors that enable it to motivate its employees for continuous learning and to take advantage of this knowledge to ensure its living. Osteraker (1999) further explains that many motivational theories have been constructed to find these motivational factors, but the values of the employees in specific organizations are seldom included in these theories. Reis and Pena (2001) argue that motivating people to work in the twenty-first century with theories conceived in the 1800s and early 1900 are likely to be infeasible. Managers should reconsider the outdated motivational patterns utilized to maintain role performance in organizations.

3. Analysis of Data

Malayan Railways Limited (KTMB) provides safe, efficient and reliable integrated rail services for people and goods. Motivation questionnaires were distributed to (KTMB) staff. Sample sizes of 50 respondents were used to make assumptions on the motivational level of the general population of all the staff at KTMB. The questionnaires were distributed evenly among top, middle, and bottom level management. A copy of the distributed questionnaire is enclosed in this paper. Questionnaire development was guided by 19 motivation dimensions derived from the literature review, i.e., activity; achievement; competition; fear of failure; power; recognition; status; ethics; interest; flexibility; progression; pressure; teamwork; management; customers; remuneration; job security; autonomy; and growth. Based on data responses analyzed using Likert Scale, various findings were developed on the factors affecting the motivational level of KTMB staff. The first motivation dimension to be studied was activity. KTMB staff had a very high level of activity in their daily jobs. All 50 respondents gave a rating of 8-10 for the activity level involved in their respective jobs. This suggests that they always had a lot to do and were always on the go with work related activities. Nevertheless, we cannot solely base the motivational level of KTMB staff on this factor alone and say that their motivation is high because there are many other factors involved.

International Journal of 26 IJMBE Management, Business, and Economics Sometimes you are always busy with work and you are always on the go as it is part and parcel of your job whether you are motivated to do it or not. You have to adhere to orders and instructions that go with your job.

In terms of the achievement level motivation dimension, a more varied response was collected. All 50 respondents gave a rating of 5-8 for achievement level. The majority of respondents felt the achievement level they could reach was average. Only the top level management felt they could achieve a high level of achievement on their job. The reason for this is that top level management probably has a higher level of testing job objectives, demanding responsibilities, and various new challenges.

In terms of competition dimension, a varied response was once again derived from the findings. Middle level management and top level management gave a rating of 8-9 for competition. They felt they worked in a competitive environment where people strived to be the best. In lower level management people just worked to get the job done and did not feel motivated in terms of competition. They only gave a rating of 4-6.

Fear of failure was another motivation dimension. This got a rating of 8-9 among all employees. Top level management felt that they were leaders in their respective jobs and had to prove their worth in their position. Middle level management and lower level management had a different perspective on fear of failure. They wanted to prove to upper level management that they could get the job done and also they did not want to be looked down at for not being able to get the job done. They also needed to gain respect from their superiors and did not want to be treated indifferently by their superiors for not being able to get the job done.

As for the motivation dimension of power, top level management and middle level management gave a high score of 8-9 for this question. They felt they had the freedom of being in charge, exercising control and having responsibility for people due to their job title and job description. Lower level management gave a score of 3-6 for this question. It ranged from low to average. From this, it is safe to say that KTMB most probably did not exercise empowerment throughout the organization and only a selected few enjoyed this privilege.

In terms of recognition, all the employees gave a score of 7-8. As this is the majority figure extracted from the survey, it can be interpreted that the employees view the level of appreciation for their services is given due recognition by the management. They felt they were acknowledged by bosses and colleagues for their efforts, skills and competencies in a satisfactory manner.

The next motivation dimension to be studied was status. The question on this motivation dimension received a varied response from each level of management. A score of 4-8 was obtained among all employees for this question. Although the response was quite diversified, a particular trend was noticed. Senior employees gave a high score while new employees like fresh graduates gave a lower score. The most likely reason for this occurrence is that senior employees are given more importance and a better standing due to their job experience gained from various organizations as well as their maturity in terms of age. Fresh graduates and relatively inexperienced staff do not have a high standing at KTMB despite their high qualifications. Seniority and experience seems to be given more importance in this organization.

In terms of ethics as a motivational factor, all employees felt they were working in an ethical working environment. The score for this was 9-10. This is a very good score from a sample size of

International Journal of IJMBE Management, Business, and Economics 27 50 and from this it can be deduced that there are no severe cases of sexual harassment, bullying, unhealthy office politics and other various misconducts.

All employees at KTMB gave a satisfactory response for interest as a motivational dimension. They gave a rating of 7-9 for this aspect of motivation. This suggests that employees at KTMB are encouraged to channel their thoughts and ideas in work- related decisions and activities. They felt their job offered them varied, stimulating and creative job objectives and work activities. In terms of flexibility as a motivational dimension, all employees gave a score of 6-7 for this question. While most agreed they had accommodating bosses, they did not agree about the flexibility of working hours and working conditions. This is because the working hours were generally fixed office hour times. The working conditions did not give a worker enough privacy. There were no cubicles for even middle level management. They worked in an open area where people could see what each other were doing.

This paper also studied progression as another motivational dimension. A varied response was derived from the findings of this question. All experienced and senior employees gave a high score of 8-9 while fresh graduates and young employees who had 3-7 years experience gave a low score of 2-5. The reason for this was senior employees were given a higher stand in the organization for progression. They either had a lot of experience from previous organizations or had worked a long time at KTMB and had moved up gradually at a slower pace. Fresh graduates and young employees who were highly skilled but lacked the years of experience would not be able to advance to more higher positions unless they had worked in the organization for a long time. Hence progression was seniority based and not on how well you did on the job.

In terms of pressure as a motivational dimension, the employees gave an average score of 6- 7. Most employees could handle the competing priorities, facing tight deadlines and managing setbacks. The likely reason for this could be that KTMB is a government linked corporation and employees are more likely to accept the fast and demanding working environment that has become associated with the private sector.

There were no complaints in terms of teamwork. All employees gave a score of 6-9 for this question. This proved that all employees could work together irrespective of seniority and status. It indicates that employees are encouraged to work in teams and teamwork is instrumental in accomplishing assignments objectives. Hence, it is safe to say that at KTMB, each employee subordinates his individual interests and opinions to fulfil objectives or goals of team.

This paper also studied management as another motivational dimension. Senior staff gave a high rating for this question. They gave a score of 8-9, while young employees gave a low score for this question. They gave a score of 2-4. The simple logic behind this was that senior employees had the freedom to supervise other people’s tasks, performance and personal while young employees did not have this freedom no matter how high their qualifications were.

In terms of customers as a motivational dimension, there were no problems. All employees gave a score of 7-9 for this question. They were all well trained in this aspect hence they did not face any problems here. They were capable enough to deal directly with customers and suppliers and handle problems in an appropriate manner.

The survey findings suggest that remuneration was not a significant motivational dimension at KTMB. Employees gave a rating of 6-7 for this question. This is because KTMB did not follow the Expectancy Theory whereby efforts lead to performance and performance leads to rewards.

International Journal of 28 IJMBE Management, Business, and Economics Remuneration was given based on the job title or once you had gained promotion and not based on job performance on your current job. Hence, the remuneration factor applied by KTMB did not really motivate its employees.

In terms of job security as a motivational dimension, all employees gave a high score of 7-9. Although the career advancements for young employees was not very promising and neither was the remuneration system at KTMB, all employees agreed that they had a secure, permanent and reliable job position. This indicates that employees could work at a peace of mind in the knowledge that they would not be sacked easily unless they committed some sort of gross misconduct.

The next motivation dimension to be studied was autonomy. The question on this motivation dimension received a varied response from each level of management due to specific reasons. Senior employees had the freedom and discretion to decide how to carry out work. Hence, they gave a score of 7-9 for autonomy as a motivational element. Young employees only gave a score of 4-5 for this motivational dimension as they did not have the freedom and discretion to decide how to carry out their work.

Finally, this paper studied growth as a motivational dimension. Senior employees gave a very high rating for this. They gave a score of 8-10 while young employees gave an average score of 6-7. The survey results suggest that senior employees had the opportunities to acquire new knowledge and skills as well as reach their personal goals. As for young employees, they also had the opportunities to acquire new knowledge and skills but there were many obstacles to reach their personal goals and it took a longer time.

4. Conclusion

The study finds that motivation theories learnt from scholars are not always applied in organizations. This does not suggest that these theories are irrelevant, but concludes that it is only applied in organizations where the culture is to follow management theories as well as adapting it with current times. However, from thorough research and observations, it became apparent that this is only being applied in most Western cultures as well as Japanese organizations. In Malaysian organizations, it is still a very much hierarchical and traditional way of applying management. This is especially so in the government sector where seniority plays a bigger role in motivating an employee as compared to the productivity level and skills of the worker.

Paper qualifications and skills alone do not guarantee you success in Malaysian organizations. Experience and seniority plays a big part as in the case of KTMB. KTMB is not a government agency, it works as a private agency but their organization runs very much on the same line as most government organizations. Hence, this paper reveals the many disadvantages for a highly qualified young employee who possesses all the skills but lacks the experience and seniority.

Due to the way organizations such as KTMB operate, they might struggle to motivate young employees. Instead, there is a high possibility that KTMB might end up making their young employees feel demotivated to work in such an organization. Young employees might feel that there is some sort of injustice towards them. No matter how much they contribute in terms of performance, they will not be given their just rewards and progression will only come once they have gained a lot of experience and worked for a long time. Hence, they might end up just producing the minimum level required of them so that they have a job and go back with a monthly salary.

International Journal of IJMBE Management, Business, and Economics 29 There is every possibility that young employees would not be motivated and have the high spirits that enable them to contribute to something new to achieve their personal goals as well as the organizational goals. This study indicates that if this were to continue, KTMB could struggle to attract fresh graduates as well as young employees who would bring in new skills to blend with the knowledge and experience of senior workers.

The main recommendation of this research is for the KTMB management to correlate management theories with motivation theories and apply them to motivate all their employees instead of just focusing on a cluster group of senior and long-serving employees. This research paper further stresses the importance and significance of management and motivation theories to an organization.

What is learnt in theory can be applied in organizations so that all employees whether new or old will be motivated to work and contribute to reaching the goals of their organization as well as their personal goals. Motivation theories like Expectancy Theory, Maslow’s Hierarchy of Needs, Needs-based model, Process model, Hertzberg’s Two-Factor Theory and so on are still applicable to the situation and context of today’s organizations. These theories were not invented by scholars just for the sake of creating some management theory. They were theories that were created after careful and thorough analysis of organizations in the past. These scholars looked at ways to improve the motivational level of organizations based on real life situations, not just some fancy creation that they taught of in their head. Hence, all these motivational theories are still applicable in organizations today.

Overall the study findings serve as providing indicative guidelines for Malaysian organizations to correlate management theories with motivation theories and apply them to motivate all their employees. This could help Malaysian organizations to be as successful and competitive as Western and Japanese organizations.

References

Albert S. King, (Nov 1997). The crescendo effect in career motivation, Career Development International, Vol.2, 6, 293-301.

Constantine Andriopoulos, (Dec 2001). Determinants of organizational creativity: a literature review, Management Decision, Vol.39, 10, 834-841.

Dayr Reis, Leticia Pena, (Oct 2001). Reengineering the motivation to work, Management Decision, Vol.39, 8, 666-675.

Jones, G., & George, J. (2003) Contemporary Management. (3rd ed.). New York: McGraw-Hill.

Lewis, P., Goodman, S., & Fandt, P. (2004). Management: Challenges for Tomorrow’s Leaders. (4th ed.). Ohio: Mason, Natorp Boulevard, South-Western.

Maria C. Osteraker (Mar 1999).Measuring motivation in a learning organization, Journal of Workplace Learning, Vol. 11, 2, 73-77.

International Journal of 30 IJMBE Management, Business, and Economics Appendix

Motivation Questionnaire

Lower Average Higher Motivation Dimension Activity: Having a lot to do, being on the go, 1 2 3 4 5 6 7 8 9 10 staying busy all the time. Achievement: Testing job objectives, 1 2 3 4 5 6 7 8 9 10 demanding responsibilities, new challenges. Competition: Working in a competitive 1 2 3 4 5 6 7 8 9 10 environment, striving to be the best. Fear of Failure: Not wanting to let self and others 1 2 3 4 5 6 7 8 9 10 down, being able to prove to others. Power: Being in charge, exercising control, having 1 2 3 4 5 6 7 8 9 10 responsibility for people. Recognition: Acknowledgment by bosses and 1 2 3 4 5 6 7 8 9 10 colleagues of efforts, skills, and competencies. Status: Deriving standing and feelings of 1 2 3 4 5 6 7 8 9 10 importance from work and job seniority. Ethics: Working in accordance with ethical 1 2 3 4 5 6 7 8 9 10 standards and personal principles. Interest: Varied, stimulating, and creative job 1 2 3 4 5 6 7 8 9 10 objectives and work activities. Flexibility: Accommodating bosses, hours 1 2 3 4 5 6 7 8 9 10 and working conditions. Progression: Opportunity to continually 1 2 3 4 5 6 7 8 9 10 advance to more senior positions. Pressure: Handling competing priorities, 1 2 3 4 5 6 7 8 9 10 facing tight deadlines, managing setbacks. Teamwork: Operating as part of a team 1 2 3 4 5 6 7 8 9 10 rather than as an individual contributor. Management: Supervising other people’s 1 2 3 4 5 6 7 8 9 10 tasks, performance, and personal. Customers: Dealing directly with customers and 1 2 3 4 5 6 7 8 9 10 suppliers and handling problems. Remuneration: Opportunity to boost earnings 1 2 3 4 5 6 7 8 9 10 related to job performance. Job Security: Secure, permanent, and reliable job 1 2 3 4 5 6 7 8 9 10 position. Autonomy: Freedom and discretion to decide how 1 2 3 4 5 6 7 8 9 10 to carry out work. Growth: Opportunities to acquire new 1 2 3 4 5 6 7 8 9 10 knowledge and skills, reach personal goal.

International Journal of IJMBE Management, Business, and Economics 31

Ambush Marketing in Sports

Gerd Nufer ESB Business School, Reutlingen University, Alteburgstrasse 150, D-72762 Reutlingen, Germany Tel: +49 7121 2716011, Fax: +49 7121 271906011 E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 33

Ambush Marketing in Sports

Gerd Nufer ESB Business School, Reutlingen University, Alteburgstrasse 150, D-72762 Reutlingen, Germany Tel: +49 7121 2716011, Fax: +49 7121 271906011 E-mail: [email protected]

Abstract

Sports event organizers sell exclusive marketing rights for their events to official sponsors, who, in return, acquire exclusive options to utilize the event for their own advertising purposes. Ambush marketing is the practice by companies of using their own marketing, particularly marketing communications activities, to create an impression of an association with the event to the event audience, although the companies in question have no legal or only underprivileged or non-exclusive marketing rights for this event sponsored by third parties. So, the objective of ambush marketing is to benefit from the success of sports sponsorship without having the duties of an official sponsor. The paper describes and structures the phenomenon of ambush marketing. It is fine line between creative marketing communication and infringing on sponsorship rights. From the perspective of the event organizers and sports sponsors it represents an understandable threat, while from the perspective of the ambushers it offers the opportunity to reach the target audience in an attractive environment and at affordable cost. In this paper ambush marketing is evaluated from a neutral perspective. Spectacular cases of ambush marketing are discussed and the opportunities and threats of ambush marketing in the sports context are summarized.

Keywords: Ambush Marketing, Sports Sponsorship, Event Marketing, Sporting Events, Soccer World Cup, Olympics

1. Introduction

For many companies, it is major international sporting events in particular, e.g. the Soccer World Cup or the Olympics, that constitute the ideal platform for the integration of their target group-specific communications into an attractive sports environment. Sports event organizers therefore sell exclusive marketing rights for their events to official sponsors, who, in return, acquire exclusive options to utilize the event for their own advertising purposes. Ambush marketing is defined as the method used by companies that do not actually hold marketing rights to an event, but still use their marketing activities in diverse ways to establish a connection to it.

2. The Principles of Ambush Marketing

The philosophy of ambush marketing consists of achieving conventional marketing objectives with unconventional methods. The general intention is that a relatively small investment generates the greatest possible impact.

International Journal of IJMBE Management, Business, and Economics 35 2.1. The Definition of Ambush Marketing

In popular sources, ambush marketing is frequently used synonymously with terms such as "coattail marketing", "parasitic marketing" and "freerider marketing". Official sponsors define these ambushes on high-priced advertising rights as "theft" and emphasize the illegal aspects of ambush marketing (Payne, 1998; Townley, Harrington & Couchman, 1998). However, there are also representatives of the opposite standpoint. They see ambush marketing as a "legitimate power" that facilitates more efficiency in the sponsorship market. "All this talk about unethical ambushing is … intellectual rubbish and postured by people who are sloppy marketers" (Welsh, 2002).

For the following observations, this definition shall be applied: Ambush marketing is the practice by companies of using their own marketing, particularly marketing communications activities, to create an impression of an association with the event to the event audience, although the companies in question have no legal or only underprivileged or non-exclusive marketing rights for this event sponsored by third parties. Thus, ambushers want to promote and sell products via an association with the event as official sponsors are allowed to do (Nufer, 2013; 2010).

2.2. The Objectives of Ambush Marketing

The idea of ambush marketing is to capitalize on the success of sports sponsorship without taking on the intrinsic obligations of an official sponsor. The objectives of ambush marketers are therefore largely identical to those of the sponsors, but are to be attained with reduced financial expenditure (Pechtl, 2007). The objectives of ambush marketing can thus be deduced from the objectives of sponsorship. Their primary function is the achievement of psychological and/or communicative aims (see Figure 1).

Target variables of Ambush Marketing

economic psychological competition-orientated

sales, attention awareness, image, weakening of competition, turnover, topica lity goodwill reduction of effectiveness of sponsorship market share, profit

Figure 1 Objectives of Ambush Marketing

3. Structuring the Manifestations of Ambush Marketing

In the following an approach to structuring the various manifestations of ambush marketing is presented. This classifies the latter into different categories, case groups and cases.

International Journal of 36 IJMBE Management, Business, and Economics 3.1. Differentiating the fundamental Categories of Ambush Marketing

In the first step, three basic categories of ambush marketing are differentiated.

To begin with, it can be differentiated between direct ("blatant") and indirect ("subtle") ambush marketing (Du Toit, 2006; Pechtl, 2007; Wittneben & Soldner, 2006). It is characteristic of direct ambush marketing for actions to target the marketing rights of the event organizer or the event sponsors without deviation. Indirect ambush marketers, on the other hand, use the sports event as the motive for their own marketing activities, which is why indirect ambush marketing is prevalent primarily in the area of communications. In literature this fundamental differentiation has been established. The aforementioned dichotomy is complemented by a third category that can best be designated as dominant destructive-aggressive ambush marketing: The essential objective of actions in this category is to diminish the effectiveness of official sponsorships with predatory methods. The obstruction of sponsors’ measures is generally an attack on a direct competitor of the ambusher: in effect weakening the competition.

3.2. Differentiating Ambush Marketing Case Groups per Category

In a second step, these three categories are further broken down into case groups, in which similar cases are grouped together.

Within the scope of direct ("blatant") ambush marketing, direct ambushing approaches that are motivated primarily by product policy and predominantly pursue (mainly short term) economic objectives are distinct from direct ambushing activities whose motivation and implementation are focused primarily in the realm of communications policy and which therefore prioritize (mainly medium term) psychological objectives. Within the scope of the first case group, event-associated products are created and marketed in an unauthorized manner. The second case group involves communicative pretense to a sponsorship that, in reality, does not exist (Nufer & Geiger, 2011).

Initially, indirect ("subtle") ambush marketing is subdivided into ambush marketing by intrusion and ambush marketing by association. Whereas under ambush marketing by intrusion all ambush activities that can be characterized as "capitalizing on the opportunity" are subsumed within the scope of a sports event, ambush marketing by association can be further differentiated: "Agenda setting" encompasses all ambush marketing measures that can be subsumed under "positioning by topicality" and focus on the event as a communications platform (Pechtl, 2007). "Fun ambushing" (Nufer, 2005) and "philanthropic ambushing" (Nufer & Geiger, 2011) constitute two separate special cases of ambush marketing by association.

The category "dominant destructive-aggressive ambush marketing" is not differentiated into any distinguishable case groups.

3.3. Typology of the Manifestations of Ambush Marketing

Finally, in the third step, a total of 21 cases of ambush marketing subsumed in the individual categories and case groups are distinguished from one another. Figure 2 summarizes the observations with regard to structuring and systematizating the manifestations of ambush marketing.

International Journal of IJMBE Management, Business, and Economics 37 Ambush Marketing

Direct ("blatant") Indirect ("subtle") Dominant destructive–aggressive Primarily Primarily By Intrusion By Association product-policy communications-policy motivated motivated Agenda Fun Philantropic setting ambushing ambushing

(1) Unauthorized use (4) Advertising with (8) Advertising in the (14)Sportsand event (19) Fun (20)Philantropic (21)Dominant of event brands event brands geographical asthecontextual ambushing ambushing destructive-aggressive environment leitmotif of the ambush marketing (2) Unauthorized use (5) Simulationof communiations of event materials sponsorship (9) Advertising in the strategy media environment / (3) Unauthorized (6) Overreachingon public relations (15)Equipment sponsorship cateringat the lower-privilege event venue rights in a (10)Broadcast program (16)Testimonial/celebrity sponsorship sponsorship endorsement subcategory (11)TV advertising in the (17)Advertising with the (7) Advertisign at the context of event coverage event location event venue (12)Providing services (18)Partnership to facilitate in theextended event establishing connections environment to the event

(13)Launch of products orservices in conjunction with the event

Figure 2 Systematization of the Manifestations of Ambush Marketing

A clear cut differentiation is not always possible, but that overlaps do occur (Nufer, 2011). What this means is that some ambush activities have multiple characters and could (or even should) be ascribed to two (or possibly more) parallel cases. Neither does the systematization claim to be complete. Based on the highly innovative content of ambush marketing, with its constantly new creative activities, this is rather a snapshot of the current situation. The applied structure is therefore not rigid, but flexible and open in order to allow for new cases to be subsequently included and integrated.

4. Case Studies

Soccer World Cup championships cumulatively reach well over 30 billion television viewers worldwide, thus being the most popular sports event by far. Thus, Soccer World Cups provide a welcome opportunity for companies to align their advertising activities with the event. The following presents two particularly striking examples of ambushing activities that were observed in the context of the 2006 and 2010 Soccer World Cups (Nufer, 2013).

Before and during the 2006 Soccer World Cup in Germany, Bavaria, a beer brand owned by the Dutch Heineken group, distributed about 250,000 samples of imitation lederhosen in the Dutch national colour orange, bearing the advertising imprint "Bavaria" (see Figure 3).

International Journal of 38 IJMBE Management, Business, and Economics

Source: http://blog.karotte.org (accessed 2 August 2006)

Figure 3 Ambush marketing by Bavaria 2006

The intention was to have the Dutch fans wear these lederhosen during their World Cup stay in what was supposedly the "lederhosen country" of Germany and especially to display these prominently during their stadium attendances. This strategy was initially successful, as thousands of Dutch fans showed up wearing the bib-pants at the Netherlands vs. Ivory Coast group stage game in Stuttgart to – consciously or subconsciously – act as disseminators transporting unauthorized advertising into the stadiums. In order to protect the official sponsors, a rapid decision by the organizers was called for. FIFA invoked Rule 10 of the tickets’ terms and conditions, which stated that "advertising, commercial, political or religious articles of all types, including banners, symbols and flyers … are inadmissible and … may not be brought into the stadium if the organization committee has grounds to assume that these will be displayed in the stadium." Therefore, the FIFA Rights Protection Team saw to it that all unauthorized Bavaria advertising items remained outside the stadium gates, i.e. over 1,000 Dutch fans had to remove their lederhosen, otherwise FIFA would have barred them from entering the stadium. Although ultimately a repelled ambush attempt, the operation produced a tremendous amount of attention for Bavaria. The fact that over 1,000 persons followed a World Cup game in the stadium in their underpants was picked up with great interest by the media.

During the 2010 Soccer World Cup in South Africa Bavaria also relied on ambush marketing and again attained a high level of media attention – this time with the so-called "beer babes". The spectators at the preliminary round game Netherlands against Denmark in Johannesburg included 36 young women who showed up in the orange-coloured mini-dresses of the brewery. This time the Bavaria brand name was only evident on a small label on the seam (see Figure 4).

International Journal of IJMBE Management, Business, and Economics 39

Source: http://www.zeit.de (accessed 14 August 2010)

Figure 4: Ambush marketing by Bavaria 2010

Once again, FIFA was rigorous in dealing with this action, had the blondes removed from the stadium and even briefly had their alleged ringleaders arrested. Then the situation exploded. The World Soccer Association filed suit in court against the planned promotion. The Dutch embassy assured the women of legal support. While Bavaria’s advertising intent in 2006 with the clearly visible logo on the bib-pants was obvious, the brewery’s calculation in 2006 was infinitely more subtle. In the opinion of the author, this is literally cool, calculated ambush marketing straight from the drawing board. On site, i.e. in front of and in the stadium the action was initially not recognized as ambush marketing. Thus, the "beer babes" – other than four years earlier the fans dressed in orange Bavaria-bib pants – were easily able to make their way into the stadium. Who pays attention to a few orange-clad girls (with a barely visible Bavaria logo) in a stadium, when thousands of orange-clad Dutch fans are already there? Again, it was only with the intervention of FIFA that the ambush marketing activity was exposed as such and became public knowledge. Only this way did an initially totally harmless incident, in terms of advertising effectiveness, make it into the media reports and achieve such an immense PR impact – and that is precisely what Bavaria wanted to achieve.

5. A Critical Evaluation of Ambush Marketing

Ambush marketing is situated at the intersection of two opposing spheres of interest waging a distribution battle for the marketing potential of a sports event. On one side are the organizers and the official sponsors; on the other, the ambushers. From the perspective of the organizers and sponsors ambush marketing represents a threat; from the perspective of the ambushers it creates an opportunity (Bruhn & Ahlers, 2003, Pechtl, 2007). The following arguments can be made for and against ambush marketing.

5.1. The Risks and Limits of Ambush Marketing

In return for their sponsorship and licensing fees, the official sponsors want to have the exclusive capacity to fully exploit the marketing potential of the sports event. This also serves the interests of the organizers as they can command higher revenues from the sponsorship and licensing business. From this perspective it is therefore legitimate to take advantage of the available legal options to protect this common interest with exclusivity. The infringement of intellectual property rights of official sponsors, in particular, is subject to legal action. Based on the general sense of justice it can be argued that only companies who have made a financial contribution to the implementation of the sports event can reap its economic rewards (Wittneben & Soldner, 2006).

International Journal of 40 IJMBE Management, Business, and Economics Moreover, ambushers infringe on the bylaws of diverse company and agency organizations, whose aim it is to promote fair and ethical marketing (e.g. the "Standards of Practice" of the American Marketing Association of Advertising Agencies and the "Code of Ethics" of the Business Marketing Association). In this regard ambush marketing constitutes deception of consumers (Bruhn & Ahlers, 2003; Wittneben & Soldner, 2006). A negative image transfer from the ambushing actions to the initiating company is also possible and is a particular threat if the target group sought compares the positive promotional ideas of the official sponsors with the possibly even destructive- aggressive practices of the ambushers – something that can climax in a reaction by the targeted consumers.

Opponents of ambush marketing condemn ambushing as illegal theft of high-priced advertising rights. A statement made by former IOC marketing director Michael Payne sums up the opinion of many critics: "Ambush marketing is not a game. It is a deadly serious business and has the potential to destroy sponsorship. If ambush or ‘parasite’ marketing is left unchecked, then the fundamental revenue base of sports will be undermined. […] ambush marketers are thieves knowingly stealing something that does not belong to them" (Payne, cited in Sportlink, 2003). These arguments can be further consolidated as follows: what would happen if all companies were to prefer ambushing to their commitments as official sports sponsors?

5.2. The Opportunities and Application Options for Ambush Marketing

Due to the high cost of official sponsorship and the assurance of industry exclusivity by the organizers, a dwindling number of companies are able to participate as official sponsors at mega sports events. Ambush marketing conforms to the competitive notion of not letting profit and sales opportunities go untapped. The lack of a company’s own performance in support of a sports event and the aim of still taking advantage of its marketing potential is not unethical per se. A sports event should not be conducted as a "private function" by the organizers and the participating sponsors.

In recent years an increasing tendency to "monopolize" large scale sporting events has also been observed. This is sometimes manifested in "regulation frenzies" that are, if anything, exaggerated and perpetrated by the organizers with regard to the usage of their event-related hallmarks. This is not always discernible to a broader public and occasionally even generates certain sympathies for ambushers. At the same time, a rigid approach to dealing with ambushing also endangers having a modicum of advertising freedom (Pechtl, 2007; Wittneben & Soldner, 2006).

Jerry Welsh is considered to be one of the most active champions of ambush marketing: "When you own and license Kermit you have only given the rights you own to one specific frog, and maybe not even to all green ones. […] ambush marketing, correctly understood and rightly practiced, is an important, ethically correct, competitive tool in a non-sponsoring company's arsenal of business- and image-building-weapons. To think otherwise is either not to understand – or willfully to misrepresent – the meaning of ambush marketing and its significance for good – and winning – marketing practice" (Welsh , 2002). The proponents of ambush marketing define ambushing as a legitimate, creative power that helps the sponsorship market by providing greater efficiency. They believe that ambush marketing is only possible if the sponsors do not sufficiently protect their activities or do not completely exploit their potential (Portmann, 2008; Welsh, 2002). Ambush marketing could thus be considered a new and innovative instrument in the marketing mix.

International Journal of IJMBE Management, Business, and Economics 41 6. Managerial Implications and Discussion

It is obvious that ambush marketing operates in a "grey area" somewhere between permissible and prohibited actions and between fair and unfair competition (Bruhn & Ahlers, 2003; Wittneben & Soldner, 2006). Therefore, an evaluation of ambush marketing must necessarily apply legal as well as ethical-moral standards. In the following, the insights derived from the above examination are revisited and combined with the results of a legal and ethical-moral evaluation (see Table 1).

Table 1 Results of a nuanced Contemplation of Ambush Marketing

Legal evaluation Legally preventable Legally unpreventable or virtually Ethical-moral unpreventable evaluation Morally Containable: Controversial: objectionable Direct Ambush Indirect Ambush Marketing Marketing by intrusion, dominant-aggressive Ambush Marketing Morally Tolerated: Innovative: unobjectionable or virtually Local Ambush Indirect Ambush unobjectionable Marketing Marketing by smaller businesses by association

The four fields of the matrix can be characterized as follows:

"Containable" Ambush Marketing: This group consists of ambushing actions against which the organizers are not defenseless in terms of legal repercussions and, above and beyond this, are also morally objectionable. On the one hand, the organizers can counter the infringement of their rights with legal action. On the other hand, such cases of ambushing can be averted or at least greatly constrained with the use of appropriate preventive measures. This category is primarily characterized by direct ambush marketing.

"Controversial" Ambush Marketing: This group encompasses measures that, while fundamentally legitimate or legally unpreventable or virtually unpreventable, must nonetheless be subject to critical assessment in terms of ethical-moral aspects. At this point dominant-aggressive ambush marketing must be mentioned. However, cases of indirect ambush marketing by intrusion can also be subsumed under this category. Organizers frequently have no ex ante legal recourse to inhibit these forms of ambush marketing or to counter with ex post intervention.

"Tolerated" Ambush Marketing: Practices that are basically open to legal challenges by the organizers, but at the same time appear relatively harmless in ethical terms can be placed in this area of the matrix. These are cases that can be interpreted as unauthorized ambush actions but generally do not incur legal action by the organizers, i.e. they are tolerated because they do not result in a weakening of official sponsorship. Such actions are often initiated by smaller, local operations, e.g. a baker offers "World Cup rolls".

International Journal of 42 IJMBE Management, Business, and Economics "Innovative" Ambush Marketing: This area refers to ambush marketing that is neither legally nor ethically-morally objectionable and is open to all creative ambushers. The prime example for this group is indirect ambush marketing by association. As long as the rights of organizers and official sponsors are not infringed upon, there are no objections to agenda setting and even less so to fun ambushing. These creative and frequently amusing approaches may even be rated as innovative communications policies that enrich advertising practice.

7. Conclusion

Ambush marketing remains controversial and will continue to be the subject of contentious discussions. From the perspective of the event organizers and sports sponsors it represents an understandable threat, while from the perspective of the ambushers it offers the opportunity to reach the target audience in an attractive environment and at affordable cost. However, ambush marketing may by no means be relegated to the status of a "dirty word" of sports marketing per se on the basis of its controversial nature. Instead, ambush marketing should be classified as a competitive tool in conjunction with a sporting event. The fact that ambush marketing is often a "race between the tortoise and the hare" in which the organizers take on the role of the hare should therefore be viewed as a sign of functioning competition in which all the participating players deploy their specific "weapons": official sponsorship versus creativity (Pechtl, 2007; Nufer, 2010).

