2014 Asia Conference on Economics & Business ...

2014 Asia Conference on Economics & Business Research (ACEB 2014) CONFERENCE PROCEEDINGS NOV 13 - 14, 2014 SINGAPORE

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Copyright ©APIA Publications 2014 Asia Conference on Economics & Business Research – Singapore Conference Proceedings ISBN: 978-981-09-0089-2 Publisher: Asia Pacific International Academy November 2014

The authors of individual papers are responsible for technical, content, and linguistic correctness.

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Have a great day!

Tan Lee Ming Conference Secretariat

ACEB ADVISORY BOARD 

Associate Professor Evan Lau, Ph.D International Economics Universiti Putra Malaysia, Faculty of Economics and Business, Universiti Malaysia Sarawak, Managing Editor of International Journal of Business and Society (IJBS)



Prof Dan Levin, Ph.D, Wharton Business School, University of Pennsylvania, Director (Academic Affairs) Graduate Programs Aventis School of Management



Prof Luis Hall, Ph.D in Finance NYU



Prof Rajah Rasiah, Ph. D Cambridge University, Faculty of Economics and Administration, University of Malaya



Dr. Zulnaidi Yaacob, Ph.D Accounting, Universiti Utara Malaysia, Senior Lecturer at Universiti Sains Malaysia



Prof Ramayah Thurasamy, Faculty of School of Management, Universiti Sains Malaysia



Prof Dr. László Józsa, Széchenyi István University



Dr Simonetti Biagio, University of Sannio, Italy



Roberto Janelli, University of Sannio, Italy



Prof. Dr. Mansor H Ibrahim, PhD in Economics Washington University, USA, Professor of Finance & Econometrics, Finance and Accounting Department, INCEIF (International Centre for Education in Islamic Finance)



Dr. Chor Foon TANG, Ph.D in Economics University of Malaya, Senior Lecturer at Centre for Policy Research and International Studies (CenPRIS), Universiti Sains Malaysia



Dr. Navid Mollaee, MBA Lecturer at University of Tehran, Faculty of Economics, University of Tehran, Iran



Dr. AFM Kamrul Hassan, Ph.D in Economics, Curtin University, Australia, Lecturer (Finance) School of Management and Governance, Murdoch University, Perth, WA, Australia

ACEB OFFICERS

Samuel Teo General Manager Aventis School of Management, Singapore E-mail: [email protected]

Tan Lee Ming Conference Manager Asia Pacific International Academy, Singapore E-mail: [email protected]

Nicodemus Koh Conference Officer Asia Pacific International Academy, Singapore E-mail: [email protected]

Table of Contents

1.

The Relationships Among Four Factors and Turnover Intentions on

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Different Levels of Perceived Organizational Support ThanawatdechThirapatsakun Ph.D, Chanongkorn Kuntonbutr D.B.A., Panisa Mechinda Ph.D (Thailand)

2.

Is Natural Resources still an Important Determinant of Economic

29

Growth? Or It has Already been Replaced by Openness and Innovation? Zhijun Gao (USA) 3.

Impact of Service Quality and Trust on Customer Patronage Decision:

49

Testing the Moderating effects of Corporate Image. Muhammad Sabbir Rahman, Osman Mohamad, Fadi Abdel Muniem Abdel Fattah (Malaysia) 4.

Taxes management in corporate financial strategies in European Union

71

countries. The case of Poland. Prof. Teresa Famulska Ph.D., Bożena Ciupek Ph.D., Jan Kaczmarzyk Ph.D (Poland)

5.

Sales Force Attitudes on Sales Practices – A Study of Life Insurance

99

COorporation in India, Machilipatnam Division – Andhra Pradesh, India Prof. Naladi. Vijaya Ratnam, Dr Dokka. Jagan Mohan Rao, Mr. Pallekonda. Srinivasa Rao (India)

6.

Technology Innovation Efficiency of Traditional Industries in Jiangsu Province Li Peng, Hu Han-Hui (China)

120

7.

Factors contributing to successful Public Private Partnerships (PPPs)

136

in Road Infrastructure Investment in Vietnam: Stakeholder’s Perspective Do Trung Nguyen, Dr Christine Smith, Dr Matthew Manning, Dr DucTho Nguyen (Australia)

8.

ECONOMIC TRANSFORMATION AND URBANIZATION OF INDIA

161

Initiatives for Sustainable Development Vinod Nakra (India), Prema Nakra (USA)

9.

Impact of macroeconomic indicators on expectations of equity risk

178

premium in CEE private equity markets Roman Cibera, Tomas Krabec (Czech Republic)

10. Examining the Impact of FDI on Social Development in the ASEAN 5

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Region Sridevi Narayanan (Malaysia) 11. Changing professional identities in the English National Health Service

204

(NHS) acute care: Institutional logics and healthcare commissioning Zlatinka. Gougoumanova (Singapore), Pinar Guven-Uslu (United Kingdom) 12. The Relative Profitability of Family Dominated Banks in Bangladesh

223

Tasmina Mahbub, Kate Barker, Kent Matthews (United Kingdom) 13. The role of venture capital for entrepreneurship in less developed economies Thomas Straub (Switzerland), Stefano Borzillo (France), Alexandru Caragea, Anon Jinaru, Roxana Voicu-Dorobantu (Romania)

238

14. Dividend policy and factors that affect dividend policy in Vietnam stock market Hai Nguyen Viet, Tai Khuat Thai, Van Ta, Thuy Anh Tong, Nguyet Anh Nguyen, Ngoc Hoang

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ACEB Conference Proceedings

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The Relationships Among Four Factors and Turnover Intentions on Different Levels of Perceived Organizational Support Thanawatdech Thirapatsakun Rajamangala University of Technology, Thanyaburi, Thailand Chanongkorn Kuntonbutr Rajamangala University of Technology, Thanyaburi, Thailand Panisa Mechida Rajamangala University of Technology, Thanyaburi, Thailand

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ABSTRACT This article investigated the relationships among four factors and turnover intention in the context of different levels of perceived organizational support. Data were collected from 890 professional nurses working in Thailand. The results revealed that three components, job demand, work schedule flexibility, and financial reward, best explained turnover intention. The result indicated that job demand had an influence on turnover intention through work engagement. Moreover, perceived organizational support had an effect on turnover intention through work engagement. Additionally, there was insignificant difference in terms of the fit of the structural models for the high and low level of perceived organizational support, indicating there is no moderating effect of perceived organizational support on the relationship between job demand and work engagement. Keywords: Context of different levels; Perceived organizational support; Turnover intention

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INTRODUCTION

Since 2005, the Thai private hospitals industry has faced significant effects from a professional nurse shortage and turnover intention. Meanwhile, the government has promoted Thailand as the regional center of excellent health care and as the medical hub in Asia, and the Thai private hospitals industry benefits from the 2015 launch of the Asian Economic Community (AEC). Based on several reports, however, it is clear that the nursing profession in Thailand is in crisis. The problems concerning the nursing practice include the work environment, remuneration and opportunities for advancement. Some private hospitals also suffer from shortages of personnel because many nurses leave for continuing education, resign as a result of dissatisfaction with their welfare or the administration, or pursue jobs in other fields (Srisuphan et al., 1998). Simones, Villeneuve, and Hurst (2005) noted that the nursing shortage appears to be caused by several factors including fewer young people entering the work force, the low social value of nursing, and the negative perception of the working conditions of nurses. Additionally, nurses perceive an increase in job stress. At the same time, there is an increasing importance of new employees, acknowledgment of advancements in technology, globalization, demographic trends, constantly changing work roles, and expectations along with increasing work demands, which could lead to work overload, job dissatisfaction, and job stress (Beehr & Glazer, 2005). Thus, employers are exploring various incentive strategies to improve retention of their workforce and to support employees’ growth aspirations. This study was conducted to investigate the factors that decrease turnover.

This study contributes to the existing literature on the relationships among job demands, work engagement, work schedule flexibility, financial reward, and turnover intentions in the context of different levels of perceived organizational support and addresses strategic implications for practitioners. First, this study examined job demand, work engagement, work schedule flexibility, and financial reward on turnover intentions. These factors may influence different levels of perceived organizational support that is moderated between job demand and work engagement, both of which are crucial for practice and gap areas of research. Second, the study provides better understanding of the perceived organizational support that may be an extrinsic motivator to employees because it fosters employee engagement, creating low-level turnover intention. 3


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Another purpose of this study was to examine perceived organizational support as a possible moderating variable with multi-group equivalent applications for determining a measurement that operates equally across the different populations of the group in the model approach.

There is an abundance of research that aims to explain the relationships among job demand, work engagement, work schedule flexibility, financial reward, and turnover intentions in the context of the different levels of perceived organizational support. Employees who have to work increasingly long work hours may have different work and leisure expectations, but according to one article, employees want to work fewer working hours (Major, Klein,& Ehrhart, 2002).Furthermore, long working hours may result in other negative effects, such as trouble in balancing home and work life leading to psychological distress (burnout), decreased performance, and decreased job satisfaction (Frone, Russell, & Barnes, 1996; Major et al., 2002). Work schedule flexibility enhances employees’ quality of life at work and lessens the degree to which work and family roles conflict (Baltes et al., 1999; Major et al., 2002). In addition, Rosin and Korabik (2002) found work schedule flexibility is beneficial in motivating employees, particularly in high performing professions, and can decrease turnover. Hence, hypothesis 1 (H1) was formulated as follows: H1: Work schedule flexibility has a negative effect on an employee’s turnover intention. According to the index of organizational reactions (IOR), Kahn and Byossier (1990) found that employees would feel obligated to continue to work if the organization did not provide financial rewards or compensation for their resources and benefits, and employees are more likely to disengage from their work role. Rhoades, Eisenberger, and Armeli (2001) found that if employees did not receive fair and just rewards, they would withdraw and disengage from the organization. Financial reward systems are particularly useful for controlling the turnover of employees who are high performers because the more rewards provided under an employee performance contingent system the more satisfied and less likely to leave these employees would be (Allen & Griffeth, 2001). Without performance contingent rewards, the relationship between financial rewards and turnover intention becomes positive such that individuals who are not rewarded are much more likely to leave rather than employees who are rewarded. While this may be true, there may be many factors that cause turnover, not just financial rewards (Trevor, 4


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Gerhart, & Boudreau, 1997). In addition, based on the workplace culture, rewards for task completion show high satisfaction and low turnover and are indicators of the desire of employees to stay in a workplace (March, Guetzkow,& Simon, 1958). The rationale and evidence provided in the earlier studies led to hypothesis 2 (H2), as follows: H2: Financial reward has a negative effect on an employee’s turnover intention. Maslach and Jackson (1986) supported the hypothesis that states that the presence of specific demands (work overload and personal conflicts) predicts burnout and dissatisfaction, which increases turnover. When employees are stressed and have personal conflicts within their jobs, they experiences burnout or health problems. These situations caused them to leave their organization. Based on these ideas, the hypothesis 3 (H3) was formulated as follows: H3: Job demand (JD) is positively related to turnover intention (TI). Demerouti and Cropanzano (2010) as well as Schaufeli and Salanova (2007) supported the idea that engagement is associated with employees’ positive attitude, proactive job behaviors, higher levels of psychological well-being, and increased individual job and organizational performance. These factors decrease turnover intention. Moreover, Demerouti, Bakker, Nachreiner, and Schaufeli (2001) conducted a study of employees with high work demands and controlled for the presence of high time pressure and higher levels of engagement. Job demands were positively related to burnout and disengagement (Schaufeli & Bakker, 2004). In addition, Hu, Schaufeli, and Taris (2011) and Llorens, Bakker, Schaufeli, and Salanova (2006) found that job demands were negatively associated with work engagement. Low job demands may have a positive effect on engagement. Harter, Schmidt, and Hayes (2002) supported the finding that engagement levels were positively correlated with business-unit performance and the level of turnover intention of employees. Thus, hypothesis 4 (H4) was expressed as follows: H4: The relationship between job demands (JD) expressing negative turnover intention (TI) are mediated by work engagement (WE). Perceived organizational support is defined as the extent to which employees perceived how an organization values an employee’s contributions and cares about his or her well-being (Eisenberger, Huntington, Hutchinson,& Sowa, 1986). Bishop, Scott, and Burroughs (2000) supported the idea that organizational support can positively influence organizational 5


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commitment and thus reduce turnover intention. Moreover, Rhoades, Eisenberger, and Armeli (2001) stated that perceived organizational support and affective organizational commitment are associated with significant reductions of voluntary turnover. In addition, Stinglhamber and Vandenbergehe (2003) also stated that perceived organizational support is able to reduce turnover. Some investigators proposed that perceived organizational support heightens performance, decreases absenteeism, and reduces the possibility of employees quitting their jobs (Mowday, Porter, &Steers, 1982; Eisenberger et al., 1986). According to Kahn (1990), a supportive environment allows employees to experiment and try new things and even to fail without fearing the consequences. In addition, perceived organizational support may lead to positive effects through employee engagement (Sak, 2006). Employees will likely be more committed to the organization than when they do not perceive organizational support (Dessler, 1999). As a result, hypothesis 5 (H5) was formulated as follows: H5: The relationship between perceived organizational support (POS) and turnover intention (TI) is negative and is mediated by work engagement (WE). Kahn (1992) supported underlying variables related to or linked with hypothesis 4 and stated that perceived organizational support as a moderating variable can be generalized from psychological safety involving a sense of being that is able to exhibit and employ the self without negative consequences. Moreover, Sak (2006) stated that perceived organizational support might lead to positive consequences through an employee’s engagement. Hence, hypothesis 6 (H6) was expressed as follows: H6: Perceived organizational support (POS) moderates the relationship between job demands (JD) and work engagement (WE) such that the relationships among transformational and transactional behaviors are related to job demands (JD) and to work engagement (WE). Benchmarks in the literature have focused on the models of the antecedents of work engagement that occur when an employer experiences the suitable blend of workload, control, reward, sense of community fairness, and value congruence (Maslach, 1998). Possible positive consequences of engagement for an organization include outcomes such as increased profit and productivity, increased customer satisfaction, decreased turnover, and a sense of employee wellbeing with a higher job score (Harter, Schmidt, & Hayes, 2002). In addition, the research of Schaufeli and Bakker (2004), Hallberg and Schaufeli (2006), and Sak (2006) supported the 6


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relationship between engagement and turnover intentions (i.e., work engagement negatively predicted an intention to leave). However, there is a relationship between engagement and turnover where an employee with low engagement is considered to be a “threat” to the organization and has a high risk of turnover (Gostick & Elton, 2007). Thus, the hypothesis 7 (H7) was constructed as follows: H7: Work engagement (WE) has a significant negative relationship to the outcome variables of turnover intention (TI).

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METHODOLOGY The research method is quantitative. Specifically, this study examined the associated hypotheses for different variables. Fig. 1 illustrates the conceptual framework of the study.

Research Design The data used to test the hypotheses was collected from a sample of 890 professionals who had worked in the private health care service sector (medium and large sized hospitals with more than 51 beds) of medical tourism in Thailand. To ensure valid and reliable research procedures, on site interviews were conducted with 40 volunteers during participation in a pretest phase. Responses to closed-ended questions using a 7-point Likert scale survey were analyzed, and then, the statistical relationships were determined. Measurement of Variables (exogenous, endogenous) Data were collected from questionnaires with eight sections consisting of personal demographics and work status, job demands, work engagement, perceived organizational support, turnover intention, work schedule flexibility, and financial reward. The 9-item scale in the perceived organizational support section is based on unidimensionality of Eisenberger et al.’s (1986) scale. Cronbach’s alpha for this scale was .90 (Rhoades & Eisenberger, 2002). The 26-item scale in the job demand section was adopted from the job content questionnaire (JCQ) of Karasek’s (1985) scale. Cronbach’s alpha for this scale was and estimate ranging from .61 to .71 (Karasek, Brison, Kawakami, Houtman, Bongers & Amich 1998). The 17-item scale of the work engagement scale was adopted from the Utrecht Work Engagement Scale (UWES) developed by Schaufeli, Martinez, Marques, Salanova, Bakker, (2002). Cronbach’s alpha for this scale ranged from .90 to .92 (Schaufeli & Bakker, 2004a). The turnover intention scale refers to an anticipated leaving job behaviors scale and was measured by a questionnaire. The questionnaire consisted of 14 items, and prior research demonstrated the reliability of Cronbach’s alpha coefficient of .91 (Roodt & Jacobs, 2008). In addition, according to the control variable section, the 5-item scale in the work schedule flexibility was assessed using Rothausen’s (1994) questionnaire. Cronbach’s alpha coefficient of this scale was .91. The financial rewards factor of the Index of Organizational Reactions (IOR) identifies the employer’s position on the relationship of job performance and 8


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the amount of money received based on responses to items 33 to 37 of the survey instrument (Cook, Hepworth, Wall, & Warr, 1981). The reliability of the internal consistency factors ranged from .68 to .91. Sequence of Analysis Part 1: To test six proposed hypotheses (H1, H2, H3, H4, H5, and H7), descriptive analysis, confirmatory factor analysis (CFA), and structural equation modeling (SEM) were performed. The results are reported in the result section. Part 2: To test the last proposed hypothesis (H6), a conceptual model illustration of moderation was considered. To conceptualize the model, multiple group analysis was conducted to examine whether the different level of perceived organizational support plays a role as a moderator between job demands and work engagement.

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CONCLUSION Respondent Profile Data were collected from February to April 2013. A total of 890 questionnaires from 44 private hospitals were returned. See Table 1 for the respondents’ profile. Descriptive Analysis The results illustrated the Cronbach’s alpha of the research variables ranged from .85 to .92, indicating good reliability (Fornell & Larcker, 1981). Confirmation Factor Analysis Confirmatory factor analysis was performed to confirm scale validity and reliability. In testing the model, six latent constructions were included representing the full hypothesized model. All of these constructions were tested by using the SEM program. The results revealed that all of the factor weights were significant (p < .05). The results of adaptability were χ2 = 770.583, df = 300, χ2 /df = 2.569, RMSEA =.042, NFI = .962, SRMR = .086, and CFI = .976. The values were below the model adaptability, as suggested by referring to χ2 /df ≤ 3, RMSEA ≤ .070, NFI ≥ .090, SRMR ≤ .080; CFI > .90, which indicated a better fit (Byrne, 2001). The study removed items with factor weights less than 0.7. The results indicated that the modified model achieved an acceptable standard, as shown in Table 2. Table 2 illustrates that the composite reliability ranged from .844 to .953, which was higher than the standard of 0.7. For the convergent and discriminant validity of the questionnaire, the average variance extracted (AVE) values ranged from .56 to .78, which was higher than .50. Therefore, the convergent validity of the measurement scale was acceptable. The results showed that all average variance extracted (AVE) estimates were greater than the corresponding interconstructs squared correlation estimate. In conclusion, the measurement scale had discriminant validity (Fornell & Lacker, 1981). Structural Equation Model The study used structural equation modeling to investigate the relationships among constructs. The results of adaptability were χ2 = 831.972, df = 319, χ2 /df = 2.608, RMSEA 10


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=.043, NFI = .962, SRMR = .085, and CFI = .976, which indicate a better fit (Byrne, 2001). The relationships among the key variables produced a standardized coefficient, a standard error, and a critical ratio that was significant at p < .05. The summary of the regression weights for the model is presented in Fig. 2, which shows the path results of the research model. The Moderation Effect Test The moderation effect for the underlying variable of perceived organizational supports was tested. To examine whether perceived organizational support moderates between job demands (JD) and work engagement (WE), a multiple group structural equation model was conducted. The data were divided into two groups, including 1) the low level of perceived organizational support and 2) the high level of perceived organizational support, based on the median of values of perceived organizational support. Then, those two groups were tested to investigate whether their measurement models were different. If the measurement models were different, it could be concluded that the two models are different. To test the multiple group invariance, the initial step (the model configuration) requires that the same number of factors and the factor loading pattern should be the same across the groups. Thus, the same parameters estimated in the baseline model for each group were estimated in the multiple group models separately (Byrne, 2010). This model was tested as a multiple group representation of the baseline models. Accordingly, the model incorporated the baseline models for the high level of perceived organizational support and the low level of perceived organizational support within the same file. Considering the model assessment, the goodness-of-fit statistics for this multiple group model was reported. Multiple Group Models of CFA for Testing Moderation Effect Analysis of Multiple Groups Invariance Step first: Testing for the validity of the hypothesized model across the high and low levels of perceived organizational support. Model Assessment of Step First The goodness- of-fit statistics related to the two unconstrained group models (Model 1) were reported in Table 3. The Chi-square value of 1187.979, with 600 degrees of freedom, provided the baseline values with which the subsequent tests for invariance may be compared. The values of CFI and RMSEA were .955 and .033, respectively, were determined for the 11


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hypothesized six factor model. The result represented a relatively good fit across the two panels of perceived organizational support. Step second: Testing for invariance of the fit for the fully constrained model across the high and low levels of perceived organizational support. Model Assessment of Step Second Goodness- of-fit statistics related to this constrained two groups model (Model 2) were presented as the second entry in Table 3. By testing the invariance of this constrained model, the Chi-square value of 1373.071 (with 642 degrees of freedom) was compared with that of the initial model (Model 1) in which no equality constraint was imposed. Meanwhile, the Chi-square difference value of 185.92 with 42 degrees of freedom was greater than 58.124, indicating a statistically significant difference (p < .05); however, some equality constraints did not hold across the two groups. Step third: Testing for the invariance of factor loading across the high and low levels of perceived organizational support. Model Assessment of Step Third As indicated in Table 3, the results revealed that the entire factor loading should be equivalent across the high and low levels of perceived organizational support, as reflected in the significant Chi-square difference between the test model (Model 3) and Model 1. The Chi-square value of 1226.929 (with 621 degrees of freedom) were compared with a Chi-square value of 1187.799 (with 600 degrees of freedom) of the initial model (Model 1) in which no equality constraints were imposed. The results were compared and revealed that the Chi-square difference value of 39.13 with 21 degrees of freedom was more than 32.671, indicating a statistically significant difference (p < .05). Based on this result, some equality constraints did not hold across the two groups. Step four: Testing for the invariance of factor variance and covariance across the high and low levels of perceived organizational support.