References

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McDonald, John & Davidson, John (2002), Avoiding Surprise Results at the Olympic Games, Managing Intellectual Property, No. 115, pp. 22-27.

Meenaghan, Tony (1998), Ambush Marketing: Corporate Strategy and Consumers Reaction, Psychology & Marketing, Vol. 15, No. 4, pp. 305-322.

Nufer, Gerd (2005), Ambush Marketing – Angriff aus dem Hinterhalt oder eine Alternative zum Sportsponsoring? In Horch, Heinz-Dieter, Hovemann, Gregor, Kaiser, Sebastian & Viebahn, Kai (Eds.), Perspektiven des Sportmarketing. Besonderheiten, Herausforderungen, Tendenzen, Deutsche Sporthochschule Köln, pp. 209-227.

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Nufer, Gerd (2011), Ambush Marketing: Beschreibung, Erscheinungsformen und Grenzen, der markt – International Journal of Marketing, Vol. 50, No. 1, pp. 55-69.

International Journal of IJMBE Management, Business, and Economics 43 Nufer, Gerd (2013), Ambush Marketing in Sports. Theory and Practice, Oxford and New York: Routledge.

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Townley, Stephen, Harrington, Dan & Couchman, Nicholas (1998), The Legal and Practical Prevention of Ambush Marketing in Sports, Psychology & Marketing, Vol. 15, No. 4, pp. 333-348.

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International Journal of 44 IJMBE Management, Business, and Economics The Economic Value of Money Market Funds in and Around the Financial Crisis of 2008

John F.O. Bilson Illinois Institute of Technology, Illinois, Chicago, USA E-mail: [email protected]

and

Lalita Hongratanawong University of the Thai Chamber of Commerce, Bangkok, Thailand E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 45

The Economic Value of Money Market Funds in and Around the Financial Crisis of 2008

John F.O. Bilson Illinois Institute of Technology, Illinois, Chicago, USA E-mail: [email protected]

and

Lalita Hongratanawong University of the Thai Chamber of Commerce, Bangkok, Thailand E-mail: [email protected]

Abstract

MMFs have been a popular vehicle for both investors and borrowers. However, during the 2008 financial crisis, the Reserve Primary Money Fund was forced to drop their NAV below a dollar. The MMF business was highly stressed with many investors rushing to withdraw their investments. The situation stabilized when the U.S. Treasury stepped in and provided a guarantee to all investors in MMFs that the government would not allow the NAVs to fall below one dollar. After the incident, there has been a wide ranging discussion within the investment community and its government regulators over the appropriate regulation of MMFs. During the recent debate, one topic that has not been extensively discussed is the economic value of the MMF business to the investors and borrowers in the industry. In this research, we estimate the demand for MMF funds by borrowers and the supply of MMFs funds by investors. Using concepts similar to the concept of consumers and producers surplus, we estimate the investors’ and borrowers’ surplus from the existence of the MMF business. In the empirical section of the paper, we estimate the supply and demand curves in the MMF business. These estimates then allow us to estimate the investors’ and borrowers’ surplus. Some commentators have suggested that recent regulatory changes have resulted in an increased spread between borrowing and lending rates in the MMF business of 0.1 percent. Our model allows us to estimate the economic loss from 0.1 percent to 1 percent from the regulation. While the fact that the regulation causes economic loss does not mean that it should not be implemented, it is important for regulators to determine if the benefits of the increased regulatory burden and worth the costs incurred.

Keywords: Money Market Funds, Economic Value, Regulation, Financial Crisis

International Journal of IJMBE Management, Business, and Economics 47 1. Introduction to Money Market Mutual Funds

Money market mutual funds (MMFs) are also known as money funds or money market funds. MMFs are regulated by the Securities and Exchange Commission (SEC) in the United States, under Rule 2a-7. 1 Regulations adapted from the Investment Company Act Protection of 1940 allow MMFs to offer deposit like instruments that are traded at a fixed one dollar net asset value (NAV). The stable price per share is attractive to investors, and can be perceived as a cash equivalent or as an alternative to a bank’s deposit accounts including checking accounts, saving accounts, money market deposit accounts and time deposit accounts, even though the MMFs are not insured by The Federal Deposit Insurance Corporation (FDIC). MMFs are required to restrict their asset holdings to short duration fixed income instruments with high credit quality. (Seligman 1983; Koppenhaver and Sapp 2005; Investment Company Institute 2009, 17).

The amount invested in MMFs2 increases rapidly during the financial crisis of 2008 comparing to the total investment in all commercial banks in the United States3. By restricting assets to instruments of short duration and high credit quality, the MMFs typically offer a very high probability of not “breaking the buck.” This feature is especially difference to investments in equities and long term bonds where losses can exceed 10 percent in a single day. MMFs also offer advantages to borrowers since they provide a broad and deep source of funds during periods in which bank lending may be limited.

Since MMFs operate as an intermediary between investors and borrowers, those funds are very useful especially to small investors and mid-size borrowers, who have limitations on how to invest in multiple markets and in large quantities. The models used in this study are based on the literature of the demand and supply for MMFs and an actual model of the investors’ and borrowers’ surplus in the MMFs market.

The study illustrates that the supply curves are considered “elastic” or changes in the yields of MMFs have a relatively large effect on the quantity of the assets that the investors want to invest. Whereas the demand curves are considered “inelastic” or change in the yields of MMFs have a relatively small effect on the quantity of the assets that borrowers demanded. With same change in yield, the change in asset demand is less than the change in assets supplied. It can also be hypothesized that the borrower has less power in driving the yields of the MMFs, since they have options only related to funds, and are restricted more so than investors.

1 Corresponding to references in the bibliography. Swirsky (2008) and The University of Cincinnati College of Law (n.d.) provide an excellent information about Rule 2a-7.

2 Total assets investments in MMFs are total share class investments in billions of dollars. Data is from Crane, Money Fund Intelligence.

3 Total investments at all commercial banks are collected from data For further information of, please refer to the Board of Federal Reserve System’s H.8 release, http://research.stlouisfed.org/ fred2/series/INVEST?cid=99.

International Journal of 48 IJMBE Management, Business, and Economics 2. The Mechanism of Money Market Mutual Funds

Not only MMFs are the instruments that attract lenders who are after liquidity, and a safe source of income, but also they are the instruments that attract borrowers who need short-term cash by selling securities or borrow funds. In this sense, MMFs are described as a repository for short- term funds.

In order to find the value of the MMFs for both borrowers and investors, the calculation of the equilibrium value for demand and supply curve for MMFs is required. The demand and supply curves are identified from tracing factors that shift one curve without manipulating the other.

Lam et al. (1989), Dow and Elmendorf (1998), Farinella and Koch (1999) and Ball (2001, 2002) suggested that the amount of MMFs that lenders supply is negatively related to the yield of saving deposits and the yield of government debts such as three month United States Treasury bills. Therefore, the supply function can be simply described as a function of the difference between the yield of the MMFs and the yield of three month United States Treasury bills. An increase in the yield of the three-month Treasury bills would cause investors to pull their money out of the money market mutual fund, and place their money into an alternative investment such as the Treasury bills. This would result in a smaller quantity of funds and a higher yield. In order to enumerate the higher yield, one would have to determine the slope of the supply curve.

MMFs allow borrowers including private companies, governments, government agencies, depository institutions, and banks to acquire temporary cash by issuing short-term debts with the maturity less than a year including commercial paper, Treasury bills, certificates of deposit, and repurchase agreements. According to Copeland and Rappaport (2009), today MMFs are riskier with the higher yields than that in the previous MMFs. Municipalities who have issued debt instruments have relatively higher risk to those securities they hold. However, borrowing through MMFs is still considered cheaper than issuing similar debt with bank guarantees. The interest rates that banks charge can be in the range of 0.1 percent to more than 2 percent, or they can even be higher than the overall debt offering.

The yield of AAA bonds was chosen as the relative interest rate used in the demand function in this study. The demand function can therefore be explained as a difference between the yield of the money market mutual fund and the yield of AAA bonds. If we were to see an increase in bond rates, this would stimulate the borrowers to issue their owned bonds, commercial paper, or any short term instrument as their source of funds, hence the increase in demand for MMFs. This in turn would cause an increase in yield, as well as an increase in quantity. In order to enumerate the higher yield, one would have to determine the slope of the demand curve.

In determining the simple model for money market demand and supply curves, one can think of the event that an investor supplies his money to trade in the MMFs as the event that he expects to gain the interest from the borrowers such as sophisticated hedge funds and banks as in a standard matching model. In order to identify the demand and supply curves, some shift factors for demand should influence demand without influencing supply, and some shift factors for supply should influence supply without influencing demand. Since there are many shift factors that influence the demand and supply curves, the objective of this study is not to obtain the best fit. It is complicated to predict the numerical value of assets being invested in MMFs because of a large number of factors that collectively affect these assets. However, these other factors may be difficult to predict or identify independently. In addition, there are a number of possible errors involved in gathering and computing these shift factors. The contribution of this study is to estimate the main value of the

International Journal of IJMBE Management, Business, and Economics 49 MMFs. Therefore, after reviewing the previous research, we assume that money market mutual fund investors allocate their money into a three-month United States Treasury bills as an alternative method of investment, which directly influences the supply of MMFs. In addition, the borrowers are assumed to issue AAA bonds as an alternative source of funds, which directly influences the demand for MMFs.

The exponential regression model or the log-linear model is used in supply function and demand function to measure elasticity of the total amount of assets invested in MMFs with respect to the yield different between MMFs and three-month Treasury bills in supply function and the yield differential between AAA bonds and MMFs in demand function, respectively. The elasticity is the percentage change in the total amount of assets invested in money market mutual fund for a small percentage change in these independent variables in supply function and demand function, respectively.

2.1 Supply Function: E E Q s K exp ( 0 1 ( MMF s TB 3)) s (1)

where, Qs represents the total amount of assets invested in MMFs in supply function, qs represents the natural log of the total amount of assets invested in MMFs in supply function, Ks represents the net worth of investors. It is a constant term in supply function, E ! and represents the constant of the supply function, 1 0 E represents the coefficient of the supply function, 1 MMFs represents the annualized 7-day yields of Crane 100 Index of MMF, TB3 represents three-month Treasury bills.

From equation (1), we take the natural logarithm of both sides of the equation, as well as denoting the entire equation by the symbol qs, giving us s ln(Q ) qs (ln(K s ) E 0 ) E1 (MMFs TB3) Since ln(Ks) is a constant, we can rewrite that s ln(Q ) qs E 0k E1 (MMFs TB3) (2) where,

E0k ln(K s ) E 0 2.2 Demand Function: J J Q d K exp ( 0 1 ( MMF d AAA )) (3) d s we can see from Figure 6.2 that Ȗ1 is less than zero, we want to get the positive Ȗ1 for simple calculation. Therefore, we can rewrite the equation (3) as; J J Q d K exp ( 0 1 ( AAA MMF d )) d (4) where, Qd represents the total amount of assets invested in MMFs in demand function, qd represents the natural log of the total amount of assets invested in MMFs in demand function, Kd represents the net worth of the borrowers. It is a constant term in demand function, J ! and represents the constant of the demand function, 1 0 J represents the coefficient of the demand function, 1 MMFd represents the annualized 7-day yields of Crane 100 Index of MMFs,

International Journal of 50 IJMBE Management, Business, and Economics AAA represents three-month Moody's Seasoned Aaa Corporate Bond Yield.

From equation (4), we take the natural logarithm of both sides, as well as denoting the entire equation to be represented by a single variable qd, giving us ln(Q d ) q (ln(k ) J ) J (AAA MMF ) d d 0 1 d Since ln(Kd) is a constant, we can rewrite that ln(Q d ) q J J (AAA MMF ) d 0k 1 d (5) where,

J 0k ln(K d ) J 0 In equation (1) and (2), there are two unknowns; E and E . Moreover, there are two unknowns; 0k 1 J andJ in equation (4) and (5). 0k 1

The equilibrium value of MMFs occurs when investors are willing to put their assets into MMFs, which is equal to a monetary value that money borrowers are required to have at a certain yield. This yield is called the equilibrium yield. It will tend not to change unless demand or supply of the MMFs change. When the yield is above the equilibrium point there is a surplus of supply as supply exceeds demand. In other words, the demand and supply are imbalanced resulting in disequilibrium and generating oversupply. Therefore, the equilibrium function can be written as;

2.3 Equilibrium function:

In terms of quantity invested in the MMFs, ln(Q s ) q ln(Q d ) q ln(Q*) q * (6) s d In terms of yields, MMFs=MMFd=MMF* (7) where, Qs and Qd represent the total amount of assets invested in MMFs in supply function and demand function respectively, qs and qd represent the natural log of the total amount of assets invested in MMFs in supply function and demand function respectively, Q* represents the total amount of assets invested in MMFs in the equilibrium function, q* represents the natural log of the total amount of assets invested in MMFs in the equilibrium function, MMFs and MMFd represent the yield of MMFs in supply function and demand function respectively, MMF* represents the yield of MMFs in the equilibrium function.

Whereas the yield is below the equilibrium point there is a shortage in supply as demand exceeds supply. In other words, there are out of balance between demand and supply, which also cause the disequilibrium and generate over demand or shortages supply. When there is disequilibrium in the market, the yield and the amount of assets invested in MMFs will be adjusted back to the equilibrium value so that both investors and borrowers agree. The area under the horizontal line of the equilibrium yield and above the supply curve is called supply surplus as illustrated in Figure 1. Supply surplus is the difference between what investors actually receive at the certain interest rate or yield that they invest in the MMFs and what they are willing to invest in these funds.

International Journal of IJMBE Management, Business, and Economics 51

Figure 1 Economic Surplus

3. The Economic Equilibrium Model of MMFs

As mentioned above, shift factors for both demand and supply are used to identify the supply and demand curves. The demand shift factors should influence demand without influencing supply and the supply shift factors influence supply without influencing demand. We assume that MMFs investors will allocate their money into a three-month United States Treasury bills as an alternative method of investment, and that AAA bonds directly influence the demand of MMFs as an alternative source of funds.

Taking the first two functions into account, one can then use this to determine when the equilibrium in the market place occurs. This occurs when the supply is equal to the demand, and in equating the three equations (equation (2);

qs E 0k E1 (MMFs TB3) , equation (4); qd J 0k J 1 (AAA MMFd ) and

equation (6); qs qd ), we can derive the equation as follows: E E (MMF * TB3) J J ( AAA MMF *) 0k 1 0k 1 (8) The next step is to rearrange MMF* to be on the same side then we have; J E E J MMF* 0k 0k 1 TB3 1 AAA (9) E J E J E J 1 1 1 1 1 1 The equilibrium function (8) shows us that both the Treasury bills and the AAA bonds affect the yield of the MMFs. From the equilibrium function, if the supply curve is infinitely

elastic (E1 o f) , then the equilibrium yield will be equal to the three month Treasury bill rate, and if

the demand curve is infinitely elastic (J 1 o f) , then the equilibrium yield will be equal to the AAA bond yield. The quantities of assets in the MMFs would then be determined by the demand and supply curve respectively. In addition, the sum of the coefficients of the explanatory variables in equilibrium function equal one. Since the sum of the two coefficients equal one,

International Journal of 52 IJMBE Management, Business, and Economics E J 1 1 1 (10) E J E J 1 1 1 1 Therefore, E J 1 TB3 1 AAA can be rearranged as; E J E J 1 1 1 1

J 1 (AAA TB3) TB3 (11) E J 1 1 Replace (10) in equation (8), we have the equilibrium function in term of the yield of the MMFs as; J E J MMF*TB3 0k 0k 1 (AAATB3) (12) E J E J 1 1 1 1 To identify the equilibrium function in term of the amount of assets invested in the MMFs, we employ equation (6); MMFs = MMFd = MMF* From equation (2); ln(Q s ) E E (MMF TB3) , we can rearrange the equation in term of 0k 1 s MMFs that; § ln(Q s ) E · MMF ¨ 0k ¸ TB 3 (13) s ¨ E ¸ © 1 ¹ And from equation (5); ln(Q d ) J J (AAA MMF ) , we can rearrange the equation in term of 0k 1 d MMFs that; § ln(Q d ) J · MMF ¨ 0k ¸ AAA (14) d ¨ J ¸ © 1 ¹ Since we know that MMFs=MMFd=MMF*, therefore; § ln(Q*) E · § ln(Q*) J · ¨ 0k ¸ TB3 ¨ 0k ¸ AAA (15) ¨ E ¸ ¨ J ¸ © 1 ¹ © 1 ¹ From equation (15), we can rearrange ln(Q*) or q*in one side, then we have E J E J E J ln(Q*) q* 1 0k 0k 1 1 1 (AAATB3) (16) E J E J 1 1 1 1 From the equation (16)4, the total amount of assets invested in MMFs at equilibrium depends upon the different between the yield of AAA bonds and the yield of three-month Treasury bills. If there is an increase in the yield of AAA bonds, the borrowers assume to shift their cost of funds to issue money market products. Similarity, if there is a decrease in the yield of three-month Treasury bills, investors assume to shift their funds to invest in MMFs.

4 From equation (16), we can get the total amount of assets invested in MMFs at equilibrium by taking exponential of the ª E J E J E J º Q* exp(q*) exp 1 0k 0k 1 1 1 ( AAA TB3) « E J E J » logarithmic function. Therefore, ¬ 1 1 1 1 ¼

International Journal of IJMBE Management, Business, and Economics 53

4. Data

The following analysis is based on monthly historical data over the crisis period from April 2006 to December 20105, containing fifty seven monthly observations, in order for us to investigate the equilibrium condition. The MMF yield is represented by the Crane 100 money fund index yield, which are the average returns for 100 largest taxable MMFs including both retail and institutional funds.6 TB3 and AAA yields are taken from the Fred database distributed by the Federal Reserve Bank of St. Louis, which are defined as TB3MS or Three-Month Treasury Bill: Secondary Market Rate and AAA or Moody's Seasoned Aaa Corporate Bond Yield, respectively.7 The fifty seven monthly observations are illustrated in Figure 2.

Source: Crane Database and Federal Reserve Economic Data (FRED)

Figure 2 Observation Periods

5 Crane Data started to collect MMF data since April 2006.

6 See Appendix B: Crane 100 Money Fund Index for more information.

7 Data are available at Federal Reserve Economic Data (FRED) from Federal Reserve Bank of St. Louis. http://research.stlouisfed.org/fred2/categories/22

International Journal of 54 IJMBE Management, Business, and Economics

5. Regression Analysis

To find the MMF yield at equilibrium or MMF* from equation (12); J E J MMF*TB3 0k 0k 1 (AAATB3) E J E J 1 1 1 1 Let

MMF*TB3 G0 G1 (AAA TB3) (17) where, J E J G 0k 0k , and G 1 0 E J 1 E J 1 1 1 1 A regression was run on equation (17) from April 2006 to December 2010. The result is shown below. MMF*TB3 0.31190.0321*(AAATB3) (18) t-statistics (1.7581) (0.7105) where, Standard Error = 0.6441, r2 = 0.0091.

From equation (18), we can rewrite the model after moving TB3 to the right side as following;

MF* = 0.3119+0.9679TB3 + 0.0321AAA (19)

The results exhibit that MMF yields are influenced by both supply and demand. In particular, an increase in AAA bond yields will encourage borrowers to switch their short term demand for funds into money market instruments; this will cause the yield on MMF’s to rise over the yield on Treasury bills. The coefficient of TB3 is higher than that of AAA. This can be explained that investors are more interest rate sensitive than the borrowers or that Treasury bills are a closer substitute than long term AAA bonds. The high coefficient close to one of three-month Treasury bills represents the close substitute of MMFs to three-month Treasury bills. When the yields of the three-month Treasury bills increase in value, the corresponding yields of the MMFs also increase in value. Therefore, this allows for more money to be situated within MMFs. In contrast however, when the yields of AAA- bonds increase, the yields of MMFs increase only slightly, which thereby indicates that MMFs are within an investors market. In essence, the borrower has much less power in driving the yields of the MMFs.

Equation (17) contain 4 unknown parameters. In order to find the value in the supply function and demand function, we need to find the value of E0k , E1,J 0k , and J1. With the fixed coefficient

( E1 and J1), the constant terms ( E0k and J 0k ) in supply function and demand function are allowed to change through time. This technique is to let the constant term consist of the error term. An E J E J E J equation is needed. From equation (16); ln(Q*) q* 1 0k 0k 1 1 1 (AAATB3) E J E J 1 1 1 1 Let

ln(Q*) I0 I1 (AAATB3) (20)

International Journal of IJMBE Management, Business, and Economics 55 Where, E J E J E J I 1 0 0 1 , and I 1 1 0 E J 1 E J 1 1 1 1 A regression was run using the same data. The result is shown below. ln(Q*) 14.4661 0.1023 * ( AAA TB3) (21) (0.0370) (0.0094) [390.9922] [10.8631] where, Standard Error = 0.1343, r2 = 0.6821.

The result of the regression is significant. The r-square, together with the t-statistics of both constant and the coefficient, is significantly high.

With 4 equations; derived from equations (18), and (21), 4 unknowns can be solved.

J 1 First, plug in G1 0.0321 from equation (19) into equation (21). E1 J 1

E1J 1 I1 E1G1 E1 * 0.0321 0.1023 E1 J 1 0.1023 Therefore E1 3.1883 0.0321 J Since G 1 = 0.0321, then J (E J )*0.0321, 1 E J 1 1 1 1 1 Move J1 to the left and plug in E1, then we have

E1 *0.0321 3.1883*0.0321 J 1 0.1057 0.9679 0.9679

With the fixed coefficient, the constant terms, which consist of the error term in supply E function and demand function, are allowed to change through time. The next step is to solve for 0k and J in each period across time. From equation (2); ln(Q s ) q E E (MMF TB3) , plug 0k s 0k 1 E in all data in each period, we can solve for 0k across time that; E q E (MMF TB3 ) (22) 0k t st 1 t t And from equation (4); ln(Q d ) q J J (AAA MMF) , plug in all data in each d 0k 1 J period, we can solve for 0k across time that; J q J ( AAA MMF ) (23) 0kt d t 1 t t The average MMF yield at equilibrium or MMF* through the period from April 2006 to December 2010 is equal to 2.37 percent and the average assets invested in MMFs at equilibrium or

Q* is equal to $2,796,891 million dollars. The demand curve and supply curve using the value of E1 = 3.1883, and J = 0.1057, and the average of E = 13.4716, J = 14.4991 are illustrated in 1 0kt 0kt Figure 3.

International Journal of 56 IJMBE Management, Business, and Economics

Source: Crane Database and Federal Reserve Economic Data (FRED)

Figure 3 The Equilibrium in the MMFs

The above figure shows that the demand curve is steeper or less elastic than the supply curve. In other word, with the same change in yield, the change in assets demanded when TB3 is constant is less than the change in assets supplied, when AAA is constant. Generally the demand for goods and services for which no substitutes exist are inelastic. This can therefore be explained by that fact that borrowers have options pertaining to their source of funds, and are more restricted than that of their investors.

During the financial crisis between the dates of July 2007 until December 2008 it was evident that there was an unusual increasing gap in yield between MMF and TB3. (See Figure 4.). The increase in these spreads raised the cost of borrowing and initiated the Temporary Guarantee Program regulated by Federal Reserve. At the same time, the spread between the corporate AAA bonds and the TB3 was increasing tremendously through time. Issuing AAA bonds is considered very expensive compared to issuing short-term instruments, because investors demand higher interest rates to compensate for the higher default risks. At the same time, the financial crisis caused a number of investors to shift their assets to safe and liquid products. As a result the assets in MMFs increased by $800 billion from the end of July 2007 through August 2008.

Taylor et al. (2008) explained that the yield difference that increased counterparty risk between banks contributed to the rise in spreads and found no empirical evidence that the new term auction facility (TAF) had reduced spreads.

International Journal of IJMBE Management, Business, and Economics 57

Source: Crane Database and Federal Reserve Economic Data (FRED)

Figure 4 Yield Difference

6. Economics of Surplus

6.1 Investor Surplus

Investor surplus is the difference between the yield that investors, both retail investors and institutional investors, are willing to accept to invest in the MMFs. It is the yield that investor are willing to receives, which is the equilibrium market yield for each dollar invested.

s From the supply function in equation (2); ln(Q ) E 0k E 1 (MMF TB3) and then rearrange § ln(Q S ) E · S ¨ 0k ¸ function in equation (13); MMF ¨ ¸ TB3 . We integrate the supply function from © E 1 ¹ Q0 to Q* on both sides as, Q* Q*§ ln(Q S ) E · Q* MMF s ¨ 0k ¸ TB3 (24) ³ ³ ¨ E ¸ ³ Q0 Q0© 1 ¹ Q0 And solve for the equation (See Appendix A) Q* 1 E MMF s >@Q ln Q Q Q* 0 Q Q* TB3*Q Q* (25) ³ E Q0 E Q0 Q0 Q0 1 1 Q* Therefore, the supply surplus = MMF * (Q * Q 0 ) ³ MMF S (26) Q0 6.2 Borrower Surplus

Borrower surplus is the difference between the yield that borrowers such as governments, banks, conduits, and corporations are willing to pay for the source of funds. It is the yield that borrowers are willing to pay, which is the market yield or the yield at the equilibrium for each dollar.

International Journal of 58 IJMBE Management, Business, and Economics d From the demand function in equation (4); ln(Q ) J 0k J 1 ( AAA MMF ) § ln(Q D ) J · D ¨ 0k ¸ And then rearrange function in equation (14); MMF ¨ ¸ AAA , © J 1 ¹ Then we integrate the demand function from Q0 to Q* on both sides as, Q* Q*§ ln(Q D ) J · Q* MMF D ¨ 0k ¸ AAA (27) ³ ³ ¨ J ¸ ³ Q0 Q0© 1 ¹ Q0 And solve for the equation Q* 1 J MMF D >@Q ln Q Q Q* 0k Q Q* AAA*Q Q* (28) ³ J Q0 J Q0 Q0 Q0 1 1 Q* Therefore, the borrower surplus = ³ MMF D MMF * (Q * Q 0 ) (29) Q0 6.3 The Numerical Value of MMF’s Surplus

If there is no government intervention, borrowers and investors can match their requirement at the market equilibrium. Both borrowers and investors gain benefit from free trade. In each trade, borrowers receive demand surplus, and investors receive supply surplus. The value of the MMFs can be estimated based upon the total value of the surplus of the borrower’s demand and the surplus of the investor’s supply.

In this study, we calculate the average numerical value of MMFs and the average parameters from investors’ supply function in equation (2); ln(Q s ) q E E (MMF TB3 ) and t s t 0k t 1t s t t d borrowers’ demand function in equation (5); ln(Q t ) q J J (AAA MMF ) . The d t 0k t 1t t d t results from the calculations are shown in Table 1.

Table 1 The Average Value of Assets Invested in MMFS and Annualized Yields at Equilibrium in Each Period

4/2006 - Period 2006 2007 2008 2009 2010 12/2010 Q* (million 1,809,65 2,472,67 3,304,04 2,730,11 2,796,891 3,421,163 dollars) 7 0 4 0 MMF* (%) 2.37 4.87 4.89 2.38 0.28 0.07 TB3 (%) 1.95 4.88 4.17 1.15 0.14 0.14 AAA (%) 5.39 5.60 5.55 5.61 5.33 4.93 MMF-TB3 0.42 -0.01 0.72 1.23 0.13 -0.07 (%) AAA-MMF 3.02 0.74 0.66 3.23 5.06 4.85 (%)

Source: Crane Database and Federal Reserve Economic Data (FRED)

In Table 1, the average assets invested in the MMFs at equilibrium are close to three trillion dollars at 2.37 percent average yields at equilibrium between April 2006 and December 2010. The average spread between the yields of MMFs and those of three-month Treasury bills is at 0.42 percent. The average spread between the yields of AAA bonds and those of MMFs is 3.02 percent.

International Journal of IJMBE Management, Business, and Economics 59 During the market crash including the meltdown of Reserve Primary Fund in 2008, the average amount of assets invested in the MMFs at equilibrium rose up to over three trillion dollars. As the governments restrict the short-term interest rates during the crisis, the spread between the yields of the MMFs and the three-month Treasury bills became wider. The average spread between the MMFs and three-month Treasury bills increased dramatically from -0.01 percent in 2006 to 1.23 percent in 2008. However, the spread reduces to -0.07 percent after the crisis in 2010. In addition, the average spread between the yields of AAA bonds and those of the MMFs increased from 0.74 percent in 2006 to 3.23 percent during the crisis in 2008. The then spread continued to rise to 5.06 percent and 4.85 percent in 2009 and 2010 respectively.

The average amount of assets in the MMFs at equilibrium increased during the 2008-2009 crisis when the yields at equilibrium reduced from 4.89 percent in 2007 to 2.38 percent and 0.28 percent in 2008 and 2009, respectively. However, when we take a closer look to the amount of assets in the MMFs at equilibrium in 2009, the equilibrium amount of assets invested in MMFs at the beginning of the year is approximately $3.7 trillion dollars while those assets at the end of the year is only $3.1 trillion dollars. This can be explained that investors withdrew about $553 billion dollars out of money market mutual fund in 2009 because of the low interest rates that are close to zero.

In Table 2, the average value of the constant terms E J 0k and 0k from the supply function in s equation (2); ln(Q ) E 0k E 1 (MMF TB3) and the demand function in equation d (5); ln(Q ) J 0k J 1 ( AAA MMF ) are presented.

Table 2 The Average Value of the Constant Terms in Supply Function and Demand Function, When

the Slope E 1 is Fixed at 1.2448 and the Slope J 1 is Fixed at 0.1304

4/2006 - Period 2006 2007 2008 2009 2010 12/2010

E0k 13.47 14.44 12.41 11.08 14.62 15.05

J 0k 14.50 14.32 14.65 14.67 14.51 14.31

In Table 3, the borrower surplus, investor surplus and the value of MMFs are determined in terms of million dollars. Before the crisis in 2006 and 2007, the borrower surplus, are approximately $171 billion dollars and $233 billion dollars, respectively. The investor surplus are approximately $5.6 billion dollars and 7.8 billion dollars in 2006 and 2007, respectively As the government restriction policy on short-term interest rates during the crisis led to a wide spread as shown in Table 1, the value of borrower surplus and investor surplus increased dramatically. In 2008, the borrower surplus and investor surplus increase to $312 billion dollars and $10.4 billion dollars, respectively. Consequently, the borrower surplus, are approximately $324 billion dollars during 2009. The surplus value of the MMFs increases to $10.7 billion dollars during 2009.

In 2010, the borrower surplus decreased to approximately $258 billion dollars and the investor surplus decreased to $8.6 billion dollars. The results confirm with the result in Table 1 that the yields of MMFs and the spread between those yields and the three-month Treasury bills had dropped dramatically right after the crisis, while the spread between the AAA-bonds and those yields increased dramatically due to financial panic and the borrowers’ ability to restore the flow of credit. There was a fear in investors where they felt that corporate borrowers would have to declare bankruptcy due to an inability to roll over the commercial paper that they had placed their money into their MMFs.

International Journal of 60 IJMBE Management, Business, and Economics Table 3 Borrower Surplus, Investor Surplus and the Value of MMFS (Million Dollars)

4/2006 - Period 2006 2007 2008 2009 2010 12/2010 Borrower Surplus 264,504 171,140 233,842 312,465 323,541 258,188 Investor Surplus 8,772 5,676 7,755 10,363 10,730 8,563 Value of the 273,276 176,816 241,597 322,829 334,272 266,751 MMFs

6.4 The Yield Elasticity of Investors and Borrowers

In order to explain the sensitivity of the amount of MMFs assets holding to change in its yield, one can compare the yield elasticity of investors and borrowers in each period. In other words, the elasticity of Q with respect to MMF is the change in Q when MMF increases by one percent (Wooldridge 2006).

The yield elasticity model for investors, which depends on the value of MMF, is

We take derivative of Q with respect to MMF from equation (1), we have Therefore, Also the yield elasticity model for borrowers, which depends on the value of MMF, is

We take derivative of Q with respect to MMF from equation (4), we have Therefore,

The results are presented in Table 4.