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Model Assessment of Step Four As shown in Table 3, the results from estimating Model 4 yielded a Chi-square of 1614.832 with 678 degrees of freedom. Therefore, the difference of Chi-square values between this model and Model 1 was statistically significant (p < .05). The comparison of results revealed that the Chi-square difference values of 427 with 78 degrees of freedom were more than 99.617. This indicated a statistically significant difference (p < .05). Overall, the test results of the group invariance across the four models showed that multiple groups were statically significant. This difference value was distributed as a Chi-square with degrees of freedom. Evidence of no invariance is claimed if this Chi-square difference value is statistically significant (Byrne, 2010). Analysis of the Full Measurement of Multiple Groups To assess the difference between the low and high level perceived organizational support groups, a parameter-constrained path between job demand and work engagement factors were tested, and the multiple sample model was estimated. A constrained model estimated the relationship (between job demand and work engagement path factors) compared to the differences between low and high level perceived organizational supports. An interaction effect is significant if the change in the Chi-square value is significant. Between the high and low perceived organizational support groups, the unconstrained model provided a Chi-square value of 1257.116 with 648 degrees of freedom. This indicated that the Chi-square value and degrees of freedom are equal for the models estimated separately for the two groups (Byrne, 2004). The model with equality constraints on the one common relationship provided a Chi-square value of 1258.452 with 649 degrees of freedom, and as a result, the hypothesis that these relationships were invariant across the two sample groups was rejected (∆χ2 = 1.336, 1 df). According to the table of the critical value of Chi-square, a critical value at an alpha of .05 and a degree of freedom of 1 is equal to 3.48, (1.33 < 3.84), which was not statistically significant. Thus, the difference is statistically significant at a level greater than .05, and the results, revealed that all of the measurements of perceived organizational support function in the same direction for both groups. This means perceived organizational support has no moderating impact on the relationships of hypothesis 6 (H6).

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Discussion of the Findings Across the Hypotheses and Implications for Practice The findings were synthesized across the hypotheses as follows. The results revealed that the path showed a positive effect on turnover intention and was significant, with a standardized coefficient of .32, (p 0.70); AVE=Variance extracted (value > 0.50); CR=Composite Reliability (value > 0.70); X2= chi square; d.f.= degree of freedom; GFI= goodness of fit index; CFI=comparative fit index; RMSEA= root mean square error of approximation

Insert Table2: SEM general linear model analysis results (Standardised Estimate) Hypothesis

H1

Independent

Dependent

Estimate

variable

variable

(β)

Service Quality (SQ)

Trust (T)

.651

67

t= value

P=value

Result

2.792

0.000

Accepted


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H2

Service Quality (SQ)

Customer patronage intention of ‎health insurance ‎Products CPIHIP‎=‎(CPI)

.572

2.869

0.000

Accepted

H3

Trust (T)

Customer patronage intention of ‎health insurance ‎Products‎ CPIHIP= (CPI)

.030

.835

.812

Rejected

Fit indices

Statistics

X2

580.966

GFI

.717

CFI

.728

RMSEA

0.05

Degrees of Freedom 206

P 0.000

Insert Table 3: influence Effect among the variable Path

Direct Effect

Indirect Effect

Total effect

Service Quality to Trust

.651

-------

0.651***

Trust to Customer patronage intention of ‎health insurance ‎Products‎(CPI)

.029

-------

0.029

Service Quality to Customer patronage intention of ‎health insurance ‎Products‎(CPI)

.572

0.019

0.591***

Insert Table 4: Moderation Test Constrained Model

Unconstrained Model

Chi-Square Difference

Chi-Square

341.919

321.813

20.106

Degrees of Freedom

117

106

11

68

Result on Moderation

Result on Hypothesis


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GFI

.742

.742

AGFI

.636

.620

CFI

0.702

.720

RMSEA

0.057

0.056

Chi-Square/ Degrees of Freedom

2.92

3.03

H5: Corporate image has significantly positive influence on the customer patronage decision when playing as moderating role between trust and customer patronage decision.

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Supported


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Figure Captions Figure 1.1: Conceptual framework for Service Quality and Trust on Customer Patronage Decision of Health Insurance Products

Corporate Image (CI)

H2 H4

H5 Service Quality (S)

H1

Trust (T)

H3

Figure 1. The full Measurement model by using standardised estimate

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Customers’ patronage decision of health insurance Products (CPIHIP)


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Taxes management in corporate financial strategies in European Union countries. The case of Poland. Teresa Famulska University of Economics in Katowice, Poland Bożena Ciupek University of Economics in Katowice, Poland Jan Kaczmarzyk University of Economics in Katowice, Poland

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www.academy.edu.sg ABSTRACT

Effective management of corporate finance is one of the factors that condition a competitive position of any enterprise in the European Union. Enterprises that wish to realise their objectives set have to consider all threats and opportunities that result from functioning in the complex environment including formal and legal settings. Taxes are an indispensable element of such settings, thus being - for enterprises - important external limitations of their financial strategy objectives set. This perception of taxes results in the situation when enterprises do not act passively but undertake actions aimed at reducing their fiscal burden. This article aims at identifying potential opportunities for managing fiscal burden of enterprises in the aspect of formulating their financial strategies. At the same time, it is assumed that an opportunity for shaping fiscal burden by the very enterprise complies with all binding regulations. Realisation of the objective set is facilitated by theoretical considerations that are based on the relevant literature related research and economic analyses of the tax law regulations. This article presents results of the research conducted in the sample group of representative 50 enterprises that function in Poland. The research is focused on the issue of managing major tax burden to be faced by enterprises in the European union, i.e. on corporate income tax and value added tax.

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Poland has been a European Union (EU) member state since 2004. Polish EU accession involved remarkable changes for Polish enterprises. They began to function within the homogeneous European market that is characterised by free flow of capital, goods and people along with freedom of service provision. These realities influence financial strategies to be adopted by enterprises. Decisions made by enterprises within their financial strategies depend, inter alia, on external factors, i.e. on elements of corporate environment. In this general approach, it is possible to distinguish closer environment (market) and further environment (macroeconomic). Additionally, some attention is paid to the global nature of the environment in question (Giachetti, 2010). Taxes are specific elements of macroeconomic environment. Generally, a system of taxation imposed on enterprises in Poland does not significantly differ from solutions that are used in other EU countries. Normally, this system consists of three categories of taxes that are imposed on the following: (1) property, (2) income, (3) revenue. Particular taxes have diversified consequences for corporate finance, thus being related with financial strategies adopted in a different way. However, fiscal burden is always some limitation for enterprises trying to meet objectives of their financial strategies. This results in an enterprise’s necessity to manage taxes, i.e. to undertake activities that aim at optimising fiscal burden borne. The article aims at identifying potential possibilities to manage fiscal burden to be borne by an enterprise in the context of formulating enterprise financial strategies. The following thesis is assumed: it is possible to manage fiscal burden to be borne by an enterprise in the context of formulating enterprise financial strategies, which is demonstrated by means of theoretical and legal analyses. The possibilities in question are confronted with practical application of tax management by enterprises on the basis of some empirical research. A group of 50 representative enterprises that function in Poland was subject to this research. Verification of possibilities to manage taxes in enterprises was based on the material collected while carrying out direct interviews with entrepreneurs by means of a standardised sheet of survey questions. The research involved 50 enterprises that were diversified as far as their business activities carried out, their legal status, size of operations and the period of functioning are concerned. The territorial scope was limited to Silesian Voivodeship. 73


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The research was concentrated on the problem of managing major fiscal burden of enterprises in the EU, i.e. on the Corporate Income Tax and Value Added Tax.

74


www.academy.edu.sg METHODOLOGY

Determinants of a corporate financial strategy Creating market value is a basic financial objective of any enterprise wishing to function commercially, which requires constantly maintained profitability of business activities undertaken. Maximisation of owners’ benefits is a superior criterion for reaching a financial objective. Corporate Social Responsibility – CSR that is more and more frequently promoted provides for maximisation of benefits obtained by a wide range of stakeholders. However, objectives of enterprises understood in compliance with CSR do not contradict financial objectives but are their logical complementation (Martin, Petty, Wallace, 2009). It is necessary to pay attention to the fact that reaching social objectives depends on enterprises’ ability to reach their financial objectives. Business environment of enterprises is a source of risk that is deemed neutral in categories of opportunities and threats (Chapman, 2011). Creating an effective financial strategy of an enterprise that would include risk to be taken and that would allow for using positive impulses and neutralise negative ones that are generated by the environment is really important while realising objectives of business activities. Aiming at an increase in the market value of an enterprise requires its permanent development. Enterprise’s aspirations in the context of expanding business activities are determined by enterprise’s capacities to carry out investment activities. On the one hand, free access to the EU homogeneous market means potentially larger market where goods and services might be sold. On the other, hand, this also means increased competition, which is undoubtedly an important developmental incentive that encourages enterprises to make investment decisions. Increased competition is simultaneously an opportunity and a threat for enterprises, and in principle encourages them to undertake developmental actions that allow for providing more and more unique and innovative goods and services of better and better quality. Enterprise environment also offers numerous barriers of economic, legal and financial nature and those barriers finally shape developmental aspirations of business entities involved. Financial determinants are predominantly associated with some access to external financing and costs involved while obtaining and servicing such financing. An important aspect of correct 75


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perception of financial determinants may be attributed to the scale of activities undertaken by a particular business activity including access to external financing through the financial market. In case of micro, small and medium-sized enterprises (SMEs) that make up the core of the Polish economy, development of the capital market resulting in some access to external equity is of marginal importance. Venture Capital and Private Equity (VC/PE) that is in principle MSEs oriented does not play any important role in Polish conditions (Kaczmarzyk, 2008). A level of high risk capital is particularly insignificant when compared to capital that comes from banking credits (Table 1). Table 1 High risk capital versus bank credits for enterprises in 2008-2013 in Poland All Private Equity Funds in Poland

2008

2009

2010

2011

2012

2013

(€ thousands) Early-stage

8 860,00

13 360,00

0,00

1 100,00

18

20

840,00

000,00

Later stage venture

0,00

0,00

7 660,00

2 460,00

0,00

0,00

Balanced

0,00

0,00

0,00

0,00

0,00

0,00

7 660,00

3 560,00

18

20

840,00

000,00

0,00

0,00

0,00

0,00

0,00

651

131

107

408

466

241

600,00

990,00

100,00

280,00

600,00

250,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

120,00

0,00

Total Venture

Growth capital

8 860,00

100 000,00

Buyout

Mezzanine Generalist

13 360,00

76

30 750,00


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All Private Equity Funds in Poland

2008

2009

2010

2011

2012

2013

(€ thousands) Total funds raised

760

145

114

442

485

261

460,00

350,00

760,00

590,00

560,00

250,00

Bank credits for

30 030

30 967

32 068

35 998

40 311

39 520

SMEs

677,79

820,46

025,15

913,24

139,38

640,43

Bank credits for the

25 884

23 089

23 404

23 886

26 270

27 488

Big

383,09

917,73

287,55

071,36

730,39

425,93

55 915

54 057

55 472

59 884

66 581

67 009

060,88

738,18

312,70

984,60

869,77

066,36

Total bank credits

Source: Own on the basis of: European Private Equity Activity Data 2007-2013, European Private Equity and Venture Capital Association (EVCA) and Raportów o sytuacji banków [Reports on the Situation of Banks] published by Komisja Nadzoru Finansowego (KNF) [Polish Financial Supervision Authority (PFSA)] for the years of 2008-2013. Taking financing of investment activities into consideration, the SME sector is predominantly based on self-financing and financing by capital that comes from banking credits. It is necessary to pay attention here to a systematic increase in importance of capital that comes from banks although there is still major dominance of own equity. A visibly higher level of financing by own capital in the years of 2007-2008 may largely be connected with some increased risk aversion of the financial sector resulting from the financial crisis (Figure 1). Figure 1. Structure of financing SMEs in Poland in the years of 2007-2011

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100,0% 90,0%

80,0% 70,0% 60,0% 50,0% 40,0%

30,0%

Foreign capital, including bank credits

20,0%

Bank credits and loans

10,0%

Own equity

0,0% 2007

2008

2009

2010

2011

Source: Own on the basis of Raporty o stanie sektora małych i średnich przedsiębiorstw w Polsce [Reports on the Situation of the Small and Medium-Sized Enterprises in Poland] published by Polska Agencja Rozwoju Przedsiębiorczości (PARP) [the Polish Agency for Enterprise Development (PAED)] for the years of 2007-2011. Free access to inexpensive foreign capital is an additional developmental incentive that complies with financial objectives of business activities undertaken by enterprises. This allows for formulating a financial strategy that is flexible in the context of shaping the capital structure initiating a positive effect of a financial leverage. Finding the right proportions between an increase in profitability of own equity and the level of the financial risk taken and understood in a category of volatility of results before taxation should consequently lead to an increase in the market value of an enterprise. Presented interdependencies were also confirmed in case of 50 enterprises subject to research, among of which 47 were unambiguously classified as SMEs. In 64% of cases enterprises agreed that access to external financing was difficult or very difficult. Only 6% of them clearly stated that the access in question was easy (Figure 2). Figure 2. Access to external financing of activities undertaken as assessed by enterprises subject to research

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44,0%

0%

10%

20%

20,0%

30% very difficult

40% difficult

50%

22,0%

60%

rather difficult

70% rather easy

8,0%

80%

6,0%

90%

100%

easy

In the group of enterprises subject to research, 45.9% of entities decided that the high cost was a basic barrier to using external capital, whereas 39.3% of entities recognised a required level of security to be provided as such a barrier (Figure 3). Figure 3. Barriers to access to external financing as assessed by enterprises subject to research

39,3%

0%

10%

20%

high level of security

45,9%

30%

40%

50%

high cost of financing

60%

14,8%

70%

80%

90%

100%

unbeneficial contractual provisions for users of financing

High cost of debt makes it impossible for enterprises to choose a profitable structure of capital and leverage their own equity profitability. As a result, they may experience risk of capital structure, particularly including limitation of own equity profitability and some increase in volatility of financial result to be obtained after financial costs have been taken into account. Enterprises subject to research consequently pointed to some necessity to decrease requirements that concern creditworthiness and to expand credit action. It is necessary to highlight here that in Polish conditions anticipated money flows of any investment planned by an enterprise do not offer any security from the perspective of a bank. Financing of innovative projects that are initiated by start-ups is a very rare phenomenon. Barriers to access to external financing largely determine financial strategies of enterprises that as a result are based on profit retention. On the one hand, dominance of the own equity limits 79


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financial risk including risk of capital structure and credit risk that is thought to be risk of change in creditworthiness. On the other hand, debt allows for carrying out larger scale investment activities and for realising objectives of business activities undertaken. Limitations of financial nature are negatively overlapped with economic and legal barriers (Figure 4).

Figure 4. Barriers to running business activities as assessed by enterprises subject to research*

42,2%

0%

10%

20%

44,6%

30%

40%

legal barriers

50%

60%

economic barriers

13,3%

70%

80%

90%

100%

financial barriers

* maximum 2 answers possible Economic barriers suggested by enterprises include high fiscal burden. Fiscal costs to be borne by enterprises with reference to employment (37.3%) were thought to be the most important. Similar opinions were held in the context of taxes on turnover and income (24% and 21% respectively) (Figure 5). Figure 5. Economic barriers to running business activities as assessed by enterprises subject to research*

24,0%

0%

10%

21,3%

20%

30%

37,3%

40%

50%

60%

17,3%

70%

80%

high tax burden of entrepreneur’s turnover

high tax burden of entrepreneur’s income

high fiscal costs of labour

low demand for goods and services

80

90%

100%


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* maximum 2 answers possible It is necessary to state that while formulating an effective financial strategy that would aim at realising financial objectives of an enterprise, some attention has to be paid not only to barriers of limited access but also to the scope and scale of fiscal burden to be borne with reference to business activities carried out. Fiscal burden borne largely reduces enterprise profitability, thus limiting enterprises’ capability to increase their market value. Fiscal burden is not only the most important economic barrier but also a serious legal obstacle to be overcome while running a business. In the group of enterprises subject to research, 58.9% of entities recognised the complication level of legal regulations to be the most important legal barrier. Another important barrier was attributed to volatility of legal regulations governing business activity undertaken – stressed by 39.3% of enterprises (see Figure 6). Figure 6. Legal barriers to running business activities as assessed by enterprises subject to research*

1,8%

0%

39,3%

10%

20%

58,9%

30%

40%

50%

complex procedures of establishing own business

60%

70%

volatility of legal regulations

80%

90%

100%

complex tax regulations

* maximum 2 answers possible Establishing a financial strategy of an enterprise in Polish conditions is therefore largely related with some necessity to schedule tax management actions. On the one hand, it is necessary to consider fiscal burden as an economic barrier and some effort aimed at tax optimisation. From the owners’ and stakeholders’ points of view, a decrease in fiscal burden is similar in its result to expansion of business activities since both the decrease and the expansion result in some increase in money flows, thus potentially increasing the market value. On the other hand, correct application of the tax law regulations is equally important for enterprises. Behaviours that do not comply with the law may involve financial consequences and, in extreme cases, a loss of possibilities to further run business activities. It is necessary to state that enterprises that base their strategies on using own equity that 81


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firstly comes from retention of profits will be particularly interested in tax optimisation that leads to decreasing their fiscal burden. Fiscal environment of enterprises Like in other UE countries, in the Polish fiscal system enterprises bear fiscal burden imposed on their resources owned, incomes obtained and revenues (turnover) made. Taxes imposed on resources owned include a property tax and a tax on means of transport. These taxes make up costs of activities undertaken by enterprises and that is why they are perceived as the least severe fiscally. Moreover, they are seldom subject to management while realising any financial strategy. However, realising financial strategies requires management of income taxes and revenue taxes. In Polish systemic solutions, income taxes match organisational and legal forms of enterprises. Incomes of enterprises that enjoy legal personality and that in a majority of cases act as corporations are subject to taxation in compliance with the Corporate Income Tax Act (Journal of Laws, 2011, No. 74, Item 397). However, enterprises that are natural persons and that function as independently run businesses or partnerships are taxed in compliance with the Personal Income Tax Act (Journal of Laws, 2012, Item 397). Income taxes cover both generated incomes and shared or spent ones. Therefore, they are significant fiscal burden for enterprises. Fiscal effectiveness of those taxes is lower only than taxes that are imposed on enterprises’ revenues. In the Polish tax system, turnover taxes include VAT (Journal of Laws, 2011, No. 177, Item 1054) and excise duty (Journal of Laws, 2011, No. 108, Item 626). VAT is a tax of universal nature. Excise duty is a selective tax that is imposed on sales of selected goods. Turnover taxes are imposed on enterprises regardless of their organisational and legal forms and the size of activities undertaken. The Polish tax system is a domestic system that has been developed historically. Nevertheless, this system is subject to systematic changes. An important reason for ongoing changes may be attributed to the Polish membership in the European Union and our public authorities’ obligation to undertake activities that aim at tax harmonisation. Common solutions particularly refer to taxes that are imposed on enterprises whose subject of taxation is characterised by high mobility. Assuming that financial capital, fixed assets along with products and services are considered to be a mobile subject of taxation, and land along with property to be an immobile one, harmonisation of tax system predominantly refers to turnover and income taxes (Sorensen, 1990). However, a level of harmonisation of particular taxes is different. Turnover taxes are the most harmonised. In case of

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income taxes, there are some common solutions that concern selected scopes of taxation subjects. However, in case of property taxes, no important harmonisation efforts have been made yet. Major elements of the tax environment of enterprises that function in Poland along with the level of harmonisation are presented in the Figure 7. Figure 7. Tax environment of enterprises that function in Poland

Elements of tax environment of enterprises that function in Poland Taxes that are costs of business activities: 

property tax,



transport means tax

Taxes that are not harmonised

Taxes imposed on corporate income: 

corporate income tax,



personal income tax

Taxes that are hardly harmonised

Taxes imposed on corporate revenues: 

VAT,



excise duty

Taxes that are highly harmonised

Some necessity to take tax effects into consideration while making financial decisions results in the situation when fiscal burden becomes a specific subject of management in enterprises. It is necessary to assume that management of taxes performed in order to realised adopted financial strategies should be realised by means of different methods that are legitimate. Management of taxes requires recognition and analyses of tax levy from the perspective of opportunities and threats to be faced while realising financial strategies of enterprises. Each enterprise looks for appropriate solutions paying much attention to specifics of own activities undertaken. Only those solutions that allow for effective realisation of objectives set are going to be adopted. Tax related decisions depend in a majority of cases on optimising effective tax rates and keeping financial liquidity, which requires activities of strategic nature and current, operational actions.