Table 4 The Elasticity of Investors and Borrowers

4/2006 - Period 2006 2007 2008 2009 2010 12/2010 Investors 7.56 15.52 15.59 7.58 0.88 0.23 Borrowers -0.25 -0.51 -0.52 -0.25 -0.03 -0.01

From Table 4, one can see that investors are considered “elastic” or changes in the yields of MMFs have a relatively large effect on the quantity of the assets that the investors want to invest. The result confirmed with Gordon and Pennacchi (1992) that the elasticity of investors’ supply increases than that before 1961. Whereas borrowers are considered “inelastic” or changes in the yields of MMFs have a relatively small effect on the quantity of the assets that borrowers demanded. During 2006 and 2007, investors’ elasticity is high. This can be explained that investors are sensitive to the interest rate. They prefer to invest in a fund that offers higher interest rates. One can also see the diminishing trend of the elasticity of investors and borrowers through time. In the post-crisis, the elasticity is very low for both investors and borrowers. The elasticity of borrowers is close to zero in 2010.

International Journal of IJMBE Management, Business, and Economics 61 The main reason for the dramatic decrease in the yield of the MMFs after the crisis initial was due to the monetary intervention by the U.S. Federal Reserve, which reduced the value of the fed funds target rate, thereby affecting all the related rates. One can see that the regulations affected the borrowers’ demand surplus more than the investors’ supply surplus. The reason that demand surplus reduced more than supply surplus can be explained by the fact that the borrowers have more restricted access to source of funds, such as issuing bonds or obtaining short-term financing.

7. The Effect of the New Money Market Mutual Funds Policy by SEC

As mentioned earlier that the SEC released a memorandum on January of 2010, which stated that MMFs would have a requirement whereby they would need to have a minimum of ten percent of their assets in extremely liquid securities on a daily basis. In addition, they would also need thirty percent of their assets to be in an extremely liquid security on a weekly basis, as well as the requirement that they also shorten the maturity life of their holdings on average. This in essence, would cause a fund to shift and restrict their maximum weighted average of their fund’s portfolio, causing an average drop of fund portfolio maturation to move from 90 days to 60 days.

Peter Crane (2010), the president of Crane Data, opposed the memorandum on January of 2010. He estimated that the change will most likely result in a reduction in the total yield of MMFs by approximately 0.1 percentage points. What he mentioned has been proved in Table 1, as one can see that the average yield of MMFs is reduced from 0.28 percent in 2009 to 0.07 percent in 2010. In addition, he expected that more people would pull their money out of MMFs because of the already low rates. There had been an evidence where there was over seven hundred billion dollars pulled out of the various MMFs from 2009 to 2010.

To see the impact of the new regulation to the MMFs proposed by SEC, the effect of a 0.1 percent tax on MMFs is illustrated in Figure 5.8

8 The chart is not to scale and is only displayed to illustrate the surplus and loss.

International Journal of 62 IJMBE Management, Business, and Economics

Source: Crane Database and Federal Reserve Economic Data (FRED)

Figure 5 The Effect of an Increase in 0.1 Percent Cost

The regulatory change causes a reduction of both investors and borrowers surplus. This is a cost for investors and borrowers who have left the market, since they face lower yields on investments and higher costs for borrowing in the alternative markets. If the government were to tighten the policy that increases the cost and reduces the yield by 0.1 percent from the investors within a closed equilibrium system, this will cause a shift in the supply curve from supply to InvesterCost and increase yield to PCost and decrease the assets to QCost (as shown in Figure 5). If investors are concerned with a reduction in yields, then they are willing to invest in the MMFs at the same amount of their assets only if they can receive the higher yields equal to the regulation imposed.

In Table 5 during April 2006 to December 2010, the implicit cost by the SEC rule shifts the supply curve up ranging by 0.1 percent to 1 percent. At 0.1 percent increase in cost, the equilibrium assets from April 2006 to December 2010 decrease from $2,796,891 million dollars to $2,768,411 million dollars. At 1 percent increase in cost, the equilibrium assets decrease to $2,524,799 million dollars during the same period. At 0.1 percent increase in cost, investors in MMFs perceive yields after tax imposed decrease from 2.47 percent to 2.37 percent during the same period. On the other hand, borrowers perceive their borrowing cost increase from 2.37 percent to 2.47 percent during the same period. One can see that during 2009 and 2010 the actual yields investors perceived are close to zero.

International Journal of IJMBE Management, Business, and Economics 63

Table 5 The Average Value of Assets Invested in MMFS and Annualized Yields at Equilibrium in Each Period

4/2006 - Period 2006 2007 2008 2009 2010 12/2010 2,796,89 1,809,65 2,472,67 3,304,04 3,421,16 2,730,11 Q* (million dollars) 1 7 0 4 3 0 0.1% Increase 2,768,41 1,791,23 2,447,49 3,270,40 3,386,32 2,702,31 Qcost (million dollars) 1 0 2 1 7 1 Actual Yields Borrowers Perceived 2.47 4.97 4.99 2.47 0.37 0.17 (%) Actual Yields Investors 2.37 4.87 4.89 2.37 0.27 0.07 Perceived (%) 0.2% Increase 2,740,22 1,772,99 2,422,57 3,237,10 3,351,84 2,674,79 Qcost (million dollars) 2 1 1 0 6 5 Actual Yields Borrowers Perceived 2.57 5.06 5.08 2.57 0.47 0.27 (%) Actual Yields Investors 2.37 4.86 4.88 2.37 0.27 0.07 Perceived (%) 0.3% Increase 2,712,32 1,754,93 2,397,90 3,204,13 3,317,71 2,647,55 Qcost (million dollars) 0 7 3 9 6 9 Actual Yields Borrowers Perceived 2.66 5.16 5.18 2.67 0.57 0.36 (%) Actual Yields Investors 2.36 4.86 4.88 2.37 0.27 0.06 Perceived (%) 0.4% Increase 2,684,70 1,737,06 2,373,48 3,171,51 3,283,93 2,620,60 Qcost (million dollars) 2 8 6 3 3 0 Actual Yields Borrowers Perceived 2.76 5.26 5.28 2.77 0.66 0.46 (%) Actual Yields Investors 2.36 4.86 4.88 2.37 0.26 0.06 Perceived (%) 0.5% Increase 2,657,36 1,719,38 2,349,31 3,139,21 3,250,49 2,593,91 Qcost (million dollars) 5 0 8 9 4 6 Actual Yields Borrowers Perceived 2.86 5.35 5.38 2.86 0.76 0.56 (%) Actual Yields Investors 2.36 4.85 4.88 2.36 0.26 0.06 Perceived (%) 0.6% Increase Qcost (million dollars) 2,630,30 1,701,87 2,325,39 3,107,25 3,217,39 2,567,50

International Journal of 64 IJMBE Management, Business, and Economics 4/2006 - Period 2006 2007 2008 2009 2010 12/2010 6 3 6 4 6 3 Actual Yields Borrowers Perceived 2.95 5.45 5.47 2.96 0.86 0.65 (%) Actual Yields Investors 2.35 4.85 4.87 2.36 0.26 0.05 Perceived (%) 0.7% Increase 2,603,52 1,684,54 2,301,71 3,075,61 3,184,63 2,541,36 Qcost (million dollars) 3 3 8 4 5 0 Actual Yields Borrowers Perceived 3.05 5.55 5.57 3.06 0.95 0.75 (%) Actual Yields Investors 2.35 4.85 4.87 2.36 0.25 0.05 Perceived (%) 0.8% Increase 2,577,01 1,667,39 2,278,28 3,044,29 3,152,20 2,515,48 Qcost (million dollars) 3 0 1 7 8 3 Actual Yields Borrowers Perceived 3.15 5.64 5.67 3.15 1.05 0.85 (%) Actual Yields Investors 2.35 4.84 4.87 2.35 0.25 0.05 Perceived (%) 0.9% Increase 2,550,77 1,650,41 2,255,08 3,013,29 3,120,11 2,489,86 Qcost (million dollars) 2 2 2 8 1 9 Actual Yields Borrowers Perceived 3.24 5.74 5.76 3.25 1.15 0.94 (%) Actual Yields Investors 2.26 4.76 4.78 2.27 0.17 -0.04 Perceived (%) 1% Increase 2,524,79 1,633,60 2,232,12 2,982,61 3,088,34 2,464,51 Qcost (million dollars) 9 7 0 5 0 6 Actual Yields Borrowers Perceived 3.34 5.84 5.86 3.35 1.24 1.04 (%) Actual Yields Investors 2.34 4.84 4.86 2.35 0.24 0.04 Perceived (%)

After the SEC enforced a new requirement that causes an increase in cost, the demand surplus drops to A as illustrated in Figure 5. Also the supply surplus drops to C. Unlike tax imposed regulation, this regulation creates an extra cost by reducing the yields to the investors and has no benefit to government revenue. Therefore, the total loss occurred is B+D. The numerical results are shown in Table 6.

International Journal of IJMBE Management, Business, and Economics 65 Table 6 The Average Value of the MMFS After an Increase in Cost (Million Dollars)

4/2006 - Period 2006 2007 2008 2009 2010 12/2010 0.1% Increase Demand Surplus 261,810 169,398 231,461 309,284 320,247 255,559 (A) Supply Surplus (C) 8,683 5,618 7,677 10,258 10,621 8,476 Value of the MMFs 270,493 175,016 239,137 319,541 330,868 264,035 (A+C) Loss (B+D) 2,783 1,800 2,460 3,287 3,404 2,716 0.2% Increase Demand Surplus (A) 259,144 167,673 229,104 306,135 316,986 252,957 Supply Surplus (C) 8,595 5,561 7,598 10,153 10,513 8,389 Value of the MMFs (A+C) 267,739 173,234 236,702 316,288 327,499 261,346 Loss (B+D) 5,537 3,583 4,895 6,541 6,773 5,405 0.3% Increase Demand Surplus (A) 256,506 165,965 226,771 303,017 313,758 250,381 Supply Surplus (C) 8,507 5,504 7,521 10,050 10,406 8,304 Value of the MMFs (A+C) 265,013 171,470 234,292 313,067 324,164 258,685 Loss (B+D) 8,263 5,346 7,305 9,762 10,108 8,066 0.4% Increase Demand Surplus (A) 253,894 164,276 224,462 299,932 310,564 247,832 Supply Surplus (C) 8,421 5,448 7,444 9,947 10,300 8,219 Value of the MMFs (A+C) 262,314 169,724 231,906 309,879 320,864 256,051 Loss (B+D) 10,962 7,092 9,691 12,949 13,408 10,700 0.5% Increase Demand Surplus (A) 251,309 162,603 222,176 296,878 307,401 245,308 Supply Surplus (C) 8,335 5,393 7,369 9,846 10,195 8,136 Value of the MMFs (A+C) 259,643 167,996 229,545 306,724 317,596 253,444 Loss (B+D) 13,633 8,821 12,052 16,105 16,676 13,307 0.6% Increase Demand Surplus (A) 248,750 160,947 219,914 293,855 304,271 242,810 Supply Surplus (C) 8,250 5,338 7,294 9,746 10,091 8,053 Value of the MMFs (A+C) 257,000 166,285 227,208 303,601 314,362 250,863 Loss (B+D) 16,276 10,531 14,390 19,228 19,909 15,888 0.7% Increase Demand Surplus (A) 246,217 159,308 217,675 290,863 301,173 240,338 Supply Surplus (C) 8,166 5,284 7,219 9,647 9,989 7,971

International Journal of 66 IJMBE Management, Business, and Economics 4/2006 - Period 2006 2007 2008 2009 2010 12/2010 Value of the MMFs (A+C) 254,383 164,592 224,894 300,509 311,161 248,309 Loss (B+D) 18,893 12,224 16,703 22,319 23,110 18,442 0.8% Increase Demand Surplus (A) 243,710 157,686 215,458 287,901 298,106 237,891 Supply Surplus (C) 8,083 5,230 7,146 9,548 9,887 7,890 Value of the MMFs (A+C) 251,792 162,916 222,604 297,449 307,993 245,780 Loss (B+D) 21,484 13,900 18,993 25,379 26,279 20,971 0.9% Increase Demand Surplus (A) 241,228 156,080 213,264 284,969 295,071 235,468 Supply Surplus (C) 8,000 5,176 7,073 9,451 9,786 7,809 Value of the MMFs (A+C) 249,229 161,257 220,338 294,421 304,857 243,278 Loss (B+D) 24,047 15,559 21,260 28,408 29,415 23,473 1% Increase Demand Surplus (A) 238,772 154,491 211,093 282,068 292,066 233,071 Supply Surplus (C) 7,919 5,124 7,001 9,355 9,687 7,730 Value of the MMFs (A+C) 246,691 159,615 218,094 291,423 301,753 240,801 Loss (B+D) 26,585 17,201 23,503 31,406 32,519 25,950

From Table 6, at 0.1 percent increase in cost, one can see that the new policy reduced the value of the MMFs. The loss from the inefficiency of the market is approximately 2.72 billion dollars in 2010, which takes 1.02 percent of the value of the MMFs before the regulation was imposed. If the new policy caused 1 percent increase in cost to the MMFs, the loss from the inefficiency of the market can be up to approximately 26 billion dollars in 2010.

The regulation imposed is mainly effected on the intra-marginal borrowers and investors who have few alternatives available for them. For the large investors in MMFs, they can respond to the regulation by shifting funds out of money funds and investing in similar alternative yields such as direct investments in short-term securities or deposits in offshore Eurodollar accounts. For any investors and borrowers who have limited choice of investments, even though they have to pay higher cost for the regulation policy, the MMFs are still a considerable and favorable choice for them.

8. Conclusion

This paper attempts to estimate the value of the MMFs for both money borrowers and investors through the calculation of the equilibrium value for demand function and supply function of the funds. The demand function and supply function are identified from tracing factors that shift one curve without manipulating the other. We assume that MMF investors will allocate their money into a three-month United States Treasury bills as an alternative method of investment. We also assume that AAA bonds directly influence the demand of MMFs as an alternative source of funds.

International Journal of IJMBE Management, Business, and Economics 67 Investors who place their money into MMFs do not consider AAA bonds as an alternative investment due to their different characteristics such as their ability to maintain a stable price per share. In addition, the borrowers who obtain short-term financing through MMFs do not consider three-month Treasury bills as substitute investment.

Without any restrictions, the value of the MMFs can be estimated based upon the total value of the surplus of the borrower’s demand and the surplus of the investor’s supply. This research also attempt to estimate the economic costs of restrictions on the MMFs, such as a new requirement to hold assets that were of a greater liquidity as well as greater quality, as well as letting all potential investors know the true value of their assets per share on a more frequent basis applied to the MMFs.

Since January 27, 2010, the U.S. Securities and Exchange Commission announced new regulations placed upon MMFs. The financial reform was intended to increase the flexibility of MMFs during economic suffering, reducing the risks of the existing funds to break the buck, facilitating the orderly liquidation of a money market mutual fund that breaks or is about to break the buck to meet redemption requests, and provide SEC detailed and timely information about the performance of the funds.

This regulation is estimated to create an extra cost by reducing the total yields of MMFs to the investors and has no benefit to business and government revenue. The result is that the new policy would most likely cause a loss of economic efficiency and trigger institutional investors to move their funds in alternative investments that offer higher interest rates. Investors who seek the returns and businesses, which borrow from the money market, are primarily hurt by the policy because they cannot take advantage of these alternatives.

References

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International Journal of 68 IJMBE Management, Business, and Economics Dow, J. P., and D. W. Elmendorf. (1998). "The Effect of Stock Prices on the Demand for Money Market Mutual Fund." Finance and Economic Discussion Series from Board of Governors of the Federal Reserve System (U.S.), no. 24.

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International Journal of IJMBE Management, Business, and Economics 69

Executive Duality and Corporate Entrepreneurial Innovation of Nigerian Listed Corporations: An Impact Assessment

Mansur Lubabah Kwanbo Department of Accounting, Kaduna State University, Kaduna, Nigeria E-mail: [email protected]

and

Yusha’u Ibrahim Ango Department of Business Administration, Kaduna State University, Kaduna, Nigeria

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 71

Executive Duality and Corporate Entrepreneurial Innovation of Nigerian Listed Corporations: An Impact Assessment

Mansur Lubabah Kwanbo Department of Accounting, Kaduna State University, Kaduna, Nigeria E-mail: [email protected]

and

Yusha’u Ibrahim Ango Department of Business Administration, Kaduna State University, Kaduna, Nigeria

Abstract

Various reforms in the corporate sector has necessitated consequent changes in the pattern of governance in its industries. One of such changes is the bifurcation of executive duality, which implies the power and centrality of the lead entrepreneur has been redefined in the light of corporate entrepreneurial innovation. The objective of this paper was premise in this context, to know whether executive duality significantly relates and impacts on corporate entrepreneurial innovation. Data were collected from 215 financial statements of the corporations that made the sample for the period under review. The one-sample t-test and the Hosmer and lemeshow test was used to test the hypothesis formulated for the study. Findings revealed a significant relationship exists between executive duality and corporate entrepreneurial innovation, as well as a significant impact. The study concludes, bifurcation of executive duality is indifferent to the corporate entrepreneurial innovation process. In this wise, sustaining legitimacy through innovations that translates into huge earnings should be pursued.

Keywords: Executive Duality, Corporate Entrepreneurial Innovation

1. Introduction

Extant literature has shown that, one of the most important factors in any corporation is the power and centrality of the lead entrepreneur. It is this distinguishing characteristic, effectiveness, principles and behavior of this specific person that brings to bear the control and influence of activities of the corporation at any point in time. This influence is precipitated by the energy of advancing innovation in changeable surroundings. Innovation is a series of action that combine worth and originality to the corporation’s suppliers and customers through the development of new products, services and new ways of dealings in commercial activities. Amidst this series of action, the principal roles of the corporate entrepreneur are to dare bureaucracy, to determine new opportunities, to support and take advantage of corporate assets and to move the innovation process forward. However, the roles of the corporate entrepreneur were put to bear by the provision of the codes of corporate governance issued in 2003 by the Securities and Exchange Commission (SEC).

International Journal of IJMBE Management, Business, and Economics 73 One of the provisions the code made imperative to comply with includes, that of executive duality. The provision requires that, the responsibilities of the head of the Board, that is the Chairman, should be clearly separated from that of the head of Management, i.e. MD/CEO, such that no one individual/related party has unfettered powers of decision making by occupying the two positions at the same time. From the forgoing, it is clear that the corporate entrepreneur has a bifurcated capacity, i.e power and centrality is divided. This implies daring bureaucracy and determining new opportunities, to support and take advantage of corporate assets and to move the innovation process forward is no longer in the power and centrality of one individual. This by implication can positively or negatively affect corporations as some studies in the united states demonstrated that nonmarket forces like government regulation can make or break innovation (Christensen , Anthony and Roth 2005). It is within this context that this study seeks to address the following questions; Has the bifurcation of executive duality significantly related and impacted on corporate entrepreneurial innovation of listed corporations in Nigeria?

Besides seeking to address these questions, there is an attempt by the study to contribute to bridging the existing gap on the relationship and impact of executive duality on corporate entrepreneurial innovation in Nigerian listed corporations. The remaining part of this paper is structured into five sections, section one is the introduction including this paragraph. Section two, presents the literature review highlighting; concepts, prior studies and theoretical review. Immediately after that is the methodology, presenting how the study defined and measured it variables. Afterwards, is the discussion of findings and based on the findings the paper concludes and highlights the study’s implication in the last section of the paper.

2. Literature Review

2.1 Concepts

Corporate entrepreneurial Innovation (CEI): The need to comprehend innovation is of paramount importance to the understanding of CEI. Innovation is the response to environmental challenges or future opportunities (Hitt, Hoskisson, and Kim 1997 and Atuahene-Gima, 2001). An innovation may be determined by scientific research resulting in new technology, by individual entrepreneurship, or by a strategic decision and further development of the innovation throughout the entire company (Sundbo,1997). Hence entrepreneurial philosophy, which stimulates change, and the provision of a supportive environment, is most likely to foster innovation which invariably needs a purpose and therefore, the introduction and identification of a new consumer need or the development of additional technology within the market place usually initiates the process (Shaw, O’loughlin, and Mcfadzean, 2005). The initiated process, is more commonly identified as the push- pall process (Tidd, Bessant, and Pavitt, (2001)). Hence, the key precipitating environmental factors for the innovation process are uncertainty, risk, and change (Amit et al, 1993 and Braganza and Ward, 2001). In the same vein, Robert, (1988) emphasizes that, new technology also impacts innovation. According to Dosi, Freeman, Nelson, Silverberg and Soete (1988) technological development is core to innovation process. For Porter, (1998) new technology has the potential to alter industry structure thereby changing the market place and hence influencing consumer needs. This implies an entrepreneur organization that is proactive when it comes to innovation earns the potential of a competitive advantage (Miller, 1983).

Furthermore, Robert, 1988; Porter, 1998; Means and Fulkner, 2000 and Dooley and O’sullivan, 2001 observes that, recognition and exploitation of the competitive significance of technological change is important, as this can also change the rules and parameters under which

International Journal of 74 IJMBE Management, Business, and Economics organizations operate. Emphasizing further, (Shaw, O’loughlin, and Mcfadzean, 2005) argues entrepreneurial activity might not be deliberate, opportunity recognition is clearly determined by entrepreneurial alertness and intuition. More so, other prerequisites for opportunity recognition include a wide social network and prior knowledge of markets and consumer problems (Ardichvili and Cardozo, 2000). Similarly, Shane (2000) establish, while examining technology entrepreneurs exposed to an MIT invention, that major dimensions of prior knowledge were required and combined with technology knowledge to facilitate opportunity recognition. These include prior knowledge of ways to serve markets, prior knowledge of customer problems, and prior knowledge of markets. Prior knowledge of how to serve markets entails how technologies can be packaged to meet the needs of a particular market. Aldrich and Wiedenmayer (1993) showed that, the product or service lines entrepreneurs establish are related to the organizational units for which they previously worked. Buttressing this position, Shane (2000) revealed an entrepreneur who had experience in machine design would package the potentially profitable technology through a machine rather than a service.

From a different perspective there are a handful of studies that demonstrated that, specific type of knowledge and human capital had influence on opportunity recognition and venture creation, this have a way of enhancing the entrepreneurial process. Christensen and Peterson (1990) examined technology and market knowledge as prerequisites for recognizing opportunities. They presented opportunity recognition as a problem-solving process that calls on both kinds of knowledge. Their findings revealed that technology and market knowledge allows for individuals to identify both problems and potential opportunities to solve problems with technology. In the same vein Leonard & Sensiper, 1998; O’Connor & Veryzer, 2001 were emphatic on the role of specific and divergent knowledge types in recognizing and developing opportunities. Furthermore, Amabile (1999) posits that, combining market knowledge and technology knowledge is advantageous for developing new ideas, hence an individual’s creativity is enhanced if his or her cognitive style facilitates the ability to link divergent knowledge types. This according to (Leonard & Sensiper, 1998; Leonard & Straus, 1997) is often referred to as creative abrasion, which is the group dynamics of different ideas coming together and undergoing constructive criticism to develop new products. This process is enhanced when individuals within the group provide different types of knowledge (Amabile, 1999; Leonard & Sensiper, 19989 ; O’Conner & Veryzer, 2001). The results of the innovation process, whether success, indirect or unintended consequences (O’Loughlin, 2001) or failure, should form the basis for further learning, leading to improved knowledge (McGrath, 1999; Schaffer and Paul-Chowdhury, 2002) and in some cases resulting in re-innovation (Rothwell and Gardiner, 1989). On the other hand there are a few studies like that of Marvel and Lumpkin (2007) that establish the effect of specific knowledge or human capital on innovation that is radical in nature as a product or service too far ahead of its time to gain initial sales and penetrate markets.

Corporate entrepreneurial innovation (CEI), could mean the effort of promoting innovation in an uncertain environment, innovation is the process that provides added value and novelty to the organizations and its suppliers and customers through the development of new procedures, solutions, products and services as well as new methods of commercialization (Shaw, O’loughlin, and Mcfadzean, 2005). Explaining further, they posit that, within the innovation process, the principal roles of the corporate entrepreneur are to challenge bureaucracy, to assess new opportunities, to align and exploit resources and to move the innovation process forward. The corporate entrepreneur’s management of the innovation process will lead to greater benefits for the organizations. From another perspective, corporate entrepreneurialship innovation is an independent process (Cunnigham and Lischeron, 1991; Jin, 2000; Dooley and O’sullivan, 2001; Baun et al, 2001 and Chesbrough, 2003). The entrepreneurial function within this independent process lies with the executive function of management (Schumpeter,1934 Hagedoorn, 1996).

International Journal of IJMBE Management, Business, and Economics 75 This only implies the lead entrepreneurs resides within the policy formulation segment and implementation segment of the organization, as Kent, Sexton and Vesper, (1982) posits that entrepreneurs act is core in the innovation process. In this wise, Hekker, Suursa, Negro, Kuhlmann, and Smits, (2007) were emphatic to reveal that, there is no such thing as an innovation system without entrepreneurs. Entrepreneurs are essential for a well-functioning innovation system. The role of the entrepreneur is to turn the potential of new knowledge, networks, and markets into concrete actions to generate–and take advantage of–new business opportunities. Entrepreneurs can be either new entrants that have the vision of business opportunities in new markets, or incumbent companies who diversify their business strategy to take advantage of new developments referred to as entrepreneurship within existing organizations (Kanter, 1983; Pinchot, 1985) or group entrepreneurship within existing organizations (Stewart, 1989). From the foregoing what has been made clear from these studies is that, the CEI process needs attributes like independence, being a function of the executive management, prior knowledge, specific knowledge or human capital through a dynamic group of teamwork that is capable of yielding an edge over other organizations in the same industry, in terms of new products, better services that enhances the value of the corporation.

2.2 Corporate Entrepreneurial Innovation in Nigerian listed corporations

A lot of innovation has been witnessed in the Nigerian corporations. These innovations are seen in the products and services they roll out to customers. For example, most of these corporations have been able to communicate the nature and importance of their products or services through billboards, social networks, print and mass media. For example on the service segment, decades ago, the opening of savings account requires cash deposit but nowadays it is on zero balance, i.e the customers are not required to open an account with immediate cash deposit. Also cheques can be paid into savings account not drawn. Still on services, technology has brought about easy cash withdrawals and transfers through e-banking, internet and mobile banking. On the product segment, especially in the consumer goods sector, almost all the corporations in the sector have been able to demonstrate their sense of innovative capabilities in the products they roll out to their customers. For example, house hold durables, non-alcoholic beverages and personal house hold products to mention but a few. It is important to note that, different organizations possess different levels of creativity and innovative ability (Gundry and Prather; 1994; Amabile and Mcfadzean, 1996; Hoegl, Gemuender and O’loughlin, 2001). This creative and innovative ability produces a large growth in turnover and profit for firms (Sundbo,1995). Entrepreneurship is held to promote wealth creation through innovation (Drucker, 1985; Ireland et al., 2001), and manifests itself through the development of new markets for differentiated or improved products and new applications, value creation, growth and organizational renewal (Aldred and Unsworth, 1999; Zahra, 1991). Renewal in this regard must be able to produce or add value to the organization (Wetlaufer, 1997) if otherwise, innovation falls short of expectations (McGrath, 1999; Rogers, 1995).

2.3 Prior Studies on Executive duality (ED) and Corporate Entrepreneurial Innovation

Studies conducted on executive duality and corporate entrepreneurship are few and having inconclusive findings some of these studies includes that of Daily and Dalton, 1993; Certo, Lester, Dalton, and Dalton, and Hung and Mondejer (2005) they had an objective of establishing the association between corporate governance and entrepreneurial innovation. They identified three attributes; risk taken, acceptance of changes and development of new initiatives. They found that chief executive officer and chairman duality was found to be positively related to preference for risk- taking and development of new initiatives of firms but not to the acceptance of changes in firms. However, they found share ownership of directors was related to risk-taking preference, but not to

International Journal of 76 IJMBE Management, Business, and Economics acceptance of changes and development of new initiatives of firms. Hung and Mondejer (2005) went further to establish that, directors being executive or non-executive had no impact on entrepreneurial innovation. Similarly, Zahra, et al, (2000) studied entrepreneurship and the effects of ownership and governance structure. Their sample consisted of 231 manufacturing firms in existence for at least eight years and having assets totaling twenty five million dollars to five hundred million dollars for the period 1991 to 1993. Their findings indicate that commitment to corporate entrepreneurship is high when the board chair and the chief executive officer are different individuals.

From a different angle, there are some studies that had proved that regulations can alter the direction of innovation. For example, Christensen , Scott, and Roth (2005) demonstrated that, Non- market forces, such as government regulations, can make or break innovation. Nonmarket forces can have a major impact on innovation. Government regulation or policy can push an industry toward or away from innovation. The 1996 Telecommunications Reform Act in the United States was intended to encourage competition through deregulation. However, market uncertainties, technical challenges and the popularity of the technology false confidence led to disorder in the telecommunications market and left policy makers confused and frustrated. It is important to note here that, making innovation legal does not make it happen. However, innovations can translates into huge turnover.

2.4 Theoretical Background

An attempt is made in this section to review the entrepreneurialship and innovation theory as well as the legitimacy theory in order to set the frame work in which the mathematical model of the study is deduced. The theory of entrepreneurialship and innovation simply proposes that, the health of any economy depends on the pursuit of opportunities by prospective entrepreneurs in which entrepreneurs preference to pursue the possibility of making profit is an individual difference (Schumpeter, 1934;Kirzner, 1973; and McMullen, and Shepherd, 2006). The fact that the theory is focused on individualism makes it handicapped as far as the objectives of this study is concerned. In this wise, the study uses Stolper (1994) modified Schumpeter’s theory of entrepreneurialship and innovation as its framework. The theory proposes that, the role of entrepreneurial activities highlighted in the traditional theory are worthwhile in understanding the dynamics of innovation and are important features in considering the fact that, entrepreneurial activities ranges from single person economic agent to a collective entrepreneurial function in large companies. This implies, the creativity of collective entrepreneurialship function that reflect firm specific advantages that are created through innovative capabilities (Dosi and Teeci, Kogur and Zander 1993). In that context, collective entrepreneurialship is not a magic phenomenon or a deus ex machine but primarily an endogenous factor that combines the application of innovative capabilities based on tacit knowledge with well-developed internal search routines, firm specific skills and organizational learning (Hagedoorn, 1996). Innovation is a radical act which is the introduction of a new element or a new combination of old elements Schumpeter, 1934. This element produces a large growth in turnover and profit for the firm (Sundbo, 1997). The corporate entrepreneur’s management of the innovation process will lead to greater benefits for the organizations. This position is in line with the organizational legitimacy theory. Legitimacy is important to organizations because of the access it provides to key resources (Parsons, 1960; Pfeffer & Salancik, 1978).

Suchman (1995) sees organizational legitimacy as the generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions. Stakeholders are more likely to associate with groups deemed proper and appropriate and to support organizations that embody prevailing social norms and values (Certo, Lester, Dalton, and Dalton, 2005). Legitimate organizations are viewed as inherently more trustworthy (Suchman, 1995); this trust can, in turn, be leveraged to facilitate

International Journal of IJMBE Management, Business, and Economics 77 increased access to resources (Pfeffer & Salancik, 1978). In contrast, even the threat of loss of legitimacy can disrupt the flow of necessary resources into the firm. As noted by Suchman (1995), the negative effects of firm failure are felt even more acutely when legitimacy is at stake. External constituents are likely to distance themselves from organizations suffering legitimacy losses to avoid the risk of negative contagion taking with them the financial, social, and intellectual capital that the damaged firm needs to recover and survive (Suchman, 1995; Deephouse and Carter (2005). Organizations that deviate from normal behaviour violate cultural or legal expectations and theories of organizing. They are subject to legitimacy challenges and may be deemed unacceptable by stakeholders. It is important to note here that, the reforms in the Nigerian corporate sector is a pointer to this position. The bifurcation of the responsibilities of the head of the Board, that is, the Chairman clearly separated from the head of Management, i.e. MD/CEO, such that no one individual/related party has unfettered powers of decision making by occupying the two positions at the same time. This is deemed a corrective measure promoting a normal behavior, in order not to violate cultural or legal expectations so as to be acceptable to a coalition of stakeholders. Furthermore, legitimacy serves as a medium for enhancing corporate entrepreneurial innovations. From the explanation so far, bifurcation of executive duality is expected to go in the same direction with the corporate entrepreneur’s management of the innovation process that will lead to greater benefits for the organizations. This is the stem of the hypothesis of the study.

3. Methodology

Methodologies for investigating innovation are based both on information directly provided by firms themselves and on various other sources, such as assessment by experts or historical literature (Kleinknecht, 1993; Pavitt., Robson, Townsend, 1987). Some researchers are concerned about the fact that innovation is often measured on the basis of perceptual, self-reported data (Hoffman et al., 1998), even if multi-item scales are often used in questionnaires in order to have a higher reliability. In any case, the problem of ambiguity is difficult to eliminate even though the wordings of interviews and questionnaires are commonly adapted in order to be easily understandable by different interviewees. Also face-to-face interviews are adopted to facilitate item interpretation. Rather than indicating the futility of self-reporting surveys, however, the conflicting results may be a function of conceptual, operational and measurement issues (Stewart and Roth, 2001). Furthermore, it is worth noting that self-reporting surveys have been the most commonly used methods for testing innovation issues (Sonfield, Lussier,, Corman, McKinney, 2001). While some authors report a strong correlation between perceptual and objective measures of innovation (Kahn and Manopichetwattana, 1989; Jennings and Young, 1990), others underline the possibility of over assessment of innovation activities when the interviewees are describing their own results (Flor and Oltra, 2004; Coombs and Tomlinson, 1998). Also in statistical and quantitative research, the difficulty of quantifying innovation performance remains a major hurdle (Romijn and Albaladejo, 2002).

It is clear from the foregoing that, primary sources of data are the tools used to collect the data used in measuring or investigating innovation. Furthermore, reliability of data have always been questioned. However, this study relies on secondary sources of data extracted from the income statement and value added statements in the financial reports and accounts of the corporations that made the sample of this study. These data are the framework of the financial ratios employed as proxies for corporate entrepreneurial innovation. A handful of studies demonstrated the importance of the value added disclosure in the statement as a tool for measuring performance. For example, Sinha (1983) submits that the statement of value added provides a useful measure to help in gauging performance and activity. The figure of value added can be a pointer to the net output of the firm;

International Journal of 78 IJMBE Management, Business, and Economics and by relating other key figures (for example, capital employed and employee costs) significant indicators of performance may be obtained. Cruns (1982) mention its occasional use in the context of the performance of British industry, in reforming company-wide profit-sharing schemes, and in facilitating financial performance analysis.

The objectives of this study is; to establish whether or not there is a relationship between bifurcation of executive duality and corporate entrepreneurial innovation. Secondly to determine whether executive duality impacts on corporate entrepreneurial innovation. To achieve these objectives, 43 corporations were studied for the period 2007-2011. The choice of this period is influenced by the fact that, it is in the era of post consolidation. The study specified two accounting ratios; Gross earnings margin (GEM) and Value added margin (VAM) as proxies for the independent variable, corporate entrepreneurial innovation (CEI). The choice of these proxies is based on the assertions that, CEI is not measurable directly but can be measured through what it achieves for an organizations, like innovative products and services brings in more customers, investors which in turn yields huge gross earnings. On the other hand value added is the wealth the reporting entity has been able to create by its own and its employees' efforts during a period (Morley, 1978; Sizer 1994; and Riahi-Belkaoui, 1999). This effort could be translated to mean the innovative capabilities of these corporations. For the dependent variable, Executive duality was identified and it was measured as a dichotomous variable. SPSS version 16 was used to aid the analysis of data collected.

3.1 Population and Sample of the Study

The population of the study is all the 218 corporations listed on the Nigerian stock exchange as at December 2012. The study adopted the following Yamane (1967) formula to determine the sample of the study.

n = N____ 1+ N (e)2

The choice of this sampling technique is based on the fact that, the population of the study is finite. In the formula: n is the sample, N(218) is the population and e is the level of precision or sample error. This was considered at 0.152%, as the data sought are sampled on a heterogeneous population. Arising from the above, substituting into the formula the sample is arrived at. n = ___218______1+218(0.152)2

n = _218______219(0.023)

n = 218_ = 43 5.037

The selection of the 43 corporations for the period of 5years, that made the sample of the study, was simply based on the availability of the financial reports and accounts for the period under review. These reports were gotten from the Nigerian stock exchange, Kaduna state branch and the website of African financials. Based on the number of corporations and period a total of 215 financial reports and accounts for the following corporations were used; Livestock feeds plc, Okomu

International Journal of IJMBE Management, Business, and Economics 79 oil palm plc, Presco plc, Cocoa processors plc,National salt company plc, Vita foam plc, 7up bottling company, Dn meyer plc, Flour mills of Nigeria plc, United African company plc, African paints plc, Sandtex Portland paints and products plc, Chellarams plc, Nestle plc, Cadbury Nigeria Plc, Uniliver Nigeria plc, First bank of Nigeria plc, Access bank plc, Sterling bank plc, First city monument bank, Zenith bank plc, Wema bank plc, Consolidated hall mark insurance plc, Lasaco assurance plc, Niger insurance plc, Nem insurance plc, Mutual benefits assurance plc, Standard alliance insurance plc, prestige assurance plc, American international insurance company plc, Regency alliance plc, Oando Nigeria plc, Total Nigeria plc, Mrs oil Nigeria plc, Mobil oil Nigeria plc, Eterna plc, Conoil Nigeria plc, Studio press Nigeria plc, Morrison industries plc, Pharma deko plc, Evans medical plc, Fidson health care plc, and Glaxo smithkline Nigeria plc.

3.2 Variable Specification

Based on the theoretical framework of this study, a hypothesis was formulated. The dependent variable proxy (executive duality) was treated as a dichotomous variable, i.e binary number 1 was assigned to the years within the period under review, were the directives in the code for executive duality bifurcation was observed, if other wise 0 was assigned.

For the independent variable; Gross Earnings margin (GEM) and Value added margin (VAM) are specified as proxies for corporate entrepreneurial innovation (CEI). GEM is calculated by dividing profit before tax by Earning or turnover, while VAM is arrived at by dividing value added arrived at with gross turnover, after deducting gross turnover from services brought in. The b b x b x b x b x following mathematical model: ED� = o + 1 i1 + 2 i2 + GEM iGEM + VAM iVAM was developed to test the following null hypothesis:

Ho1 executive duality do not significantly relate and impact on corporate entrepreneurial innovation (Gross earnings margin and value added margin) of listed corporations in Nigeria.

3.3 Techniques of Data analysis

Two techniques were employed Logistic regression was used to analyze the data. This due to the fact that, the dependent variable is measured as a dichotomous variable and the technique can reveal whether a relationship exist. Secondly, the one sample t-test was also employed. The technique was chosen because it can indicate whether there is a possible impact. In order to test for the impact, the study considered using VAM, this is influenced by the fact that, value added is the wealth the corporations under study have been able to create on their own and their employees' efforts during the period under review and this effort could be translated to mean the innovative capabilities of these corporations. The study considered whether the VAM of the 43 corporations that made the sample differs from the test value of 4.00. The test value is the average rate of the VAM across the industries.

4. Discussion of Findings

Hypothesis was formulated to achieve the objective of this study, which is to assess the relationship and impact of executive duality on corporate entrepreneurial innovation of listed corporations in Nigeria. Tables 1-7 presents the findings.

International Journal of 80 IJMBE Management, Business, and Economics Table 1 Classification Table

Predicted Executive Duality (ED) Percentage Observed 0 ED Correct Step 0 Executive Duality 0 0 5 .0 (ED) ED 0 38 100.0 Overall Percentage 88.4 Source: Spss output listing 2013

In Table 1, the overall percentage is at 88.4% this is large indicating that the model from the perspective of the dependent variable ED is correct.

Table 2 Variables in the Equation

B S.E. Wald df Sig. Exp(B) Step 0 Constant 2.028 .476 18.175 1 .000 7.600 Source: Spss output listing 2013

In Table 2 , the wald is at 18.17 with a significant level of less than 5%. This implies the parameter is useful to the model.

Table 3 Omnibus Tests of Model Coefficients

Chi-square df Sig. Step 1 Step 1.822 2 .402 Block 1.822 2 .402 Model 1.822 2 .402 Step 2 Step -.034 1 .854 Block 1.788 1 .181 Model 1.788 1 .181 Source: Spss output listng 2013

In the Table 3 at step 1 the chi-square is at 1.822 with a significant value of 0.402. At step 2 the chi-square is -0.034 with a significant value of 0.854. The significant values at each step falls within the framework of data fit adequacy, since it is not less than 5%.

International Journal of IJMBE Management, Business, and Economics 81 Table 4 Hosmer and Lemeshow Test

Step Chi-square df Sig. 1 5.446 8 .709 2 5.534 8 .699

Source: Spss output listng 2013

In the Table 4 at step 1 and 2, the chi-square value is at 5.446 and 5.534 with a significant level of 0.709 and 0.699. This further implies that the data adequately fits the model.

Table 5 Model Summary

Cox & Snell R Nagelkerke R Step -2 Log likelihood Square Square 1 29.090 .041 .081 2 29.124 .041 .079

Source: Spss output listng 2013

In Table 5, the 2 log likelihood is at 29.09 and 29.12 for step 1 and 2 respectively. R2 for cox and snell is at 0.041 in both steps. This implies a significant relationship. For R2 Nagelkerke, it is at 0.081 for step 1 and 0.079 for step 2. This further implies the adequacy of the model, as the values are not less than 5%.

Table 6 One-Sample Statistics

Std. Std. Error N Mean Deviation Mean Value Added Margin 43 26.9927 18.58545 2.83425 (VAM) Source: Spss output listng 2013

The Table 6 is the one sample statistics. The mean is at 26.99, the standard deviation is at 18.58 and the standard error mean is 2.83.

International Journal of 82 IJMBE Management, Business, and Economics Table 7 One-Sample Test

Test Value = 4 95% Confidence Interval of the Difference Sig. (2- T df tailed) Mean Difference Lower Upper Value Added Margin 8.112 42 .000 22.99270 17.2729 28.7125 (VAM) Source: Spss output listng 2013

The one-sample test is Table 7. This table contains the information about the impact. The t - value is 8.11 and the p-value is 0.000. Since the p-value is less than 0.05, the difference between the mean (26.99) and the test value (4.00) is statistically significant. The 95% confidence interval of the difference is 17.27 to 28.71. From the findings in Table 3 and 5, the null hypothesis formulated for this study, which states:

Ho1 executive duality do not significantly relate and impact on corporate entrepreneurial innovation (Gross earnings margin and value added margin) of listed corporations in Nigeria, is rejected.

5. Conclusion

The power and centrality of the lead entrepreneur lies in the distinguishing characteristic, effectiveness, principles and behavior that brings to bear the control and influence of activities of the corporation at any point in time. Amidst this series of activities, the principal roles of the corporate entrepreneur are to dare bureaucracy, to determine new opportunities, to support and take advantage of corporate assets and to move the innovation process forward. However requirement of the corporate governance code bifurcated executive duality. This is power and centrality is divided, implying daring bureaucracy and determining new opportunities, to support and take advantage of corporate assets and to move the innovation process forward is no longer in the power and centrality of one individual. This study set out to find out whether the bifurcation of executive duality significantly related and impacted on corporate entrepreneurial innovation of listed corporations in Nigeria? findings of this study revealed that; bifurcation of executive duality significantly relates to corporate entrepreneurial innovations of listed corporations in Nigeria. This finding is in line with Zahra, et al, (2000). Secondly, there is a significant impact of bifurcated executive duality on corporate entrepreneurial innovations of listed corporations in Nigeria.

The implication of these findings is that bifurcation of executive duality is indifferent to the corporate entrepreneurial innovation process (i.e, separating the capacity of the board chair from executive management promoted the entrepreneurial innovation process of Nigerian listed corporations). But it is important to note that, this study being a multiple sector research may have prevented the recognition of specific sector effects and actual relationship and impact of executive duality on corporate entrepreneurial innovation of individual sector. This is a possible area for future research in Nigeria. Secondly, there is the need to carry out a similar research using both secondary and primary sources of data in order to achieve robust findings or results. Based on this conclusion, it is imperative to recommend that, sustaining legitimacy through innovations that translates into huge earnings should be pursued.

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International Journal of 88 IJMBE Management, Business, and Economics Convergence with IFRSSin India: Prospects and Challenges

Sankar Thappa School of Business, Kaziranga University, Seuni Ali, A.T. Road, Jorhat, Assam, India Tel:+919435565119, E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 89

Convergence with IFRSSin India: Prospects and Challenges

Sankar Thappa School of Business, Kaziranga University, Seuni Ali, A.T. Road, Jorhat, Assam, India Tel:+919435565119, E-mail: [email protected]

Abstract

The globalization has brought a lot of changes in doing business across the world. The business of multinational companies are being extended and established in various countries with emerging economies .These companies in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside the country. This results in making the Capital markets global in nature. The use of different accounting frameworks in different countries creates confusion for users of financial statements resulting into inefficiency in capital markets across the world. The increasing complexity of business transactions and globalization of capital markets call the regulators, multinational companies, auditing firm and investors to see the need for common standards in all areas of financial reporting. Thus, the case for a single set of globally accepted accounting standards has prompted many countries to pursue convergence of national accounting standards with IFRS. After the liberalization and tremendous growth of Indian Economy; the Indian MNCs are also going global. These companies have been also raising capital from global capital market. Under these circumstances, it has become imperative for Indian corporate to adopt IFRS for their financial reporting. The Government of India had committed to convergence of Indian Accounting Standards with IFRS from April 1, 2011.This paper tries to examine the need and importance of IFRSs in India, the various phases of implementation of IFRSs in India. The paper also highlights on the challenges ahead in the implementation of IFRS in India and the possible ways to address the challenges.

Keywords: GAAP, IFRS, IAS, SIC

1. Introduction

International Journal of IJMBE Management, Business, and Economics 91 After the liberalization and tremendous growth of Indian Economy, the Indian MNCs are also going global. These companies have been also raising capital from global capital market. Under these circumstances, it has become imperative for Indian corporate to adopt IFRS for their financial reporting. The Government of India had committed to convergence of Indian Accounting Standards with IFRS from April 1, 2011.

IFRSs are standards and interpretations adopted by the International Accounting Standards Board (IASB). This includes IFRSs, IAS, and Interpretations originated by the IFRIC or its predecessor the former Standing Interpretations Committee (SIC). IFRSs are increasingly being recognised as Global reporting standards of financial statements. .

This paper tries to examine the need and importance of IFRSs in India, the various phases of implementation of IFRSs in India. The paper also highlights on the challenges ahead in the implementation of IFRS in India and the possible ways to address the challenges. The study is primarily based on the secondary data gathered from related literature published in the journals, newspaper, books, statements, reports. The nature of study is primarily qualitative, descriptive and analytical. There is no quantitative tool being used for the study.

Motivation of the Study

A number of study have been carried out in the Accounting literature in relation to transition from national accounting standards to IFRS mainly on developed economies like countries in Europe((Emenyonu & Gray, 1992, 1996; Herrmann & Thomas, 1995, 1996; Murphy, 2000; Van der Tas, 1988). Some studies have been also conducted in Asia and African countries. In addition to academic literature, there are also surveys conducted by the United Nations Conference on Trade and Development (UNCTAD) and by major accounting firms between 2000 to date on IFRS. Focus on these surveys was on the tendency of countries to adopt IFRS, the benefits of IFRS and the challenges ahead. All these surveys were mainly for large developed countries and developing countries (Boolaky). With the rapid liberalization process experienced in India over the past decade, there is now a huge presence of multinational enterprises in the country. Furthermore, Indian companies are also investing in foreign markets. This has generated an interest in Indian GAAP by all concerned. In this context, the role of Indian accounting standards, which are becoming closer to IFRS, has assumed a great significance from the point of view of global financial reporting (UNCTAD, 2008). As compared to the need a very few study has been done in this issue in India. Looking at the issue that the previous studies fail to address the problems and challenges of IFRS in India, the author argues that the issue needs to be addressed in order to fill this gap.

A brief profile of India

India is the 7th largest country by geographical area and second most populous country of the World (UN database). India's diverse economy encompasses a wide spectrum of activity, ranging from high technology to subsistence agriculture. More than half of the work force is in agriculture, but services are the major source of economic growth, accounting for nearly two-thirds of India's output. The Indian Economy responded to globalization by liberalizing its economy in1991. This economic liberalization has been done through openness to financial and technology transfer, industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, resulting to accelerate the country's growth, which has averaged more than 7% per year since 1997. Following the slowdown induced by the global financial crisis in 2008-09, the Indian economy responded strongly to fiscal and monetary stimulus and achieved a growth rate of 8.6 per cent and 9.3 per cent respectively in 2009-10 and 2010-11(Economic Survey-2012). Still

International Journal of 92 IJMBE Management, Business, and Economics significant challenges are to be resolved, including addressing the fiscal deficit, high inflation rates and government debt, and improving infrastructure and agricultural productivity.

Some economic indicators of India

India's GDP grew by 6.2 per cent in 2012. India's GDP is USD US $4.684 trillion (PPP,2012) while its Gross Domestic Product per capita in India was last recorded at $3,829 (PPP 2012). Indian Foreign Exchange Reserve is US $ 295.29 billion (October 2012). During 2000–10, the country attracted $178 billion as FDI. India accounts for 1.44% of exports and 2.12% of imports for merchandise trade and 3.34% of exports and 3.31% of imports for commercial services trade worldwide. The moderation in growth is primarily attributable to weakness in industry (comprising the mining and quarrying, manufacturing, electricity, gas and water supply, and construction sectors),which registered a growth rate of only 3.5 per cent and 3.1 per cent in 2011-12 and 2012-13 respectively. In 2011 India’s imports of goods valued atUS $450,957million exports of goods valued atUS $ 296,556million.Top 5 destinations of export for the country are USA, UAE, China, Singapore and UK .India's major export commodities are Pharmaceuticals, Coffee/Tea/Spices, Readymade Garments, Iron & Steel &Machinery whereas major import commodities from the CIS region are Iron/Steel/Nickel, Fertilizers, Mineral Fuel, Cereals & Rubber.

Objectives of the Study

The objectives of the study are: a) To examine impact of IFRSs in Indian Corporate Sector. b) To know the various phases of implementation of IFRSs in India. c) To examine benefits and the challenges ahead in the implementation of IFRS in India and d) To find out the possible ways to address the challenges.

Methodology of the Study

The study is primarily based on the secondary data gathered from related literature published in the journals, newspaper, books, statements, reports. The nature of study is primarily qualitative, descriptive and analytical. There is no quantitative tool being used for the study.

2. Literature Review

In the late 1990s, a movement within the international business and accounting professional communities to standardize globally financial accounting reporting methods and practices was initiated. Since that time, both American and international governmental, professional accounting organizations, governing bodies, business leaders and regulatory administrators have written extensively concerning the benefits and disadvantages of the implementation of a single global accounting standard ( Winney, Marshall, Bender &Swiger).

Barth et al. (2006) find that firms adopting IFRS have less earnings management, more timely loss recognition, and more value relevance of earnings, all of which they interpret as evidence of higher accounting quality. The accounting system is a complementary component of the country’s overall institutional system (Ball, 2001) and is also determined by firms’ incentives for financial reporting. La Porta et al. (1998) provide the first investigation of the legal system’s effect on a country’s financial system. They find that common law countries have better accounting systems and better protection of investors than code law countries (Soderstrom and Sun). Several papers

International Journal of IJMBE Management, Business, and Economics 93 attempted to determine the level of accounting harmonization by examining selected measurement practices used by companies in Europe (Emenyonu& Gray, 1992, 1996; Herrmann & Thomas, 1995, 1996; Murphy, 2000; Van der Tas, 1988). These studies analyzed the annual reports from companies headquartered in different countries to determine the level of compliance between various accounting practices and the impact of adopting international standards on accounting harmonization (Eva K. Jermakowicza, SylwiaGornik-Tomaszewski).

Several studies have addressed issues related to accounting harmonization in Europe and its impact on comparability and transparency of nancial statements. A study conducted by Street and Shaughnessy(1998)reported that at the beginning of the 1990s, numerous differences existed between international standards and the accounting standards of the major Anglo-American countries. Another study highlighted the signicance of the enforcement issue for the IASC as it was seeking an International Organization of Securities Commissions (IOSCO) endorsement (Street & Bryant, 2000).The research conducted by McLeay, Neal, and Tollington(1999)distinguishes harmonization from standardization and presents a method for measuring harmonization that allows for choice between alternative accounting treatments.

Cai& Wong (2010) in their study of global capital markets summarized that the capital markets of the countries that have adopted IFRS have higher degree of integration among them after their IFRS adoption as compared to the period before the adoption. The study carried out by Callao et al (2007) on financial data of Spanish firms revealed that local comparability is adversely affected if both IFRS and local Accounting Standards are applied in the same country at the same time. The study, therefore calls for an urgent convergence of local Accounting Standards with that of IFRS. Epstein (2009) in his article on Economic Effects of IFRS adoption emphasized on the fact that universal financial reporting standards will increase market liquidity, decrease transaction costs for investors, lower cost of capital and facilitate international capital formation and flows (Jain 2011).

IFRSs – around the World

The need for a global set of high-quality financial reporting standards has long been apparent. The process of international convergence towards a global set of standards started in 1973 when 16 professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and the United States agreed to form the International Accounting Standards Committee (IASC), which in 2001 was reorganized into the International Accounting Standards Board (IASB). The IASB develops global standards and related interpretations that are collectively known as International Financial Reporting Standards (IFRS).

The process gained speed when the International Organization of Securities Commissions (IOSCO) endorsed the IASC standards for international listings in May 2000. It was further facilitated by the Regulation approved by the European Commission in 2002 requiring the preparation of the consolidated (group) accounts of listed companies in the European Union in accordance with IFRS.2 Recently, many more countries have announced their transition to IFRS, in some instances extending the scope of application beyond group accounts to legal entities and incorporating IFRS into their national regulatory framework.

The globalization of business and finance has brought various changes in the world. This change also brought a tremendous change in the pattern of financial reporting of business activities, which led to more than 12000 companies in more than hundred countries to require or permit IFRS reporting. This was started in 2005 when the European Union (EU) made it mandatory for publicly traded companies to present consolidated financial statements in conformity with International

International Journal of 94 IJMBE Management, Business, and Economics Financial Reporting Standards (IFRS) starting from Jan 1, 2005. Australia, Newzealand, Israel, Brazil, South Africa, Philippines, Singapore have essentially have adopted the IFRS. Malaysia, Pakistan and Thailand have adopted selected IFRSs quite closely. In Nov, 2008 SEC published for public comment proposed IFRSs roadmap. The roadmap outlines milestones that if achieved could lead to mandatory transition to IFRSs starting for fiscal year ending on or after 15 Dec, 2014. Canada which previously plans to require IFRS for publicly accountable entities after Jan, 2011. Japan is also planning to go for convergence after 2011.

International Financial Reporting Standards (IFRS) in India

Background

The Institute of Chartered Accountants of India (ICAI) set up the Accounting Standards Board (ASB) in 1977 to prepare accounting standards. In 1982, ICAI set up the Auditing and Assurance Standards Board (initially known as the Auditing Practice Committee) to prepare auditing standards. ICAI became one of the associate members of the International Accounting Standards Committee (IASC) in June 1973. The ICAI also became a member of the International Federation of Accountants (IFAC) since its inception in October 1977. While formulating accounting standards in India, the ASB considers International Financial Reporting Standards (IFRS) and tries to integrate them, to the extent possible, in the light of the laws, customs, practices and business environment prevailing in India.

The Accounting Standards Board has worked relentlessly to introduce an overall qualitative improvement in the financial reporting in the country by formulating accounting standards to be followed in the preparation and presentation of financial statements. So far, the Board has issued 32 Accounting Standards. Besides this, it has also issued various accounting standards interpretations and announcements, so as to ensure uniform application of accounting standards and to provide guidance on the issues concerning the implementation of accounting standards which may be of general relevance. (UNCTAD review,2006)

ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), while formulating the Accounting Standards (ASs), the ASB gives due consideration to International Accounting Standards (IASs) issued by the International Accounting Standards Committee or International Financial Reporting Standards (IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible. However, where departure from IFRS is warranted keeping in view the Indian conditions, the ASs have been modified to that extent. Further, the endeavor of the ICAI is not only to bridge the gap between ASs and IFRSs by issuance of new AS but also to ensure that the existing ASs are in line with the changes in international thinking on various accounting issues. The National Committee on Accounting Standards (NACAS) constituted by the Central Government for recommending accounting standards to the Government, while reviewing the AS issued by the ICAI, considers the deviations in the AS, if any, from the IFRSs and recommends to the ICAI to revise the AS wherever it considers that the deviations are not appropriate.(Concept paper of ICAI)

International Journal of IJMBE Management, Business, and Economics 95 Regulatory Framework and Enforcement of Accounting Standards

The regulatory framework of financial reporting and enforcement of accounting standards are being discussed below:

(A) Legal Recognition of Accounting Standards issued by ICAI under the Companies Act (1956)

The legal recognition to the Accounting Standards was accorded for the companies in the Companies Act, 1956, by introduction of section 211(3C) through the Companies (Amendment) Act, 1999, whereby it is required that the companies shall follow the Accounting Standards notified by the Central Government on a recommendation made by the National Advisory Committee on Accounting Standards (NACAS) constituted under section 210A of the said Act. The proviso to section 211(3C) provides that until the Accounting Standards are notified by the Central Government the Accounting Standards specified by the Institute of Chartered Accountants of India shall be followed by the companies. The Government of India, Ministry of Company Affairs (now Ministry of Corporate Affairs), issued Notification dated December 7, 2006, prescribing Accounting Standards 1 to 7 and 9 to 32 as recommended by the Institute of Chartered Accountants of India, which have come into effect in respect of the accounting periods commencing on or after the aforesaid date with the publication of these Accounting Standards in the Official Gazette. It may be mentioned that the Accounting Standards notified by the Government are virtually identical with the Accounting Standards, read with the Accounting Standards Interpretations, issued by the Institute of Chartered Accountants of India. (Concept paper of ICAI)

Legal recognition of accounting standards by other regulators

Reserve Bank of India

The Banking Regulation Act (1949) empowers the RBI to regulate financial reporting of the financial sector, including banks and financial institutions. One of the Schedules to the Banking Regulation Act prescribes formats for general purpose financial statements (e.g. balance sheet, and profit and loss accounts) and other disclosure requirements. Banks are also required to comply with requirements of the Companies Act (1956), provided they are consistent with the Banking Regulation Act. The RBI has issued circulars requiring banks to comply with the accounting standards issued by ICAI.

Securities and Exchange Board of India

Listed companies in India are required to comply with the requirements prescribed by the SEBI in its Act of 1992 and the Securities Contracts (Regulation) Act of 1956, which provides for the regulation of securities transactions. To protect investor interests, SEBI has issued a listing agreement which specifies disclosures applicable to listed companies in addition to other applicable auditing and accounting requirements. In particular, it requires compliance with the accounting standards issued by ICAI.

The Insurance Regulatory and Development Authority (IRDA)

The Insurance Regulatory and Development Authority (IRDA) regulates the financial reporting practices of insurance companies under the Insurance Regulatory and Development Authority Act (1999). Insurance companies and their auditors are required to comply with the

International Journal of 96 IJMBE Management, Business, and Economics requirements of the IRDA regulations of 2002 titled “Preparation of Financial Statements and Auditor’s Report of the Insurance Companies”, in preparing and presenting their financial statements and the format and content of the audit report. IRDA regulations require compliance with the accounting standards issued by ICAI.

Road map for adoption of IFRS by Indian corporate

In line with the global trend the ICAI has proposed a roadmap for convergence with IFRS for certain defined entities( listed entities, banks and insurance entities, and certain other large sized entities) with effect from accounting period commencing on or after April 1, 2011. ICAI is under the process of issuing IFRS equivalent Accounting Standards.The Indian accounting standards body, the Institute of Chartered Accountants of India (ICAI), has set a time line of 2011 for compulsory switchover to the new standard. There will be two separate sets of Accounting Standards under Section 211(3C) of the Companies Act, 1956. The first set would comprise the Indian Accounting Standards, which are converged with the IFRS (IFRS converged standards) and which shall be applicable to the specified class of companies in a phased manner. The second set would comprise the existing Indian Accounting Standards (existing accounting standards) and would be applicable to other companies, including Small and Medium Companies (SMC). The Announcement states that a separate roadmap for banking and insurance companies will be prepared and submitted to the government for consideration after consultation with the concerned regulators. The Announcement lays down a phased approach to convergence. Convergence with IFRS is planned in three phases which are given in the annexure.

Full and immediate adoption of IFRSs would be a challenge in the Indian environment in view of the conflicting legal and regulatory requirements and the technical preparedness of Industry and accounting professionals. Accordingly as part of its convergence strategy the ICAI has classified IFRS into the following broad categories:

Category I - IFRSs which do not involve any legal or regulatory issues nor have any issues with regard to their suitability in the existing economic environment, preparedness of industry and any conceptual differences from the Indian Accounting Standards. This category has further been classified into two parts as follows:

Category I A - IFRSs which can be adopted immediately or in near future in view of no or minor differences.( for example Construction Contracts, Borrowing Costs, inventories );

Category II - IFRSs which may require some time to reach a level of technical preparedness by the industry and professionals keeping in view the existing economic environment and other factors. (for example Retirement Benefit Plans,Share based payments);

Category III - IFRSs which have conceptual differences with the corresponding Indian ccounting Standards and where further dialogue and discussions with IASB may be required( for example consolidation, associates, joint ventures, provision for contingent liabilities);

Category IV - IFRSs, the adoption of which would require changes in laws/regulations because compliance with such IFRSs is not possible until the regulations/laws are amended (for example accounting policies and error, property and equipment, first time adoption of IFRS);

International Journal of IJMBE Management, Business, and Economics 97 Category V - IFRSs corresponding to which no Indian Accounting Standard is required for the time being. However, the relevant IFRSs, when adopted upon full convergence, can be used as the “fallback” option where needed.(for example Financial Reporting in Hyper-inflationary Economies). The ICAI examined whether convergence with IFRSs can be achieved stage wise as below:

Stage I: Convergence with IFRSs falling in Category I immediately

Stage II: Convergence with IFRSs classified in Category II and Category III after a certain period of time, say, 2 years after various stakeholders have achieved the level of technical preparedness and after conceptual differences are resolved with the IASB.

Stage III: Convergence with IFRSs classified in Category IV only after necessary amendments are made in the relevant laws and regulations.

Stage IV: Convergence with IFRSs classified in Category V by way of adoption on full convergence.

Benefits of adopting IFRSs in India

The forces of globalisation prompt more and more countries to open their doors to foreign investment and as businesses expand across borders the need arises to recognise the benefits of having commonly accepted and understood financial reporting standards. Following are some of the benefits of adopting IFRS -

Better Global Comparability

IFRS improves the transparency of financial reporting as well as better comparability of performance of business enterprises. Investors, customers, suppliers, bankers would be easily able to compare when two financial statements follow the same reporting procedure. As the Indian companies are becoming global through their operations outside the country and having investor base, IFRS would enable a comparison of Indian companies with global competitor.

Better Access to International Capital Market and Lower Cost of Capital

IFRS are being used by the firms of reporting financial results across the world. Currently many firms for expansion of their operations around the world seek to raise capital at cheaper cost which is available in American, European, Japanese capital markets. To meet the regulatory requirements of these markets or the expectations of the investment banker and investors Indian companies should report their financial results as per IFRS. Thus adoption of IFRS would help the Indian companies in accessing international capital markets for raising funds at cheaper cost. It would also help the companies that are raising capital and listed only in stock exchanges in India in attracting the international investors by providing financial information that is more transparent and understandable for the international investor community.

Easy Cross border listing

Adoption of IFRS would eliminate the obstacles in cross-border listing by ensuring that financial statements are more transparent. Indian firms require funds for their expansion of operations as well as acquisitions around the world. These funds requirements are being met through raising of capital markets like European and American capital markets. Because of these many

International Journal of 98 IJMBE Management, Business, and Economics Indian companies are listed in the stock exchanges of these markets. One of the major pre-requisites of getting listed on European Markets is preparation of accounts as per IFRS requirements.

Avoidance of Multiple Reporting

Currently, many large Indian business groups like TATA,BIRLA,MAHINDRA,AMBANI etc have firms registered in India and also firms outside India in European and American capital Markets. The firms registered in India prepare their accounts as per Indian Accounting Standards whereas firms registered in other countries prepare their financial statements as per Reporting Standards of the respective country. This increases the effort of finance function; introduces complexity in financial reporting and increases costs of the finance function. Group-wise adoption of IFRS would eliminate the need for such multiple financial reporting by the Indian companies as they would be following single set of financial reporting.

Better Quality of Financial Reporting

Adoption of IFRS would help the firm in bringing in better quality of financial reporting due to consistent application of Accounting Principles and improvement in reliability of financial statements. Historical cost would be substituted by fair value for various balance sheet items which enable the companies to know its true worth.

Economic Growth

The convergence with IFRS benefits the economy by increasing growth of its international business, higher cross-border capital flows and transaction. It facilitates maintenance of orderly and efficient capital markets and also helps to increase the capital formation and thereby economic growth. It encourages international investing.