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Management of income taxes by enterprises For any income taxpayer, it is of strategic importance to select a place and legal form of activities carried out. However, it is necessary to notice that decisions made by Polish enterprises with reference to their places of running their business activities are in principle quite limited. This limitation predominantly results from possibilities of competing on the international markets. Hence, in the Polish reality enterprises that start their business activities usually decide to do that domestically and only a small percentage of enterprises that enjoy stable situation on their domestic market undertake actions aimed at internationalisation. Even fewer enterprises while deciding to internationalise their business activities pay attention to the aspect of fiscal solutions observed in a particular target country. However, enterprises that decided to take this challenge in their processes of income tax management may additionally utilise differences in the very construction of the taxes in question, particularly in the context of the way income tax bases, tax preferences, amortization allowances, methods of taxing dividends and possibilities of international settlement of losses borne are determined (Szymański, 2009). For a majority of enterprises that function exclusively on the domestic market, it is of much importance to manage taxes by selecting a legal form that determines principles of taxing generated incomes and all related rights. Income taxes are characterised by their entity related universality. Corporate income tax is addressed at all enterprises that are legal persons and the most important principle of this tax is that each entity is an independent taxpayer. A principle of entity related universality is applied with reference to natural persons as well. However, in case of personal income taxation, owners of enterprises are taxpayers, not enterprises themselves. This also means that if a natural person simultaneously receives some income in a few enterprises, all the income obtained is calculated and the person in question pays one tax on all the income resulting from business activities undertaken (Mazur, 2012). Decisions aimed at long term effects are supported by decisions of operational nature whose realisation is generally based on managing volumes of revenues generated that are recognised as tax revenues, on eliminating costs that are not included in the catalogue of income generating costs, on using tax preferences, and on rescheduling maturity dates of tax liabilities. Activities undertaken in this context are similar for both constructions. In both cases income that is calculated as some surplus of tax income over income generating costs is subject to taxation. A tax category of income refers to financial result of an enterprise but it is not synonymous. There are some differences between income 84


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established for tax related purposes and financial result generated and these differences result from the following (Dobrucka, Berczyńska, 2002):  financial result is shaped by revenues but not all revenues are tax revenues,  balance losses and extraordinary losses also include items that are not tax costs,  some revenues are recognised to be obtained and some costs are recognised to be borne at different moments in compliance with the balance sheet regulations or fiscal law,  tax reliefs may be deducted from the taxed income. This generally means that in practice, tax income will never be equal to profit. In a majority of cases tax income is higher that gross profit generated. Additionally, the differences obtained might be of permanent or temporary nature (Olchowicz, 2009). Analysing solutions provided by acts concerning income taxes to identify opportunities for tax management within realisation of tax strategies, it is necessary to pay attention to solutions concerning the very nature of revenue and tax cost, principles of their identification, dates of revenue and dates of recognition of the categories in question. In solutions concerning income taxes, a categories of tax revenues are not defined. They are only listed. With reference to tax revenues, a date of revenue is defined. The legislator generally defines the date of revenue to be the moment when a product is transferred, property right is sold or service is provided. Contrary to a category of revenues, the legislator does not list but defines income-generating costs as costs that are borne in order to obtain some income or keep or secure a source of revenue. At the same time, some events that are not considered to belong to this group although there is some cause and effect relationship are named by the legislator as well (Boroszowski, 2010). Identification of income tax and as a result of tax base is one of two elements that influence volume of the final financial result of an enterprise. A tax rate is the other one. Generally, with reference to legal persons a 19% flat tax rate is applied. In case of natural persons a progressive tax rate is used and the following values are applied: 18%, and 32%. There is also a tax-free amount. Moreover, taxpayers are entitled to opt for a 19% rate. Considering solutions adopted, it is necessary to highlight the fact that a tax liability set with reference to gross profit may be a fiscal burden that is considerably higher than a nominal tax rate could suggest. In practice, tax burden may considerably exceed a standard rate applied in case of the generated gross income, which remarkably decreases opportunities for self-financing current and development activities undertaken by enterprises and opportunities to generate direct benefits in case of owners (Davis, Pointon, 1997). 85


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The above results in some conclusion that income tax that are imposed on every type of income generated significantly contribute to limitation of opportunities for realisation of enterprise financial strategies. The tax in question also results in the decrease in direct benefits generated by owners, thus decreasing rates of return in case of the capital involved. Moreover, the way major tax categories are identified with no consideration for the date of receiving financial means resulting from sales of goods or services lead to problems with keeping current financial liquidity. Confirmation of the thesis that enterprises should manage their income taxes was tried to be obtained while carrying out some research. In the group of fifty enterprises subject to this research, 15 functioned as legal persons and 35 as natural persons. The group of enterprises that function as legal persons is dominated by medium-sized enterprises (60%). However, both large and small-sized enterprises amount to 20% of the group subject to this research. In 80% of cases, these enterprises have been functioning on the market for more than 10 years. On the other hand, in case of enterprises that function as natural persons, in a majority of cases they have been functioning on the market for more than a year. Almost a half of them have been functioning on the market for more than 10 years. Generally, these enterprises belong to a group of micro-enterprises (68.6%) and small-sized enterprises (22.9%). Only 8.5% of the group may be classified as medium-sized enterprises. Considering specifics of income taxation, a launchpad used to identify opportunities for income tax management is provided by questions about reasons for selecting legal status of an enterprise (Figure 8) and characteristic objectives that determine financial decision making (Figure 9).

Figure 8.Premises for selecting legal status of business activities undertaken in enterprises subject to research

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No reply

Amount of tax related to transfer of profit to the owner’s level

Recording requirements Natural person

Value of the basic rate

Legal person Total

Income taxation principles

Scope of responsibilities for liabilities

Amount of capital necessary to set up a business 0%

10%

20%

30%

40%

50%

60%

70%

Answers provided allow for concluding that enterprises largely (60%) make their decisions concerning legal status of business activities undertaken considering non-fiscal premises. Almost 47% of enterprises in the group of legal persons and approximately 66% in the group of natural persons declare that their major premise for selection of legal status for their business activities undertaken is to be found in the amount of capital that is necessary to set up their operations. Fiscal premises are declared by 20% of entities subject to this research (including 6% of legal persons and 14% of natural ones). Major fiscal premises that determine legal status of enterprises include a possibility to enjoy a right of selecting income tax principles and requirements related to documentation required in a particular type of taxation. When asked to provide premises that determine financial decision-making, enterprises subject to this research point to willingness to maximise generated profit (16%), retained profit (18%) and paid profit (56%). They also suggest that their business operational objectives include increasing their assets (16%) and keeping liquidity (38%). However, it is necessary to notice here that an increase in assets is mainly declared by legal persons (33.3%). However, natural persons are predominantly interested in keeping liquidity (45.7%). These answers confirm conditions and specifics of the conditions in which Polish enterprises have to function. Although they declare their willingness to develop, they are mainly oriented at generation of financial benefits for their owners. Figure 9. Objectives that determine financial decision-making in enterprises subject to research *

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Matching activities with market needs Aiming at maximisation of owners' profits

Aiming at maximisation of retained profits

Natural person Legal person

Aiming at keeping liquidity

Total

Aiming at maximisation of assets Aiming at maximisation of the balance profit

0%

10%

20%

30%

40%

50%

60%

*more than one answer possible – this does not sum up to get a declared number of enterprises.

Simultaneously, it is necessary to note down that a majority of enterprises subject to this research (56%) declare that income taxation remarkably influences realisation of pre-determined objectives. Almost all of them believe that this influence is negative. When asked to provide reasons for such a negative opinion, they all suggest that the negative impact of income taxation on realisation of objectives results from a wide scope of the tax in question, high tax rates, accrual basis of accounting and short terms of tax settlements (Figure 10). Figure 10. Reasons of negative impact of income taxation on realisation of financial objectives in enterprises subject to research *

Short tax settlement terms

Major cost generation based on the accrual basis of accounting Natural person

Major revenue generation based on the accrual basis of accounting

Legal person Total

High tax rates

Excessively wide subject scope of taxation

0%

10%

20%

30%

40%

50%

60%

70%

80%


In this background, it is interesting to answer a question concerning attitudes adopted by enterprises subject to this research in the context of income tax. Enterprise subject to research most frequently declared their attitude involving some acceptance of income taxation conditions (78%). In case of legal persons, such acceptance is expressed by 67% of enterprises. However, as many as 83% of enterprises subject to research demonstrate the acceptance in question in the group of natural 88


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persons. At the same time, it is necessary to highlight that in many cases enterprises subject to research declare some other active attitudes to income taxation (Figure 11). The most frequently given ones include undertaking activities aimed at a price increase, i.e. some attempt to push fiscal burden away. In some enterprises decisions aimed at price decreases were made as well. Figure 11. Reactions of enterprises subject to research to income tax burden*

Giving up the core of business activities undertaken Looking for legal loopholes

Undertaking actions aimed at a decrease in labour costs


Undertaking actions aimed at an decrease in purchase prices

Total

Undertaking actions aimed at an increase in sale prices Acceptance of tax conditions

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


This moderate activity in the context of income tax management represented by almost a half of enterprises subject to this research raises a question concerning knowledge of existing tax solutions that allow for optimisation of income tax burden. A question concerning income tax solutions that allow for this optimisation is answered by 52% of enterprises subject to research only. Other 48% of enterprises are not able to provide such solutions (Figure 12). Figure 12. Knowledge of enterprises subject to this research about solutions that allow for income tax management*

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No response Concerning results of selection of business activity financing sources Concerning dividends Selection of settlement periods Principles of setting income generating costs


The date expenses are recognised as tax costs

Total

Directing the moment of tax revenue generation Income taxation principles Concerning selection of the legal status Selection of the place for running business activities 0%

10%

20%

30%

40%

50%

60%


Data obtained translate into mediocre knowledge about income tax management in the group of enterprises subject to this research. At the same time some regularity is observed. In case of larger enterprises that enjoy organisational and legal structures and that have been functioning on the market for a long time, the knowledge in question is higher and use of this knowledge in practice more intensive. To conclude, in the context of income tax management enterprises undertake some actions that aim at optimisation of tax burden. Such actions are declared by almost a half of enterprises subject to this research. However, these actions are quite basic and simple and they mainly involve transferring fiscal burden or tax avoidance by means of using elements of the tax construct suggested by the legislator. This situation undoubtedly stems from an insufficient level of knowledge about financial aspects of company performance including knowledge about income tax solutions.

VAT management by enterprises There are much fewer possibilities of VAT management by enterprises than in case of income taxes. This predominantly results from specifics of the very tax. In compliance with the EU directive on the common system of VAT in the European Union countries, this tax is a general consumption tax that is applied in case of goods and services (Official Journal of the European Union 2006, L.347/1, as amended). The VAT collection system includes all subsequent links of business activities undertaken, i.e. production, distribution and retail sales. Therefore, VAT affects all enterprises 90


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although it is supposed to stay neutral. The very nature of VAT limits tax management by enterprises. This does not mean that this tax does not have to be taken into consideration while working on enterprise financial strategies. VAT is considerable burden for enterprises, both in its economic and technical (since it requires much service) dimension. VAT is also one of determinants financial objectives of enterprises, mainly in the context of sales profitability and financial liquidity. Major impact of VAT on corporate finance results from its price generating function. This tax is an element of a price and that is why its rate influences a price and as a result this influences the demand. A VAT rate is therefore a factor that affects volume of revenues and sales profitability of enterprises. Generally, the influence in question is negative and it is necessary to remember that the lower the rate, the weaker the influence. In Poland the basic VAT rate amounts to 23%. Lower rates of 5% and 8% are also used. They mainly refer to basic goods (e.g. selected foodstuffs or healthcare related products). As compared to other EU members, Poland belongs to countries with the highest basic VAT rates (VAT Rates…, 2014). VAT is assumed to be charged on the final user, i.e. a consumer. Because of its universality, basic rate affects a general level of prices. An excessively high rate is not desired since it is related to limitation of citizens’ purchasing power, especially those less affluent ones. Public authorities that want to protect basic consumption of households may apply reduced tax rates. Preferential treatment of consumers is also some protection for enterprises since this gives a possibility to introduce adequately lower prices or to enjoy higher profitability. Diversification of rates provides an opportunity for VAT management by means of economic decisions concerning the scope of business activities undertaken. Confrontation of the above with practice leads to a conclusion that such management is rarely observed. Research results obtained as a result of analysing a group of 50 enterprises show that only one of the enterprises in question took VAT rates into consideration while choosing subject of business activity undertaken. Similarly, only one enterprise declares that the VAT rate influenced their decision to change their business profile. That is why, the research results suggest decisions concerning selection and change of business profiles are mainly made with taking non-fiscal factors into consideration. The regularity reported should be deemed correct. Otherwise, economic decisions would be distorted by taxation. A particularly interesting situation that requires activity of an enterprise is observed when the legislator replaces reduced rates with basic ones or when tax rates are raised. In Poland VAT rates 91


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were raised from the 1st of January 2011 and that is why a majority of enterprise subject to this research experienced this increase (37 out of 50). When asked about their reaction to this change of business conditions, enterprises involved predominantly pointed to some increase in sales prices (Figure 13). A domineering part of enterprises affected by the VAT increase decided to raise prices adequately to the level of the new VAT rate. However, in many cases (almost 30% of all enterprises involved) total tax forward shifting was not observed. Instead of shifting taxes forward, increase in prices was smaller than it was supposed to be resulting from the VAT rate increase or tax backward shifting was applied affecting suppliers. In five cases enterprises declared that the new increased VAT rate had been imposed at their cost (e.g. by reducing net prices or decreasing sales volumes), which contradicts the very economic nature of this tax. The research allows for concluding that enterprises’ reaction to increased VAT rates is determined by the present market situation, which confirms all the theses formulated in the theory of taxation (Famulska, 2007). Figure 13. Reaction of enterprises subject to research to the increased VAT rates*

Higher VAT was collected at expense of the enterprise

Negotiating lower prices with suppliers

Increase in sales prices higher than the increase in VAT

Increase in sales prices lower than the increase in VAT

Increase in sales prices at the level of the increase in VAT 0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

80,0%

90,0%

*more than one answer possible – this does not sum up to get a declared number of enterprises. Keeping financial liquidity is an important objective of the financial strategy in enterprises. Meeting this objective may be facilitated by skilful VAT management. This tax remarkably affects enterprise’s financial liquidity as a result of the adopted mechanism of settlement. In enterprises, VAT functions as the following: (1) output VAT (sales related), (2) input VAT (purchase related) and (3) VAT settled with a tax office as a difference between output VAT and input VAT. Generally, the settlement may take the following form:: 1)

if output VAT > input VAT => tax liability, or 92

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if output VAT < input VAT => tax refund.

Specific legal time categories (period and deadlines) also influence financial liquidity of an enterprise. They are connected with identification of the above-mentioned three ‘types’ of VAT. They include the following:  output VAT: a moment a tax liability arises,  input VAT: a moment of acquiring a right to make a tax refund,  VAT settled with a tax office: a settlement period, a term a tax liability is settled, a date and mode of refunding surplus of input VAT over output VAT. In case of VAT, accrual basis of accounting is commonly applied, which in case of input VAT is profitable and in case of output VAT is not. Hence, VAT management in the financial liquidity context is closely related to management of due payments and liabilities that emerge in the course of transactions with customers and suppliers that subject to VAT. When VAT management is connected with enterprise’s financial liquidity, some solutions that are provided for by law may be found useful. These solutions predominantly include a possibility to select a settlement period (monthly or quarterly), the way surplus of input VAT over output VAT is refunded (direct or indirect method), shortening of the period for refunding surplus of input VAT over output VAT, using ‘bad debt’ relief, using preferences resulting from the ‘small VAT taxpayer’ status (cash method settlements or quarterly settlements). Identified possibilities of VAT management are confronted with the relevant knowledge in the group of fifty enterprises subject to this research (Figure 14). In this case 23 enterprises (46%), provided answers and other 27 decided not to answer. In a majority of cases, enterprises that provided their answers concerning possibilities of VAT management pointed to the moment a tax liability arises. Subsequently, they referred to settlement periods and identification the moment a right to make an input VAT deduction is acquired.

Figure 14. Knowledge of enterprise subject to this research about solutions that allow for VAT management VAT*

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No reply Possibility to shorten a refund period in case of the input VAT ‘Bad’ debt relief Cash method settlement

Settlement period (monthly, quarterly) Qualification of business activities in the VAT context Identification of the moment a right to VAT deduction is acquired Identification of the moment a tax liability arises

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%


Recognition of possibilities of VAT management in this group is limited. Additionally, this situation is in contrast with the answer to the question concerning relevant application of such possibilities. In this context, fewer enterprises provided their answers than in case of the question concerning the above-mentioned possibilities, i.e. only 17 entities, which is 34% of the whole research sample (Figure 17). Out of those 17 only 2 enterprises declared VAT management. In both cases this was related with the settlement period applied. Therefore, it is necessary to state that VAT management is relatively rarely used in the group of enterprises subject to this research.

Figure 15. VAT management in enterprises subject to this research

4,0%

0,0%

30,0%

10,0%

20,0%

66,0%

30,0%

40,0%

VAT managed

50,0%

60,0%

VAT was not managed

70,0%

80,0%

90,0%

100,0%

No response


On the basis of this research, some attempt was made to identify reasons for low activity of enterprises in the context of VAT management. Research results obtained allow for concluding that VAT is a complex and difficult construct for enterprises subject to this research. These entities 94


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formulated highly negative evaluation of legal VAT regulations. Complexity of VAT is also confirmed by limited identification of solutions that allow for VAT management. Great challenge is posed by the very correct establishing and meeting VAT liabilities. A part of enterprises undertake different actions in the context of VAT settlements (Ciupek, Famulska, 2013). A major method to reduce tax risk is to use services provided by accounting offices and tax consultancy companies. It is also recommended to take part in relevant training systematically. Wishing to settle VAT correctly, enterprises spend much time and efforts, which significantly reduces their VAT management. However, it is necessary to expect some expansion of this activity along with a desired increase in the level of tax knowledge in enterprises. Improvement in the quality of fiscal regulations should also be anticipated.

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www.academy.edu.sg CONCLUSION

To sum up, theoretical considerations made along with the economic analysis of the tax law regulations carried out in connection with source research conducted in selected enterprises make it possible to formulate the following generalised conclusions: 1. Meeting financial objectives of an enterprise requires formulating a specific financial strategy. This strategy is determined by numerous factors of financial, economic and legal nature. In Poland, SMEs that rely on their own equity dominate. That is why, these enterprises are largely interested in profit retention. 2. In case of enterprises, a level of generated and retained profits largely depends on fiscal burden volumes. Therefore, tax management is of vital importance while formulating financial strategies of enterprises. 3. Polish tax system that generally does not differ considerably from standards applied in other EU countries allows for managing taxes. These possibilities are diversified depending on the type of taxation. 4. Income taxes enjoy the greatest tax management potential. Potential of VAT in this respect is slightly lower. 5. Tax management that results from financial strategies of enterprises should contribute to meeting pre-defined objectives including expected profitability and financial liquidity. 6. Confrontation of identified possibilities of income tax and VAT management with practice allows for concluding that these possibilities are not fully recognised by Polish enterprises. 7. Incomplete tax knowledge together with imperfection of the tax law regulations results in limited activity of Polish enterprises in the context of tax management. 8. While evaluating the way taxes are managed by Polish enterprises, it is necessary to state that this level is higher in case of income taxes as compared to VAT, which should be deemed correct.