Opportunities for accounting professional

Convergence with IFRSs also benefits the accounting professionals in a way that they are able to sell their services as experts in different parts of the world. It offers accountants in public practice them more opportunities in any part of the world if same accounting practices prevail throughout the world. For accounting professionals in industry as well as in practice, their mobility to work in different parts of the world increases. Being a comparatively new subject, professionals like CAs and CFAs with sound theoretical and practical knowledge of IFRS are certain to have more opportunities in the times to come.

4. Challenges on adopting IFRSs in India

Amendment to the existing laws

The accounting framework in India is deeply affected by laws and regulations. It is mainly the Indian Companies Act, 1956 and Indian GAAP which governs the accounting practices in India. Other existing laws, such as SEBI regulation, RBI Regulation, IRDA regulation also provides guidelines on preparation of financial statements. IFRS do not recognise these laws. For adoption of IFRS these existing laws have to be amended as per the requirements of IFRS. ICAI has to receive co-operation from other regulators (like, SEBI, RBI, IRDA), tax authorities, courts and tribunals to make the adoption successful.

International Journal of IJMBE Management, Business, and Economics 99 Shortage of Trained and experienced Resources

It has been observed that at present India does not have enough number of resources with training or experience in IFRS. The adoption of IFRS by the Indian companies would result in huge demand for IFRS trained or experienced resources. Along with professional accountants other resources like Accountants , Govt. Officials, CEOs, would be responsible for smooth adoption of IFRS. This would create a huge demand for training to be provided to a large group. Currently India lacks training facilities and trained or experienced resources to train such a large group.

Creation of Awareness about IFRS

Adoption of IFRS means a complete set of different reporting standards which will have significant difference with Indian GAAP. Currently there is still absence of awareness of IFRS among the stakeholders. Considerable time and efforts would be required on making complete awareness and communicating to investors, Banks, stock exchanges, Commodity exchanges, the analyst community etc which would be big task for the companies.

Measurement of Business Performance

Adoption of IFRS would have significant difference with Indian GAAP. This would have significant impact on financial position and financial performance of the Indian companies. The fair value measurement can bring a lot of volatility and subjectivity in the financial statements. As till now the Indian companies have been following Historical Cost basis for preparation of financial statements.

Complexity in financial Reporting

There will be a need to consider several factors which were not required and relevant as per the Indian GAAP for preparation of financial statements with adoption of IFRS.As already discussed fair value measures would require the companies, auditors, users and regulators to get familiar with fair value. This would initially increase the complexity in financial reporting process and may make financial statements more difficult to understand for certain class of users.

Increased initial cost

Adoption of IFRS would lead to increase initial one-time cost. This cost includes additional cost of modifying IT systems, costs of training internal corporate staff, increased audit cost, costs of educating various constituents like investors, analysts, Board members etc.

International Journal of 100 IJMBE Management, Business, and Economics 5. Recommendation for facing the challenges

In order to face the challenges ahead in the implementation of IFRSs in India the following views are being recommended:

Regulatory Reforms

First and foremost steps regarding towards implementation of IFRSs in India is to bring necessary regulatory reforms to the existing laws in compliance to IFRSs. The Government should take initiative for bringing changes in case of all existing Companies Act 1956(which already have been in process), Tax Laws (in process), Foreign Exchange Management Act, Insurance Act etc. as per the requirement of IFRSs. Similarly the other regulatory authority like RBI, IRDA, SEBI would also need to initiate to accept IFRSs to replace their prescribed existing accounting rules.

Trained Skilled Human Resource

In the step of implementation a big question is whether the country has sufficient trained and skilled people who could understand IFRS properly and implement it. For implementation of IFRS in India, a large number of trained Accountants and Auditors in IFRS are required for proper implementation which are absent in the current scenario in India. Though the Institute of Chartered Accountants of India (ICAI) has started taking initiative in this regard but still it is not sufficient to meet this requirement.

Establishment of Monitoring Board

Merely adoption of IFRSs is not going to bring high quality in the financial reporting in the country. Effective enforcement and monitoring mechanism is very much necessary to ensure high quality financial reporting by the corporate organization. In order to make sure the compliance of IFRSs by the corporate organization a common monitoring board should be formed comprising of representatives from the law makers of the country and ICAI. The board should be able to play both advisory role as well as monitoring the compliance part. Because at the initial stage the advisory role of the board would be very important for the corporate organization.

Encouraging the business enterprises for adoption

As at the initial stage the business enterprises have to bear some expenses in relation to infrastructure (IT), training of existing staff, new recruitment, etc might lead to hesitation for adoption of IFRSs. The government, regulatory authority should encourage them through incentive, relaxation in some criteria who comply with the IFRSs.

Create Awareness

The government should take steps along with other regulatory bodies like ICAI, RBI, IRDA,SEBI to create awareness on the importance of IFRSs and its adoption in relation to quality improvement in Financial reporting.

International Journal of IJMBE Management, Business, and Economics 101 Improvement on quality of Accounting Education

Only quality of accounting education in a country ensures the availability of trained accountants and auditor in a country. Therefore an initiative for curriculum development and training-the-trainers activities is required to be taken by ICAI alongwith the academic community of universities.

6. Conclusion

The environment of high quality corporate financial reporting depends on effective enforcement mechanisms. All the interested parties such as Regulators and Law makers, Professional Accountants and auditors Top management and Directors have to come together in the process of working for adoption of IFRSs. The Government and the Regulators should establish legal and regulatory environments that provide for compliance with all the IFRSs. The Government should frame/ revise laws in consultation with NACAS to reflect the IFRSs. Similarly, various Regulators (like RBI,SEBI,IRDA etc) should frame/revise regulations in consultation with ICAI. This should be considered as a high priority. The Professional accountants and auditors should ensure that the financial statements are prepared and audited in compliance of IFRSs. Industry associations such as Federation of Indian Chambers of Commerce and Industry (FICCI), Associated Chambers of Commerce (Assocham) and Confederation of Indian Industries (CII) should have to play an important role in preparing their constituents for the adoption of the IFRSs. For increasing awareness ICAI,RBI, SEBI,IRDA should work jointly to design awareness programme on importance of compliance with accounting and auditing standards. ICAI has to play a great role as an educator for creating foundation of IFRS in the country for the future. In order to ensure a minimum quality standard in teaching accounting and auditing in all over the country ICAI has to take an initiative along with the universities for curriculum development and training for the trainer activities.

References

Ali Fatima, Cao Lei: ‘International Financial Reporting Standards –Credible and Reliable? An Overview’, Advances in Accounting , Incorporating Advances in International Accounting, vol.26(2010) ,pp 79-86,2010.

Ball R : ‘Infrastructure Requirements for an economically efficient system of public financial reporting and disclosure’, Brookings-Wharton Papers on Financial services, pp 127-169,2001.

Barth,M, Landsman W.R. Lang, M: ‘International Accounting Standards and accounting quality’, Working Paper, Stanford University and University of North Carolina at Chapel Hill, 2006.

Bhattacharjee, Surmon, Islam, Zahirul, Muhammad: ‘Problems of Adoption and Application of International Financial Reporting Standards(IFRS) in Bangladesh’, International Journal of Business & Management vol.4, No.12,pp 165-76,2009.

Boolaky,PranKrishansing: IFRS in Small Island Economies: Problems and challenges to the private and public-sector enterprises: Using data from Mauritius(http://ssrn.com/abstract=1578075)

Cai, Francis, Wong Hannal: ‘The effect of IFRS adoption on Global market Integration’, International Business & Economic Research Journal,Vol.9,No.10,pp 25-34,2010.

International Journal of 102 IJMBE Management, Business, and Economics Das,Bhagaban: Convergence of Accounting Standards : ‘Internationalisation of Accounting’ , International Journal of Business and Management,Vol.4,No.1, pp 79-86,2009.

Daske,H. Hail,L.Leuz, C and Verdi, R: ‘Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences’, Journal of Accounting Research, Vol.46,No.5,pp 1085- 1043,2008.

Epstein,J. Barry : ‘The Economic effects of IFRS adoption’ , The CPA journal ,Vol.79,No.3,pp 26- 31,2009.

Horton J, Serafeim G, Serafeim I: ‘Does Mandatory IFRS Adoption Improve the Information Environment?’, Working paper ,Harvard Business School,2010.

Jain,Pawan: ‘IFRS Implementation in India : Opportunities and Challenges’, World Journal of Social Sciences Vol.1,No.1, pp125-136,2011.

JermakowiczK.E,Tomaszewski G.S :‘Implementing IFRS from the perspective of EU publicly traded Companies , Journal of International Accounting’ ,Auditing and Taxation, 15(2006) pp 170- 196,2006.

KhattriJamil and Master Akeel: ‘Convergence with International Financial Reporting Standards (IFRS) : Impact on Fundamental Accounting practices and Regulatory Framework in India’, Bombay chartered Accountants Journal, pp 71-75,2009.

Muthupandian K.S): ‘IFRS-First time Adoption of International Financial Reporting Standards-A closer look’,The Management Accountant, Journal of ICWA,Vol.42,No.10,pp779-783,2007.

TripathiRabindra and Gupta Shikha: International Financial Reporting Standards : ‘A way for global consistency’, Australian Journal of Business and Management Research, 1(1)pp38-57.

Winney K, Marshal D, Bender B, Swiger J: ‘Accounting Globalisation: Roadblocks to IFRS Adoption in the United States’, Global Review of Accounting and Finance Vol.1No.1, pp167- 178,2010.

UNCTED: ‘Practical Implementation of International Financial Reporting Standards: Lessons Learned , Country Case studies’,2008.

Zeff A.S): ‘Some Obstacles to Global Reporting comparability and Convergence at a high level of quality’, The British Accounting Review,Vol.39(2007), pp 290-302,2007.

IFRS and Indian GAAP -Deloitte.

IFRS: Developing a Roadmap to Convergence: KPMG,March,2008.

Concept Paper on Convergence with IFRS in India: ICAI, India.

International Journal of IJMBE Management, Business, and Economics 103 Annexures-1

After detailed deliberations on the various implementation challenges, especially those elated to legal and accounting framework, transitional issues, and sector specific concerns, the following roadmap for convergence with IFRS has been finalised by the Core Group:

Phase Date Applicable for

Phase I 1st April i. Companies which are part of NSE – Nifty 2011 50 ii. Companies which are part of BSE – Sensex 30 iii. Companies whose shares or other securities are listed on stock exchanges outside India iv. Companies whether listed or unlisted, whose net worth exceeds Rs. 1,000 crores, as at March 31, 2009.

Phase II 1st April Companies, whether listed or unlisted, whose net 2013 worth exceeds Rs. 500 crores but does not exceed Rs. 1,000 crores, as at March 31, 2009.

Phase III 1stvApril Listed companies which have a net worth of Rs. 2014 500 crores or less.

IFRSs would a. Unlisted companies which have a net worth of not be Rs. 500 crores or less and whose shares or other applicable for securities are not listed on stock exchanges outside India. b. SMEs

International Journal of 104 IJMBE Management, Business, and Economics Annexure-2

The roadmap for convergence with IFRS in respect of insurance companies, banking companies and non-banking finance companies is as follows:

Category of Company Applicable Date 1. Insurance Companies 1st April, 2012 2. Banking Companies (i) All scheduled commercial banks and those urban co- 1st April, 2013 operative banks (“UCBs”) which have a net worth in excess of Rs. 300 crores. (ii) UCBs which have a net worth in excess of Rs.200 1st April, 2014 crores but not exceeding Rs. 300 crores (iii) UCBs which have a net worth not exceeding Rs. IFRS not applicable,may adopt 200 crores and Regional Rural banks (RRBs) voluntarily. 3. Non-Banking Financial Companies (“NBFCs”) (i) All NBFCs which are part of NSE-Nifty 50, BSE 1st April, 2013 Sensex 30, and have a net worth in excess of Rs.1,000 crore 1st April, 2014 (ii) All listed NBFCs and those unlisted NBFCs which do not fall in the above category and which have a net worth in excess of Rs. 500 crore IFRS not applicable, (iii) Unlisted NBFCs which have a net worth of Rs. may adopt voluntarily. 500 crores or less

International Journal of IJMBE Management, Business, and Economics 105 Annexure-3

Time Line for adoption of IFRS:

Country Target date for convergence to IFRS Canada 2011 India Companies with networth of Rs1000 crore and April,2011 those which are part of BSE Sensex and NIFTY and Companies listed overseas exchanges India All Companies with net worth Rs.500-1000 April 2013 Crore India Banks and Non Banking Finance Companies April 2013 India All listed companies with net worth of Rs.500 April 2014 crore or less Japan 2011 Malaysia 2012 Maxico 2012 United 2012 Kingdom USA 2014-15 Source: Markets in Motion, 2010

International Journal of 106 IJMBE Management, Business, and Economics The Dynamics of Relationship between Exports and Economic Growth in Saudi Arabia

Saud A. Almutair College of Economics and Administrative Sciences, Al-Imam Muhammad Ibn Saud Islamic University, Riyadh, Saudi Arabia Tel: 00966505217457, E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 107

The Dynamics of Relationship between Exports and Economic Growth in Saudi Arabia

Saud A. Almutair College of Economics and Administrative Sciences, Al-Imam Muhammad Ibn Saud Islamic University, Riyadh, Saudi Arabia Tel: 00966505217457, E-mail: [email protected]

Abstract

The objective of this study is to find the dynamics of relationship between the growth rate of real export (RX) and the growth rate of real gross domestic product (RGDP) in one side and between the growth rate of (RX) and the growth rate of non-oil real gross domestic product (NORGDP) in Saudi Arabia in the other side. The study uses annual data for the period 1970 to 2013. The estimation methodology procedure consists of cointegration test, the error correction model estimation, and VAR Granger Causality. This paper confirms a positive long run relationship between the growth rate of RX and the growth rate of RGDP. The findings indicate that the RGDP and RX are cointegrated. The long run bidirectional causality between the RX and the growth rate of RGDP has been also proved. On the other hand, the study indicates that the NORGDP and RX are not cointegrated but there is short run bidirectional causality between the RX and the growth rate of NORGDP. The implication of the study indicates that the export promotion policy not only contributes to the economic growth of RGDP in Saudi Arabia but also contributes to the economic growth of NORGDP. The export promotion policy tends to participate in the process of diversifying the economic base of Saudi Arabia.

Keywords: Export-Led Growth Hypothesis, RGDP, NORGDP, Economic Growth, Granger Causality, Cointegration, Error Correction, Diversifying the Economic Base, Saudi Arabia

1. Introduction

Macro-economic prosperity increases the quality of life of citizens which mainly comes from the increasing real growth rate of Gross domestic Product (RGDP). There are different ways to achieve the target of rapid growth RGDP. One possibility is to promote exports to achieve higher standards of living. Exports of goods and services represent one of the most important sources of foreign exchange income that ease the pressure on the balance of payments and create employment opportunities. An export led growth strategy aims to provide producers with incentives to export their goods through various economic and governmental policies. It also aims to increase the capability of producing goods and services that are able to compete in the world market, to use advanced technology, and to provide foreign exchange needed to import capital goods. Exports can increase intra-industry trade, help the country to integrate in the world economy and reduce the impact of external shocks on the domestic economy. Experiences of Asian and Latin American economies provide good examples of the importance of the export sector to economic growth and development, which led economists to stress the vital role of exports as the engine of economic growth.

International Journal of IJMBE Management, Business, and Economics 109 Economists are concerning whether export promotion leads to higher economic growth or economic growth promotes exports growth. Thus, economists have came up with different views and the literature puts forward a debate for researchers and policy makers since the last few decades. One school of thought argues in favour of export-led growth hypothesis. According to this school causality comes from export to GDP. Second school advocates for growth-driven export hypothesis which indicates that causality come from GDP to export. Third school of thought has came from the existing literature which provides the evidence that export promotion leads to economic growth and economic growth leads to export promotion, i.e., the bi-directional causality between exports and economic growth.

Thus, Saudi Arabia can be an interesting case study of the export and economic growth relationship because Saudi Arabia depends totally on Oil as an engine of economic growth. Therefore, the most important point in this regard is the concern of whether the growth of oil export participate in economic diversification or not. This paper attempts to go over the empirical issue of the relationship between growth of exports and economic growth in deferent countries and to take Saudi Arabia as a case study for the period 1970 to 2013. The concentration of this paper not only on the causality between growth of exports and economic growth of the RGDP but also on the causality between growth of exports and economic growth of the NORGDP. The rest of the paper is organized as follows: Section II studies the theoretical model; Section III go over the literature review; Section IV discusses the data and methodology; Section V makes the empirical analysis; and section VI concludes.

2. Theoretical Model

The argument concerning the role of exports as one of the main deterministic factors of economic growth is not new. It goes back to the classical economic theories by Adam Smith and David Ricardo, who argued that international trade plays an important role in economic growth, and that there are economic gains from trade and specialization. It was also recognized that exports provide the economy with foreign exchange needed for imports that cannot be produced domestically. The theoretical discussion is focused on whether a developing country would be better served by trade policies oriented toward import substitution or export promotion (Irwin, 2002, Shafaeddin, Pizarro, 2007, Jayanthakumaran, 1994, etc). The Export-led growth hypothesis generally reflects the relationship between export sand economic growths. The proponents of such hypothesis argue that export promotion through policies such as export subsidies or exchange rate depreciation will increase total factor productivity because of their impact on economics of scale and other externalities such as technology transfer, improving skills of workers, improving managerial skills, and increasing productive capacity of the economy. The other advantage of export-led growth (ELG) is that it allows for a better utilization of resources, which reflects the true opportunity cost of limited resources and does not discriminate against the domestic market. (Helpman, Krugman, 1985, Boomstrom, 1986 Grossman and Helpman ,1990). Thus, ELG leads to re-allocation of resources from the inefficient non-trade sector to the trade sector and disseminating of the new management styles and production techniques through the whole economy (Feder, 1982, Lucas, 1988, Edwards, 1992). The entire economy would benefit due to the dynamic spill over of the export sector growth. These positive externalities promote economic growth (Bhagwati, 1978; Balassa, 1978; Krueger, 1978; Feder, 1982; Krueger, 1990; Vohra, 2001; Ullah et al., 2009). Also, countries with high growth rates and relatively low absorption rates must necessarily export the excess output (Arnade and Vasavada, 1995; Fosu, 1996; Thornton, 1996; Henriques and Sadorsky, 1996; Sharma and Panagiotidis, 2005).

International Journal of 110 IJMBE Management, Business, and Economics An increase in exports improves the balance of payment and enlarges the foreign monetary reserves, which consequently enables the increase of investment goods import and facilities necessary for the domestic production growth (Chenery, Strout, 1966). On the contrary, the argument that economic growth promotes export growth stands on the idea that the import substitution strategies seek to promote rapid industrialization of the local production in order to substitute the imports needed to further economic development. Therefore, the government involves import trade barriers as tariffs, import quotas, etc. As a result of import barriers, import will be decreased which causes the import substitution sectors to expand. This kind of strategies will increase the demand for unemployed labor in the economy causing rabid increase in the growth rate of GDP. Whether the original export sector shrinks or not depends on some important factors. One of these factors is the level of unemployment in the economy. If the expansion in the import substitution sector uses the unemployed labors and does not cause higher wage rate in the economy, then the original export sector will not be hurt by the growth of the import substitution sector. As import substitution sector expands, gains in productivity give rise to comparative advantages that lead naturally to export growth. In addition, some studies demonstrate that there exists a bi-directional relationship between these variables such that export causes economic growth and economic growth causes export (Dutt and Ghosh, 1994; Thornton, 1997; Shan and Sun, 1998a; Shan and Sun, 1998b; Khalafalla and Webb, 2001). It is due to such contradicting evidences about the dynamic relation between exports and economic growth that many developing countries are still in dilemma whether to open up their economies to promote international trade or whether they should concentrate on economic activities that will promote economic growth. A good number of researchers and policy makers believe that developing countries can achieve economic growth through free market while others believe that developing countries should protect their industries from imported goods and promote their economic activities which will lead to the economic growth. Exports imply access to the global market and permit increased production. While trade encourages efficient allocation of resources, it contributes to economic growth by generating long-run gains (Easterly, 2007).

3. Literature Review

The argument concerning the role of exports as one of the main deterministic factors of economic growth is not new. It goes back to the classical economic theories by Adam Smith and David Ricardo, who argued that international trade plays an important role in economic growth and that there are economic gains from specialization. The argument of the neo-classical economists is that competition in international market promotes economies of scale and increases efficiency by concentrating resources in sectors in which the country has a comparative advantage. These positive externalities promote economic growth. These theoretical arguments regarding exports-economic growth nexus have been empirically verified by economists and researchers at different times. A number of studies including Jung and Marshall (1985), Chow (1987), Darrat (1987), Hsiao (1987), Bahmani-Oskooee et al (1991), Kugler (1991), Dodaro (1993), Van den Berg and Schmidt (1994), Greenaway and Sapsford (1994), and Islam (1998) have had adopted time series analysis for exploring the causal liaison between exports growth and output growth. Using the Granger (1969), Sims (1972) and Hsiao (1987) causality procedures, these studies failed to provide an unvarying conclusion about the export-led growth hypothesis. However, these time series studies were not free from disparagement. Although standard Granger or Sims tests are only valid if the original time series are not cointegrated, none of these studies checked the cointegrating properties of the time- series variables involved. When two or more time series variables are cointegrated, inferences based on traditional time-series modelling techniques will be misleading, as pointed out by Granger (1988). This is because traditional causality tests would miss some of the “forecastability”, hence, reach incorrect conclusions about causality. Moreover, all the studies reviewed above used growth of

International Journal of IJMBE Management, Business, and Economics 111 Gross Domestic Product (GDP) and that of exports which are akin to first differencing and filter out long-run information.

In order to alleviate such occurrences, cointegration and error correction models have been recommended to combine the short-term as well as long run information. Bahmani-Oskooee and Alse (1993) took all these issues into account and employed quarterly instead of annual data for the nine countries studied. They found strong empirical support for two-way causality between exports growth and GDP growth in eight out of nine countries. Darrat (1986) worked on four Asian countries, (Hong Kong, South Korea, Singapore, and Taiwan) and found no evidence of unidirectional causality from exports to economic growth in all the four economies. In the case of Taiwan, however, the study detected unidirectional causality from economic growth to export growth. Nandi and Biswas (1991) found the evidence of unidirectional causality from growth of exports to economic growth in India. This study does not test for stationarity and conduct Sims causality test on the levels of the income and export variables. Given that the levels of the income and export variables are usually non-stationary, the results are unreliable. Kim (1993) has examined the major trends of key macroeconomic variables in South Korea and Chile and correlated them to export performance. Kim identified exports as a major source of economic growth and provided the evidence of the validity of the claim that an open and trade-oriented economy is not only the best guarantee for long-term economic growth, but it lightens the initial impacts of external shocks. Kim, further, mentioned that there are factors other than trade which increase economic growth. Sharma and Dhakal (1994) offer some evidence of the export-led growth hypothesis for India. The study concludes that the income and export series for India are non-stationary using the Phillip-Perron test. It tests for causality, but does not test for cointegration. However, the correct application of Granger tests requires the identification of a possible cointegrating relationship. Bhat (1995) re-examines the exports-economic growth nexus for India, and finds evidence of bi-directional causality between growth of exports and economic growth. Erfani (1999) examined the causal relationship between economic performance and exports over the period of 1965 to 1995 for several developing countries in Asia and Latin America.

The results showed the significant positive relationship between exports and economic growth. Erfani's study provides the evidence of export-led growth hypothesis. Ghatak and Price (1997) studied the case of India and concluded that growth of exports is caused by output growth in India. Dhawan and Biswal (1999) examine the same issue for the period 1961 to 1993, and find that growth in GDP causes growth in exports while causality from exports to GDP appears to be a short run phenomenon. Nidugala (2000) finds that exports had a crucial role in influencing GDP growth in the 1980s. Anwar and Sampath (2000) examine the export-led growth hypothesis for 97 countries (including India, Pakistan and Sri Lanka) for the period 1960 to 1992. They found the evidence of unidirectional causality in the case of Pakistan and Sri Lanka, and no causality in the case of India. Vohra (2001) showed the relationship between the exports and economic growth in India, Pakistan, Philippines, Malaysia, and Thailand for the period 1973 to 1993. The empirical results indicated that when a country has achieved some level of economic development then the exports have a positive and significant impact on economic growth. The study also showed the importance of liberal market policies by pursuing export expansion strategies, and by attracting foreign investments. However, Kemal et al (2002) finds a positive association between exports and economic growth for India as well as for other economies of South Asia. Chandra (2000; 2002) found bi-directional short-run causal relationship between growth of exports of India and GDP growth.

However, since the cointegration between growth of exports and GDP growth was not found, there was no long-run causal relationship. Subasat (2002) investigated the empirical linkages between exports and economic growth. The study suggested that the more export-oriented countries

International Journal of 112 IJMBE Management, Business, and Economics like middle-income countries grow faster than the relatively less export-oriented countries. The study further showed that export promotion does not have any significant impact on economic growth for low and high income countries. Amavilah (2003) determined the role of exports in economic growth by analyzing Namibia’s data from 1968 to 1992. Results explained the general importance of exports, but the study finds no discernible sign of accelerated growth due to exports. Lin (2003) stated that 10 per cent increase in exports cause 1 per cent increase in GDP in the 1990s in China on the basis of new proposed estimation method, when both direct and indirect contributions are considered. Shirazi et al (2004) studied the short-run and long-run relationship among real exports, real imports, and economic growth on the basis of co-integration and multivariate Granger causality test as developed by Toda and Yamamoto (1995) for the period 1960 to2003. This study showed a long-run relationship among imports, exports, and economic growth and found unidirectional causality from exports to output.

However, it did not find any significant causality between imports and exports. Sharma and Panagiotidis (2004) test the export-led growth hypothesis in the context of India, and the results strengthen the arguments against the export-led growth hypothesis for the case of India. Raju and Kurien (2005) analyzed the relationship between exports and economic growth in India over the pre- liberalization period 1960-1992, and found strong support for unidirectional causality from exports to economic growth using Granger causality regressions based on stationary variables, with and without an error-correction term. Mah (2005) studied the long-run causality between exports and economic growth for China with the help of the significance of error correction term. This study indicates that export expansion is insufficient to explain the patterns of real economic growth. Tang (2006) stated that there is no long-run relationship among exports, real Gross Domestic product, and imports in China. This study further shows no short- and long-run causality between export expansion and economic growth on the basis of Granger causality test while economic growth does Granger-cause imports in the short-run. It is believed that the rapid growth of China and India is mainly due to the expansion of their exports. “The success of China and India largely caused by both the export-led growth and access to technology through globalization” (Stiglitz, 2007). Jordaan (2007) analyzed the causality between exports and GDP of Namibia for the period 1970 to 2005. The export-led growth hypothesis is tested through Granger causality and cointegration models. The study tests whether there is unidirectional or bi-directional causality between exports and GDP. The results revealed that exports Granger-cause GDP and GDP per capita, and suggested that the export- led growth strategy through various incentives has a positive influence on growth.

Rangasamy (2008) examined the exports and economic growth relationship for South Africa, and provides the evidence that the unidirectional Granger causality runs from exports to economic growth. Pazim (2009) tested the validity of export-led growth hypothesis in three countries by using panel data analysis. The conclusion of Pazim was that there exists no significant relationship between the size on national income and amount of exports for these countries on the basis of one- way random effect model. The panel unit root test shows that the process for both GDP and exports at first glance is not stationary, while the panel co-integration test indicates that there is no cointegration relationship between the exports and economic growth for these countries. Ullah et al (2009) re-investigated the export-led growth hypothesis using time series econometric techniques over the period of 1970 to 2008 for Pakistan. The results reveal that export expansion leads to economic growth. Dash (2009) analyzes the causal relationship between growth of exports and economic growth in India for the post-liberalization period 1992-2007, and the results indicate that there exists a long-run relationship between output and exports, and it is unidirectional, running from growth of exports to output growth. Elbeydi, Hamuda and Gazda (2010) investigated the relationship between exports and economic growth for Libya for the period 1980 to 2007. The findings indicate

International Journal of IJMBE Management, Business, and Economics 113 that there exists a long-run bi-directional causality between exports and income growth, and thus, the export promotion policy contributes to the economic growth of Libya.

It is, therefore, clear from the above literature review that the evidence regarding exports- economic growth nexus is rather ambiguous and mixed. Also, most of literature lacks studies including the period of recent global financial crisis. With regard to Saudi Arabia, up to my knowledge, the only study I found is Thurayia (2004) who studied the relationship between exports and economic growth experience in Saudi Arabia and Sudan. Results showed that the growth rate in total exports in Saudi Arabia had an active role in achieving economic growth while it had a weak influence in Sudan. The results of cointegration and error correction models showed a positive effect of exports on GDP which confirms the validity of the hypothesis of export-led growth in Saudi Arabia, and Sudan. The study of Thurayia (2004) used short time period covering 33 years from 1970 to 2002 while this study uses longer time period covering 44 years from 1970 to 2013. The longer the time period is the better the econometric result will be. Most importantly, the study of Thurayia (2004) did not touch the effect of total export on the growth rate of NORGDP which is very important especially for the case of economic diversification. Therefore, this paper is an attempt to re-investigate the exports-economic growth nexus for Saudi Arabia considering the period of recent global financial downsizing. This study shall provide the useful information helpful to policy makers. It can serve as a reference to subsequent research works on the issue ‘exports-economic growth nexus’ in the context of Saudi Arabia.

4. Data and Methodology

Data The objective of this paper is to investigate the dynamics of the relationship between exports and economic growth in Saudi Arabia using the annual data for the period 1970 to 2013. In this study, the variables are real total Exports by Saudi Arabia (EX), the Real Gross Domestic Product (GDP) and Real Non-Oil Gross Domestic Product (NOGDP). Total Exports by Saudi Arabia is the sum of oil, and non-oil exports expressed in Saudi Riyal. Data for the sample period are obtained from the SAMA Annual Report 2014. All the variables are in real term and taken in their natural logarithms to avoid the problems of heteroscedasticity. The estimation methodology employed in this study is the cointegration and error correction modeling technique. The entire estimation procedure consists of three steps: first, unit root test; second, cointegration test; third, the error correction model estimation.

Augmented Dick-Fuller (ADF) Test

This paper uses Augmented Dicky-Fuller (ADF) test to examine the presence of unit roots in the variables. ADF test is an extended version of the original test of Dicky and Fuller (1979) to control for the serial correlation of the error term (Dicky and Fuller, 1981). Cointegration in empirical methodology requires variables that are non-stationary in level but stationary after first- differencing. To test whether variables are stationary or not, unit root tests are performed. The time series properties of variables are examined by Dicky and Fuller (DF) or Augmented Dick-Fuller (ADF) unit root test. It is used to determine the order of integration of time series. The test is based on estimates of the following regression equations. For level:

International Journal of 114 IJMBE Management, Business, and Economics And for first difference:

Where variable the variable is tested for unit root; is the first difference operator; is the constant term; T is time trend; p is the number of the lag length which was selected. The null hypothesis is : =0 and the alternative hypothesis : <0. When the absolute value of the calculated t-test is greater than the critical value from Mackinnon (1991), the null hypothesis of the unit root (non-stationary) is rejected, indicating that the variable is stationary at level and integrated of degree zero [I~ (0)]. However, when the absolute value of the calculated t-test is smaller than the critical value, the null hypothesis of the unit root (non-stationary) is accepted, indicating that the variable is not stationary at their level form and we have to chick their stationary for the first difference.

Johansen Cointegration Test

In order to examine the cointegration relationship between the real export and the RGDP or NOGDP, this study employs widely used Johansen (1988, 1991) cointegration test which implement a maximum likelihood procedure. This is because our time series variables are non-stationary in level and stationary after first-differencing. If we find a cointegration between banks loans and the stock market price index variables, it implies that there is a long run relationship between stock market price index and banks loans. This methodology tests for the number of cointegration relationships and estimates the parameters of such cointegrating relationships. The cointegration is applied by using vector autoregressive (VAR) model. A general unrestricted VAR model can be represented as the following:

Where (n x 1) vector of variables is, is (n x 1) vector of constant terms and Șt is (n x1) vector of usual error term. Equation (3) could be rewritten in the following error correction form:

Where

If coefficient matrix has reduced rank r < k, then there exist k x r matrices Į and ȕ each with rank r such that t is stationary. Here r is the number of cointegrating relationships, the elements of Į are defined as the adjustment parameters and each column of ȕ is a cointegrating vector. The Johansen-Juselius test uses two test statistics through VAR model to identify the number of cointegrating vectors, namely the trace test statistic and the maximum eigenvalue test statistic. The test statistic for the trace test is given by:

The trace test’s null hypothesis is r = 0, cointegrating vectors against the alternative hypothesis of n cointegrating vectors.