96


www.academy.edu.sg REFERENCES

Boroszowski, P. (2010). Działalność gospodarcza w konstrukcji prawnej podatku [Business Activities in the Legal Construct of Taxes]. Warszawa: Wolters Kluwer Business. Chapman, R. (2011). Simple tools and techniques for enterprise risk management. West Sussex: John Wiley & Sons. Ciupek, B., Famulska, T. (Ed.) (2013). Strategie podatkowe przedsiębiorstw [Tax Strategies of Enterprises]. Katowice: Univeristy of Economics. Davis, E.W., Pointon, J. (1997). Finanse i firma [Finance and Enterprises]. Warszawa: PWE. Dobrucka, M. D., Berczyńska, A. (2002). Wynik finansowy – ujęcie podatkowe i bilansowe   a zmiany w rachunkowości od 2002 roku [Financial Result – Tax and Balance Sheet Concepts Vs. Changes in Accounting since 2002]. Gdańsk: ODDK. Dyrektywa 112/2006 Rady z dnia 26 listopada w sprawie wspólnego system podatku od wartości dodanej [Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax]. Official Journal of the European Union 2006, L.347/1, as amended. Famulska, T. (2007). Teoretyczne i praktyczne aspekty funkcjonowania podatku od wartości dodanej [Theoretical and Practical Aspects of the Way Value Added Tax Functions]. Katowice: University of Economics. Giachetti, R. (2010). Design of European Systems. Theory, Architecture and Methods. Boca Raton: CRC. Kaczmarzyk, J. (2008). Aktywność inwestycyjna funduszy Private Equity/Venture Capital  w latach 20012006 [Investment Activities of Private Equity/Venture Capital in the Years of 2001-2006]. In: Znaniecka, K., Zieliński, T. (Ed.) Finanse wobec sfery realnej gospodarki [Finance in the Context of the Real Economic Sector]. Katowice: University of Economics. Martin, J., Petty, W., Wallace, J. (2009). Shareholder Value Maximization — Is There a Role for Corporate Social Responsibility? Journal of Applied Corporate Finance, No. 2. Mazur, Ł. (Ed.) (2012). Optymalizacja podatkowa [Tax Optimisation]. Warszawa: Wolters Kluwer Business. Merna, T., Al.-Thani, F. (2008). Corporate Risk Management. West Sussex: John Wiley  & Sons Ltd.

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Olchowicz, I. (2009). Rachunkowość podatkowa [Tax Accounting]. Warszawa: Difin. Raport o stanie sektora małych i średnich przedsiębiorstw w Polsce w latach 2011-2012 [Report on the condition of small and medium-sized enterprise sector in Poland in the years of 2011-2012]. (2013). Warszawa: Polska Agencja Rozwoju Przedsiębiorczości (PARP) – the Polish Agency for Enterprise Development (PAED). Sorensen, P.B. (1990). Tax Harmonization in the European Community. Problems   and Prospectus. Copenhagen: University of Copenhagen. Szymański, W. (2009). Strategie podatkowe osób prawnych w Unii Europejskiej [Tax Strategies of Legal Persons in the European Union]. Warszawa: C.H. Beck. Ustawa z dnia 26 lipca 1991 r. o podatku dochodowym od osób fizycznych. Tekst jednolity, Dziennik Ustaw 2012, poz. 361 z późn. zm. [The personal income tax. Consolidated text. 2012 Official Journal of Laws, Item 361 as amended.]. Ustawa z dnia 15 lutego 1992 r. o podatku dochodowym od osób prawnych. Tekst jednolity, Dziennik Ustaw 2011, nr 74, poz. 397 z późn. zm. [The corporate income tax. Consolidated text. 2011 Official Journal of Laws no. 74, Item 397 as amended.]. Ustawa z dnia 11 marca 2004 r. o podatku od towarów i usług. Tekst jednolity, Dziennik Ustaw 2011, nr 177, poz. 1054, z późn. zm. [The goods and services tax act. Consolidated text. 2011 Official Journal of Laws no.177, Item 1054 as amended.]. Ustawa z dnia 6 grudnia 2008 r. o podatku akcyzowym. Tekst jednolity,  Dziennik Ustaw 2011, nr 108, poz. 626 z późn. zm. [The excise duty tax act. Consolidated text. 2011 Official Journal of Laws no.108, Item 626 as amended.]. VAT Rates Applied in the Member States of the European Union. (2014). Brussels: European Commission.

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SALES FORCE ATTITUDES ON SALES PRACTICES – A STUDY OF LIFE INSURANCE CORPORATION IN INDIA, MACHILIPATNAM DIVISION – ANDHRA PRADESH, INDIA

Naladi. Vijaya Ratnam Acharya Nagarjuna University, India Dokka. Jagan Mohan Rao DMH & SVR Engineering College, India Pallekonda. Srinivasa Rao Acharya Nagarjuna University, India

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Marketing always stresses the importance of satisfying customer needs and wants through a process of exchange. Marketing occurs in virtually every aspects of life, Marketing and selling are directly related to each other; however sales people and their attitude are most important for successful sales practices. This study is based on primary data with 208 sales agents and development officers respondents of LIC operating at Machilipatnam division Andhra Pradesh. India. The objective of this research paper is to make an attempt to examine the sales force attitudes on sales practices conducted at LIC. Statistical tools like percentage, Chi-square test and p-values were used to analyse the data collected. Keywords; sales Force, Sales practice, selling & Sales Force Attitude.. LIC: Life Insurance Corporation of India.

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Selling is one of the principal and most crucial functions of an organization. In insurance industry, the selling function performs various roles such as enhancing knowledge pertaining to the internal and external environments, developing positive relationships with customers and negotiating to sell the company’s products profitability. The attitude of a company’s sales force plays a crucial role in determining the ability of the company to compete and survive in the competitive business environment especially in insurance sector. The attitude of sales force determines the altitude to which they can raise in their career in an organization. It is often said that sales force need three components to thrive – knowledge, skills and attitude. Majority focus too much time and energy on the first two – knowledge and skills, neglecting the pursuit of the right attitudes. All three oil the gears of a top performing salesperson, but attitude is the highest grade oil. Attitude is the most important attribute of top performing sales force, without doubt but the wrong attitude can be heavily damaging. The days of the aggressive sales person are long gone and while there are still a few holdouts, there has been an evolution of the type of attitude that is needed for a successful sales person. Today’s highly successful sales people are the masters of relationship building and understand that refinement and listening which are the keys for making sales. An effective sales person displays healthy levels of self confidence, not arrogance. An arrogant attitude is not a required trait in a sales person in today’s market environment which is highly competitive. Hence, managements have to give attention to changing attitudes of the sales force by taking various measures such as to ensure well being of the sales force, having a timely appraisal system, with reward system. Having a timely appraisal system with reward system at right magnitude, maintaining good relationships among the employees in the organization, while providing trainings and the managers should be impartial, unbiased and objective towards all sales people then only it is possible to achieve the target of the organization. The review of literature has been presented in order to assess the importance of sales force attitudes on sales practices in the organization especially for firms of insurance. Few studies have been conducted so far in this area, however, among few studies important ones have been presented here. 

Milton Mandell (1955) in his comprehensive study “A compensative guide to the

selection of salesmen” has examined recruitment and selection practice of salesmen. This 101


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study made a sample survey of 205 firms and examined the practices with regard to various aspects of the selection of salesmen. Barjatya (1979) made a survey of the “Expectations and satisfaction” of certain salesmen in respect of various need factors and observed that the highest dissatisfaction existed in the area of ‘promotion’ followed by ‘recognition of good work done’ has mentioned in salesman’s motivation Apostolides (1988) in his article investigated the relationship between age and attitudes of sales person towards self development potential in looking at the age of sales persons. Using a ten-item Self Development Opportunity Index, the scores were measured on a 5 point Likert type scale. All these studies help the management to improve the existing state of affairs mainly by emphasizing on functional areas of sales force attitudes for successful sales practices in LIC. Objectives and Hypothesis of the study: •

to appraise sales force attitudes on sales practices followed in LIC based on

perceptions. •

to offer pragmatic suggestions to the organization for effective implementation of

sales force management strategies. Hypothesis H o: The Sales force attitudes in LIC are not at an expected level while selling LIC Products and services. H 1: The Sales force attitudes in LIC are at an expected level while selling LIC Products and services.

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Selection of Unit: Machilipatnam has a big division of Life Insurance Corporation of India. It is located in coastal districts (Krishna district) of Andhra Pradesh, India. This unit has been deliberately chosen for the study and data collected for meaningful insights. There were 262 development officers and 10,152 agents in the unit. Keeping the size inview, the authors have selected this unit for evaluating sales force attitudes on sales practices. Sampling Size and Design: The study is conducted by using both analytical and descriptive type of methodology. The study consists of primary and secondary data. Primary data were collected, by using structured questionnaire from the development officers of LIC (103) and sales agents of LIC (105) and the sample technique used was convenience. Secondary data: The secondary data were collected from journals, magazines and books, publication of articles and periodicals, reports, research papers websites and company publications and booklets. Statistical tools used: the statistical tools such as simple percentages, Chi-square test and, P-test were used for effective analysis.

Discussions and Results 1) Table showing training programmes have changed the attitude and improved the knowledge and skills of sales force in LIC Development

Sales Agents

Officers S.N o

Scale

No. of Respond ents

% to Total

% to

No. of

total

respondents

tot al

% to total

1

Highly satisfied

45

43.8

50

47.6

95

45.6

2

Satisfied

29

28.1

30

28.6

59

28.4

103


3

4

5

Neither satisfied nor dissatisfied Dissatisfied Highly dissatisfied Total

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7

6.8

6

5.7

13

6.3

16

15.5

13

12.4

29

13.9

6

5.8

6

5.7

12

5.8

103

100

105

100

208

100

Chi-Sq = 0.648, P-Value = 0.958 Source: Filed survey Training is the act of increasing the knowledge and skills of an employee for doing a particular job. Today most of the corporate companies as well as Public sector institutions look at training is the only activity to increase (KSA) knowledge, skill and improved attitude. Through this strategy the employee will get the confidence for doing a particular job and in some cases the employee getting the promotions as it leads to employee satisfaction. The respondent opinions over the statement that whether the training programmes have changed their attitude and improved their knowledge and skill were presented in above table. It is evident from the above table that 47.6 percent of sales agents as compared to 43.8 per cent of development officers stated highly satisfied with the statement that training programmes have changed the attitude and improved knowledge and skills in LIC, followed by 28.5 percent of sales agents against 28.1 percent of development officers stated satisfied. Against the above tendency, 15.5 per cent of development officers as compared to 12.4 percent of sales agents stated dissatisfied, however a meagre 5.8 percent of development officers against 5.7 percent of sales agents of the respective units stated highly dissatisfied. It can be concluded from the analysis that sales agents were more satisfied as compared to development officers and the extent of satisfied and highly satisfied were greater than discontented lot.

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Statistical Analysis: From the chi-square value it is concluded that, for the statement “training programme have changed in the attitude and improved knowledge and skills in LIC”, development officers and sales agents opined in a similar passion at 5% level of significance. 2) Table showing development – an important dimension in the organization Development Officers S.No

1

2

Scale

Highly satisfied Satisfied

Sales Agents Total

% to

No. of

% to

No. of

% to

Respondents

total

Respondents

total

31

30

50

47.8

81

38.9

29

28.4

24

22.8

53

25.4

15

14.5

6

5.7

21

10.1

21

20.3

19

18

40

19.2

7

6.8

6

5.7

13

6.4

103

100

105

100

208

100

total

Neither 3

satisfied nor dissatisfied

4

5

Dissatisfied Highly dissatisfied Total

Chi-Sq = 8.944, P-Value = 0.063 Source: Filed survey Development activities begin when a new employee enters the organization usually in the form of employee orientation/induction and skills by the training officer as individual development leads to organization development and it is very common in today’s globalized world. It is seen from the above table that about 47.8 percent of sales agents against 30 percent of development officers stated highly satisfied over the statement that development is an 105


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important dimension in the organization, conversely, 28.4 percent of development officers against 22.8 percent of sales agents stated satisfied. Against the above tendency, 20.3 percent of development officers as compared to 18 percent of sales agents stated dissatisfied, whereas a meagre 6.8 percent of development officers against 5.7 percent of sales agents stated highly dissatisfied. It can be concluded from the analysis that highly satisfied respondents are high as compared to other responses of the respondents. However, mixed reaction is found between the units over the extent or levels of satisfaction as wide gap existed between sales agents and development officers on highly satisfied version and vice versa in the case of satisfied. Statistical Analysis: From the above table, it is concluded that with regard to the statement “development is an important dimension in the organization”, most of the respondents belong to sales agents opined positively than the development officers and the difference in the opinion is statistically significant at 10% level. 3) Table showing the statement timely reward system for sales people Development Officers S.No

1

2

Scale


Sales Agents Total

% to

No. of

% to

No. of

% to

Respondents

total

Respondents

total

40

38.9

47

44.7

87

41.8

30

29.1

29

27.6

59

28.4

12

11.6

8

7.6

20

9.6

15

14.5

14

13.3

29

13.9

6

5.9

7

6.8

13

6.3

total

Neither 3


4

5

Dissatisfied Highly dissatisfied

106

ACEB Conference Proceedings Total

www.academy.edu.sg 103

100

105

100

208

100

Chi-Sq = 1.472, P-Value = 0.832 Source: Filed survey In modern organizations efficient people are always rewarded timely with financial and non-financial benefits, otherwise there is chance of the problem of employee retention. The above table demonstrates the opinion regarding timely reward system for sales force, which depict that positiveness is greater than negativeness. It is evident from the analysis that 44.7 percent of sales agents against 38.8 percent of development officers stated highly satisfied over the statement that there is timely reward system for salespeople, conversely 29.1 per cent of development officers against 27.6 percent of sales agents stated satisfied. Against the above tendency, about 14.5 percent of development officers as compared to 13.3 percent of sales agents stated dissatisfied, whereas a meagre 6.8 percent of sales agents as compared to 5.9 percent of development officers stated highly dissatisfied. It can be concluded from the analysis that a mixed reaction is found between the development officers and sales agents over the levels of satisfaction as it is higher in highly satisfied with sales agents and it is a higher in satisfied with development officers. Besides, it can be stated that the extent of positiveness is greater than negativeness. . Statistical Analysis: It is concluded from the above table that almost equal percentage of the respondents from both development officers and sales agents opined unanimously on timely reward system for sales people at 5% level of significance as per the chi-square test mentioned above. 4) Table showing appraisal system in place in LIC Development Officers S.No

1

Scale

Highly

Sales Agents

No. of

% to

No. of

% to

Respondents

total

Respondents

total

34

33

49

46.7

107

Total

83

% to total

39.9


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satisfied 2

Satisfied

42

40.9

33

31.4

75

36.1

10

9.7

7

6.7

17

8.2

9

8.7

10

9.5

19

9.1

8

7.7

6

5.7

14

6.7

103

100

105

100

208

100

Neither 3


4

5


Chi-Sq = 4.640, P-Value = 0.326 Source: Filed survey Generally, performance appraisal is done by comparing the output that the worker or employee produces with what he/she is supposed to produce. If both are equal, we say his performance is normal. If the output is more, performance is said to be high. This system is used in traditional personnel management merely as a control device. Though it has the scope to develop the performance standards of the employee. It can be observed from the table that the extent of level or satisfaction is higher than dissatisfaction. It is evident that about 46.7 percent of sales agents against 33 percent of development officers stated that highly satisfied on the statement that appraisal system is in place in LIC. Conversely, 40.9 percent of development officers against 31.4 percent of sales agents stated satisfied to the above statement. Against to the above tendency, a meagre 8.7 per cent of development officers and 9.5 percent of sales agents stated dissatisfied. It can be concluded from the analysis that sales agents are highly satisfied than the development officers and development officers are satisfied than sales agents over the statement. Statistical Analysis: In view of views of development officers and sales agents the appraisal system in LIC is good based on their percentage mentioned in the above table and the difference 108


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in their percentage is not statistically significant at 5% level as per the above mentioned insignificant p-value of chi-square at 5% level of significance. 5) Table showing the interdepartmental relationship exists in the organization Development

Sales Agents

Officers S.No

1

2

Scale


% to Total

tota

No. of

% to

No. of

% to

Respondents

total

Respondents

total

31

30

40

38

71

34.1

32

31

29

27.6

61

29.3

15

14.5

12

11.4

27

12.9

20

19.4

18

17.1

38

18.2

5

4.8

6

5.7

11

5.2

103

100

105

100

208

100

l

Neither 3


4

5


Chi-Sq = 1.799, P-Value = 0.773 Source: Filed survey It is very common in corporate and public sector units, relations are very important for smoother work, and interdepartmental relations will develop healthy environment in the organization. It can be observed that the extent of satisfaction is greater than dissatisfaction. It is evident from the data that about 38 per cent of sales agents against 30 percent of development officers stated highly satisfied, to the statement that interdepartmental relationships exists in the organization. Conversely, 31 percent of development officers against 27.6 percent of sales agents 109


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stated satisfied. Against the above 19.4 percent of development officers against 17.1 percent of sales agents stated dissatisfied, whereas a meagre 5.7 percent of sales agents against 4.8 percent of development officers stated highly dissatisfied. It can be concluded from the above analysis mixed opinion was found among the sample respondents as sales agents are highly satisfied than development officers and development officers are satisfied than sales agents. Statistical Analysis: With regard to the statement “interdepartmental relationship exists in the organization”, both the development officers as well as sales agents opined in a similar passion at 5% level of significant as per the chi-square test value (1.799) and its corresponding P-value (0.773). 6) Table showing efforts are recognized by employers in our organization Development Officers S.No

1

2

Scale


Sales Agents Total

% to

No. of

% to

No. of

% to

Respondents

total

Respondents

total

42

40.9

40

38.3

82

39.6

31

30

32

30.4

63

30.2

7

6.7

10

9.5

17

8.1

16

15.5

14

13.3

30

14.4

7

6.8

9

8.5

16

7.7

103

100

105

100

208

100

total

Neither 3


4

5


Chi-Sq = 0.958, P-Value = 0.916

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Source: Filed survey In modern business organization it is very common that in corporate companies the top management recognize the efforts of the employees who have shown outstanding performance. It is evident from the data that about 40.9 percent of development officers as compared to 38.3 percent of sales agents stated highly satisfied to the statement that employee efforts are recognized in our organization, conversely, 30.4 percent of sales agents against 30 percent of development officers stated satisfied. Against the above tendency, 15.5 percent of development officers as compared to 13.3 percent of sales agents stated dissatisfied, whereas a meagre 8.5 percent of sales agents against 6.8 percent of development officers stated that highly dissatisfied. It can be concluded from the analysis that agreeableness is greater than disagreeableness. A mixed reaction is observed between sales agents and development officers over the extent of highly satisfied and satisfied. Statistical Analysis : Since the p-value of the chi-square is greater than 0.05, the level of significance so it is concluded that the sales agents and development officers opined in a similar passion on the statement employees efforts are recognized by employers in the organization. 7) Table showing the Leadership is provided by the top management in LIC Development Officers S.No

1

2

Scale


Sales Agents Total

% to

No. of

% to

No. of

% to

Respondents

total

Respondents

total

32

31

49

46.7

81

38.9

34

33.1

28

26.7

62

29.8

17

16.5

8

7.6

25

12.2

14

13.6

14

13.3

28

13.4

total

Neither 3


4

Dissatisfied

111


5

Highly dissatisfied Total

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6

5.8

6

5.7

12

5.7

103

100

105

100

208

100

Chi-Sq = 7.370, P-Value = 0.118 Source: Filed survey Developing leadership and providing leadership is the responsibility of the top management. It is very common in any business organization to adhere to such practice; otherwise subordinates always have to depend on superiors instructions. Table shows that the extent of satisfaction is greater than dissatisfaction. The above table demonstrates that 46.7 percent of sales agents compared to 31 percent of development officers stated that highly satisfied over the statement that the leadership is provided by the top management in LIC, conversely, 33.1 percent of development officers against 26.7 percent of sales agents stated that satisfied over the same statement. Against the above tendency, 13.6 percent of development officers as compared to 13.3 percent of sales agents stated dissatisfied, while a meagre 5.8 percent of development officers as compared to 5.7 percent of sales agents stated highly dissatisfied. It can be concluded from the analysis a mixed reaction is observed between the development officers and sales agents as to the level of highly satisfied by the sales agents and satisfied by the development officers. Statistical Analysis: From the above table it is concluded that sales agents are more positive than the development officers for the statement “Leadership provided by the top management in LIC” but the difference is not statistically significant at 5% level as per the chisquare test and its corresponding P-value mentioned above.