International Journal of IJMBE Management, Business, and Economics 115 The maximum eigenvalue test is given by:

This test, on the other hand, tests the null hypothesis of r cointegrating vectors against the alternative hypothesis of (r + 1) cointegrating vectors.

Vector Error Correction Model (VECM)

Once the cointegration established between variables, then there is a need for construction of error correction mechanism to model dynamic relationship. The aim of the error correction model is to indicate the speed of adjustment from the short run equilibrium to the long-run equilibrium. A Vector Error Correction Model (VECM) is a restricted VAR to be used with non-stationary series which are cointegrated. When the equilibrium conditions are imposed, the VECM describes how the model is adjusting in each time period towards its long-run equilibrium. Because of the variables are supposed to be cointegrated, then in the short-run, any deviations from long-run equilibrium will feedback on the changes in the dependent variables in order to make their movements towards the long-run equilibrium. According to Engle and Granger (1987), if two series are co-integrated of order one i.e. I(1), then there must exist a VECM representation in order to govern joint behavior of the series of the dynamic system. For this study VECM to be estimated as follows:

Where the error correction term is lagged one period with coefficient 5 measuring estimation ןadjustment of the model from the short-run to the long-run and is the white noise. The of equations 7 and 8 determines the nature of relationship between RX (real export of Saudi Arabia) and RGDP. The estimation of equations 9 and 10 determines the nature of relationship between RX and RNOGDP.

Whether a VAR in levels or a VECM for modeling cointegrated series is a better approach remains debatable. While the VECM conveniently combines long run behavior of the variables and their short run interactions and thus can better reflect the relationship among variables, the popularity of VAR in levels lies in its low computational burden. Moreover, it is still unclear whether the VECM outperforms the level VAR at all forecasting horizons (Naka and Tufte 1997). In the literature dealing with short-run dynamic interactions, estimating the level VAR for cointegrated variables seem to be a normal approach.

Granger (1986), states that in Granger representation theorem, if two variables are stationary of order (1) and cointegrated, then either the first variable causes the second or vice-versa. In this study, Granger causality test based on VECM is utilized. It provides an additional channel for long- run causality which is ignored by Sims and Granger causality tests. Long run causality is confirmed using the joint significance of the coefficients of lagged variables. Chi-squared test is employed to check the joint significance of the coefficients of the lagged variables and t-tests is used to check significance of the error term.

International Journal of 116 IJMBE Management, Business, and Economics

5. Empirical Results

Pearson’s correlation coefficient

At the outset, the Pearson’s correlation coefficient between exports and real GDP is calculated over the sample period, and its significance is tested by the t-test. The value of Pearson’s correlation coefficient (r) between these two time series over the sample period is 0.97. It shows that exports and real GDP are positively related in Saudi Arabia and that a very high degree of correlation is evident between them. To test whether this value of r shows a significant relationship between the two time series, student’s t-test is used. The null hypothesis of the test is r = 0 against the alternative of r z0. Since the t-statistic at 44 degrees of freedom is 26.5, and the critical t-value at 5 per cent level of significance is less than it, the null hypothesis is rejected. So, it can be said that the correlation between exports and real GDP is statistically significant. In the same manner the correlation coefficient between RX and NORGDP is 0.96. It shows that exports and RNOGDP are positively related in Saudi Arabia and that a high degree of correlation is evident between them. Since the t-statistic at 44 degrees of freedom is 22, and the critical t-value at 5 per cent level of significance is less than it, the null hypothesis is rejected. So, it can be said that the correlation between real exports and RNOGDP is statistically significant. Correlation, however, does not say anything about long-run relationship, and thus, leaves unsettled the debate concerning the long-run relationship between exports and real economic growth measured by real gross domestic product.

Unit Root Test

Table 1 Augmented Dickey-Fuller and Phillips-Perron Test Statistic

Augmented Dickey-Fuller test statistic Phillips-Perron test statistic variable Level Prob. First Prob. Level Prob. First Prob. with difference with difference Constant with Constant with Constant Constant RGDP - 0.1884 - 0.008 - 0.3344 - 0.008 2.26230 3.683636** 0 1.888563 3.683636* 0 7 * ** NORGD - 0.3876 -2.683124* 0.085 - 0.325 -2.649289* 0.0915 P 1.77461 4 1.907520 9 7 RX - 0.106 - 0.001 - 0.1411 - 0.0009 2.57238 5 4.436680** 0 2.424915 4.458869* 9 * **

Note: * Statistically significant at the 10% significant level *** Statistically significant at the 1% significant level

The results from Table 1 indicate that we cannot reject the presence of a unit root for any of the variables. All variable are not stationary at their levels but they are stationary at the first

International Journal of IJMBE Management, Business, and Economics 117 difference. By using both root test: Augmented Dickey-Fuller test statistic and Phillips-Perron test statistic, all variables are integrated of order one, I~ (1).

Johansen Cointegration Test

Table 2 Cointegration Test

Panel A: Cointegration test: RGDP and RX r Trace Statistic Prob. Max-Eigen Prob. Statistic None* 18.40860 0.0177 18.26272 0.0111 At most 1 0.145878 0.7025 0.145878 0.7025

Panel B: Cointegration test: NORGDP and RX r Trace Statistic Prob. Max-Eigen Prob. Statistic None 12.48768 0.1350 11.10971 0.1488 At most 1 1.377972 0.2404 1.377972 0.2404

From table (2) panel A the Trace test indicates the existence of one cointegrating equation at 5 per cent level of significance. Also, the maximum eigenvalue test makes the confirmation of this result. Thus, RGDP and RX have long-run equilibrium relationship between them. Nonetheless, the study cannot confirm the long-run equilibrium relationship between NORGDP and RX since the cointegration does not exist between them at even ten percent level of significance. The last result has been drawn from table 2 Panel B because the null hypothesis of no cointegration has been accepted (Prob –value is greater than 0.10 for both Trace as well as maximum eigenvalue test).

Vector Error Correction Model

However, for RGDP and RX in the short-run there may be deviations from the equilibrium, and it is required to verify whether such disequilibrium converges on the long-run equilibrium or not. Thus, Vector Error Correction Model is used to generate such dynamics relation. Error correction mechanism provides a means whereby a proportion of the disequilibrium is corrected in the next period. So, error correction mechanism is a mean to reconcile the short-run and long-run behavior.

The estimation of a Vector Error Correction Model (VECM) requires selection of an appropriate lag length. The number of lags in the model is determined according to the Akaike information criterion (AIC), sequential modified LR test statistic (LR), Final prediction error (FPE), and Hannan-Quinn information criterion (HQ). All of these criterions suggested the selection of lag length 2. An error correction model with the computed t-values of the coefficients is estimated and the results are reported in Table (3). The estimated coefficient of error-correction term (EC) in the RX equation is statistically significant and has a negative sign, which confirms that there is a long- run equilibrium relation between the independent and dependent variables at 5 per cent level of significance. The magnitude of the error-correction term is (-0.57) which indicates that the rate of convergence of total real export to the equilibrium state per year for Saudi. Precisely, the speed of adjustment of any disequilibrium towards a long-run equilibrium is that about 57 per cent of the disequilibrium in exports is corrected each year. Furthermore, the negative and statistically significant value of error correction coefficient indicates the existence of a long-run causality between RGDP and RX. The existence of Cointegration implies the existence of Granger causality at least in one direction (Granger, 1988). This causality is running from the real GDP to exports. In

International Journal of 118 IJMBE Management, Business, and Economics other words, the changes in exports can be explained by real GDP. Nonetheless, the equation of RGDP in Vector Error Correction Model (VECM) indicates that error-correction term is negative and significant. Since the value of error-correction term in the second equation is equal -0.067, the speed of adjustment of any disequilibrium towards a long-run equilibrium is about 6.7 percent of the disequilibrium in RGDP is corrected each year. This causality is running from real exports to RGDP.

Table 3 Vector Error Correction Estimates

Error Correction: D(LOGRX) D(LOGRGDP)

CointEq1 -0.573927 -0.067235 (0.18959) (0.02945) [-3.02718] [-2.28323]

D(LOGRX(-1)) 0.252713 0.044214 (0.21665) (0.03365) [ 1.16648] [ 1.31395]

D(LOGRX(-2)) -0.144730 -0.020689 (0.20524) (0.03188) [-0.70518] [-0.64901]

D(LOGRGDP(-1)) 0.543741 0.008676 (1.50126) (0.23318) [ 0.36219] [ 0.03721]

D(LOGRGDP(-2)) 0.747159 0.258621 (1.34847) (0.20945) [ 0.55408] [ 1.23479]

C 0.086886 0.024110 (0.07045) (0.01094) [ 1.23335] [ 2.20347]

R-squared 0.508714 0.463207 Adj. R-squared 0.438530 0.386522 F-statistic 7.248310 6.040403

Thurayia (2004) found the speed of adjustment of any disequilibrium towards a long-run equilibrium is about 35 percent of the disequilibrium in GDP is corrected each year which is higher than the result of this study. Therefore, this study confirms the bidirectional causality between the RX and RGDP. Here, the Granger- causality conducted by the t-test of the lagged error-correction coefficient suggests statistically significant long-term bidirectional causation between RX and RGDP variables, i.e. export causes economic growth and economic growth also causes export. This finding of bidirectional causality between RX and RGDP variables differs from Thurayia (2004) who found unidirectional causality running from export to GDP. The coefficients of the first difference of RX and RGDP lagged one period in RX equation in Table 3 are statistically insignificant which indicate the absence of short-run causality from real GDP to exports based on VECM estimates.

International Journal of IJMBE Management, Business, and Economics 119 As pointed out by Granger (1988) standard Granger tests are only valid if the original time series are not cointegrated. Since NORGDP and RX are not cointegrated, the direction of causality between them can be presented using Pairwise Granger Causality Tests. The result from table (4) indicates bi-directional short-run causalities between NORGDP and RX at 10 percent level of significant. The growth in real export of Saudi results in an a positive growth in NORGDP which in turn causes the export to grow once again. This causality is not as strong as the causality between RX and RGDP that has been derived from VECM. The results of this study suggest that promoting exports via export promotion policies will contribute to economic growth of not only RGDP but also NORGDP in Saudi Arabia. Since the growth of export contributes to the growth of NORGDP, the growth of export supports the economic diversification in Saudi Arabia.

Table 4 Pairwise Granger Causality Tests

Null Hypothesis F-Statistic Prob. Result RX does not Granger Cause NORGDP 2.98431 0.0629 Rejected at 10% only NORGDP does not Granger Cause RX 2.85526 0.0703 Rejected at 10% only

6. Conclusion and policy implications

Using annual data on Saudi's exports and GDP over the time period 1970-2013, we have analyzed the time series properties of these variables in order to determine the appropriate functional form for testing the ELG hypothesis. The study finds that GDP, and exports are cointegrated. Based on the VECM results, the evidence suggests the strong support for long-run bidirectional causality between real export and RGDP. Moreover, the study concludes that both export and economic growth are related to past deviations (error-correction terms) from the empirical long-run relationship. It implies that all variables in the system have a tendency to quickly revert back to their equilibrium relationship. This fact means that any rise in export growth would have a positive influence on economic development in both the long- and short-runs. The results of this study also suggest that promoting exports via export promotion policies will contribute to economic growth in Saudi Arabia. However, the study finds that NORGDP, and real exports are not cointegrated which means there is no tendency to revert back to their long-run equilibrium relationship. The short-run causality results suggested by traditional Grenger causality test tends to support the bidirectional causality between them. The results of this study suggest that promoting exports via export promotion policies will contribute to economic growth of not only RGDP but also NORGDP in Saudi Arabia. The export promotion policy tends to participate in the process of diversifying the economic base of Saudi Arabia.

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International Journal of IJMBE Management, Business, and Economics 125

Personal Credit Scoring Guideline for Nano Finance in Thailand

Supin Chaisiripibool M.B.A. Program Director, Graduate School of Thonburi University, Bangkok, Thailand Tel: +66816407575, E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 127

Personal Credit Scoring Guideline for Nano Finance in Thailand

Supin Chaisiripibool M.B.A. Program Director, Graduate School of Thonburi University, Bangkok, Thailand Tel: +66816407575, E-mail: [email protected]

Abstract

This article argues that a within-case analysis of the causes and patterns of the Guideline for Nano Finance in Thailand. Using the method of systematic process analysis, the article explores the expansion of credit rating in Nano Finance in Thailand from three perspectives: historical (power), sociological (diffusion) and behavioral institutionalism (prospect theory). It demonstrates that the proliferation of credit rating resulted from a change of preference on the part of Thailand. Nano Finance will grant the maximum of 100,000 baht for each borrower without collateral. The borrowing purpose is for business operation, not for consumption. The highest charging interest rate should not exceed 36 per cent a year including effective interest rate charges, fees, and penalties. This high regulated interest rate (36% per annum) would attract many new lending players who are non-bank institutions. These new players may not be financial institutions who may have no any lending experience. Therefore, the personal credit scoring guideline can help them to screen the high potential borrowers in order to lessen the bad debt problems.

Keywords: Credit Rating, Nano Finance, Financial System, Institutionalism, Systematic Process Analysis

1. Introduction

Personal credit scoring is a statistical method to evaluate an individual’s creditworthiness that represents credit payment history of a person. The scoring systems are different criteria depending on each credit bureau considerations. In the United States, there is a well-known organization, FICO (Fair, Isaac, and Company) who provides personal credit scores to national credit bureaus, banks, insurance companies, and financial institutions since 1989 (http://en.wikipedia.org/wiki/ credit_score_in_the_united_states).

The Bank of Thailand (BOT) said "nano-financing" could provide added protection and fairness for consumers along with better management of informal loans outside the financial institution system through the increase of clarity and transparency, as nano-finance would encourage people to offer and get loans from within the formal system.

The Finance Ministry has devised the "nano-finance" concept to help non-bank lenders to extend money to grass-roots people, or those who don't have access to capital, as commercial banks are having cost difficulty in providing such loans to micro-borrowers. It plans to submit a proposal to promote nano-financing to Deputy Prime Minister Pridiyathorn Devakula before the end of this month.

International Journal of IJMBE Management, Business, and Economics 129 Currently the smallest form of loan that financial institutions can offer is "micro-finance", which has a maximum loan amount of 200,000 Baht, at an interest rate of 28 percent, while the nano-finance idea would offer 100,000-120,000 Baht and the interest rate would be higher at 30-36 percent.

In methodological terms, the study uses systematic process analysis (Hall 2008), which compares the historical record of the emergence and institutionalization of rating in Thailand with the expectations of rival analytical approaches. Systematic process analysis requires deep empirical foundations because rival empirical expectations are tested against each other by documenting conforming and non-conforming observations (Hall 2008: 314). For this reason, I have double- checked basic information and collected data from three different types of sources: academic and professional publications on rating; newspaper articles about Thai financial market deregulation; and interviews with experts who represent the financial authorities.4 At the request of our interviewees, the matters discussed are used and quoted in the text anonymously.

This article assumes that the clue for understanding institutional change is the exploration of preference change. The reason for this is that material interests change little and preferences translate material interests (such as the profit interest of banks) into action. Following Frieden (1999), Vogel (1999), Hall (2005:), Woll (2005) and others, I claim that there is a difference between material interests and preferences and that it is useful to assume interests are fixed and to derive them from economic theory. Interests (which can be multiple) are the (mostly economic) values and benefits that actors pursue; their preferences define the way they order the possible outcomes of their behavior. In this study, ‘interests’ are defined as banks’ profit-seeking motives. Banks’ preferences reflect their ranking of the governance mechanisms that they can use in the assessment of creditworthiness to maximize their profits – namely how they order the use of networks, firm- hierarchy and the market.

The focus on preferences means that, in contrast to most other institutional analyses, which, following Hall and Taylor (1996), use the trinity of rational choice, historical and sociological institutionalism, this article replaces the rational choice approach with ‘behavioral institutionalism’. The reason for this is that rational choice institutionalism has problems in analyzing preference change and processes of preference formation. Historical, sociological and behavioral institutionalisms treat preference change as an empirical question because they see the formation of preferences as endogenous. Rational choice institutionalism views preferences as exogenous and given, and it is only an exogenous shock (thus a heavy and rapid systemic transformation) that is expected to change them (e.g., Hall & Taylor 1996; McDermott 2004; Hall 2005; Fioretos 2011; for an exception, see Greif & Latin 2004). In this approach, ‘institutional change happens only when ceteris is no longer paribus, that is, when shocks exogenous to the system alter the context’ (Hall 2010, emphasis in original; similarly, see Mahoney & Thelen 2010).

This article has to note that the three strands of institutionalism – historical, sociological and behavioral – share two points. First, they contend that there is an interactive relationship between actors, institutions and the decision-making situation. And second, they analyze processes of preference formation in an inductive manner and allow for endogenous preference change as a driver of institutional change. However, despite these commonalities the three institutionalisms are nevertheless quite distinctive in their understanding of Institutions and how endogenous preference change comes about (see also Table 1). While historical institutionalism has a political and historical understanding of actors’ decision making and preferences and sociological institutionalism highlights normative and cognitive dimensions, behavioral institutionalism views institution-building and endogenous preference change from the perspective of economic decision making.

International Journal of 130 IJMBE Management, Business, and Economics Table 1 Difference between Historical, Sociological and Behavioral Institutionalism

Historical Sociological Behavioral institutionalism institutionalism institutionalism (power) (diffusion) (prospect theory) Institutions Institutions reflect Institutions not only Institutions are choice power specify ‘what one should architectures relationships and are do’, but also ‘what one instruments of power can imagine oneself redistribution doing’ (Hall & Taylor 1996: 948) Endogenous Conditioned by Conditioned by cognitive Conditioned by actors’ preference existing and normative framing of relative change institutions, power dimensions of existing losses and gains struggles and strategic institutions and decision- interaction making situations

Historical institutionalism conceptualizes institutions from a power-distributional perspective and views preferences as conditioned by existing institutions and power struggles as well as strategic interaction (Thelen & Steinmo 1992; Hall 2010; Jackson2010: 68).6 Sociological institutionalism follows a ‘cultural approach’ by stressing the cognitive dimension of institutions and preferences (Hall & Taylor: 1996). Assuming the logic of appropriate behavior (Hall & Taylor 1996: 947–949), institutions not only specify ‘what one should do’ but also ‘what one can imagine oneself doing’, with the result that cognitive and normative dimensions also affect actors’ preferences (Hall & Taylor 1996).

Behavioral institutionalism loosens the ‘calculus’ approach of rational choice institutionalism, which, according to Hall and Taylor (1996), assumes that actors maximize their material interests by a specific and fixed ‘preference function’ and defines institutions as coordination mechanisms sustaining particular equilibrium (similarly, see Mahoney & Thelen 2010). Instead of stringent calculus, behavioral economics assumes bounded rationality – thus, that rationalist calculations are limited by psychological effects such as ‘loss aversion’ and ‘framing effects’ or ‘hyperbolic discounting’ (Shepsle 2006; similarly, see Posner 1998; Levi 2009).As a result, in contrast to rational choice institutionalism, and in line with sociological and historical institutionalism, behavioral economics (prospect theory) acknowledges that endogenously generated preference shifts are possible (McDermott 2004): Preferences and their formation are not deductively conceived but, as in historical and sociological institutionalism, they are treated as empirical questions. What distinguishes behavioral institutionalism from historical and sociological institutionalism is that this approach claims it is actors’ framing of relative losses and gains which make their preferences change.

Historical institutionalism views preference change as a function of existing institutions, strategic interaction or constellation of actors while sociological institutionalism points to the effect of appropriate behavior. Behavioral institutionalism by contrast links endogenous preference change to how actors frame the relative losses and gains of their behavior. Thus, behavioral economics allows investigating economic reasons for preference shifts. FICO has disclosed the main factors of credit scores allocation as the following (http://www.myfico.com/crediteducation/ hatsinyourscore.aspx):

International Journal of IJMBE Management, Business, and Economics 131 A consumer’s payment history is accounted 35% of total scores. This concerns on late payments, overdue, missing the payments, and default.

A consumer’s debt burden is accounted 30% of total scores. This counts the number of credit accounts with owed amounts comparing to credit available amounts. It can be called debt-to-limit ratio. The high ratio indicates the high risk that will get low scores.

A consumer’s credit history is accounted 15% of total scores. This is the length of time that a borrower has been using and repaying the credit. It may be an average age of each credit account and the age of oldest credit account.

A consumer’s credit usage is accounted 10% of total scores. This refers to types of credit used by a consumer such as mortgage, revolving credit, auto loan, and studying loan. A consumer who has no credit cards is weighted lower scores than a consumer with credit cards.

A consumer’s new credit account application is accounted 10% of total scores. hen a consumer applies for many credit cards or loans that are recorded and displayed on personal credit reports within 12 months. This may be lower the scores.

All these above factors are FICO’s basic credit scoring considerations. Here, FICO credit scores focus on default risk of a consumer. So, FICO credit scores are widely uses by the lenders. Anyhow, there are many details to evaluate a consumer’s creditworthiness. But the details are secret!! Each credit assessment organization always develops its own credit scoring models and calculating methods. Based on many researches from both academics and financial industry found that there is no single technique proven as superior credit evaluation for the most accuracy credit risk prediction. However, the more credit information of a consumer will help a lender to facilitate in screening the potential borrowers. In business practice, a high credit scoring customer is able to lend at a lower interest rate than a low credit scoring customer. Moreover, a high credit scoring customer is also able to have a longer credit term as well as a larger credit line comparing to the low credit scoring customer.

The major credit bureaus do much on credit reporting more than credit scoring. The credit bureaus work as credit information providers, not credit scoring evaluators. Therefore, banks, credit card issuers, and lenders have their own proprietary credit scoring models. They also have their own interpretation of a credit score that will vary by lender, industry, and the economy as a whole. Even though the same banking sector, each bank has its own credit granting criteria. Normally, smaller banks will have the easier credit granting criteria than the larger banks. However, there is a set of basic credit scoring assessments that are used by the bankers, especially the mortgage loans consideration. The basic set of a debtor’s credit assessments is called 6 Cs which are as the following (http://www.cbmfoundation.org):

Character - Paying bills on time and meeting financial obligations are signs of good character.

Capacity - Repaying a loan or other financial agreement (enough cash left over after paying fixed monthly expenses to repay loan, the stability of employment or business)

Capital - Subtracting all your debts from your assets, including any property.

Conditions – Focusing on the intended purpose of the loan and considering the economic climate and market conditions.

International Journal of 132 IJMBE Management, Business, and Economics Collateral – Backing up for a payment of a debt by any property or possession.

Common Sense – Reflecting good reasons for answering the questions.

Recently, the Bank of Thailand and the Finance Ministry would permit the non-bank institutions to provide personal credit loans which are called “Nano Finance” in order to get rid of the loans from outside the financial system (http://www.nationmultimedia.com/business/Nano-finance- regulations-approved). The Bank of Thailand found that the grass-roots people have a harder time to access the capital in financial system. At the same time, most of Thai commercial banks have high costs to lend to these groups of people who need a small amount of loan. Anyhow, there are a large number of people who need loans but they cannot meet the banks’ lending criteria. Consequently, they borrow from outside the financial system where there is no law protection. This is the main reason to issue Nano Finance that is expected to ease the problem of unlawful loans in Thailand.

Firstly, they can apply the 6Cs to develop the personal credit scoring assessments which should focus on the first 2Cs: Character and Capacity. The good potential borrower’s character is to measure his past ability to pay debt which may refer to credit bureaus’ information. If there is no any historical credit payment records, the lender should interview each borrower. The specific set of interview questions should be used as the standardization. The main questions should be related to each borrower lending and payments history, for example:

Have you ever lent money from other people? If yes, how much it was? How you spent it?

In the past, how you paid off the loan(s)? (amount and timing of payments)

How many sources of loans you have at present? And how you plan to pay off the loan(s)?

The lender can weigh the credit scores referred to FICO’s credit scores allocation which is accounted 35% for payment history and 15% for credit history. Then, the lender should allocate marks on each question up to 50 marks for payment and credit history. The good potential borrower’s capacity is measure his ability to pay debt in the future that should focus on a borrower’s job stability, income, and income sufficiency. Most of Nano’s borrowers are self-employed that may not have any official report of his job position, monthly income, and extra earnings. Again, the borrower’s interview will be the only practical tool for data collection. Then, the specific set of questions for assessing the borrower’s ability to pay off loan is a must!! These specific questions should concern on the following information:

What is your business?

Where is located?

When is your business operating hours?

Why you do this business?

How you operate your business?

How much is your daily income and daily expenses?

How you plan to use this requesting loan? And how you plan to pay off this requesting loan?

International Journal of IJMBE Management, Business, and Economics 133 The lender can also weigh the credit scores as FICO’s that is accounted 30% for consumer’s debt burden and 10% for credit usage. The rest of 10%, we may count for common sense that reflects the borrower’s wise decisions to answer the questions. The lender should allocate the marks for each question up to another 50 marks for the borrower’s ability to pay off the loan in the future. Next, the lender must consider on the cut-off criteria that provide only 2 alternative decisions:

Yes : The borrower who passes the cut-off criteria is granted for a personal loan.

No : The borrower who fails the cut-off criteria is declined for a personal loan.

FICO’s credit scores model has no exact cut-off criteria. FICO has the guidelines for good score of above 720 and bad score of below 600. The range of FICO credit scores are 300 – 850 which the average credit score is somewhere around 680 (http://www.investopedia.com/ erms/f/ficoscore.asp). As FICO guidelines, the lender can determine the cut-off criteria as percentile methods which can be calculated as the follows:

Good credit score = 720/850 = 84.7% and above

Bad credit score = 600/850 = 70.6% and below

Here, the lender can set the cut-off criteria at 71% of total credit scores. Then, the lender should consider on credit line (lending amount), credit term (lending period), and lending interest rate. The good potential borrowers are rated over 85% that can get the maximum credit line and credit term depending on the lending purpose with a lowest interest rate charge. The average range of borrowers who are rated between 71% - 85% can get the normal credit line and credit term with an average lending rate charge.

Table 2 The Recommend for Charging Interest Rate, Amount of Loan, and Credit Term

Credit Scores Interest Rate Charges Amount of Loan Credit Term 96 – 100 30% 100,000 baht 24 months 91 – 95 31% 90,000 baht 24 months 86 – 90 32% 80,000 baht 24 months 81 – 85 33% 70,000 baht 12 months 76 – 80 34% 60,000 baht 12 months 71 - 75 35% 50,000 baht 12 months

The lender may offer the interest rate discount between 1% - 3% as a reward for a good practice borrower who pays the installments and paying off the loan on time. The key success for small lending loan is the frequency of following up each borrower’s payments. So, the lender should arrange the payment methods to match the borrowers’ behaviors and should provide the variety payment channels.

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International Journal of 138 IJMBE Management, Business, and Economics Aviation Infrastructure and Regional Economic Development: Understanding the Importance of Integration in Regional Airfreight Networks

Tarryn Kille1, Paul Bates2, and Patrick S. Murray3 Aerospace Strategic Study Centre, Griffith University, Queensland, Australia E-mail: [email protected], [email protected], [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 139

Aviation Infrastructure and Regional Economic Development: Understanding the Importance of Integration in Regional Airfreight Networks

Tarryn Kille1, Paul Bates2, and Patrick S. Murray3 Aerospace Strategic Study Centre, Griffith University, Queensland, Australia E-mail: [email protected], [email protected], [email protected]

Abstract

The purpose of this article is to investigate the infrastructure challenges for regional communities with regards to the provision of regional airfreight services. Through a critical discourse analysis, the findings assist in realising the latent meanings that have the effect of shaping policy, impacting on the regional airfreight sector. Four major themes provide empirical evidence to substantially address issues of infrastructure with regards to airfreight services including: business decision-making; cost of business; governmental advice; and the limits of integration in various levels of government decision-making processes. The results presented in this research provide a framework to assist in clarifying the issues associated with regional airfreight provision. There is a notable gap in academic literature that focuses on the role of regional aviation in the logistics industry. To the best of our knowledge, no paper has yet sought to investigate the discourse that impacts on this sector. It is hoped that the outcomes of this research will support the industry and policy makers in future efforts towards the economic development of regional communities, and the progression of the regional aviation sector.

Keywords: Airfreight, Logistics, Regional Communities

1. Introduction

Over the past two decades, the air cargo industry has demonstrated significant growth (Yuan, Low, & Ching Tang, 2010). Although world air cargo traffic stagnated in from mid-2011 to 2013 (Boeing, 2014), the growth returned in 2014 accounting for approximately 35% of global merchandise trade by value (International Air Transport Association, 2008, 2014, 2015). Air cargo has the effect of facilitating trade whilst contributing to global economic development and creating millions of jobs.

One of reasons to explain this dramatic growth in airfreight is an apparent industry trend towards the production of high value, lightweight goods (Ari-Pekka & Hintsa, 2009). This includes the new economy associated with the transport of fresh, perishable, high value produce (Sim, Barry, Clift, & Cowell, 2007). Statistics support this emerging economy highlight that transport of perishable food accounts for 14% by volume of total global airfreight (Bridger, 2008).

Increases in the perishable airfreight task are linked to the emergence of a social focus on the consumption of foods produced from regions known for ‘clean’ production processes. This new

International Journal of IJMBE Management, Business, and Economics 141 social focus has called for research, which investigates the food chain in an effort to understand rural development patterns (Renting, Marsden, & Banks, 2003). Thus, sea, road, rail and air transport of freight in the food production cycle from the farm to the plate of the consumer has come under scrutiny (Saunders & Hayes, 2007). The scrutiny has been applied in the pursuit of clarity surrounding the cost of transport to the environment, society and communities.

It is regional communities that provide the first step of the food production cycle. For many regional communities, access to airfreight networks means an opportunity to penetrate and participate in markets that cannot be equally serviced by other modes of transport. The requirements for freight services are even more pronounced for sea locked communities, such as the island state of Tasmania. In the decline of traditional resource dependent and forestry product industries (West, 2013), the Government of Tasmania (2013), now anticipates that Tasmania’s agricultural industry will support Tasmania through it’s economic transition.

For perishable agri-producers, access to market means access to appropriate freight services with the ability to transport products efficiently and effectively from the farm to the consumer plate. Thus, regional aviation (or air transport in rural and remote regions) is an important factor in the development of regional communities (Kille, Bates, & Murray, 2013).

The discord from the community relating to Tasmania’s freight access indicates that we are yet to understand the needs of regional communities in this regard. For island states, in particular, access to airfreight services and associated infrastructure is directly related to regional economic development (Ward, 1998). As such in 2013, the federal government sought to investigate Tasmania’s shipping and freight services. This investigation was conducted by Australia’s Productivity Commission, who called for papers from the public regarding the matter of freight access to the island state of Tasmania.

This paper builds on our earlier work (Kille, Bates, & Murray, 2014), in an effort to further understand the condition of regional aviation and its importance to economic development of regional communities. Essentially, the paper investigates the discourse, which articulates the needs of regional communities regarding airfreight infrastructure and service reliability. It is hoped that the research will assist policy makers, regional communities, logistics and aviation industry representatives as they aim to overcome the limitations that hinder the development of regional airfreight networks in Australia.

2. Research Methodology

A systematic literature review published by Kille et al. (2014) highlighted the significant challenges facing the regional air freight sector in Australia. In particular, two aspects associated with the challenge of infrastructure were identified. Firstly, the review revealed the requirement for private investment, technology and innovation in the areas of growing and processing (at the producer level) and in the area of air transport access to regional communities. Secondly, the review revealed the need for tangential facilities which aim to enhance overall service quality, and reliability of freight services. The systematic literature review emphasised the need for further empirical evidence to support the needs of regional communities with respect to airfreight infrastructure (Kille et al., 2014)

A pragmatic investigation might suggest that research in the areas of regional aviation, the airfreight industry and the needs of regional communities is insubstantial. However, what means would the pragmatist use to come to this conclusion? What evidence is needed to understand and

International Journal of 142 IJMBE Management, Business, and Economics support the issues and concerns of regional communities? This study intends to build on the earlier systematic literature review in an attempt to answer these epistemological questions. In the greater epistemological scheme, this study forms part of a mixed methodological research approach, underpinned by the principle of triangulation (Bryman, 2006). This approach aims to reduce vulnerability of research outcomes by employing more than one measurement procedure to investigate the research problem.

This research extends on this work (Kille et al., 2014) by further investigating the state of regional aviation. Ultimately, the paper aims to provide empirical evidence through a discourse analysis, which articulates the requirements of regional communities with regards to airfreight infrastructure and service reliability.