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8) Table showing the statement impartial, unbiased and objective towards all sales people in organization Development

Sales Agents

Officers S.No

1

2

% to

Scale


Total

tot

No. of

% to

No. of

% to

Respondents

total

Respondents

total

37

35.9

44

41.9

81

38.9

28

27.4

30

28.7

58

27.8

12

11.6

10

9.5

22

10.7

20

19.4

15

14.2

35

16.8

6

5.8

6

5.7

12

5.8

103

100

105

100

208

100

al

Neither 3


4

5


Chi-Sq = 1.551, P-Value = 0.818

Source: Filed survey The above table shows the extent of satisfied is greater than dissatisfied. It is found from the table that 41.9 percent of sales agents compared to 35.9 percent of development officers stated that highly satisfied over the statement that Impartial, unbiased and objective towards all sales people in organization, followed by 28.7 percent of sales agents against 27.4 percent of development officers stated that satisfied over the same statement. Against the above tendency, 19.4 percent of development officers against 14.2 percent of sales agents stated dissatisfied, whereas a meagre 5.8 percent of development officers as compared to 5.7 percent of sales 113


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agents stated highly dissatisfied. It can be concluded from the analysis that sales agents were more satisfied and highly satisfied than the development officers to the above statement.

Statistical Analysis: The chi-square value reveals that there is no significant difference in the opinion between officers and agents with regard to the “Impartial, unbiased and objective towards all sales people in organization” at 5% level of significance.

Findings of the study: 1) It is found from the analysis that 47.6 percent of sales agents as compared to 43.8 per cent of development officers were highly satisfied over the statement that training programmes have changed the attitudes improved knowledge and skills in LIC whereas about 15.5 per cent of development officers as compared to 12.4 percent of sales agents stated dissatisfied. It can be concluded from the analysis that sales agents were more satisfied as compared to development officers. 2) Regarding the statement that development is an important dimension in the organization, about 47.8 percent of sales agents as compared to 30 percent of development officers stated highly satisfied conversely, 28.4 percent of development officers against 22.8 percent of sales agents stated satisfied. whereas 20.3 percent of development officers as compared to 18 percent of sales agents stated dissatisfied. It can be concluded from the analysis that satisfied respondents are higher as compared dissatisfied. A mixed reaction exists between development officers an sales agents regarding to the level of highly satisfied an satisfied. 3) It is found that about 44.7 percent of sales agents as compared to 38.9 percent of development officers stated that highly satisfied over the statement that there is timely reward system for sales people, conversely, 29.1 percent of development officers against 27.6 percent of sales agents stated satisfied. whereas about 14.5 percent of development officers as compared to 13.3 percent of sales agents stated dissatisfied. It can be concluded from the analysis a mixed reaction is found between the development officers and sales agents as to the level highly satisfied with sales agents. 114


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4) It is found that about 46.7 percent of sales agents as compared to 33 percent of development officers stated highly satisfied to the statement appraisal system in place in LIC. Conversely, 40.9 percent of development officers against 31.4percent of sales agents stated satisfied, whereas a meagre 8.7 per cent of development officers and 9.5 percent of sales agents stated dissatisfied. It can be concluded from the analysis that sales agents are more satisfied than the development officers over the statement. 5) It is found that about 38 per cent of sales agents against to 30 percent of development officers stated highly satisfied over the statement that interdepartmental relationships exists in the organization, conversely, 31 percent of sales agents against 27.6 percent of development officers stated

satisfied over the statement. Whereas 19.4 percent of

development officers against 17.1 percent of sales agents stated dissatisfied. It can be concluded from the above analysis mixed opinion was found between two groups of respondents over the level of satisfaction. 6) Regarding the statement employees efforts were recognized by the employers in organization that 40.9 percent of development officers as compared to 38.3 percent of sales agents stated highly satisfied, conversely, 30.4 percent of sales agents against 30 percent of development officers stated satisfied, whereas 15.5 percent of development officers as compared to 13.3 percent of sales agents stated dissatisfied. It can be concluded from the analysis that agreeableness is greater than disagreeableness and mixed reaction is observed between development officers and sales agents over satisfied and highly satisfied. 7) It is found that 46.7 percent of sales agents as compared to 31 percent of development officers stated that highly satisfied to the statement that the leadership is provided by the top management in LIC, conversely, 33.1 percent of development officers as compared to 26.7 percent of sales agents stated satisfied. Whereas 13.6 percent of development officers against 13.3 percent of sales agents stated dissatisfied. It can be concluded from the analysis a mixed opinion prevailed between the development officers and sales agents over satisfied and dissatisfied. The extent of satisfied is greater than dissatisfied. 8) It is found that 41.9 percent of sales agents as compared to 35.9 percent of development officers stated that highly satisfied over the statement that impartial, unbiased and objective towards all sales people in organization. Followed by 28.7 percent of sales 115


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agents against 27.4 percent of development officers stated satisfied. Against the above 19.4 percent of development officers against 14.2 percent of sales agents stated that dissatisfied. It can be concluded from the analysis that sales agents were more satisfied than the development officers over the statement.

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The strong need for higher productivity and performance has been felt in every organization across the world because the situation is very competitive and critical. It has become very difficult to increase production or sales due to tough competition. In this context the sales force and their attitude is utmost important for smooth running of the organization on the basis of the results obtained in the study. It is observed that the sales force attitude have created deep impact on the sales as well as organization. Hence it is concluded that the sales force attitude on sales practice can decide the overall growth of the organization. Suggestions: 1)

As only half of the respondents were highly satisfied and believed that the training

programmes have changed their attitude and improved their knowledge and skills, there should be more support in terms of policy as well as financial from the top level management in the implementation of training programmes. The management may have to arrange for a counsel to the respondents and shall explain the significance of the programmes to improve in the quality of work and prospects of future promotions. 2)

The services of sales force in LIC are not constantly recognized and rewarded for their

performance, as the mixed opinion indicates numerous opportunities are in store for sales agents to show; their worth by virtue of their profession and getting recognition for their right efforts and receive rewards for performance which should be fulcrum of the organizational culture. Obviously, the best performers expect awards and rewards. Even though there are certain policies in LIC regarding this issue, but lacks of effective implementation. The development dimension has two issues. First LIC being a big mobiliser of the funds of the people in the society, and utilize the resources for the development of the society knowledge should be acquired by the development officers about development dimension of the LIC and accord career growth dimension of development officers themselves. Substantial effort is to be made by the LIC to ensure well being of employees. Employee welfare amenities like, quarters, transport medical facilities etc., may be offered in this context. 3)

Leadership style changes from person to person and from organization to organization.

The success of leadership depends on framing and execution of policies. The leadership of the top management in LIC is able to satisfy only a section of the respondents as analysis reveals. Therefore, there is a need to review the existing practices of leadership and identify the grey 117


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areas. An executive development programme for the top brass of the LIC is an inevitable option to reorient the leadership styles and practices and mould the management attune to the needs of the majority of the employees in the organization. 4)

It seems from the finding that an iota dissatisfaction lies with development officers over

the statement impartial unbiased and objective attitude towards prevails over all sales people in the organization. In order to arrest this kind of unwanted attitude of management there should be revisiting of the management policies, procedures and practices in the organization to suit to the needs of those who are dissatisfied. 5)

It stems from the analysis that an iota of dissatisfaction bridles from the greater part of

the development officers on various facets of the study. The analysis also conveys a message that LIC is only paying lot of attention to the sales agents operating at the grassroots than development officers. Hence it is suggested that the public sector undertaking has to initiate a slew of measures in order to contain he discontent with development officers in the direction of training, provision of facilities, welfare, promotion and rewarding Scope for further research The study can be conducted in the related business Insurance industry only, sales force attitude on sales force are to be studied in other types of industries i.e. software, manufacturing and automobile etc. in India because sales force is most important assets to the organization.

118



1) John, George and Weitz, Barton (1989) sales force compensation: an empirical investigation of factors related to use of salary versus incentive compensation” Journal of marketing research Vol. XXVI, February pp 1-14. 2) Sunder Ram korivi (2005) “insurance sector in India – Challenges A head in insurance Industry. The current scenario, the ICFAI University press Hyderabad. Pp. 3-8. 3) Mandell, Milton M. (1955) A company Guide to the selection of salesmen American management Association, Research report No. 24, Newyork. 4) Snmallbone, Douglas J. (1971) “how to motivate and Remunerate your sales force” stapless press, London. Pp 128-138 5) Barjatya TC (1979) “salesman’s motivation’ Indian Journal of Marketing SeptemberOctober, Vol. X (1-2) pp 7-8 6) IRDA Annual Reports 2004- 2013 7) IRDA (Websites) reports.

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TECHNOLOGY INNOVATION EFFICIENCY OF TRADITIONAL INDUSTRIES IN JIANGSU PROVINCE

Li Peng Southeast University, Nanjing, China Hu Han-Hui Southeast University, Nanjing, China

120



This paper uses DEA model to measure the technology innovation efficiency of independent development enterprises, cooperative development enterprises and imitative enterprises based on the survey data of Jiangsu province, and then uses Tobit model to check the influence of corporate ownership, enterprise-scale and so on to technology innovation efficiency. The results showed that: the technology innovation efficiency of traditional industry is only 0.306 which caused by pure technical efficiency. Co-innovation model is the main mode of technological innovation in Jiangsu, but the contribution of independent innovation model of technological innovation efficiency is greater than the co-innovation and imitation. Corporate ownership, technical equipment, location for business innovation have different inhibition efficiency, firm size, the level of R & D institutions, the level of information and technological innovation with the brand right have different positive role in promoting.

121



Under the background of governments have been proposed the “re-industrialization” strategy, the transformation and upgrading of traditional industries is particularly important. Traditional industries are only a timing concept, but not a backward industry, however, it is the basic industry which guarantee the social development and livelihood issues, also is an integral part of the modern new industrial system, it is indispensable to the development of other industries. As an important part of the national economic system, the traditional industries of total economic output, income, total employment and taxation have made a significant contribution, and its potential for growth and innovation opportunities are not inferior to hightech industries(Sun,2013). The importance of traditional industries have been self-evident, then how can we achieve sustainable development of traditional industries? Transformation of traditional industries of economic development mode, adjust the industrial structure traditional industries, innovation-driven endogenous growth model is the key to achieving sustainable development of traditional industries, all of which are inseparable from innovation (Duan and Wang, 2010), because of technical innovation is the primary means which can improve the core competitiveness, but the enterprise is the fundamental driving force of regional economic development. Since 2012, the size of Jiangsu traditional industries maintained a steady and rapid growth, textiles, metallurgy, light industry and building materials industry are the four traditional industries with an output value of 4.75 trillion yuan, moreover more traditional industries are top of the list in China. But the development of traditional industries in Jiangsu province still exist many problems, if it wants to realize rapid development, it need to improve constantly the technological innovation capability of enterprise, because only innovation can maintain the sustainable development and competitiveness of enterprises and promote industrial structure adjustment effectively and improve the efficiency of economic growth and added value of output. Recently, Jiangsu province continued to increase investment around the target to build an innovative province and construct the regional scientific and technological innovation system in order to accelerate the transformation of scientific and technological achievements to the industry and fuel economic growth (Zhu, et al., 2013). So how to apply the scientific method to accurately measure innovation efficiency of enterprises, analyzes the impact of innovation efficiency has become one of the key issues of innovation performance evaluation.

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So far, technological innovation research mainly focus on the following three aspects: First most of papers focus on building the evaluation index system of innovative enterprises (Duan et al., 2014; Ren et al., 2013); Second, using DEA and SFA to evaluate the efficiency of innovation in the view of enterprises or provinces (Li and Zhu,2013; Zhao et al.,2013; Zhou and Zhao,2014; Niu and Zhang,2012); Thirdly, dependence on corporate research about technological innovation(Zhang and Luo,2013; Wang et al.,2010). Taken together, the current evaluation system for research innovation is very rich, but it is scare about evaluation for innovation efficiency, according to business innovation research model to study the efficiency of enterprise innovation is even more scarce based on research data. In order to check the efficiency of traditional industries’ innovation efficiency in Jiangsu province, this paper measures the innovation efficiency of traditional industries in Jiangsu province.

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This paper uses BCC model to measure the technological innovation efficiency of traditional industries in Jiangsu Province, for some decision-making unit (DMU), we can translate the BCC model to linear programming problem. s  max h  1 u r y rj  cj j  r  m  s .t .  i x ij  1  i 1 s m  u r y rj   i x ij  c j  0 r  1 i 1  i ,u r  0; i  1,2,  m; r  1,2,  s; j  1,2,  n

(1)

hj is the relative value of technological innovation efficiency for each DMU; x ij and y rj are inputs and outputs for j DMU;

i and u r are weighting coefficient corresponding to

x ij and y rj ; c j is the scale efficiency value of DMU, when c j*  0 , it means DMU is * * increasing returns to scale, c j  0 means constant returns to scale, c j  0 means decreasing

returns to scale. According to duality principle, we can translate model (1) to linear programming problem named model (2): T  min [ j - (e s   e T s  )]  n s .t . j x j  s    j x j 0   j 1 n   （2）   j y j  s  y j 0 j  1  n   j  1 j  1  e  (1, 1)T  E m ; e  (1, 1)T  E s ; j ,s  ,s   0 

In model (2),

j is the value of innovation efficiency for DMU;  is archimedes infinitesimal;

s  and s  are slack variable.

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Data and descriptive statistics The data used in the article is from the renovation and upgrading of the questionnaire by relevant departments of Jiangsu province in 2013. Total of 1390 questionnaires, 1302 were recovered, 1237 were effective. This article focuses on the influence of company’s product development model to the efficiency of enterprise innovation. The sample data provides the survey to the development mode of enterprises, the choice of answers include: (1) Building a research and development organization based in enterprise; (2) Building a research and development organization based in universities or research institutes; (3) Purchase technology; (4) Independent innovation; (5)Commission processing; (6)others. We named (1) and (2) cooperate innovation, (3) is imitative enterprises, (5) is not belong to innovative enterprises, (5) and (6) named others. Table 1 gives the basic description of traditional industries in Jiangsu province, including enterprise scale, corporate ownership and product development mode. In the view of enterprise scale, most sample enterprises are small and medium-sized enterprises (SMEs), major industry accounted for 11.08%, micro-enterprise is the least. Though in the corporate ownership sense, shareholding economy and limited liability company (LLC) accounted for 53.27%; private individual enterprise and foreign and Hong Kong, Macao and Taiwan economy accounted for 28.62%, 11.16%; state-owned business, collective economics and joint ventures accounted for 1.46%, 0.4% and 0.32%; others accounted for 4.77%. Cooperation innovation is the major development mode, independent innovation and imitate enterprises accounted for 22.64% and 11.08%. Obviously, cooperation innovation is the major development mode, did not carry out innovative enterprises accounted for 38.57%, showing that the traditional industry enterprises in Jiangsu Province innovation or slightly inadequate. Results First, we use DEA model to calculate the technological innovation of traditional industries, the results are shown in table 2. The technology innovation efficiency of traditional industry is only 0.306 which caused by pure technical efficiency. Co-innovation model is the main mode of technological innovation in Jiangsu, but the contribution of independent innovation model of technological innovation efficiency is greater than the co-innovation and imitation. 125


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In order to accurately estimate the impact of innovation and imitation of business efficiency, but also need to consider other factors that affect the efficiency of technological innovation. Because technological innovation activities of enterprises is a dynamic ecosystem implemented by the agency and the impact of technological innovation activities, these factors are interactional (Lv, 2011). Based on the results of the existing literatures (Bai, 2011; WU and Mi, 2011; Li and Zhang, 2012), this paper chooses these factors: corporate ownership, enterprise scale, research and development institution, level of information, technical equipment level and brand. For each factors, we choose a standard respectively, they are microenterprise, no research and development institutions, general equipment level, no information level, Suzhong, no brand, other factors are virtual variable, 0 and 1. The results are shown in table 3. Among the factors, the independent innovation, cooperation innovation and imitation coefficients are negative, in addition to independent innovation, the other two innovative modes are statistical significant in the level of 10%. This means, with respect to the product by processing and other types of enterprises, the influence of independent innovation, cooperation innovation and imitation enterprises to technological innovation efficiency is negative, but cooperation has more inhibition than others. Due to the impact on the efficiency of development model, we will added control variables step by step based on model (1), so we can get model (2) to model (8). With the increase of control variables, the influence of independent innovation to efficiency is from negative role to positive effect, in the mean while cooperation innovation and imitation have little negative effect, but they are not significant at 90% level. Individual private Bss, joint stock and limited liability company, foreign and Hong Kong, Macao and Taiwan, state-owned business and others have negative influence to technological innovation efficiency, and they are significant at 90% level. This indicates that relative to the collective enterprises, other ownership types of businesses all have a significant negative impact on the efficiency of technological innovation, the private individual negative effect is the largest in all enterprises. It has less and less negative effect with the increase of control variables, foreign and Hong Kong, Macao and Taiwan, state-owned business and others are not significant at 90% level, but private individual, joint stock and limited liability company have a downward trend at 90% level. Enterprise scale have positive influence to innovation efficiency, with the increase of control variables, positive effect is more and more strong. This indicates that relative to the micro-enterprises, large, 126


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medium and small enterprises have positive influence to innovation efficiency, especially, the large enterprises have the biggest influence. The impact of innovation R&D institutions are relatively large, different levels of R&D institutions are not the same influence to innovation efficiency, internal R&D institutions have the greatest contribution to innovation efficiency. With the increase of control variables, R&D institutions began to inhibit the innovation efficiency, but the degree of inhibition diminishing. The impact of technology and equipment level of technological innovation is great, the international advanced or leading, the domestic impact of advanced technological innovation efficiency is negative, and can by more than 5% confidence level test. The level of information, the impact of location on technological innovation efficiency are negatively affecting the application of information technology equipment for innovation efficiency in 1% statistical significant level, indicating that there is no information with respect to the business in terms of equipment, information technology its impact on innovation efficiency is significantly negative. Its own brand of enterprise technology innovation efficiency impact is positive, but not significant, indicating that relative to the OEM production, the impact of own-brand business innovation efficiency is not obvious.

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Based on the data of traditional manufacture of Jiangsu province in 2013, this paper research the basic characteristics of traditional manufacture of Jiangsu province from three aspects: Firm size, firm ownership and product development model. By analyzing the sample data, Joint-stock and limited liability companies is the mainly ownership mode and the cooperative innovation development model is the mainstream. Because of the lack of pure technology efficiency, by using the Data envelopment analysis, the innovation efficiency of Jiangsu Province is inefficient, only 0.306. The efficiency of independent innovative enterprises is higher than others. We use Tobit model to research the effect of corporate ownership, firm size and other variables on the innovation efficiency.

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Sun X(2013). An alternative logic of the hi-tech transformation of traditional industries: a case study of technical change in vehicle diesel engine. Studies in Science of Science,31(7):998-1005. Duan Y.L. & Wang R.D.(2010). Empirical analysis of the medium-sized industrial enterprises' technological innovation efficiency. Economic Issues, 8,109-112. Zhu X.Z., Shi S.W. & Feng Y.(2013).Evaluation of the innovation efficiencies from the valuechain perspective: evidence from Jiangsu province. Management Review,25(10):120-128. Duan S., Jiang T.W. & Zhang J.Y.(2014). Research on technological innovation evaluation of regional enterprises: analysis of technological innovation evaluation indicators for Zhejiang’s enterprises. China Soft Science Magazine,5, 85-96. Ren Y., Lv Y.B. & Liu J.S. et al.(2013). Regional evaluation and distribution characteristics studies on technological innovation capability of enterprises. Forum On Science And Technology In China,5,110-117. Li X.S. & Zhu J.P.(2013).Innovation efficiency and convergence research on China’s provincial industrial enterprises. Journal of Applied Statistics and Management, 32（6）:1090-1099. Zhao S.K.,Yu H.Q.& Gong S.L.(2013). The innovation efficiency of hi-tech enterprises in Jilin Province based on DEA method. Science Research Management,34(2):36-44. Zhou J.& Zhao M.(2014). Research on innovation efficiency and influencing factors of national high-tech industrial development zones. Science and Technology Management Research, 10,1-6. Niu Z.D. & Zhang Q.X.(2012). An analysis of technological innovation efficiency of manufacturing equipment industries in China. The Journal of Quantitative & Technical Economics,11,51-57. Zhang C.D. & Luo Y.F.(2013). Tech-innovation dependence index of innovation oriented enterprises and its application: how to get the top 100 of IOEs. Science & Technology Progress and Police,30(3):112-116. Wang Q.Y., Zhang J.J & Zhang C.D.(2010). A study on the utility patent efficiency of R&D expenditure of China innovative enterprises. Science of Science and Management of S. & T.,31(11):5-12. 129


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Feng Y. & Teng J.J.(2010). Evaluation on technology innovation efficiency of high－tech industry in Jiangsu Province. Science of Science and Management of S. & T,8,107-112. Xie X.M. & Zhao Y.(2012). Technology innovation efficiency of regions: an empirical study on Shanghai. Forum On Science And Technology In China,5,74-78. Lv Y.H.(2011).Elements models and evolution of technological innovation ecosystems. Technoeconomics and Management Research, 9,25-28. Bai J.H.(2011). Firm size, market structure and innovation efficiency: evidence from high-tech industry. Economic Issues in China, 5,65-78. Wu Y.B. & Mi Z.Y.(2011). Innovation, imitation and technical efficiency in Chinese non stateowned manufacturing enterprises. Social Sciences In China,4,77-94. Li Z.F.& Zhang M.S.(2012).The impact of government subsidy to technological programs on innovation performance of enterprise: evidence from 95 Chinese innovative enterprises. China Soft Science Magazine,12,123-132. Wu Y.B.(2014). Innovative capacities of different ownership enterprises. Industrial Economics Research,2,53-64. Pang R.Z., Xue N.& Ding M.L.(2012). Study on Innovation Efficiency and Influence Factors of ChinaPilot Innovative Enterprises: Based on Unbalance Panel Data ( 2006 － 2010) from China Pilot Innovative Enterprises. Industrial Economics Research,5,1-11.