The study examines data from submissions to the Productivity Commission’s Inquiry into Tasmania’s Shipping Costs and Freight Competitiveness. The submissions are investigated through quantitative and qualitative analysis, with a combination of content and critical discourse analysis (Jick, 1983). Two research questions formed the basis of this study including: (1) What features of airfreight services do regional communities require?; and (2) What is the significance of multi-mode freight transport services to regional communities?

Firstly, the content analysis allowed issues of quality to be treated quantitatively. It is a systematic method in social sciences by which apparent and latent contexts of written or spoken text are identified (Babbie, 1983; Krippendorff, 1980; Rosengren, 1981). In it’s simplest form, the content analysis involves the determination of units of analysis and counting the frequency of these particular words within the semantic contexts. The units are then constructed into categories, which offer another level of analysis, where a framework of coding can be used. Conceptual or operational codes, such as: ‘integrated multi-modal freight transport’; and ‘airfreight access’, allows researchers to uncover the latent meaning from the apparent content. The techniques of counting, categorising as well as coding were used in this study.

The following coding manual was initially used to assist in categorising content into areas of interest relating to the key research questions.

Table 1 Categories defined as a result of the content analysis and earlier systematic literature review

Concept Category Airfreight access Supply chain-focus on perishable, agri-produce Just-in-time (JIT) Low weight, high value Service reliability for business continuity

Integrated multi-modal Freight connectivity freight transport Logistics processes Multi-mode integration planning

The content analysis provided the cornerstone for the development of a framework of categories in which further critical discourse analysis can be applied. The critical discourse analysis offers a method of dealing with hidden issues of text quality, such as ideology and symbolic

International Journal of IJMBE Management, Business, and Economics 143 meaning. Discourse is defined as the recurrent statements, wording and themes across texts, which represent perspectives and orientations to the world (Petrina, 1998). Discourse analysis is a method of analysing text where ‘text’ denotes the spoken or written word, a picture or image, narrative or media. Text is the synthetic representation of the world (Ettinger & Maitland-Gholson, 1990; Janks, 1997; Lindkvist, 1981; Luke, 1995).

Discourse analysis also provides researchers with a method of linking text to structural relations and formations of power (Petrina, 1998). The questions that fortify critical discourse analysis include: “How is the text positioned or positioning? Whose interests are served by this positioning? Whose interests are negated? What are the consequences of this positioning?” (Janks, 1997, p. 329). As a method, critical discourse analysis draws on hermeneutics, linguistics, semiotics, and more generally from critical and post-structuralist theory.

At one level, this method of analysis includes a critical reading of the way in which texts are constructed. However, on another level, it involves a critical reading which considers how the text and the context are culturally located and interests are identified. Ultimately, critical discourse analysis offers a mechanism for drawing links between texts and demonstrating the political and powerful nature of seemingly unremarkable statements.

In this study, discourse analysis was used on its macro-analytical level to substantively address issues of infrastructure with regards to airfreight services. Discourses of regional communities, business economics, and airfreight access were analysed with regards to marginalized and minority discourses. These discourses were read against the codes of the content analysis. As discourses mirror content, they provided a second level of data for coding the submissions. It is here that manifest content is carried as empirical evidence of latent meaning (Petrina, 1998). The following table provides the framework by which the content and discourse analysis were conducted.

Table 2 Framework for discourse analysis

Concept Discourse framework - Emergent features Features to be considered (Inductively) (deductively) Private investment Infrastructure What features of airfreight Integrated multi-modal freight services do regional transport communities require? Business continuity and economic development Tangential facilities Infrastructure What is the significance of which aim to Integrated multi-modal freight multi-mode freight enhance service transport transport services to quality and Business continuity and regional communities? reliability in economic development airfreight services

The authors’ own biases in defining units of analysis and coding of discourses for interpretation reflect knowledge, personal experiences and concerns with a variety of environmental factors impacting the regional aviation sector. However, objectivity and rigour are maintained by strict adherence to the qualitative research method suggested by Glaser and Strauss (1967). Essentially, this technique provided a methodical review of the submissions with input from all

International Journal of 144 IJMBE Management, Business, and Economics authors. This allowed fresh perspectives and new insights to the data being analysed, which offered an evolution in the meaning and validation of the results (Corbin & Strauss, 2008).

3. Results

demonstrates the level of concern in the Tasmanian Freight and Shipping Inquiry submissions relating to airfreight access and integrated multi modal freight transport. In some cases, where concerns overlapped more than one category, for example ‘multi-mode integration planning’ and ‘just-in-time’, the submissions were coded and counted for both issues. Of the 61 submissions received, the topic of ‘multi-model integration planning’ was raised 25 times.

Figure 1 Concern about airfreight access and integrated multi-modal freight transport

The greatest source of submissions was the business sector, which provided 27 or 44.3% of the total. These submissions came from primary producers, manufacturers, airports, shipping companies and freight forwarders. As shown in Table 3, most of the remaining submissions came from Business and/or Industry Associations, accounting for 31.1% of the submissions. Governments, mostly local government, and federal governments were responsible for 11.4% of the submissions.

Table 3 Sources of Submissions

Participant Type Number of Submissions % Total Submissions Business 27 44.3 Business/ Industry Association 19 31.1 Individuals 7 11.5 Political party groupings 1 1.6 Federal Government 3 4.9 State Government 1 1.6 Local Government 3 4.9 Total 61 100

International Journal of IJMBE Management, Business, and Economics 145

Table 4 shows the most frequently mentioned airfreight infrastructure related issues in the submission. Multi-mode integration planning topped the list with 25 mentions and ranked equally high by all three of the major participant types including Business Submissions, Business/Industry Associations and Government submissions. Freight connectivity and Supply Chain, (with a focus on perishable, agri-produce), were the next most frequently mentioned issues for both Businesses and Business/Industry Associations. Government submissions also ranked Freight Connectivity as an important issue on equal terms to logistics processes.

Table 4 Most Frequently Mentioned Airfreight Infrastructure related Issues

Rank, by All Submissions Business Business/ Industry Government Frequency (no.) Submissions Associations Submissions Submissions 1 Multi-mode Multi-mode Multi-mode integration Multi-mode integration integration planning integration planning (25) planning planning/Service reliability for business continuity 2 Freight Freight Freight Freight Connectivity Connectivity Connectivity Connectivity/Supply /Logistics processes (14) /Supply chain - chain - focus on focus on perishable, agri- perishable, agri- produce/Logistics produce processes 3 Supply chain - Just-in-time low weight, high Supply chain - focus focus on /Service value/Service reliability on perishable, agri- perishable, agri- reliability for for business continuity produce/Just-in-time produce (12) business continuity 4 Logistics low weight, high Just-in-time low weight/high processes (11) / value value Service reliability for business continuity (11) 5 Just-in-time (8) / Logistics Low weight, processes high value (8)

In the following section, the theoretical framework is applied. The first step is to examine the ideas the concept of private investment is based on including a consideration of infrastructure, integrated multi-modal freight transport and business continuity and economic development. Next, the same framework is applied to the concept of tangential facilities, which aim to enhance service quality and reliability in airfreight services. This is then followed by a critical analysis of the discourse and the outcomes this research presents with relation to the research questions.

International Journal of 146 IJMBE Management, Business, and Economics

Requirement for private investment

The requirement for investment in infrastructure is highlighted in the discursive content of many of the submissions. While the Productivity Commission’s Inquiry sought to cover the merits and weakness of current arrangements for supporting freight and passenger services between the mainland and Tasmania, the submissions appeared to focus on the economic environment in which the regional community operates. The two most important aspects of the economic environment appeared to be associated with access to international markets and government incentives to attract foreign investment. These aspects are discussed within the framework of infrastructure, integrated multi-modal freight transport, and business continuity and economic development.

Infrastructure

Submissions to the inquiry highlighted that the direct impact of freight costs on the King Island economy is largely double the rest of the state of Tasmania. The King Island Shipping Group (2013) argues that this attributed to the restrictions of island infrastructure and limitations to access competition in service providers. The freight infrastructure challenges are further supported by the Tasmanian State Government (2013) who claims that “Tasmania's fundamental transport disadvantage stems from its regional location and its distance from markets, combined with its lack of alternative modal options for freight compared to mainland Australia. The later is the key reason why Tasmania is considered a 'special case' in terms of receiving Commonwealth assistance to reduce freight cost disadvantage.” (p. 3). Some argue that the free market has not yet encouraged appropriate private investment in freight infrastructure for the State. The TT Line Company Pty Ltd (2013) discusses the need for replacement or additional capacity to be added because a third of the Bass Strait shipping fleet is more than 20 years old. As such, the discourse focuses on the fact that the private sector has so far failed to invest in necessary replacement tonnage. This has the effect of leaving the State highly vulnerable to prolonged access issues due to the time it takes to build and/or procure replacement vessels. These factors place increased pressure on shipping rates and negatively impact Tasmania as a State and its business. Views on freight infrastructure also expands to include discussion on the lack of incentive applied to airport infrastructure, with Launceston Airport (2013) highlighting that while airfreight may offer a solution to meet the competition and alternative freight services required by the region, there is potential for private investment in freight related airport infrastructure. However, investment has stagnated due to the lack of government support provided to the airfreight sector.

Integrated multi-modal freight transport

The majority of the views in this area related to the need for a planning strategy that included all modes of freight transport. For example, one business stated: “There is not much point in having a focus on roads, if you still cannot get the goods out of the ports, or the industry shuts down as there is no competitive freight access” (Corporate Financial Consulting, 2013, p. 5). Fundamentally, the views of the majority of participants explicitly highlight the importance of all modes of transport in fostering Australia’s ability to compete in the international arena. “Efficient ports are key to long term freight planning in the State” (Burnie Chamber of Commerce, 2013, p. 4). This is supported by (Regional Development Australia - Tasmania, 2014) who comment that “to maintain industry competitiveness the state’s export infrastructure is required to be reliable, retain capacity for growth, have frequent shipping services, and maintain efficient port and intermodal infrastructure” (p. 31). The businesses and business/industry associations appreciate that infrastructure investment needs to

International Journal of IJMBE Management, Business, and Economics 147 come from private funding. “It will be the innovation in the packaging of assets, the regulatory conditions attached and the method used in offering the package to private investors that will be the key factors in attracting private sector investment” (Maritime Union of Australia, 2013, p. 5). However, these views are followed with notations that the private sector has not been able to deliver in these areas. While freight infrastructure, maintenance and replacement are high areas of concern, the shipping industry and users of sea freight emphasise that the private sector has not been able to provide relief to the capacity constraints, and that government policy in the form of ‘cabotage’ restricts further private investment in sea freight services. An alternative to support the competition appears to come in the form of airfreight capacity. Businesses (i.e., airport and consulting firms) have argued that airfreight has the potential to provide for the growing demand in fresh, time sensitive agri-produce. For this reason, private investment in freight infrastructure facilities at both Launceston and Hobart had been initiated. However, Launceston Airport (2013) comments that “artificial barriers [in the form of sea freight subsidy disadvantage] are preventing private investors from investing and stimulating the Tasmanian economy…greater competition in Tasmania’s freight industry has the ability to drive investment and productivity within the sector and enhance the state’s economic performance” (p. 2).

Business continuity and economic development

A number of the submissions express concern that when considering Tasmanian freight services, there is an “inherent lack of competition in the market place. There are only two commercial shippers who compete on the Bass Strait route with limited influence from Tasmanian government operated TT-Line” (Regional Development Australia - Tasmania, 2014, p. 1). This lack of competition, or lack of viable options is mentioned by industry groups from the smaller islands such as the King Island Shipping Group (2013) who note that King Island Port is not designed to be an all-weather port. Increased south-westerly swells leads to missed port calls into the harbour. Any ‘no boat’ situation has significant cost impacts to businesses on the island requiring extensive use of airfreight to achieve the freight movement demand. However, Flinders Council (2013) confirms that with regards to business continuity and the economic development of the community, sea and air access are “arguably the most critical factors to ensuring the sustainability of the region” (p. 2). Under this aspect of the framework, the issue of private investment is discussed by local governments under the lack of inclusion of airfreight in current subsidy schemes. Northern Tasmania Development (2013) asserts “the current exclusion of airfreight from the TFES does little to encourage on-island value adding or employment growth in niche product development for remote communities like Flinders Island. Policy measures suggested by the Productivity commission need to focus on enhancing economic inclusion and encouraging investment in value-adding of primary [produce] within regional areas like Flinders Island” (p. 5).

Tangential facilities, which aim to enhance service quality and reliability in airfreight services Infrastructure

Many participants mention the issue of service quality and reliability. Throughout the 61 submissions reviewed, the word ‘reliability’ with respect to freight services is counted 32 times. The concern for infrastructure in this aspect of the framework is discussed within the context of the removal of the international shipping services at Bell Bay. The majority of businesses utilizing the international service from Bell Bay were affected by the removal of the international service claiming that the rural sector can only survive and grow with “a regular reliable international shipper from a centralized port such as Bell Bay who’s infrastructure is set up but under utilized” (View Banks Pty Ltd, 2013, p. 1).

International Journal of 148 IJMBE Management, Business, and Economics Yet, Launceston Airport (2013) argues that the airfreight sector may be able to provide the much needed international access. “Airfreight plays an important role transporting goods, particularly time sensitive and perishable produce, to international markets.” (p. 2). Additionally, Hobart Airport (2013) claims “direct airfreight from Tasmania provides alternate port options such as Sydney and Brisbane Airports that may provide improved capacity to international markets” (p. 2). The airport submissions confirm that there is already significant freight infrastructure in the form of dedicated airfreight tarmac capacity, freight storage and the potential for freight forwarding facilities which may assist in enticing further infrastructure investment and hence assist in improving service quality and reliability.

The producers of perishable, fresh food items explain that reliability in freight services is related to infrastructure to support the processing, packaging and transporting of high value goods. “Once harvest starts the supply chain must keep moving or the system will hemorrhage. A frequent, reliable and cost effective refrigerated transport service is absolutely fundamental to the business’s supply chain and therefore viability” (Harvest Moon, 2013, p. 2).

Integrated multi-modal freight transport

The concept of reliability is discussed in the multi-modal freight transport aspect of the framework. Predominantly, the views relate to the capacity limits already experienced by TT-Line, (considered by Corporate Financial Consulting (2013) to be the most reliable freight service provider for perishable produce), and the lack of integrated multi-modal strategy. One of the businesses claim that “it would be in the interest of the Tasmanian Government to aggregate both companies [Tasrail and the TT line], develop a port link policy where freight is directed to the appropriate port, this is not being left to market forces, so as to ensure, full use of the railway and port logistics capacity, and thus generate a market competitive outcome. TT-Line admits that it is at capacity with the truck trailer borne fresh freight yet the Tasmanian Government has been expending hundreds of millions on the irrigation food bowl projects with little thought as to how the product would get to market”. While the capacity constraints for the export of fresh produce appears to be of concern to a number of businesses, it is of great concern to a range of participant types that integration of the various modes needs to be part of a planning strategy that seeks to offer reliability and service requirements needed from the producers of perishable produce.

Business continuity and economic development

The Department of Infrastructure and Regional Development (2013) accepts the value of airfreight services claiming that “airfreight presents a range of economic and efficiency advantages over freight by sea, including speed of transport and the ability to service geographical areas without seaport facilities” (p. 15). Many submissions highlight the integral part that freight access plays in the ability of regional communities to compete with mainland and international markets. Some have cited experiences where in the absence of government assistance, individual companies have commenced mainland market penetration by absorbing the significant costs associated with airfreight. However, as the product has been well received by mainland markets, more frequent airfreight services are required. Government assistance is called for which serves regional communities, such as these, in accessing sustainable business opportunities and actively growing identified priority sectors.

International Journal of IJMBE Management, Business, and Economics 149

4. Discussion

Two questions defined this part of our mixed methodology research approach. In particular, this discourse analysis aimed to uncover: (1) What features of airfreight services do regional communities require?; and (2) What is the significance of multi-mode freight transport services to regional communities? The following section provides the critical analysis of the discourse and the outcomes that this research presents with respect to those research questions. What features of airfreight services do regional communities require? Two themes in the discourse have emerged which illuminate the needs of regional communities with respect to airfreight services: (1) Business decision-making; and (2) the cost of doing business in a sea locked community.

Business decision-making

The local government and airport submissions appeared to emphasize the community need for airfreight services. However, a number of business submissions did not even consider air-freight as an alterative or an option worthy of mention. While many of these companies are producers and manufacturers of high weight, low value goods, a number of the companies import a range of products to be used in the manufacturing of products on the island. These products are often imported in less than container load (LCL) or pallet sized freight, which could certainly be accommodated for with the current airfreight services offered. Yet, the businesses appear to choose sea freight and consider this the only alternative.

Some authors of decision making and supply chain studies specifically chose to exclude airfreight as a mode of choice due to complexity, lack of use, or the assumption that this mode is only used on very rare occasions (Coley, Howard, & Winter, 2011; Ortmann, van Vuuren, & van Dyk, 2006). However, from the perspective of the grower harvesting high value, perishable produce, Akkerman, Farahani, and Grunow (2010) and Ahumada and Villalobos (2011) highlight a paradigm shift in decision behaviour. At the farm gate, decisions of transport logistics are not based on cost alone, but on reliability, network services and certainty that produce will be delivered to the consumer maintaining high quality standards (demanded by the high paying consumer) (Batt & Morooka, 2003).

The discursive content of the submissions reviewed in this study highlight the levels of concern regarding business decision making and assist in explaining why airfreight has not been considered by all as a viable alternative. Certainly, the study reveals that the businesses producing high value, perishable produce are aware of the airfreight opportunities. However, many of these comments follow a requirement for integrated freight forwarding facilities and networks with commitments to service reliability. That is, the product needs other modes of freight such as road networks at either side of the airfreight sector and the producer needs to be guaranteed that the product will maintain its quality and thus value throughout the multi-modal service.

The need for just-in-time services has been supported by a reliable sea freight schedule across the Bass Strait, which appears to adequately satisfy many of the participants. The access to integrated modes of freight service through companies such as Toll, appear to give businesses the confidence and reliability of a time sensitive delivery that is needed. The frequency and reliability of the sea freight service has been bolstered by government incentive in the form of the Tasmanian

International Journal of 150 IJMBE Management, Business, and Economics

Freight Equalisation Scheme

A number of the airport and local government submissions highlight a contradiction in the discourse arguing that while there is much potential for growth in the airfreight task, there are many opportunities for the airports and associated airport infrastructure to support this growth. However, the growth in the airfreight task is undermined by business decision making, which favours the freight service that includes rebates or government subsidies. These subsidies artificially distort the freight prices and show preference to sea freight rather than airfreight.

As such, while the sea freight offers a reliable service with government subsidy, business decision-making will continue to exclude airfreight as a viable alternative to sea freight. Since the implementation of the Tasmanian Freight Equalisation Scheme (TFES) in 1976, the Federal government has refused to include airfreight into such a subsidy scheme. However, the airports and local governments continue to hold the argument that airfreight (with associated subsidies) allows communities to enter markets previously unavailable and thus allow the community to develop their own strengths economically. This is particular for those in island communities where the cost of conducting business may be higher than for those on the mainland.

The cost of conducting business

Another significant thematic concern of discourse throughout the business and industry association’s submissions was that of the cost of conducting business within a sea locked community such as Tasmania. Businesses importing products to assist in manufacturing processes contended that they experienced a disadvantage by the cost of that freight service import. Principally, arguments were supported by citations of the significant costs of sea freight between Melbourne and northern seaports of Tasmania. Additionally, businesses argued that the subsidies, in the form of the Tasmanian Freight Equalisation Scheme (TFES), added significant costs to international exports from the island community.

This was contrasted with the argument that the subsidy scheme favours those who freight products to the mainland and instead, add value or manufacture products there. It is these businesses that have access to the freight subsidy scheme. Many of the businesses argue that this places the Tasmanian economy at a disadvantage, encouraging manufacturers and processing facilities to recede from operations in Tasmania. Thus, the lack of consideration of these circumstances in government subsidy policy has the outcome of hindering business development in Tasmania as opposed to supporting it. For example one of the business submissions noted that: “…the TFES is not available to direct international exporters from [Tasmania]. Rather, the $885 subsidy per 20’ container is only available to exporters who process or re-pack and grade [Tasmanian] produce in Victoria. The subsidy is also available to competing businesses based in [Victoria] sourcing [Tasmanian] produce - Thus no level playing field for [Tasmanian] based company’s shipping directly internationally” (Cutherbertson Bros. Pty. Ltd, 2013, p. 1).

The links between concepts associated with cost of doing business and business continuity were emphasized also in the discourse analysis as businesses and business/industry groups portrayed the entire costs of transports. Again, an issue of comparability with mainland counterparts, some listed examples of international export cost from Island communities to Asia, citing that the sector between King Island to Melbourne accounted for 70-80% of the total shipping cost (Kelp Industries. Pty. Ltd, 2013).

International Journal of IJMBE Management, Business, and Economics 151

While the apparent issue appears to be the shipping costs, the latent issue emerges in the form of the community needs associated with consistent, reliable and international market access. The international market access is what allows the often-isolated communities, the opportunity to trade, to develop transitioning economies and explore previously untapped sources and business collaborations. Submissions from the local governments, businesses and airport groups confirm this within the notion of ‘efficiency’. The question of ‘efficiency’ is amplified by the disparity between the percentage costs of the sea freight sector between Tasmanian and the mainland compared to the cost of a sea freight sector between the mainland and an Asian port (Corporate Financial Consulting, 2013).

Yet the discourse on Government subsidy links also to the infrastructure challenges facing the airfreight industry. Local government and business submissions recognize the ability that airfreight has to meet the consistency, reliability and access to international markets that regional communities appear to require. The economic reforms of the 1990’s led to the privatization of a range of Australia’s services and assets including regional airports. Now, many airports are left to their own vices, competing for similar markets, negotiating with the same airlines and developing airport-planning models that include the consideration of income streams from the potentially lucrative land surrounding and adjacent to the airport. In the isolation of integrated transport infrastructure planning, businesses have developed their own airfreight facilities and infrastructure through private investment (Launceston Airport, 2013).

The issue of the cost of doing business in Tasmania is pronounced in the effects of Government subsidy with a number of submissions citing that the lack of inclusion of airfreight into government subsidy policy hinders Tasmania’s airports from attracting further investment to support the freight task and drive growth in the airfreight sector. It is perhaps the airfreight sector that can offer the capacity issues, encouraging competition and offering viable alternatives through dedicated freight forwarding facilities, dedicated freighter aircraft and international market access.

What is the significance of multi-mode freight transport services to regional communities?

The discourse reveals an apparent understanding that while airfreight services provide the potential to support transitioning economies, particularly those with a focus on the high value, low weight agricultural products, airfreight services need to exist within a multi-modal freight service system. As such, the discursive content emphasises the necessity for a long-term integrated freight strategy.

The submissions reveal that airfreight in Tasmania has limited influence in decision making of Tasmanian businesses as well as business/industry associations and government groups. However, the word ‘airfreight’ and it’s derivatives which have an intended meaning associated with the ‘transporting of goods by air’, were noted 70 times throughout the 61 submissions that were reviewed in this study.

In the final report to the Inquiry, the Productivity Commission concludes that “Tasmania has a comparable level of competition for air freight and passenger services to regional areas on the mainland, with low cost carriers servicing Hobart and Launceston airports” (Productivity Commission, 2014, p. 9). The very nature of the inquiry into Tasmania’s freight access and associated industry is perhaps part of a larger government political process linked to two key notions including: (a) the impact of governmental advice; and (b) the limits of integration in various levels of government decision making.

International Journal of 152 IJMBE Management, Business, and Economics

Governmental advice

This finding of the Productivity Commission regarding the comparability of Tasmania’s airfreight service to other regional areas of Australia may be indicative of the response from a government body, which is considered a bastion of neo-liberal views on public policy (Freestone, 2011).

Although the Productivity Commission does not enact legislation, findings such as these inform and mould government policy (Australian Government). Neoliberal economics are anchored in a fundamental ideology allowing markets the freedom to develop the most effective and efficient services. This has been applied through a range of models in Australia’s past including the ‘macroeconomic reform’ and the ‘economic rationalism’ agendas which all premised the privatization of a range of sectors of the economy.

However, many of the submissions (particularly those from the more remote island communities in the Bass Strait), emphasise that air passenger transport and airfreight are a basic public service obligation where neoliberal ideologies associated with market demand cannot be realised.

Neoliberalism can occupy two ‘spaces’ including: ideological; and institutional (Brenner, 2004; Brenner & Theodore, 2002; Harvey, 2005). It is within these two ‘spaces’ that the predicament of regional airfreight is squeezed. For example, neoliberal ideologies were applied to a discrete space through airport deregulation in the 1990s through the new Airports Act 1996 (Steves, Baker, & Freestone, 2010). While regional airports in Australia were sold to private investors as well as local governments, this effectively transferred the ownership of state assets from the public to the private sector (Freestone, 2011). It is this transfer of ownership (in our context, airports and associated airfreight infrastructure), which amplifies the tension under neoliberal policies between communities (with potential for economic growth) and sources for “fissures in which urban resistance and social change can take root” (Boudreau, Keil, & Young, 2009, p. 22).

The tension comes down to implicit social needs of the regional community to air transport access (of which they believe the Federal Government is responsible), contradicting with the actual neoliberal process of transferring the ownership of such services (indirectly) to private investors. This is supported by the fact that in the reviews and adjustments concerning the equalization of transport and freight services across the Bass Strait since 2006, the Government, through advice from it’s various Departments and Commissions has rejected the need for airfreight services to be part of a subsidy scheme (Department of Infrastructure and Regional Development, 2013). Recently however, the subsidy scheme has been extended to include airfreight where there is no viable alternative service and the vendor may incur penalties as a result of late delivery of the goods.

Individuals, businesses, and business/industry associations are aware of this and highlighted in the following quote from an individual representing a group of businesses: “The TFES was subject to a review by the Commission in 2006. On that occasion the Commission’s recommendations reflected the usual Canberra bureaucratic view that a freight equalization subsidy to Tasmania is not warranted” (Barker, 2013, p. 3).

While the contradiction of neoliberal policies is seen in the case of regional communities, policy advice is not the only cause of airfreight’s lack of consideration in business decision-making. Categories such as ‘freight connectivity’, ‘logistics processes’ and ‘multi-mode integration planning’

International Journal of IJMBE Management, Business, and Economics 153 are linked thematically to the emergence of a topic highlighting the lack of interaction and coordination between federal and State Governments.

The limits of integration in various levels of government decision-making processes

When considering regional airfreight services in Tasmania, one of the inductive findings from this study is that lack of consideration of airfreight as a viable alternative to freight services across the Bass Strait is due (in part) to the Federal Government’s reform agenda’s of the 1990s. However, it is the need for strategic and integrated planning and communication that precipitates as a significant concern from the majority of participant types (i.e., businesses, business/industry associations, state government, local governments and individuals).

Firstly, the lack of communication between the levels of Government is highly apparent by the preface to the inquiry. Through it’s submission, the Tourism Industry Council of Australia (2013) highlighted that “the Australian Government commissioned the Tasmanian Freight and Shipping Inquiry without the input of the Tasmanian Government” (p.4).

Another area of disjointed strategy development linked to accessibility of freight networks is the emerging concern of infrastructure investments in the areas of growing and processing. Kille et al. (2014) asserted that in the case of the regional airfreight scenario, one of the challenges of infrastructure is the requirement for private investment, technology and innovation in the areas of growing and processing (at the producer level). Many niche products are highly successful in terms of quality due to the conditions of growing at specific locations. In many cases, this geographic limitation and specific growing climate is what makes the produce valuable. Time sensitive and perishable produce also does not have the luxury of distance to process as the travel to process time adds valuable time to the entire transport time.

A number of statements within the submissions support these findings including: “Freight support measures and infrastructure planning must account for the substantial existing exporting businesses in the region as well as future growth options including the dairy industry, food and beverage manufacturers and new investment that will unlock value in the forestry industry plus the inevitable productivity gains arising from new irrigations networks” (Northern Tasmania Development, 2013, p. 1).

“It will be innovation in the packaging of assets, the regulatory conditions attached and the method used in offering the package to private investors that will be the key factors in attracting private sector investment” (Maritime Union of Australia, 2013, p. 5).

However, a critical analysis of the submissions highlights a disparity in integrated planning processes. For example, the Tasmanian State Government has invested millions into irrigations schemes that seek to protect the agricultural industry. The agricultural industry (i.e., ‘Growing’) is regarded as an industry with a “bright future” (Webster Limited, 2013) and is projected to assist in supporting the transitioning Tasmanian economy (Government of Tasmania, 2013). As such, the State Government through the State owned Tasmanian Irrigation Pty Ltd, administers a range of schemes that seek to secure water and irrigations sources with public/private investment partnerships.

Unfortunately, the submissions demonstrate an area of public discord: “Millions of dollars have been spent in recent times on irrigation projects to drought-proof any future investment in the agricultural and horticultural space. However, any industry looking to establish a new operation in

International Journal of 154 IJMBE Management, Business, and Economics Tasmania or to expand an existing operation, would look closely at the cost of transporting their produce to market and ascertaining if they can do this in a viable way” (Webster Limited, 2013, p. 2).

What is apparent is a disjointed implementation of initiatives and policies, which have a consequence on freight, network deliveries and, inevitably, regional airfreight networks. In it’s submission, the Tasmanian State Government (2013) stated that it has “consistently pursued a significant suite of micro-economic reform and infrastructure projects over recent years, including: the largest expansion of irrigation infrastructure in Tasmania's history” (p. 5).

Yet, the Tasmanian State Government (2013) has also realised the limits of it’s abilities commenting that “As significant as this agenda is, its potential to deliver transformative and lasting change to the Tasmanian economy will only be fully realised if Tasmania has a transport and freight logistics network that is capable of efficiently and effectively supporting the needs of our industry and our community” (p. 5).

Many of the submissions called for an integrated freight strategy, which considers the State’s entire essential transport infrastructure, (including airports, rail, road and sea ports). Others criticize the lack of integration drawing links to private infrastructure investment and long term integrated multi-level government and industry coordination.

This lack of coordination is best explained by the concept of ‘actually existing neoliberalism’ originally developed by Brenner and Theodore (2002) and further explored and developed by Peck, Theodore, and Brenner (2009). ‘Actually existing neo-liberalism’ forms an analytical platform to approach the production of urban precincts within specific spatial contexts that are moulded by inherited and evolving institutional policy frameworks. This term assists in informing us how resistance, policy roll-out and roll-back intertwine in particular settings to produce complex variants of what still remains an ideological force and shaper of governance frameworks of irresistible momentum.

Previously we have seen how neoliberal ideals have shaped advice to governments. However, here we have an example of how ‘actually existing neo-liberalism’ wanes from neo- liberalist ideology and highlights the complexity of state interventions, which are often aimed at both promoting the rule of the market as well as managing the negative effects of this. Freestone (2011) extends that the idea supports both the path-dependent and politically contingent character of neoliberal reform initiatives through ultimately, ‘trial-and-error’. The submissions demonstrate that the majority of participant types are willing to remove the disjointed ‘trial and error’ approach, favouring a more inclusive and strategic approach, which considers all freight infrastructure and networks.

One of the responses to the inclusivity and state-wide approaches to freight infrastructure came in the form of the Federal Government funded Freight Logistics Coordination Team (FLCT), established in 2011. This team sought to provide the State Government with expert freight and logistics advice. In their final report, the FLCT provided 26 recommendations, of which airfreight featured in only one of those. While the report highlighted that there are a range of gaps in data and literature, there is little empirical evidence to inform recommendations regarding airfreight. Rather, the report concluded that “as part of the development of the Tasmanian Freight Strategy, further work should be done to investigate the extent and nature of air freight needs, with a view to identifying opportunities to better integrate air transport into Tasmania’s strategic freight system” (Freight Logistics Coordination Team, 2013, p. 11).

International Journal of IJMBE Management, Business, and Economics 155 It is recommendations such as this, which link all three categories of ‘freight connectivity’, ‘logistics processes’ and ‘multi-mode integration planning’ together. The FCTL report and the comments on airfreight embody the state of the regional airfreight sector. While freight connectivity is considered critical to the prosperity of regional communities, airfreight is considered an essential part of this ‘freight connectivity’ for sea locked communities. The urgency of supported logistics process to help regional communities with economic opportunity cannot be achieved unless there is appropriate and inclusive strategic ‘multi-mode integration planning’. With air transport and airports effectively deregulated, State and Federal planning has focused on State owned assets (such as sea ports, road networks and railways) to the exclusion of (now privately owned) airports and associated (airfreight) infrastructure.

The study has revealed that the urgency of adequate logistics processes to support regional communities cannot be achieved without appropriate and inclusive strategic ‘multi-mode integration planning’.