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Table 1 Tab.1 Basic Characteristics of Traditional Industries Sample Enterprises in Jiangsu Province Quantity

Ratio (%）

major industry

137

11.08%

medium-sized enterprise

562

45.43%

small enterprise

521

42.12%

microenterprise

17

1.37%

private individual enterprises

354

28.62%

Joint-stock and limited liability company

659

53.27%

foreign investment enterprises and Hong Kong, Macao and Taiwan

138

state-owned business

18

1.46%

collective economics

5

0.40%

joint ventures

4

0.32%

others

59

4.77%

independent innovation

280

22.64%

cooperation innovation

480

38.80%

imitation

137

11.08%

others

340

27.49%

Characteristic

Classification

Enterprise Scale

Corporate Ownership

Product Development Mode

131

11.16%


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Table 2 Tab.2 Efficiency of Different Types of Enterprises technical pure technical scale efficiency efficiency efficiency All enterprises

0.306

0.309

0.991


0.361

0.429

0.844


0.285

0.285

1.000

imitation

0.332

0.393

0.865

Others

0.380

0.393

0.982

private individual enterprises

0.306

0.370

0.816

Joint-stock and limited liability company

0.242

0.276

0.893

foreign investment enterprises and Hong Kong, Macao and Taiwan

0.403

0.484

0.876


0.448

0.743

0.611

collective economics

0.857

1.000

0.857

—

—

—

0.323

0.41

0.894

major industry

0.339

0.357

0.968


0.296

0.299

0.990

small enterprise

0.216

0.291

0.753

microenterprise

0.697

0.813

0.809

product developing mode

pattern of ownership

joint ventures others enterprise scale

132

Table 3 Tab.3 The Results of Tobit Model

constant term



imitation

model（1）

model（2）

model（3）

model（4）

model（5）

model（6）

model（7）

model（8）

0.392***

0.758***

0.713***

0.309

0.759***

0.654**

0.789***

0.770***

(19.15)

(3.95)

(3.30)

(1.11)

(3.58)

(2.00)

(3.76)

(3.65)

-0.024

-0.026

-0.028

0.019

0.026

0.024

0.022

0.039

(-0.86)

(-0.93)

(-0.98)

(0.63)

(0.89)

(0.83)

(0.77)

(1.21)

-0.105***

-0.105***

-0.108***

-0.045

-0.031

-0.030

-0.033

-0.017

(-4.31)

(-4.31)

(-4.36)

(-1.60)

(-1.10)

(-1.09)

(-1.19)

(-0.55)

-0.055*

-0.055*

-0.056*

-0.019

-0.006

-0.006

-0.004

0.013

(-1.68)

(-1.67)

(-1.71)

(-0.58)

(-0.17)

(-0.19)

(-0.12)

(0.36)

-0.393**

-0.396**

-0.327*

-0.372**

-0.338*

-0.335*

-0.340*

(-2.05)

(-2.07)

(-1.74)

(-1.99)

(-1.83)

(-1.82)

(-1.84)

-0.360*

-0.364*

-0.289

-0.335*

-0.303*

-0.302*

-0.305*

(-1.88)

(-1.90)

(-1.54)

(-1.79)

(-1.64)

(-1.64)

(-1.65)

-0.335*

-0.340*

-0.277

-0.328*

-0.292

-0.287

-0.292

(-1.73)

(-1.76)

(-1.46)

(-1.74)

(-1.57)

(-1.54)

(-1.56)

-0.357*

-0.361*

-0.288

-0.334*

-0.295

-0.288

-0.291

Individual private Bss

Joint stock and limited liability company

Foreign and Hong Kong, Macao and Taiwan


133

others

major industry


small enterprise

(-1.77)

(-1.79)

(-1.45)

(-1.69)

(-1.51)

(-1.48)

(-1.49)

-0.350*

-0.352*

-0.291

-0.335*

-0.304*

-0.297

-0.298

(-1.78)

(-1.80)

(-1.52)

(-1.75)

(-1.60)

(-1.57)

(-1.58)

0.088

0.150

0.173*

0.176*

0.175*

0.173*

(0.84)

(1.46)

(1.69)

(1.73)

(1.72)

(1.70)

0.041

0.086

0.099

0.105

0.099

0.096

(0.41)

(0.86)

(0.99)

(1.06)

(0.99)

(0.97)

0.053

0.068

0.074

0.081

0.070

0.066

(0.53)

(0.69)

(0.75)

(0.82)

(0.72)

(0.68)

0.187

-0.143***

-0.115***

-0.118***

-0.113***

(1.04)

(-3.71)

(-2.93)

(-3.03)

(-2.88)

0.223*

-0.117***

-0.095***

-0.100***

-0.093**

(1.23)

(-3.24)

(-2.62)

(-2.75)

(-2.54)

0.293**

-0.055*

-0.035

-0.037

-0.031

(1.63)

(-1.72)

(-1.07)

(-1.16)

(-0.96)

-0.116***

-0.090***

-0.093***

-0.092***

(-3.56)

(-2.73)

(-2.80)

(-2.77)

-0.079***

-0.062**

-0.066**

-0.064**

(-2.63)

(-2.07)

(-2.20)

(-2.15)

province

city

inner-enterprise

Leading and advanced

advanced home

134

apply

0.014

-0.089***

-0.087***

(0.05)

(-3.46)

(-3.39)

-0.036*

-0.034*

(-1.79)

(-1.67)

-0.035

-0.034

(-1.51)

(-1.50)

Sunan

Suzhong

private brand

0.001 (0.02)

R2 Log likelihood

0.0806

0.1096

0.1198

0.2185

0.2488

0.2931

0.3063

0.3122

-133.200

-129.000

-127.520

-113.220

-108.843

-102.419

-100.513

-99.656

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FACTORS CONTRIBUTING TO SUCCESSFUL PUBLIC PRIVATE PARTNERSHIPS (PPPs) IN ROAD INFRASTRUCTURE INVESTMENT IN VIETNAM: STAKEHOLDER’S PERSPECTIVE

Do Trung Nguyen Griffith University, Australia Christine Smith Griffith University, Australia Matthew Manning Australian National University, Australia Duc-Tho Nguyen Griffith University, Australia

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In order to investigate the potential for adoption of Public Private Partnerships (PPPs) in road infrastructure in Vietnam, this study aims to identify, categorize and analyze various critical success factors (CSFs) for road projects that are procured through PPPs. The study follows a systematic research approach which includes literature reviews, case studies, and questionnaire survey as well as in-depth interviews with PPP experts and stakeholders in Vietnam regarding CSFs for PPPs. CSF groups derived from the published literature and a set of semi-structured interviews comprise: Prevailing Environment, Project Participants, Project Implementability, Effective Procurement, Sound Financial Package and Government Support. A series of questionnaire survey packages are used to collect information from relevant people in the public and private sector in the road infrastructure industry in Vietnam. The responses are analyzed using statistical packages and the Analytical Hierarchy Process (AHP) approach. Conclusions and recommendations are then drawn on the basis of these findings. The research is potentially of value to future PPP projects in the field of road infrastructure investment in Vietnam and other developing countries.

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Since 1986, Vietnam has gradually opened up its markets through an economic reform campaign, “DoiMoi”, which marked the beginning of its transition from a centrally planned economy to a socialist-oriented market economy (Beresford, 2008). Vietnam’s economy has integrated well into the world economy and experienced very strong development and achievements over the past two decades (Unden, 2007). This development has resulted in calls for more and better public infrastructure including road transport infrastructure (World Bank, 2006a). TheGlobal Competitiveness Report 2012-2013 of World Economic Forum (WEF) revealed that he slow development, lack of uniformity, and poor connectivity of Vietnamese transport infrastructure is currently generating bottlenecks to the development of the country (World Economic Forum, 2012-2013). In 2013, the ranking of the quality of road infrastructure of Vietnam saw it ranked 120 out of the 144 countries and territories ranked, down 18 places from 2009 (102/144). This is the lowest positionachieved sinceVietnam became included in the WEF ranking. The demand for road infrastructure far exceeds the financial resources available to the Vietnamese government. This gives rise to the search for effective investment solutions and as a result Public-Private Partnerships (PPPs) has become one of the preferred options(World Bank, 2006b).Indeed this option is becoming increasingly popular amongst countries in the region and is expected to play a major role in future infrastructure investment in Vietnam. According to the World Bank’s Private Participation in Infrastructure (PPI) Project Database, from 1994 to 2012 there were 81 projects being implemented under the PPP model with total committed capital of approximately $ 11.3 billion, ratio of investment in transport sector only about 9 percent. PPPs have been adopted and implemented in road transport infrastructure in Vietnam since early 1990s through the Build-Operate-Transfer (BOT) financing mechanism. BOT and other PPP mechanisms have been increasing in number and scope over the past twenty years however the progress in this area has been significantly constrained for a variety of reasons. As a result, there is an urgent need to explore the Critical success factors (CSFs) necessary to have a viable ongoing PPP road project.

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Critical Success Factors (CSFs) The idea of CSFs was first proposed by Daniel(1961)as a business guidance tool. This concept was extended by Rockart (1982)and it has been widely used to facilitate the execution of strategies in the business management and project implementation areas. The definition of a CSF based on Rockart’s work is: "Those few key areas of activities in which favorable results are absolutely necessary for a particular manager to reach his or her goals"(p.4).CSF’s are strongly related to strategic goals or mission of a business or project. CSF research related to project success and implementation commenced in the 1970s. A focus on CSFs involves attempts to make explicit those few key areas that dictate managerial success. They encourage ongoing monitoring of the fundamental issues that need to be maintained throughout the project life cycle to ensure the successful and effective project implementation.

Ashley and Jaselskis (1987)identified 46 factors contributing to project success and grouped them into five areas including: (1) management, organization and communication, (2) scope and planning, (3) controls, (4) environmental, economic, political, and social, and (5) technical. Based on a study of eight projects with average performance and eight outstanding projects, they found significant differences between the average and the outstanding projects in six factors including planning effort in construction and design, project manager goal commitment, technical capabilities, scope and work definition, and control systems. Chan, et al. (2004)conducted a study on international construction projects and points out ten success factors that include: (1) establishing a conflict resolution strategy, (2) commitment, (3)monitoring of the partnering process, (4) clear identification of responsibilities, (5) mutual trust, (6) willingness to improve processes, (7) early partnering implementation, (8) sharing resources, (9) innovation, and (10) subcontractor involvement. Tang, et al. (2006) also identifies ten CSF’s for project success: (1) mutual objectives, (2) commitment, (3) equity, (4) trust, (5) attitude, (6) openness and effective communication, (7) teambuilding, (8) problem resolution, (9) timely responsiveness and (10) incentives. Nguyen, et al. (2004) identified five critical success factors among twenty factors contributing to projecttsuccess: (1) competent project manager, (2) providing adequate financial resources to the end of the project, (3) competent and multidisciplinary project team, (4) commitment to the project, and (5) access to resources.

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None of these studies involved a focus on either road transport infrastructure projects in general or public private partnership projects specifically. While some CSFs may be relevant to all projects, others may only be relevant to these particular contexts. Critical Success Factors for PPPs With the increasing popularity of adopting PPP projects around the world, research in this field has also become more important to both researchers and practitioners. A comprehensive literature review on PPP infrastructure projects was previously conducted by Ke, et al. (2009).PPP success factors were argued to be able to be grouped under 3 main headings: “Risk”, “Procurement” and “Finance”. Seven more specific categories were derived from within these broad areas including (a) investment environment, (b) procurement, (c) economic viability; (d) financial package; (e) risk management; (f) governance issue; and (g) integration. The techniques employed to rate the importance of these success factors vary from quantitative to qualitative approaches however consensus on the best approach to be employed for identifying CSFs for a particular are of infrastructure investment is lacking to date. According to the ADB Handbook to achieve success in the PPP area governments need to implement a series of reforms relating to this form of investment (Asia Development Bank, 2008). The critical success factors identified in this handbook comprise: (a) complete legal framework(b) regulatory policy support (Zhang, et al., 1998), (c) stable macroeconomic environment (Dailami and Klein, 1997), financial market development (Akintoye, et al., 2001), a large select qualified private corporations (Tiong, 1996), implementation of research feasibility/cost-benefit analysis, risk allocation performance (Grant, 1996), and build a competitive bidding process (Kopp, 1997). Research has been conducted focusing on PPP projects in form of BOT model.Tiong(1996)explore CSFs for private contractors in competitive tendering and negotiation, while Qiao, et al. (2001)identifiedeight CSFs related to BOT projects in China, namely: stable political and economic situation; appropriate project identification; attractive financial package; acceptable toll/tariff levels; reasonable risk allocation; selection of suitable subcontractors; management control; and technology transfer. For an Australian sports stadium project, Jefferie, et al. (2002) identified the CSFs as: solid consortium with a wealth of expertise; considerable experience; high profile and a good reputation; an efficient approval process that assisted the stakeholders in a very tight timeframe; and innovation in 140


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the financing methods of the consortium. In order to investigate the potential for adopting PPPs in China, Chan et al. (2010) sought views from Chinese experts collected via an empirical questionnaire survey. The respondents were invited to rate a total of 18 CSFs that contribute to the success of PPP projects as gleaned from the contemporary literature. The results of the survey were analyzed using the factor analysis technique. The findings suggested that the 18 CSFs could be grouped into five underlying factors including: (1) stable macroeconomic environment; (2) shared responsibility between public and private sectors; (3) transparent and efficient procurement process; (4) stable political and social environment; and (5) judicious government control. Sound economic policy (Ismail, 2013), available financing market(Akintoye, et al., 2001), strong and good private consortium (Birnie, 1999;Tiong, 1996), feasibility study/cost-benefit analysis (Brodie, 1995) and effective risk allocation (Grant, 1996) are also mentioned as critical factors for the success of PPP procurement projects in the literature reviewed for this study.

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The main purpose of this study was the identification and prioritizing the CSFs for PPP road infrastructure development projects in Vietnam. A version of the Analytical Hierarchy Process (AHP) method was employed. AHP has been successfully applied in many construction-industry studies because it is a useful tool in dealing with multi-criteria decisionmaking problems. Anagnostopoulos and Vavatsikos (2006) propose the use of AHP for supporting public authorities in assessing construction projects’ contractor prequalification. Perera and Sutrisna (2010) usedAHP in the analysisof delay claims in construction projects in the UAE.Nandi, et al. (2011) used AHP to analyze and assess project viability during the bidding stage of a construction project. Pakaeresht and Asagari (2012) used AHP to identify the CSFs in construction projects of Pars Garma Company. Gudiene, et al. (2014) proposes the use of AHP as a tool to rank CSFs for construction projects in Lithuania. Nevertheless, little prior research has been conducted aimed at designing a formal method for the assessment of the relative importance of different CSFs for PPPs projects in a particular area of infrastructure investment for a developing country like Vietnam. Outline of the AHP The AHP method was developed by Saaty (1980, 1990) and was designed to evaluate the preferred alternative and identify the relative significance of the evaluation elements in this selection process based on multi-criteria decision making (MCDM). AHP is considered a powerful and flexible method that uses a hierarchical structure to solve a complex decision problem by decomposing it into several smaller sub-problems. In the AHP method, both qualitative (historical data) and quantitative data (subjective judgment of the decision maker) can be assessed in a balanced way – with the identification of CSFs made by the calculation of their relative weights through pairwise comparison of these factors by respondents through questionnaires administered for each level of the hierarchy that has been developed to analyze the problem. Applying the AHP to survey research questionnaires allows respondents' perceptions to be clarified more precisely than by traditional methods(Sato, 2003).One of the other main benefits of the AHP is that it gives coherence to, and allows the ranking of, experts’ knowledge about competing alternatives with multiple attributes. It is less useful in areas where knowledge is limited (Manning et al., 2013). The AHP method also provides a means of checking the consistency of the various weights employed thus reducing bias in the overall decision-making process (Saaty, 1994; Manning, 2008). 142


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Population (Survey Participant) Characteristics In order to use AHP method for prioritizing, there is a need to gather and ask the expert’s opinion relating to CSFs based on pair-wise comparisons of various levels of CSFs. In our study a survey package was sent to 65 target respondents: 32 in public sector, 25 in private sector and 8 in the banking and academic community. See Figure1. These respondents had at least 5 years of experience and were selected as they had substantial knowledge relevant to PPPs in the road transport infrastructure area. See Figures 2 and 3. Road transport infrastructure projects involve a variety of stakeholders such as government agencies, private companies, consultant, construction companies, academic staff, financial institutions, insurance companies, users, community, etc. Each of these stakeholders has different objectives which therefore influence their perceptions on the critical success factors to these kinds of projects. In other words, different stakeholders may have different weightings relating to the relative importance of CSFs which can be identified and explored further through the use of the AHP approach. It is important to understand these differences as well as common agreed understandings in order to put together successful PPP arrangements.

Figure 1: Background of the questionnaire respondents Academic 8%

Bank 5%

Public 49% Private 38%

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Figure 2: Years of the survey respondents' experience in road infrastructure

38%

35%

Percentage

40% 20% 20%

6%

0% 5

6 - 10 11 - 15 Years of experience

> 15

Figure 3: Number of PPP road projects with which the survey respondents have been involved 40%

35%

35% Percentage

30%

25%

25%

18%

20% 15%

12%

9%

10% 5% 0% 1

2

3

4

>4

Number of Projects

Steps

in

AHP

Development

for

this

Study

The AHP employed in this study involved four steps:

(1). Through literature review and following personal interviews of experts and practitioners in the PPP transport infrastructure stakeholder groups in Vietnam, certain factors were initially identified which were considered to be critical for the success of PPP projects.

(2) Developing and building the hierarchy structure for analyzing PPP project success saw the 42 success factors identified in step 1 placed in a tree structure which comprised 4 levels. 144


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See Figure 4. The top level of the AHP hierarchy, referred to as the overall objective consists of a single goal, namely the success of a PPP related to road infrastructure investment. The elements that affect the goal are called criteria or factors. These criteria are placed at particular levels of the hierarchy such that at any particular level these criteria are mutually exclusive and their relative priorities are independent of the elements positioned below them in the hierarchy. At the 2nd level in our hierarchy the PPP road project success factors were classified into six groups, namely: Prevailing Environment, Project Participants, Project Implementability, Effective Procurement, Sound Financial Package and Government Support. At the 3rd level of the hierarchy four of these groups were recognized as containing meaningful subgroups. For example Project Implementability was seen as having 3 component subgroups relating to project characteristics, control and project planning, while Effective Procurement also had 3 component subgroups relating to bidding process, management and contractual arrangements. At the 4th level of the hierarchy each of the 42 success factors (or attributes) identified in step 1 were allocated to one and only one level 3 subgroup.