5. Conclusion

This research offers a framework that develops understanding of the airfreight needs of regional communities. The critical content and discourse analysis provides some insight into those issues that have emerged and shaped the discussions relating to Tasmania’s freight and shipping services. In our consideration of the features of airfreight services required of regional communities, two notions have emerged from the discourse. Firstly, business decision-making processes regarding modal choice are impacted significantly by sea freight subsidies that artificially distort the pricing of freight services and thus show preference to sea freight. Secondly, the cost of conducting business in a sea locked community is inextricably bound to discourses of business continuity, efficiency of services and prevailing subsidy schemes. While there is lack of empirical evidence, careful consideration of the impact of freight subsidies is needed for all modes of transport, including airfreight.

In our consideration of the significance of multi-modal freight transport services to regional communities, two notions emerge from the discourse. Firstly, the impact of government policy on services provided to regional communities can be heavily influenced by government agencies offering policy advice grounded in neoliberal ideologies. Secondly, there is high concern for the lack of effective integration and communication between various tiers of government resulting in disjointed implementation of initiatives and policy. This has a consequence on the freight sector, which includes regional airfreight networks. Overwhelmingly, the discourse highlights that the urgency of adequate logistics processes to support regional communities cannot be achieved without appropriate and inclusive strategic ‘multi-mode integration planning’ which seeks to integrate air, sea and road in long-term freight strategy.

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International Journal of IJMBE Management, Business, and Economics 161

Revisiting Mercantilism and Keynesian J-W –Hicks Hansen Synthesis in the Case of Malaysia from 1960 To 2009: The Dynamics of Saving, Investment and Trade Openness

Vignes Gopal Krishna University of Malaya, Kuala Lumpur, Malaysia E-mail: [email protected]

International Journal of IJMBE Management, Business, and Economics

International Journal of IJMBE Management, Business, and Economics 163

Revisiting Mercantilism and Keynesian J-W –Hicks Hansen Synthesis in the Case of Malaysia from 1960 To 2009: The Dynamics of Saving, Investment and Trade Openness

Vignes Gopal Krishna University of Malaya, Kuala Lumpur, Malaysia E-mail: [email protected]

Abstract

The type of deductive oriented research has delved into the modified version of Keynesian-Hicks Hansen macroeconomics framework to capture the real saving-investment nexus in the case of Malaysia from 1960 to 2009. This study has supported mercantilism tenet on trade surplus in capturing the flow of investment. The utilization of Johansen cointegration has advocated the existence of long run relationship between variables of interest and this has confirmed the validity of Keynesian J-W-Hicks Hansen Approach. The interesting feature captured in this study is the discussions on the role of animal spirits that were developed by Keynes (1936) and Akerlof and Shiller(2009) in capturing investment and saving nexus. Besides that, saving–investment nexus may enhance the level of meso trajectory phases of innovation that can be divided into 3 phases, origination (development of new products), diffusion (adoption and adaptation of the new products into the economic system), and retention (maintenance of existing new products) that has been explored by Dopfer et al. (2004) and this process of innovation is a continuous process. This follows the theory of creative destruction that was developed by Joseph Schumpeter, which postulates that the transition from old innovation to new innovation may enhance the level of knowledge and technological spillovers.

Keywords: Mercantilism, Keynesian, Saving, Investment, Trade, Meso Trajectory

1. Introduction and Review of Literatures

First of all, credit should be given to Solow (1956), Ramsey (1928), Cass (1965) and Koopmans (1965) for opening up the private saving-investment nexus via capital accumulation from the dimension of microeconomics. The complete set of issue of interest can be seen through the introduction of Keynesian J-W and Hicks-Hansen open economy framework into the system. Classical school of economic thought has identified interest rate as the only important factor that can influence the association between saving and investment, but, the degree of validity of the latter statement was questioned by Nelson (2008) through the complexity and dynamics of economic structure and the role of information in monitoring the direction of saving and investment. Classical and Neoclassical school of Economic Thoughts were closely tied up with the concept of symmetrical information and rationality, which was refuted by John Maynard Keynes, through his book, The General Theory of Employment, Interest and Money in 1936 which has captured the real economic situation which explains the major products of macroeconomics. The transition from old economic thinking (classical thoughts) to new

International Journal of IJMBE Management, Business, and Economics 165 economic thinking (Keynesian and evolutionary economic thoughts) can be seen as a form of innovation that can reveal the underlying conditions and outcomes of higher investment in a nation. It should be realized that lower probability of asymmetric information can strengthen the association between the above mentioned variables of interest in most of the developing nations and the concept of asymmetric information seems to be inconsistent with the concept of invisible hand that was introduced by Adam Smith. The mixture of physiological and economics effects (animal spirits) that was first coined by Keynes (1936) refers to the degree of pessimism and optimism among the economic agents in influencing the real economic activities and the aspects of animal spirits were divided by Akerlof and Shiller (2009) into smaller groups like trust, fairness and etc that can illustrate the movements of saving and investment in an evolutionary economics. Based on the previous literatures, it can be seen that the concept of animal spirits is closely related to the expected rate of return on investment. Higher degree of optimism among the investors may reflect high expected rate of return that can increase the demand for investment, whereas higher degree of pessimism among the investors may reflect low expected rate of return that can lower down the demand for investment. This study differs from Ang (2007), Sinha (2002), Narayan (2005), Schmidt (2003), Kim et al.(2007), Seshaiah and Vuyuri (2005), Vita and Abott (2002) and Mishra, et. al (2010) in terms of the sampling periods, the discussions on animal spirits and asymmetric information, the meso-trajectory phases of innovation and the usage of modified version of Keynesian J-W-Hicks Hansen approach in this research. Most of the literatures have just concentrated on Feldstein and Horioka (1980) model in illustrating the positive link between saving and investment in the developed and developing countries for various years. This study is expected to reveal the relationship between saving and investment from 1960 to 2009 both in the short and long run. The flow of the paper will discuss the conditions for the relationship to hold in the case of Malaysia. To the best of my knowledge, there has not been any study that captures the dynamics of saving and investment in Malaysia via adoption of various elements of evolutionary economics.

2. The Dynamics of Saving and Investment in the Case Of Malaysia 200,000

160,000

120,000

80,000

40,000

-40,000 60 65 70 75 80 85 90 95 00 05

RGFCF RGDS TBM

Note: RGFCF= Real gross fixed capital formation, RGDS= Real gross domestic saving, TBM= real trade balance. Source: World Development Indicators.

Figure 1 Real Gross Fixed Capital Formation Real Gross Domestic Saving and Real Trade Balance in Malaysia

International Journal of 166 IJMBE Management, Business, and Economics In general, it can be seen that real saving outweighs the real investment from 1960 to 2007 in the case of Malaysia. The latter statement has clearly indicated that the level of real saving is sufficient enough to finance the productive activities. Global recession in 1985 and Asian Financial Crisis in 1997/1998 has reduced saving and investment and this is due to the asymmetric information and animal spirits (macroeconomic uncertainties). Based on the graphical approach, it can be observed that the real gross national saving and trade balance can vapture the level of investment in Malaysia. Some of the Malaysian economists feel that poor financial management among the households can cause the movement of the variables of interest in two different ways. Higher level of national saving can be used to finance more public private partnership projects such as health care, infrastructure, insurance projects and etc in a balanced way that can reduce the economic risks. Through this, the gap of convergence between saving and investment can be increased. The role of information and reformation of financial system are crucial in determining the positive side of investment and this can enhance the level of growth rate of economic growth in Malaysia. The trust that economic agents have on the stability of financial system in Malaysia can lead to the movement of the variables of interest along the same line.

3. Analytical Framework

Keynesian-Evolutionary Economics, Schools of Economic Thoughts, And Innovation

Physiocratic School Asymmetric Information of economic thought

Keynesian J-W – Hicks Saving-Investment Hansen Approach nexus Animal Spirits Mercantilism School of Public Private Economic thought Partnership projects

Evolutionary Economics Origination

Diffusion Meso Trajectory Phases of Innovation Retention

Creative Destruction

Sources: Author, Dopfer et al. (2004), and Nelson (2008)

International Journal of IJMBE Management, Business, and Economics 167 This section touches on various schools of economic thoughts, namely Mercantilism, Physiocratic, and Keynesian schools of economic thoughts in highlighting the underlying conditions of saving and investment nexus. The concept of animal spirits doesn’t really work in Classical school of economic thought, because economic agents were assumed to be rational in the classical market and the latter statement is inline with Akerlof and Shiller (2009) and Schwartz (2010). Mercantilism school of economic thought (1500-1776) has favored the trade surplus in explaining the positive side of investment.(Brue and Grant, 2007) The connectivity between Physiocratic and Keynesian schools of economic thought can be seen through the Tableau Economique that was introduced by Francois Quesnay (physiocratic scholar), and the latter table can illustrate the role of surplus and deficit units in an economic system. The symmetrical concept of information is not applicable in reality and the components of asymmetric information (adverse selection and moral hazard) can be well explained by animal spirits. In the case of Malaysia, the investment in public private partnership projects, namely, Trust Mark, Mass Rapid Transit, water supply and etc can enhance the level of innovation through origination (development of new products/system/projects), diffusion (adaptation and adoption of the new products/system/projects into the economic system) and retention (maintenance of existing new products/system/projects until the arrival of new ones) and the latter statement can be supported by Dopfer et al.(2004). This follows the theory of creative destruction, that was introduced by Joseph Schumpeter, where old innovation will be replaced by new innovation. Knowledge and technological spillovers can be generated through high tech projects in Malaysia.

Empirical Models

Econometric models (Based on Modified Keynesian J-W-Hicks Hansen approach in appendix)

LRGFCFt = ȕ0 + ȕ1LRGDSt + ȕ2 LREXt + İt ……………………………….(1.1)

RGFCFt = ȕ0 + ȕ1RTBt + İt…………………………………………………(1.2)

where,

LRGFCF= Natural logarithm of real gross fixed capital formation. LRGDS = Natural logarithm of real gross domestic saving. LREX = Natural logarithm of real exports of goods and services. RGFCF= Real Gross fixed capital formation RTB = Real Trade balance t = represent time period (denotes the time series data) ȕ0, ȕ1, ȕ2 = Parameters İ = denotes the error term.

* RGFCF = proxy of domestic investment and RGDS = proxy of domestic saving

International Journal of 168 IJMBE Management, Business, and Economics Sources of Data

Secondary data have been utilized in this study. Time series data on real gross fixed capital formation, real gross saving and real exports of goods and services from 1960 to 2009 were obtained from World Development Indicators. Real trade balance was computed by using the difference between real exports and imports of goods and services.

4. Econometrics Methodologies

A) Univariate Test: Unit Root Test

In this present study, unit root test will be an important ladder to another test, namely, the Cointegration test. Unit root test is crucial in ensuring the fulfillment of the Johansen-Juselius cointegration test properties on the integration of variables. Unit root test can be used to capture the characteristics of mean and variance of the variables. Unit root test is important in determining whether the time series variables are stationary or non-stationary.The construction of equations for the ADF Unit root test at the level form (without the incorporation of drift) are as below:- For lag length =0, (Level form) Augmented Dickey Fuller ( ADF(0) ) Equation

(1 L)Yt P Yt 1(T 1) Ht ...... (1.3) Note: (1-L) = ǻ and L = Lag operator. H0: -1= 0 (Yt has a unit root) H1: -1 is not equal to zero (Yt has no unit root) (First difference form)

Augmented Dickey Fuller ( ADF(0) ) Equation 2 (1 L) Yt P (1 L)Yt1 (T 1) H t ...... (1.4) Note: (1-L) = ǻ and L = Lag operator. H0: -1= 0 (¨Yt has a unit root) H1: -1 is not equal to zero (¨Yt has no unit root)

For lag length t1,

(Level form)

n (1 L)Yt P E t G Yt1 ¦D i (1 L) Yti H t ...... (1.5) i 1 (First difference form) n 2 2 (1 L) Yt P E t G (1 L) Yt1 ¦D i (1 L) Yti H t ...... (1.6) i 1

International Journal of IJMBE Management, Business, and Economics 169 Table 1 Results of Augmented Dickey Fuller (ADF) Unit Root tests based on the level form.

Country Variables Unit root test ADF H0 : A variable has a unit root H1 : A variable has no unit root Middle income country Malaysia LRGFCF -1.37(1) LRGDS -0.96(2) LREX -0.08(0) RGFCF -0.88(0) RTB -0.78(0) Note: The numerical values in ( ) represent the lag lengths that are selected through Schwarz Info Criterion (SIC).

Table 2 Results of Augmented Dickey Fuller (ADF) Unit Root Test based on the first difference form.

Country Variables Unit root test ADF H0 : A variable has a unit root H1 : A variable has no unit root Middle income country Malaysia LRGFCFM -4.84(0)** LRGDSM -7.57(1)** LREXM -5.30(0)** RGFCF -8.24(0)** RTB -5.14(0)** Note: Asterisk (**) indicate that the individual variables are significant at the level of significance (5%). The numerical values in ( ) represent the lag lengths that are selected through Schwarz Info Criterion (SIC).

Based on Table 1 and Table 2, it can be inferred that all the variables of interest are integrated of order 1 at their level form in the case of Malaysia. The explained and explanatory variables are integrated of order 0 at their first difference form. The former statement has fulfilled one of the Johansen cointegration test requirements.

B) Johansen Cointegration Test

In general, Johansen cointegration test were developed by Johansen (1988) and Johansen (1991).. According to Johansen (1991), the Johansen multivariate cointegration test involves the identification of rank of m by m matrix:- k1 (1 L)Yt G ¦ *i (1 L)X ti 3X tk H t ...... (1.7) i 1 where, (1-L) = ¨. Yt = column vector of m variables. G = constant L = Lag operator.

International Journal of 170 IJMBE Management, Business, and Economics ¨.= first difference operator For example, (1-L) Yt = Yt – Yt-1 = ¨Yt * and 3 = coefficient matrices. k= represent the lag length.

If 3 has zero rank, the variables in Y are not cointegrated and there is no identification of stationary linear combination. If 3 has rank that is greater than zero, then, there will be some possible linear combinations and the variables are cointegrated. (there will be a long run relationship). 3 can be the product of multiplication (Į and ȕ ) 3 = Įȕ’ ’ ȕ = r cointegrating vectors that captures the stationary of ȕ Xt. Į = represents the speed of adjustment coefficient in the decomposition of 3 . (Masih and Masih,1999). The main rationale of the Johansen-Juselius Cointegration test usage in this study is to investigate the relationship between the variables of interest in the long run. The existence of the long run relationship will infer a situation in which the residuals are integrated of order 0. Table 3 has summarized the result of Johansen Cointegration test. Two likelihood ratio (LR) namely the trace test and the maximum eigenvalue (O- max) test is used in Johansen procedure.

Table 3 Results of Johansen Cointegration Test

Country Variables Null Alternative Trace test Maximum hypothesis hypothesis eigenvalue Middle income country Malaysia LRGFCFM, r = 0 r = 1 43.64** (29.80) 22.04** [21.03] LRGDSM r = 1 r = 2 11.60 (15.49) 11.50 [14.26] & REXM r = 2 r = 3 0.10 (3.84) 0.10 [3.84] RGFCF, & r=0 r=1 22.32** (15.49) 22.22** [14.26] RTB r=1 r=2 0.11 (3.84) 0.11 [3.84] Note : Asterisk(**) indicate that the variables are cointegrated at the level of significance (5%) . The numerical values in ( ) represent the critical values of trace test. The numerical values in [ ] represent the critical values of Maximum eigenvalues. Lag length for Johansen multivariate cointegration test is one.

Based on Table 3, it can be seen that there is a long run relationship between LRGFCF, LRGDS and LREX for Malaysia. Besides that, there is a long run relationship between RGFCF, and RTB. These findings may shed some lights towards the eradication of the spurious relationship between the variables of interest. The existence of long run relationship between the variables may indicate the causal relationship between the variables at least in one direction. (Granger, 1986). We may proceed to Vector error correction model (restricted VAR test) for Malaysia, because the variables were found to be cointegrated.

International Journal of IJMBE Management, Business, and Economics 171 C) Vector error correction model (VECM)

Error correction term is obtained from the cointegration relationships. In general, the short-run vector error correction model can be written as follows:

1 1 1 'LRGFCF t b0 ¦b1i'LRGFCFt i ¦b2i 'LRGDSt i ¦b3i'LREXt i i 1 i 1 I 1 1 ¦b6iECt iti ...... (1.8) i 1 1 1 ' ' ' RGFCF t b0 ¦b1i RGFCFt i ¦ b2i RTB t i i 1 i 1 . 1 ¦b6iECt iti ...... (1.9) i 1

Error correction term (ECt-1) represents the proportion of long run disequilibrium that need to be corrected in order to restore the economic back to the long run equilibrium. Significant error correction term indicate the existence of speed of adjustment and the significant error correction term shows that the economic theories have been satisfied in the model.

Long run equation 1 1 1 LRGFCF t b0 ¦ b1iLR GFCFt i ¦ b2i LR GDSt i ¦b3iLREXt i i 1 i 1 I 1 Ht...... (2.0) 1 1 RGFCF t b0 ¦b1iR GFCFt i ¦ b2i RTB t i i 1 i 1 Ht...... (2.1)

Table 4 Results of Long Run Estimates

Country Intercept/variables Coefficients Test-statistics Degree of elasticity Middle income country Malaysia Intercept -1.25 - LRGDSMt-1 + 1.49 -8.51 elastic , Significant LREXMt-1 -0.39 2.52 Inelastic , significant Note: Asterisk (**) indicate that the variables are significant at the level of significance (5%)

International Journal of 172 IJMBE Management, Business, and Economics Table 5 Results of Long Run Estimates

Country Intercept/variables Coefficients Test-statistics Degree of significance Middle income country Malaysia Intercept +32595.23 - RTBt-1 +1.03** -6.16 Significant (5%) Note: Asterisk (**) indicate that the variables are significant at the level of significance (5%)

The positive and significant connectivity between savings and investments can be seen clearly for Malaysia and the latter statement has confirmed the validity of Keynesian J –W-Hicks Hansen Approach. Positive association between saving and investment were supported by Ang(2007), Narayan (2005), and Sinha (2002). Higher level of real exports can negatively affect the real domestic investment in Malaysia. It can be inferred that higher; level of trade balance can capture the positive flow of domestic investment and this is inline with mercantilism school of economic thought.

Table 6 Results of Short Run Estimates

Country Intercept/variables Coefficients Test-statistics Middle income country Malaysia Intercept 0.03 0.98 ǻ LRGFCFMt-1 0.37** 2.22 ǻ LRGDSMt-1 0.05 0.32 ǻ LREXMt-1 0.13 0.33 ECTt-1 - - Note: Asterisk (**) indicate that the variables are significant at the level of significance (5%). Lag length = 1.

Table 7 Results of Short Run Estimates.

Country Intercept/variables Coefficients Test-statistics Middle income country Malaysia Intercept -1891.75 -0.66 ǻ RGFCFt-1 1.10** 2.20 ǻ RTBt-1 0.81 1.78 ECTt-1 -0.19** -2.68 Note: Asterisk (**) indicate that the variables are significant at the level of significance (5%). Lag length = 1.

Positive and insignificant saving-investment nexus in the short run can be observed for Malaysia. Based on Table 7, It can be seen that error correction term is significant for the case of Malaysia at the level of significance (5%) in terms of the connectivity between real trade balance and real investment.This shows that -19% of disequilibrium need to be corrected in order to restore back the equilibrium.

International Journal of IJMBE Management, Business, and Economics 173 5. Conclusion

Based on voluminous discussions on the flow of Keynesianism, we can infer that Keynesian economics is still alive in today’s world from various aspects, namely the dynamics of savings and investments, and the mixed economy system. So, I don’t really believe in the statement that “ Keynesianism is fully dead both in developed and developing countries”. Based on the study, it can be asserted that Keynesianism has served the aspects of interest in evolutionary economics well and this is consistent with the statement below:- “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather a doctrine…” (John Maynard Keynes). In this study, the study has captured some elements of evolutionary economic theory such as the concept of uncertainty, asymmetric information and meso trajectory phases of innovation in analyzing the validity of Keynesianism in reality. Objective and subjective judgments on the issues of interest are crucial in deciding the economic policies. The studies on the connectivity between saving and investment should incorporate the mixed analysis of psychological and economic effects (animal spirits). Positive association between saving and investment can increase the mixed role of economic agents (private and government sectors), namely, public private partnership that can enhance the meso trajectory phases of innovation., Keynesian economics can serve as a benchmark to improve the countries competitiveness and resilience of financial system although it has been said that Keynesian economics is a short run process and we are all dead in the long run and the latter statement were supported by Kurihara (1959) and Klein (1994).This study has also supported the connectivity between mercantilism and Keynesianism in terms of trade surplus in illustrating positive flow of investment. Policymakers in Malaysia should take the concept of animal spirits into consideration for public private partnership projects.

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Romer, D.(1996). Advanced Macroeconomics. Singapore: McGraw Hill Companies.

Schmidt, M.B. (2003). “US Saving and Investment: Policy Implications”. Open economies Review,Vol.14, pp.381-395.

Schumpeter, J.A. (1934). Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge: Harvard University Press.

International Journal of IJMBE Management, Business, and Economics 175 Schwartz, H. (2010). “Does Akerlof and Shiller’s Animal Spirits provide a helpful new approach for macroeconomics?”. The Journal of Socio-Economics, Vol. 39, pp. 150-154.

Sinha, D.(2002). “Saving-investment relationships for Japan and other Asian countries”. Japan and the World Economy, Vol.14, pp.1-23.

Seshaiah, S. V. & Vuyuri, S.(2005). “Savings and investment in India: A cointegration Approach”. Applied Econometrics and International Development, Vol. 5-1, pp. 25-44.

Solow, R.M. (1956). “A contribution to the theory of economic growth”. Quarterly Journal of Economics, Vol. 70, pp. 65-94.

Vita, G.D. & Abott, A.(2002). “Are saving and investment cointegrated? An ARDL bounds testing approach”. Economics Letters, Vol.77, pp. 293-299.

International Journal of 176 IJMBE Management, Business, and Economics Appendix

Conversion from Keynesian income identity approach to Modified Version of Keynesian J-W Approach

Keynesian income-identity approach

Y = C + I + G + (X-M) In 4 sector economy,

Let Y= C+S+ T., where Yd = C+S in Equation 1.1 C + S + T = C + I + G + (X-M) S + T = I + G + (X-M)

Keynesian J-W approach

I + G + X = S + T+ M

Note: J = I + G + X and W= S +T+M

Modified Version of Keynesian J-W approach

I + (X-M) = S + (T-G) I + TB = (Y-C-T) + (T-G) I + TB = Y-C-T+T-G I + TB = ST SG = (T-G) SP = Y – C- T SP = Y – C – (TD + TI ) S = SP + SG = (Y-C-T) + (T-G) = Y – C – G Y – C – G = I + (X-M) Let ST = Y-C-G. ST = I + (X-M) = I + TB Let I = IP + IG . I + TB = ST (IP + IG) + (X-M) = ST (IP + IG) = ST – (X-M) = ST – X + M

where,

Y = Real Gross domestic Product C = Real Household Consumption I = Real Gross fixed capital formation G = Real Government expenditure X= Real Exports of goods and services

International Journal of IJMBE Management, Business, and Economics 177 M =Real Imports of goods and services (X-M) = RNX (Real Net exports) ST = Real gross saving SG = Real gross government saving SP = Real gross private saving Ip = Real private gross fixed capital formation. IG = Real public gross fixed capital formation.

So,

I = ST – X +, M (Modified version of Keynesian J-W Approach)

International Journal of 178 IJMBE Management, Business, and Economics Guide for Authors

International Journal of Management, Business, and Economics (IJMBE) is published by Sripatum University, University of Greenwich, and Lincoln University. It is published thrice yearly in a spring, summer, and fall edition and is directed toward the needs of academia, practitioners, executives, researchers, students, and the general public interested in business management (i.e., Marketing, Service Management, Innovation and Design in Business, Finance, Banking, Accounting, Economics, Insurance and Risk Management, Production, Industrial and Operation Management, Strategic Management and Management, International and Global Business Management, Entrepreneurships, Organization Behaviour, Business Ethics, Business Law, Business System, Hospitality and Tourism Management, Human Resource Management, and Office and Facility Management).

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Lukason, O. and Hoffman, R. C. (2014), “Firm Bankruptcy Probability and Causes: An Integrated Study,” International Journal of Business and Management, Vol. 9, No. 11, p. 80-91.

Books: Morden, T. (2007), “Principles of Strategic Management” (3 Eds.), Ashgate Publishing: Burlington, USA.

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This will This provide will provide students students with a with a O EvaluatingO Evaluating Motivational Motivational Levels ofLevels Employees of Employees at Malayan at Malayan Railways Railways Limited/ Limited/ firm foundationfirm foundation for the for future the after future graduation. after graduation. The university's The university's philosophy philosophy is "Education is "Education develops develops human human Keretapi Keretapi Tanah Melayu Tanah MelayuBerhad Berhad(KTMB) (KTMB) resourcesresources who enrich who theenrich nation" the nation" which focuses which focuses on characteristics on characteristics of Wisdom, of Wisdom, Skills, Cheerfulness Skills, Cheerfulness and and Ganakrishnan Ganakrishnan Gopalakrishnan Gopalakrishnan ...... 17 17 Morality.Morality. O AmbushO Ambush Marketing Marketing in Sports in Sports Gerd Nufer...... 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SupportedSupported by by SripatumSripatum University University Editors:Editors: 2410/2 Phaholyothin2410/2 Phaholyothin Rd., Jatujak, Rd., Jatujak,Bangkok, Bangkok, 10900, Thailand10900, Thailand Tel.: +66Tel.: 2 579 +66 1111, 2 579 Fax.: 1111, +66 Fax.: 2 558 +66 6868 2 558 6868 Ungul LaptanedUngul Laptaned E-mail: [email protected]: [email protected] ,RDQQLV0DQLNDV,RDQQLV0DQLNDV Website:Website: www.spu.ac.th www.spu.ac.th Gilbert GilbertNartea Nartea

,QWHUQDWLRQDO-RXUQDORI,QWHUQDWLRQDO-RXUQDORI ¡¡ SRIPATUMSRIPATUM UNIVERSITY UNIVERSITY IJMBEIJMBEManagement,Management, Business, Business, and andEconomics Economics GRADUATEGRADUATE COLLEGECOLLEGE OF OF PresidentPresident SupportedSupported by by RutchaneepornRutchaneeporn Pookayaporn Pookayaporn Phukkamarn, Phukkamarn, Sripatum University,Sripatum University, Thailand Thailand MANAGEMENTMANAGEMENT Dean of GraduateDean of GraduateCollege of College Management of Management Vichit U-on,Vichit Sripatum U-on, University,Sripatum University, Thailand Thailand |z~j}Ôjq}j|z~j}Ôjq}j

Advisory AdvisoryBoard Board &KXQ3LQJ=HQJ1HZ

Copyright Copyright© 2015 Sripatum © 2015 UniversitySripatum University Editor-In-ChiefEditor-In-Chief Ungul Laptaned,Ungul Laptaned,Sripatum University,Sripatum University, Thailand Thailand All right reserved.All right reserved. No part ofNo this part publication of this publication may be reproduced, may be reproduced, stored in storeda retrieval in a retrieval AssociateAssociate Editor Editor system, orsystem, transmitted or transmitted in any form in any or by form any or means, by any electronic, means, electronic, ,RDQQLV0DQLNDV8QLYHUVLW\RI*UHHQZLFK8QLWHG.LQJGRP,RDQQLV0DQLNDV8QLYHUVLW\RI*UHHQZLFK8QLWHG.LQJGRP mechanical,mechanical, photocopying, photocopying, recording, recording, or otherwise, or otherwise, without permission without permission in writing fromin writing the editors. from the editors. Guest EditorGuest Editor Gilbert Nartea,Gilbert Lincoln Nartea, University, Lincoln University, New Zealand New Zealand ,661,661

SecretariatSecretariat PhongvitchuladaPhongvitchulada Surakhan, Surakhan, Sripatum University,Sripatum University, Thailand Thailand

Editorial BoardEditorial Board GraduateGraduate College College of Management of Management $QEDODJDQ.ULVKQDQ&XUWLQ8QLYHUVLW\RI7HFKQRORJ\0DOD\VLD$QEDODJDQ.ULVKQDQ&XUWLQ8QLYHUVLW\RI7HFKQRORJ\0DOD\VLD SripatumSripatum University, University, Building 11,Building floor 11,11, 2410/2floor 11, Phaholyothin 2410/2 Phaholyothin Road,Jatujak, Road,Jatujak, Bangkok Bangkok10900, Thailand 10900, Thailand $QVRQ.D.HXQJ$X7KH8QLYHUVLW\RI+RQJ.RQJ+RQJ.RQJ$QVRQ.D.HXQJ$X7KH8QLYHUVLW\RI+RQJ.RQJ+RQJ.RQJ Tel: (+66)Tel: 2579 (+66) 1111 2579 ext. 11113000 ext. - 4 3000 Fax: - (+66)4 Fax: 2579 (+66) 1111 2579 ext. 11113011 ext. E-Mail: 3011 [email protected] E-Mail: [email protected] &6ZDUQDODWKD5DMX$QQD8QLYHUVLW\,QGLD&6ZDUQDODWKD5DMX$QQD8QLYHUVLW\,QGLD Chian-SonChian-Son Westerlund, Westerlund, Helsinki School Helsinki of Economics,School of Economics, Finland Finland &KX+XL6WHLQHU3URJUDP/HDGHU8QLYHUVLW\RI'HUE\,VUDHOL&KX+XL6WHLQHU3URJUDP/HDGHU8QLYHUVLW\RI'HUE\,VUDHOL &KXQ+XZ(VFDODQWH8QLYHUVLW\RI*HRUJLD86$&KXQ+XZ(VFDODQWH8QLYHUVLW\RI*HRUJLD86$ 'DQLHO$ULI7KH%ULWLVK8QLYHUVLW\,Q'XEDL8$('DQLHO$ULI7KH%ULWLVK8QLYHUVLW\,Q'XEDL8$( +VXQ0LQJ/HH7H[DV6WDWH8QLYHUVLW\6DQ0DUFRV86$+VXQ0LQJ/HH7H[DV6WDWH8QLYHUVLW\6DQ0DUFRV86$ Huei-ZhenHuei-Zhen Gu, Lungwa Gu, University Lungwa Universityof Science of and Science Technology, and Technology, Taiwan Taiwan ,+XD%RQ8QLYHUVLW\HUVLWL7XQ+XVVHLQ2QQ0DOD\VLD0DOD\VLD,+XD%RQ8QLYHUVLW\HUVLWL7XQ+XVVHLQ2QQ0DOD\VLD0DOD\VLD Jaroslav Laukkanen,Jaroslav Laukkanen, University Universityof Kuopio, ofFinland Kuopio, Finland -DVSHU-RKQVRQ1RUWK'DNRWD6WDWH8QLYHUVLW\86$-DVSHU-RKQVRQ1RUWK'DNRWD6WDWH8QLYHUVLW\86$ /\)LH6XJLDQWR0RQDVK8QLYHUVLW\$XVWUDOLD/\)LH6XJLDQWR0RQDVK8QLYHUVLW\$XVWUDOLD 0DKHVKD.DSXUXEDQGDUD8QLYHUVLW\RI:HVWHUQ6\GQH\$XVWUDOLD0DKHVKD.DSXUXEDQGDUD8QLYHUVLW\RI:HVWHUQ6\GQH\$XVWUDOLD Marc Lindblom,Marc Lindblom,Helsinki School Helsinki of Economics,School of Economics, Finland Finland 6WXDUW*DUQHU(GLWK&RZDQ8QLYHUVLW\$XVWUDOLD6WXDUW*DUQHU(GLWK&RZDQ8QLYHUVLW\$XVWUDOLD Takashi Koshida,Takashi Matsue Koshida, National Matsue College National of CollegeTechnology, of Technology, Japan Japan Tingyang LewisTingyang Quynh Lewis Nhu, Quynh Vaasa Nhu, University, Vaasa University, Finland, Finland Finland, Finland Victoria Chen,Victoria National Chen, Chung National Cheng Chung University, Cheng University, Taiwan Taiwan Vineet Yamada,Vineet Nakamura Yamada, Nakamura Gakuen University, Gakuen University, Japan Japan :DQ6KLRX+X8QLYHUVLW\RI:HVWHUQ6\GQH\$XVWUDOLD:DQ6KLRX+X8QLYHUVLW\RI:HVWHUQ6\GQH\$XVWUDOLD :HQ

Advisory Board &KXQ3LQJ=HQJ1HZ

Secretariat Phongvitchulada Surakhan, Sripatum University, Thailand