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Figure 4: The Hierarchical Tree of the CSFs for PPP road projects in Vietnam Level 1

Level 2

Level 3

Level 4

Socio-legal and political environment

CSF#1, CSF#2, CSF#3

Favorable Economic Conditions

CSF#4, CSF#5

Owner

CSF#6, CSF#7, CSF#8

Project Manager

CSF#9, CSF#10

Consult/Contract

CSF#11, CSF#12, CSF#13

Project Characteristics

CSF#14, CSF#15, CSF#16, CSF#17, CSF#18, CSF#19

Control System


Project Planning


Bidding Process

CSF#26, CSF#27, CSF#28, CSF#29

Management


Contractual Arrangement

CSF#34, CSF#35

Sound Financial Package

Sound Financial Package


Government Support

Government Support


Prevailing Environment

Project Participants

Critical Success Factors for PPPs transport infrastructure investment in Vietnam

Project Implementation

Effective Procurement

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Legend for the level 4 attributes CSF#1

Political support

CSF#2

Public Awareness and support

CSF#22 Adherence to Schedules, budget, Quality, safety and Environmental Controls

CSF#3

Adequate legal and regulatory framework

CSF#23 Assessment of the costs and benefits

CSF#4

Stable macroeconomic conditions

CSF#24 Accurate initial cost estimates

CSF#5

Sound economic policy

CSF#26 Transparency in procurement process

CSF#6

Strong private consortium

CSF#27 Competitive procurement process

CSF#7

Partnering experiences and skills

CSF#28 Bidding with international standards

CSF#8

Commitment to establishing budget and schedule

CSF# 9

Project manager competency and authority

CSF#29 Thorough and realistic assessment of the cost and benefits CSF#30 Clear project brief and client requirements

CSF#10 Project manager commitment

CSF#31 Risk identification

CSF#11 Capability of contractor/Consultant

CSF#32 Communication and coordination

CSF#12 Commitment of Contractor/Consultant

CSF#33 Absence of bureaucracy

CSF#13 Experience of Contractor/Consultant

CSF#34 Appropriate Risk identification

CSF#14 Technical feasibility

CSF#35 Good concession design

CSF#15 Multi - Benefit objective

CSF#36 Availability of a suitable and adequate financial market

CSF#16 Technical innovation and technology transfer

CSF#37 Appropriate funding mechanisms

CSF#17 Economic viability

CSF#38 Financial Capacity / Ability of the Parties

CSF#18 Right Project Identification

CSF#39 Effective PPP unit/cell

CSF#19 Appropriate risk allocation and risk sharing

CSF#40 Government involvement in providing guarantee

CSF#20 A strong Monitoring and Evaluation(M&E) system for theprojects implemented

CSF#41 Incentives mechanism CSF#42Well-organized and committed public agency

CSF#21 Private partner capacity appraisal 147


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(3) With the hierarchy tree developed based on AHP methodology, a questionnaire survey was implemented within the various stakeholder groups to collect pair-wise comparison data relating to each level of the hierarchy. Each respondent was asked to rate the relative importance of elements at a given level of the hierarchy in contributing to the components at the next highest level of the hierarchy. For example, pairwise comparisons were made relating to how important the groups of factors (level 2 of the hierarchy) were to the overall success of the PPP project (level 1 of the hierarchy), then how important the subgroups of factors (level 3 of the hierarchy) were to the particular group (level 2 of the hierarchy) to which they belong, and finally how important the CSFs (level 4 of the hierarchy) were to the particular sub-group (level 3 of the hierarchy) to which they belong. Following the Saaty approach these pairwise comparisons were made by respondents using the widely accepted nine-point scale as indicated in Table 1. Table 1.Measurement scales

Intensity of importance 1

Definition

Explanation

Equal importance

Two elements are of equal importance

3

Weak importance

5

Essential or strong importance

Experience and judgment slightly favour one element over another Experience and judgment strongly favour one element over another

7

Demonstrated or very strong importance Absolute importance

An element is strongly favoured and its dominance is demonstrated in practice The evidence favouring one element over another is of the highest possible affirmation

Intermediate values

When compromise is needed

9 2, 4, 6, 8

Source: Saaty (1990).

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(4) Estimating the weights of the factors was completed by using the eigenvalue method as developed by Saaty (2008). Aggregating the relative weights of the decision elements allows us to provide a set of ratings for the decision alternatives. Groups, Subgroups or Factors at any given level of the hierarchy, namely pi and pj(where i,j=1,2,….n and n is the number of groups, subgroups or factors), are compared with each other in pairs to determine which one is more important. The nine- point scale is employed to all possible pairwise comparisons to be summarized in matrix of dimension n x n (Table 2). Table 2. Example of pairwise comparisons matrix of factors (p1, p2, p3) p1 p1 p2 p3

p2

1 3 1/5

1/3 1 1/7

p3 5 7 1

Source: Saaty (1980).

These comparisons produce a square matrix: P =║ pij║

(i,j=1,2,..n)

The value of an elementpij in this matrix can be 1 if both compared factors are rated by respondents as “equal importance” and p ij can have a value 9 when factor pi is “absolutely more important” than element pj. This is a symmetric matrix where, by definition,pij=1/pji. The weights in Saaty’s AHP method - the vector ω - are normalized components of aneigenvector corresponding to the largest eigenvalueλmax of the matrix P 149


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Pω= λmaxω Where λmax: largest eigenvalue of P and ω: the eigenvector associated to λmax. When conducting our survey related to the road infrastructure industry in Vietnam, all experts’ opinions were considered to be of the same importance, we used the geometric mean as the aggregation method for the calculation of the average weights. When processing our survey results, we needed to check the consistency of our respondent’s answers. The consistency degree of the specific ratings of each expert is determined by the consistency index C.I. and the corresponding consistency ratio C.R. (Saaty,1980). The consistency index is defined as the ratio:

𝐶. 𝐼 =

λ max – n 𝑛−1

Where n is the number of the factors compared. Calculating a consistency ratio (CR), which assists us in determining the consistency of our respondent’s answers, requires dividing CI by a random consistency index (RI). Saaty (1980) defines a random index (RI)as ‘‘…the consistency index of a randomly generated reciprocal matrix from the scale 1 to 9, with reciprocals forced’’ (p. 21). Thus:

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𝐶. 𝑅 =

𝐶. 𝐼 𝑅. 𝐼

The matrix is consistent if the consistency ratio C.R.is smaller than 0.1 (Saaty 1980). Our respondent’s ratings were consistent for all sets of pairwise comparisons such that we did not need to reject any observations.

A routine developed using Microsoft Excel 2010 was used to compute the normalized and unique priority weights for the various levels of the hierarchy depicted in Figure 4. The results of the data analysis determine the relative importance of the individual groups, subgroups and success factors that are the focus of study

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Results Table 3: CSFs ranking with local and global weights

Level 1: Goal 1 CSFs for PPPs Road infrastructure investment in Vietnam

Level 2: Groups (x6) 2 Prevailing Environment

Project Participants

Project Implementability

Group Weights 3 0.1754(3)

0.0598(6)

0.3216(1)

Level 3: Subgroups (x13) 4 Stable Political and Social environment Favourable Economic Conditions Owner

Subgroup Weights 5 0.5934(1)

0.4062(2)

0.7247(1)

Project Manager

0.1481(2)

Contractor/Cons ultant

0.1272(3)

Project Characteristics

0.6425(1)

Control

0.1329(3)

Project Planning

0.2245(2)

152

Level 4: CSFs (x42)

CSF Weights

Global Weight

6 Political support Public Awareness and support Adequate legal and regulatory framework Stable macroeconomic conditions Sound economic policy

7 0.6011(1) 0.1566(3) 0.2423(2) 0.5765(1) 0.423(2)

8 0.0626(4) 0.0163(20) 0.0252(16) 0.0411(8) 0.0301(12)

Strong private consortium Partnering experiences and skills Commitment to establishing budget and schedule Project manager competency and authority Project manager commitment Capability of contractor/Consultant Commitment of Contractor/Consultant Experience of Contractor/Consultant Project Technical feasibility Multi - Benefit objective Technical innovation and technology transfer Project Economic viability Right Project Identification Appropriate risk allocation and risk sharing A strong Monitoring and Evaluation(M&E) system for the projects implemented Private partner capacity appraisal Adherence to Schedules, budget, Quality, safety and Environmental Controls Assessment of the costs and benefits

0.6563(1) 0.1853(2) 0.1585(3)

0.0284(13) 0.0080(28) 0.0069(31)

0.8231(1) 0.1766(2) 0.6701(1) 0.1059(3) 0.224(2) 0.0651(5) 0.239(2) 0.0419(6) 0.3668(1) 0.1521(3) 0.1341(4) 0.1669(3)

0.0073(29) 0.0016(41) 0.0051(35) 0.0008(42) 0.0017(40) 0.0135(23) 0.0494(6) 0.0087(27) 0.0758(2) 0.0314(11) 0.0277(14) 0.0071(30)

0.3783(2) 0.4547(1)

0.0162(21) 0.0194(18)

0.1517(3)

0.0110(25)

Accurate initial cost estimates Good goals design

0.3682(2) 0.4802(1)

0.0266(15) 0.0347(9)


Level 1: Goal 1

Level 2: Groups (x6) 2 Effective Procurement

Sound financial package

Government support

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Group Weights 3 0.0738(5)

0.2347(2)

0.1347(4)

Level 3: Subgroups (x13) 4 Bidding Process

Subgroup Weights

Level 4: CSFs (x42)

CSF Weights

Global Weight

5 0.6225(1)

6 Transparency in procurement process Competitive procurement process Bidding with international standards Thorough and realistic assessment of the cost and benefits Clear project brief and client requirements Risk management Communication and coordination Absence of bureaucracy Appropriate Risk identification Good concession design Availability of a suitable and adequatefinancial market Appropriate funding mechanisms Project Financing Capacity Effective PPP unit/cell Government involvement in providing guarantee Incentives mechanism Well- Organized and committed public agency

7 0.4653(1) 0.3215(2) 0.1162(3) 0.0971(4)

8 0.0214(17) 0.0148(22) 0.0053(34) 0.0045(36)

0.1713(2) 0.1706(3) 0.112(4) 0.5461(1) 0.5173(1) 0.4822(2) 0.1444(3)

0.0028(37) 0.0028(38) 0.0018(39) 0.0090(26) 0.0059(32) 0.0055(33) 0.0339(10)

0.2961(2) 0.5594(1) 0.0948(4) 0.4110(1)

0.0695(3) 0.1313(1) 0.0128(24) 0.0554(5)

0.3548(2) 0.1394(3)

0.0478(7) 0.0188(19)

Management

0.2236(2)

Contractual Arrangement Finance

0.1539(3)

Government

1.0000(1)

1.0000(1)

Note: The numbers in brackets after each set of weights indicate the ranking of the weights within the groups, subgroups, or factors that are the subject of pairwise comparisons within each level.

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Table 3 provides the local weights for each level of the hierarchy in columns 3, 5 and 7. The overall global weights for CSFsfor PPP road infrastructure development in Vietnam are shown in column 9, with these global weights found by multiplying the corresponding elements in columns 3, 5 and 7 for each CSF.

The Project implementability group with a local weight of 0.3216 is the most valued group in the second level of the hierarchy.See column 3. The Sound financial package group(with a weight of 0.2347) and the Prevailing Environment group(0.1754) are judged by our respondents to be the next most important. The first group was seen as approximately two times greater than that of the third group, since (.3216/0.1754 = 1.83). The Government support group (0.1347)was ranked at the fourth position followed by the Effective Procurement (0.0738) and Project Participants (0.0598) groups, respectively.

In the third level of the hierarchy, the Project Characteristics subgroup was the most important subgroup in terms of its relative contribution to the Project implementability group with a local weight of 0.6425, about three to five times greater than that of the Project planning (0.2245) and the Control (0.1329)subgroups. See column 5. Other entries in column 5 can be interpreted in a comparable manner showing the relative contributions of each subgroup to the parent group within the hierarchy.

The entries in column 7 show the relative contributions of the various CSFs to their parent subgroup within our AHP hierarchy. For example with respect to the Contractual Arrangement subgroup, the weights of the two contributing factors are approximately equal – with appropriate risk identification having a weight of 0.5173 and good concession design having a slightly lower weight of 0.4822.

The global weights associated with each of our 42 CSFs are given in column 8. The top ten CSFs based on our respondents various pairwise comparison ratings are: (1)Financing Capacity (0.1313), (2) Project Economic viability(0.0758), (3) Appropriate funding mechanisms (0.0695), (4) Political support (0.0626), (5) Government involvement in providing guarantee (0.0554), (6) Multi-Benefit objective(0.0494), (7) Incentives mechanism(0.0478), (8) Stable macroeconomic 154


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conditions(0.0411), (9) Good goals design(0.0347), and (10) Availability of a suitable and adequate financial market(0.0339). We can also use our results to indicate not just a ranking of CSFs. For example, the top ranked CSF is regarded by our respondents as approximately 3 times more important than the eighth ranked CSF (since 0.1313/0.0411 = 3.19).

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CONCLUSION

Vietnam has implemented a large number of PPP projects in recent years. But the overall success rate of these projects is still not satisfactory. This study identified and prioritized critical success factors for PPPs road infrastructure projects in Vietnamand proposed the AHP approach as a tool to evaluate the relative importance of these different factors. A survey with 42 CSFs was distributed among to road transport professionals and expert in public and private sector who have PPP road projects knowledge and related experience. The results reported in this paper are averaged across the various stakeholder groups, however subsequent papers will compare results across these groups. The study highlighted the key factors for successful implementation of PPPs road infrastructure projects in Vietnam. The findings reported in Table will be of help to the successful adoption and operation of PPPs road infrastructure projects in Vietnam.

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Grant, T. (1996). Keys to successful public-private partnerships. Canadian Business Review.Vol. 23, No 3, p. 27. Gudiene, N., Podvezko, V. and Banaitiene, N. (2014). Identification and evaluation of the critical success factors for construction projects in Lithuania: AHP approach. Journal of Construction Engineering and Management, Vol 20, No 3, pp. 350-359. doi: 10.3846/13923730.2014.914082 Jefferie, M., Gameson, R. and Steve Rowlinson. (2002). Critical success factors of the BOOT procurement system: reflections from the Stadium Australia case study. Engineering, Construction and Architectural Management, Vol. 9, No 4, p.352. Ke, Y. J., Wang, S.Q., Chan, A.P.C. and Cheung, E. (2009). Research trend of public private partnership (PPP) in construction journals. Journal of Construction Engineering and Management, Vol. 135, pp. 1076-1086. Kopp, J.C. (1997). Private capital for public works:designing the next generation franchise for public private partnership in transportation infarstructure.PhD Thesis, North Western University, United States. Manning M. (2008). Economic Evaluation of the Effects of Early Childhood Intervention onAdolescent Outcomes, PhD thesis, Griffith University, Brisbane. Manning M., Ransley J. Homel R., Smith C., Mazerolle L. and Cook A., (2013).Policing methamphetamine problems:a framework for synthesising expertopinion and evaluating alternativepolicy

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ECONOMIC TRANSFORMATION AND URBANIZATION OF INDIA INITIATIVES FOR SUSTAINABLE DEVELOPMENT Vinod Nakra AMITY University, India Prema Nakra Marist College, New York, USA

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ABSTRACT

Urbanization, a process of city establishment and growth, is fast becoming the defining process in shaping the course of demographic, economic and social transformations of a nation. The process has been underway for more than 250 years but has become a global salient feature only in 21st century, especially with its prime locus in the poorer parts of Asia and Africa.

Using India as a case study, the author will discuss how the country has transformed the economy during past twenty years from an agrarian society to a semi-urban society. As the trend toward economic growth and urbanization in India accelerates, cities will struggle to absorb new residents while providing an environment in which people and businesses can thrive. The authors demonstrate that unmanaged or unplanned urbanization results in unintended consequences. For India to continue on its path of economic growth and sustainability it must manage the process of urbanization with inclusive growth strategies.

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ECONOMIC TRANSFORMATION AND URBANIZATION OF INDIA Initiatives for Sustainable Development The Republic of India (India), located in South Asia, is the seventh largest country in the world by area. The population of over 1.2 billion makes it the second most populous country in the world as well as the largest democracy. The country comprises 29 states and 7 union territories. India’s economic journey from an impoverished country to an emerging global economy has been an inspiring example for many developing nations. India’s Transformation After 200 years of British rule, India became an independent nation in 1947. This newly born nation faced a number of challenges, including shattered economy, minimal rate of literacy and unmanageable poverty. It seemed like a mission impossible for Indian leaders. The first order of business was to establish the rule of law. Taking cues from Soviet Union, the country decided to develop a public sector whereby the government was in charge of most of the consumer services including transportation such as airlines, railroads and local transportation, communication services such as postal, telephone and telegraph, radio and television broadcasting, and social services such as education and health care (Gosal, 2013). The country’s attempt to follow the Soviet model of self-sufficiency, however, failed to keep pace with the investment needed to contain unemployment, especially since the working-age population had expanded. By the end of 1990, this young nation was at its lowest point in history as it faced growing inflation, unemployment, and low foreign exchange reserves. When India introduced a new economic policy on July 24, 1991, it made concerted efforts to remove barriers to growth in multiple sectors including manufacturing, agricultural as well as financial. Reforms included liberalization and privatization, lowering of tariffs and relaxation of foreign direct investment (FDI) policies. In an effort to attract foreign direct investment, the Government of India has invested in India’s infrastructure and upgraded ports, telecommunications and highways (Pandit, 2005; World Trade Organization, 2011).

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Economic Growth Accelerates In the decades following the 1991 reforms, India has enjoyed over 15 years of strong and accelerating growth. Its gross domestic product (GDP) doubled between year 2000 and 2011, to reach around US$ 4.5 trillion at purchasing power parity (PPP). India has displaced Japan to become the world's third biggest economy in terms of purchasing power parity (PPP), according to a World Bank report released on April 28, 2014. India's share in World GDP in terms of PPP was 6.4% in 2011 compared with China's 14.9% and the US' 17.1%, (Economic Times, 2014, Economist, 2013). Table 1: States with Urban Population growth in 2030

Insert Table 1 Here Table 1 shows the five states in which the percentage of total population living in urban areas will exceed 50 percent. By 2020, 42% of India’s urban population will live in cities with a population greater than 1 million.

Most international bodies including World Bank, rank India among top three global investment destinations. According to a United Nations (UN) report in the period 1999–2004, India received US$ 19.52 billion of foreign investment. In the period 2004–09, foreign investment in the country reached US$ 114.55 billion, further increasing to US$ 172.82 billion between 2009– September, 2013. During FY 2012–13, India attracted FDI worth US$ 22.42 billion (World Trade Organization, 2011; IBEF, 2014). Three major forces behind India’s economic growth and prosperity included increased foreign direct investment, India’s expertise in information technology and increased domestic consumption because of a growing middle class population. India’s growing middle class is the backbone of its economy and about half of its population will fall into the category of middle class by 2040 (Gosal, 2013).

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Urbanization Takes Shape Since economic reforms of 1991, India’s urbanization has shown remarkable selective growth by city sizes, regions and sectors. The urbanization process will continue at high speed throughout the first half of the 21st century in India and other Asian countries. The rate of urbanization in India increased from 22.81 percent in 2001 to 31.6 percent in 2011. By 2008, an estimated 340 million people already lived in urban India, representing nearly 30 percent of the total population. Today 15% of the urban population lives in one of the four largest megacities, Mumbai, Delhi, Chennai and Kolkata (McKinsey Global Institute, 2010). Urbanization in India is neither unique nor exclusive. Urbanization was inevitable since every major industrialized country in the world has experienced a shift over time from a largely rural, agrarian dwelling population to one that lives in urban non-agricultural centers. MGI projects that India’s urban population could soar further to 590 million by 2030 and 915 million in 2050. Many of the people will live in megacities – with 7 out of 49 megacities worldwide being located in India, already making it an area of mega-urbanization (McKinsey Global Institute, 2010). India Plans for Urban Growth Anticipating the challenges the country will face in view of rapid growth in urbanization, India took steps to deal with them. India anticipated a need for rapid transportation, provision for reliable energy sources, development of roads and urban renewal among others. Authors have identified a few initiatives that government agencies have taken to deal with the complexities of urbanization. Industrial Corridors Spread out across more than 1,500 kilometers and six different Indian States, the Delhi-Mumbai Industrial Corridor (DMIC) is one the most ambitious Indian infrastructure projects in the nation’s history. Undertaken in collaboration with the Japanese government, the DMIC is set to consolidate India’s growing role as a global manufacturing and trading hub while boosting the nation’s economy in the process. When completed, the DMIC will feature an industrial zone spanning the length of the corridor with “smart cities” that will accelerate the expansion of 165


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industry and infrastructure throughout the region. One of the main goals of the DMIC is to foster a stronger, globally competitive economic base in India that additionally creates favorable conditions for local commerce, foreign direct investment and long-term sustainable development (India Briefing, 2014). Mass Rapid Transit System However, the first Mass Rapid Transit System in Kolkata was launched in 1986, sensing the importance of public transportation; major initiatives were launched in the post liberalization era with Delhi Metro taking the lead in rail based Mass Rapid Transport system. During the first two phases, 190 kilometers were completed by 2012, including connectivity to satellite towns in the National Capital Region, with a total passenger capacity of 2 million passengers per day. The third phase covering 103 kilometers will be completed by 2016. It is projected that passenger capacity will rise to 4 million passengers per day by 2015-2016 (Delhi Metro Rail Corporation, 2013). Road construction is also underway as is reflected in Table 2. Table 2: Progress of Road Construction Projects Insert Table 2 Here Multiple metro transit projects are in various stages of completion of Mumbai, Kolkata, Chennai, Bangalore, Jaipur and Hyderabad. Approximately 20 Indian cities plan to undertake rail transit mass transportation projects. To provide last mile connectivity on a sustainable basis, other bus rapid transit systems are also in various stages of completion in various parts of the country (India Briefing, 2014; Hindu (2013).

Electric Power India had an installed capacity of 248 kilowats of electric power as in May 2014-third largest in the world in the year 2013, surpassing Japan and Russia. Captive power plants provide an additional capacity of 24 kw. Approximately 87.5% of the power comes from non-renewable sources (International Energy Agency, 2014).

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Urban Renewal Projects Jawaharlal Nehru National Urban Renewal Mission (JNNURM) started in 2005 with the aim of providing urban infrastructure for service delivery. The Central Government of India partially funded this project and required the state and local governments to implement specific reforms at their levels of jurisdiction. Recognizing that Indian Municipal entities lacked the legal authority to undertake and implement services for its inhabitants, 74th Amendment Act 1992 was adopted (Government of India, 2014).

Slum Improvement Projects In 2011, the Government created a new initiative, Rajiv Awas Yojana (RAY) or Rajiv Dwelling Plan to separate slum development programs from JNNURM. This program is designed to provide property rights to urban poor and to develop inclusive and equitable cities in which every citizen has access to basic civic and social services and decent shelter. The Ministry of Housing and Urban Poverty Alleviation is also implementing various plans and policies in the country to address the concerns of housing, infrastructure, and the provision of basic civic amenities with special emphasis to urban poor (Government of India, 2014, Andavarapu and Edelman, 2013). Strategies for Sustainable and Inclusive Growth To date, India’s urban transition has been beneficial for many, providing access to higher quality healthcare, education, jobs and higher standard of living. Urbanization has also brought problems of growth of dense and unplanned residential areas. These include environmental pollution, inefficient and inadequate traffic corridors, poor environmental infrastructure, etc. Housing, water supply, roads, drainage, waste disposal, non-polluting mass rapid Transit system, education, health services, police and fire services, etc. have not been able to keep pace with the prevailing urban growth rate (Ahluwalia, 2014). The unfinished agenda for urban India would include but not be limited to the issues addressed below to generate enough funds for such infrastructure and social services. Boosting the Manufacturing Sector The country’s shrinking manufacturing sector has not been able to absorb this urban labor force, exacerbating the problems of urban unemployment, slum expansion and widening income 167


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inequality. Manufacturing accounts for 13 percent of GDP and employs 9.4% of workforce. Service sector employs 26% of workforce and contributes 58.1 percent of India’s GDP (McKinsey Global Institute, 2013). Expanding the Pool of Skilled labor Despite one of the largest youth populations in the world, the country lacks the educational programs, systems and training centers necessary to provide up-to-date technical, vocational, literacy and language skills to its ever-growing employable population. Maintaining the growth trajectory and competitiveness of various sectors of the economy requires a skilled workforce aligned to the industry requirements. India has a very large education infrastructure: 675 universities, 45,000 colleges but only 21 percent of people in the age group of 18-24 are in college (Carlin, 2011). Creating Employment Opportunities According to McKinsey reports, India will face multiple challenges including a potential surplus of college-educated workers, a shortage of workers with a high school education, and not enough jobs for its large cohort of very low skilled workers. Employment growth in India was just 0.5% per annum from 2004-05 to 2011-12, the period that saw the highest growth of GDP by 8.5% per annum (McKinsey Global Institute, 2010). According to the World Bank, 90 percent of jobs are in informal sector. Informal employment is insecure, poorly paid and has no social security. While the informal sector plays a vital role in many of Asia’s urban areas it also means that people are compelled to work in unhealthy and/or unsafe conditions. It is important to develop a formal process to allow informal enterprises to be part of the formal sector. Fixing Urban Physical and Energy Infrastructure Investment in infrastructure development is vital for developing and maintaining functionality, livability, and sustainability of India’s cities. Good quality physical infrastructure is a condition precedent to sustainable city life. Institutions of governance will hold the key to meet the deficit of infrastructure and ensure service delivery mechanisms (McKinsey Global Institute, 2013; Ahluwalia, 2014). 168


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India’s state owned railways are the fourth largest in the world. However, they have suffered from low investment. The system is described as a severely congested network that creates barrier to economic growth. Even though the investment in the railway network through public private partnership for 2014-2015 is estimated to be 60.65 billion rupees, this is a fraction of the cash that is needed to overhaul the railway network (Wikles, 2014). International Energy Agency has estimated that India will need to add 600-1200 GW of additional new power generation by 2050. As this initiative to improve power-generating capacity is undertaken, multiple challenges will emerge. To ensure effective implementation of expanded power generating capacity administration and other decision makers must reduce the transmission and distribution losses, which are approximately 24%. India also needs to improve management of supply of coal and natural gas for power plants, capability to ensure availabilities of quality and quantity of fuel as well as develop and implement strategies to accelerate wind, geothermal, solar and nuclear power projects (International Energy Agency, 2014). Expanding Housing infrastructure Today about 25 million households in India, approximately 35% of all urban households, cannot afford housing at market prices and around 17 million of these households live in slums. Estimates suggest that of the 364 million urbanites today, roughly 169 million currently live in urban slums. In Greater Mumbai, slum dwellers account for 54 percent of the total population. With a further 250 million people expected to join the ranks of India’s urbanites over the next 20 years, this number could increase to 38 million households. Unless new affordable housing is developed, people and families are likely to settle in slums, a socially and economically undesirable development that India can ill afford (IIPS, 2006; Booz and Co. 2010; PRIA, 2013). Providing Access to Healthcare The concentration of public, tertiary health centers and impressive private hospitals in cities makes it easy to overlook the fact that there are huge deficits in the provision of health care to the majority of the urban population. The urban poor suffer disproportionately from a wide range of diseases and other health problems. They are also at increased risk of violence and chronic and communicable diseases such as tuberculosis and HIV ⁄ AIDS. WHO further noted that ‘the 169


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major drivers, or social determinants, of health in urban settings are beyond the health sector, including physical infrastructure, access to social and health services, local governance, and the distribution of income and educational opportunities (Butsch, et. al.2012; Ghuncha, 2012). Improving Quality of Life for Urban Poor Good cities offer a certain quality of life for its citizens and an attractive proposition for companies. Despite a mushrooming of shining glass and steel structures across its cities and most global companies setting up shop across its landscape, it is failing many of its citizens. According to a Planning Commission Survey in 2010, there was an increase of 17.8 million in urban slum population across the country in the last decade. Across all major quality of life indicators, most slum dwellers do not have access to clean water, sanitation and health care facilities. Approximately 54 percent of urban slums do not have toilet facilities. Their daily challenges include limited access to employment opportunities and income, inadequate and insecure housing and services, violent and unhealthy environment, little or no social protection mechanism, and limited access to health and education opportunities (PRIA, 2013; World Watch Institute, 2012). Final words We are witnessing a fundamental shift in the way people live on the planet, and that shift brings with it challenges and opportunities. For the last twenty years, India has been struggling to reinvent herself in the quest for an economic superpower status. From an agrarian, importdependent, impoverished, peripheral colonial economy, India has found its rightful place in the developing world. While life has never been better in India for young urban upwardly mobile professionals, the widening income gap between rich and poor remains just as undisputable (McKinsey Quarterly, 2001). Every major city of India and the world at large faces the same proliferating problems of urban expansion, inadequate housing, poor transportation system, poor sewerage, erratic electric supply, insufficient drinking water supplies, etc. (Kotkin, 2011). If urbanization has to act as a catalyst in economic development, all stakeholders from policy makers to communities to billionaires to corporations must recognize that the strength of a nation is in its people not in glass and steel buildings, expanding malls, gated communities and/or rising assets and wealth 170


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accumulated by a handful of corporations. For sustainable development, policy makers and other stakeholders must focus on an inclusive growth whereby all people in this young and emerging nation have access to clean air to breathe, potable water to drink, decent places to live and an opportunity to expand their skills and work in a safe and productive environment.

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References Ahluwalia I J, (2014), Urbanization in India, Challenges and Opportunities and the way forward. Ed. Ahluwalia, I, J, Kanbur R, Mohanty, P K, SAGE Publications India Private Limited, New Delhi, 2014.

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Butsch, Carsten, Patrick Sakdapolrak, V.S. Saravanan (2012), Urban Health in India, Internationales Asienforum, Vol. 43, No. 1–2, pp. 13–32 Carr, Carlin (2011), Skill training for India’s Youth, Searchlight South Asia, May 20, retrieved from http://urbanpoverty.intellecap.com/?p=9

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Economic Times, (2014), India Displaces Japan to Become Third Largest World Economy in Terms of PPP: World Bank, April 30.

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Ghuncha, Firdaus (2012), Urbanization, Emerging Slums and Increasing Health Problems, Journal of Environmental Research and Management. Vol. 3(9). pp. 0146-0152, December, retrieved from http://www.e3journals.org

Gosal, Dustyant (2013), History of Economic Growth In India, International Policy Digest, April 24, retrieved from http://www.internationalpolicydigest.org/2013/04/24/history-ofeconomic-growth-in-india/

Government of India (2014), Jawaharlal Nehru National Urban Renewal System, Overview, Ministry of Urban Development, retrieved from http://jnnurm.nic.in/nurmudweb/toolkit/Overview.pdf Hindu, The (2013), Delhi Metro Marks 11th Anniversary December 25, retrieved from http://www.thehindu.com/news/cities/Delhi/delhi-metro-marks-11thanniversary/article5500373.ece

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Table 1: States with Urban Population growth in 2030 State

Tamil Nadu Gujarat Maharashtra Karnataka Punjab

2008 Urban Population in Million 35.4 25.2 47.9 21.6 10.0

% of total population 53 44 44 37 36

2030 projections Urban Population in million 53.4 48.0 78.1 39.6 19.0

% of total population 67 66 58 57 52

Source :UN-Habitat (2012) State of World Cities, 2012-2013, Statistical Annex, Table 4, p. 135-136.

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Table 2: Progress of Road Construction Projects

Length Identified State Andhra Pradesh Bihar Chattisgarh Jharkhand Madhya Pradesh Maharashtra Orissa Uttar Pradesh Total

( in km) 620 674 2092 753 237 420 614 67 5477

Estimates sanctioned (in US$ (in km) million) 620 185.5 674 101 1968 436 760 180 237 34.7 470 132.8 614 155.6 67 6.9 5410 1232.5

Works awarded (in US$ (in km) million) 629 145.5 674 86.9 1500 258.6 645 121.4 144 16.2 477 95.8 614 136.3 67 6.07 4711 866.77

Source: Ministry of Road Transport and Highways, Presentation at Economic Editors Conference, October 8, 2012. Exchange rate US$1= Rs 60

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IMPACT OF MACROECONOMIC INDICATORS ON EXPECTATIONS OF EQUITY RISK PREMIUM IN CEE PRIVATE EQUITY MARKETS Roman Cibero, University of Economics, Prague, Czech Republic Tomas Krabec University of Economics, Prague, Czech Republic

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ABSTRACT The subject of our study presented in this paper consists of generalization of the impact of macroeconomic indicators on the income based valuation of privately held companies and its value driving factors. Particular attention within the general subject of our study in this paper is focused on impact of macroeconomic indicators on expectations of equity risk premium (ERP). Macroeconomic indicators and their estimations create the basic components for derivation of expectations of value drivers within the methods of income based business valuation (whether assessment of fundamental value of publicly traded companies or assessment of a particular basis of value of privately held companies). Impact of macroeconomic indicators on stock prices of companies traded on financial markets is, therefore, subject of interest within a whole range of empirical and theoretical studies, e.g. Quayes and Jamal (2008), Hsing and Hsieh (2011) or Gallagher and Taylor (2002). Our paper focuses on theoretical evaluation of ERP being one of the key value drivers applied on investments in privately held companies. Connection between ERP and macroeconomic environment is first documented in studies of public financial markets (Rapach, Strauss and Zhou, 2010). Parallel to the studies of public financial markets, attention has been given to private equity (PE) markets and their specific characteristics (Jegadeesh, Kräussl and Pollet, 2009). By following the theoretical findings reached in this area, e.g. Ernst, Koziol and Schweizer (2013), Cochrane (2007) or Lehavy and Sloan (2008), our goal is to outline theoretical background for the future empirical research focusing on government macroeconomic policy and its influence on expectation of ERP in the PE environment by using the example and data of the Czech Republic. Future research should verify in how far the transparency of government macroeconomic policy and its understanding by PE investors is applicable for the purpose of estimation of the expected ERP in the PE environment.

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INTRODUCTION Equity risk premium (ERP), being an important part of cost of equity calculation, is one of the key value drivers within the income based valuation methods. Basic characteristic of this item is stated in great amount of textbooks concerning asset valuation or corporate finance. Typical understanding of ERP as a premium that investor demand for investing in the average risk equity investment is offered for example in Damodaran 2009. Within this concept, ERP is a market specific component of risk and such as is not diversifiable and should be reworded. The basic aspects of ERP are common to all risk and return models in finance (e.g. the risk is defined as in terms of variance in actual returns around expected return). As the common aspects, there are also some common questions arising from the conception of ERP. Subjects of a question is for example the way of estimation of ERP for the purposes of valuation or the fact that ERP varies over time, which is evident from the historical development of the stock markets. Is it possible to explain the changes of ERP or expected returns using the development of macroeconomic indicators? And if so, is possible to use this knowledge for the purposes of estimation of expected ERP? What are the specifics of estimation of ERP for the purposes of income valuation of privately held companies? These questions are in the centre of our attention in this paper. Before we try to answer the questions, it is necessary to look deeper into the nature of ERP and expected returns generally.

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METHODOLOGY ERP – determinants Basic determinants affecting the size of ERP as reward for the risk which an investor has to undergo are described in Damodaran 2009: •

Risk aversion – the higher the risk aversion of an investor is, the higher ERP is required

and vice versa. Measure of risk aversion depends on the individuality of particular investor and is influenced by such factors as age or consumption preferences. Just consumption preferences are interesting factor because of his connection with macroeconomics. •

Economic risk – this determinant is in the center of our attention because of its direct

connection with macroeconomics. Economic risk is related to the expectations concerning the development and predictability of the economy. •

Information – the basic and intuitive principle concerning the information and ERP or

more generally required return says that the more information we have the lower the ERP should be. But on the other hand the situation depends also on the quality and content of the information. Research of the information and its impact on ERP in a standard representative – agent exchange economy was presented for example in Gollier and Schlee (2011). •

Liquidity – this determinant is relevant primarily for the private equity markets as the

liquidity of shares on privately held companies is considerably lower and liquidation of such position can require additional costs. •

Catastrophic risk – this determinant can be observed in history but for the purposes of

expected future ERP it is almost impossible to capture it. •

Behavioral component – this determinant counts on human irrationality that was in some

cases revealed by empirical studies. For the purposes of this paper, the most important determinant from those stated above is the economic risk, because the impact of this risk can researched ex post through the macroeconomic indicators and the development of returns on stock market and the expectations concerning future macroeconomic development can potentially used for the purposes of estimation of ERP. However the existence of the other determinants shouldn’t be forgotten. Expected returns and income valuation model – theoretical roots Survey research on the question what is the nature of macroeconomic risk that drives risk premia in asset market is provided in Cochrane (2007). His survey is based on the fact that some 181


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assets offer higher average returns than others and this risk premia should reflect aggregate macroeconomic (the risk premia should reflect the tendency of assets to do badly in bad economic times). Cochrane stated the basic formula of asset pricing that is based on the idea that prices are generated by discounted payoffs: pt  Et (mt 1  xt 1 )

This formula is a basic expression of the income valuation methods (e.g. DCF valuation). The variable xt+1 is the expected future payoff and mt+1 is a discount factor, whose task is to convert the future payoff expected at time t +1 and express it in the appropriate value to the date of valuation (t). From the basic formula can be expressed equation describing the excess returns (returns above the risk free rate) saying that risk premium is higher for assets that a large negative covariance with the discount factor:

E( Rtei1 )  Cov( Rtei1 , mt 1 ) The discount factor can be expressed as the marginal value of wealth.

mt 1 

VW (t  1) VW (t )

The last equation, we will state here and which is also stated in Cochrane (2007) is the equation describing the value of wealth. This equation is important for the purposes of understanding of the theoretical connection of the concept of income valuation to the macroeconomics.

V (Wt )  max Et   j u (ct  j ) The value of wealth is the achieved level of utility rising from the consumption and given the investor has limitation that consists in the initial wealth Wt. Just the relation of the marginal value of wealth and utility based on consumption is important for the linkage of the income valuation theory and macroeconomics. Variation of expected returns – connection to macroeconomics Another important output of the research presented in Cochrane (2007) is the fact that the expected returns vary over time and across assets. The proof of this fact was based on the basic regression of excess returns on dividend-price ratios (the data set for the regression was taken

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from the period of time (1927 – 2005). The over time variation was documented on the horizon of 1, 2, 3 and 5 years. Variation of expected returns across assets was tested similarly. As the explaining variable the book/market ratio was chosen. Both of the regressions were based on market prices of stocks. By this testing, Cochrane continued previous researches made within this subject of attention. In Shiller (1981) the attention was paid to the fact that the measure of stock price volatility observed on the market is too high to be attributed only to the changes in the information about future dividends. The research led to the conclusion that the movements of stock prices could be attributed to the changes in expected real interest rate, which is the same conclusion as in the Cochrane’s research. Regression of future stock returns on common set of variables was also in the center of the research presented in Fama and French (1989). Their research was driven to answer following questions. Do the expected returns on bonds and stocks move together? Do the same variables forecast bond and stock research? Is the variation in expected bond and stock returns related to business conditions? Are the relations consistent with intuition, theory and existing evidence on the exposure of different assets to changes in business conditions? The most interesting and the most useful for the purposes of this paper are the conclusions concerning the last two questions. Fama and French confirmed that the explaining variables that are based on the market prices (dividend-price ratio) and that are used to forecast the expected returns are correlated with business cycles, with higher expected returns in bad times. This conclusion is emphasized also in Cochran (2007) with additional notion saying that number of other authors documented that the price variables used for the purposes of forecasting of returns also forecast economic activity. Cochrane continued the research of his above mentioned predecessors and confirmed their conclusions. Testing the predictability of expected returns by using suitable explaining variables leads to the result that price-dividend ratio do not forecast aggregate dividends through the regression, but it is the excess volatility (see the conclusion in Shiller 1981). On the other hand there is a certain long-term forcastability between returns and the volatility of pricedividend ratio as the coefficients of determination increase together with the increase of time horizon. Despite of the evident increase, the size R2 still isn’t very convincing. These findings lead to the conclusion that almost all stock prices movements are due to changing expected 183


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excess returns rather than to changing expectations of future dividend growth. So the stock market movements are through the risk premia tied more to the macroeconomy than to the basic assumptions of the asset pricing model concerning the expected payoff of the asset. On the other hand, the asset pricing model can also react when the linkage of the asset returns to the macroeconomics can be explained using the expression of stochastic discount rate through the marginal value of wealth, consumption-based model and permanent income hypothesis. Another linkage between ERP and macroeconomics is offered on Lettau, Ludvigson and Wachter (2007). The analysis is engaged into the relationship between increase in aggregate stock prices and fall in macroeconomic risk expressed as the volatility of the aggregate economy. Authors of this research follow the idea that changing volatility of consumption or aggregate cash flows can affect asset prices and equity premia. The empirical part of their article shows evident correlation between the development of consumption volatility or simply standard deviation of GDP growth and the behavior of stock market expressed through the dividend-price ratio or earnings-price ratio. Theoretical part of Lettau, Ludvigston and Wachter (2007) tries to explain the empirically observed relation between macroeconomic risk and stock market also through the model of rational, forward-looking agents. The conclusion says that in the model economy, a boom in stock prices occurs because the decline in macroeconomic risk, which leads to the fall in expected future stock returns, or the equity risk premium. This conclusion is similar to the one presented in Cochrane (2007). Both of these researches connect the empirical observations of the stock market, macroeconomics and asset pricing theory. The model in Lettau, Ludvigston and Wachter (2007) assumes agent’s maximizing utility defined over aggregate consumption and even the consumption play important role the consumption data serves as the learning aspect through which the agent recognize the state of the economy. Consumption as the main linkage between the model situation and macroeconomics is used also in Cochrane (2007). ERP – basic estimation approaches and the usual practice What are the basic possibilities of estimation of ERP for the purposes of income valuation? To answer this question, we can use the enumeration of basic methods stated in Damodaran (2009): •

Survey premiums – ERP is estimated based on surveying of investors, analytics,

managers or academic workers. 184

ACEB Conference Proceedings •

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Historical premiums – ERP for the purposes of discounting future cash flows is estimated

based on historical observed ERP from the stock market (difference between aggregate return of stocks and the risk free return). Usual questions solved within this estimation method concern the way of averaging, length of period of time or which stock market is a better source for the estimation. •

Implied premiums – approach based on actual market rates or prices (DCF model based

premiums or stable growth DDM premium). As ERP is basin input into the calculation of cost of equity for the purposes of income valuation that is based on the estimated future cash flows, also ERP should be predicted as forward-looking. The most frequent method of estimation is the historical one, and the ERP is estimated as constant figure. New trends in estimating of ERP Almost all the above mentioned studies concerning the relation between ERP or expected returns and macroeconomic indicators (or finance indicators correlated with macroeconomic indicators) have one thing in common. Using the regression they describe in-sample predictive ability in relation to ERP and fail to deliver consistent out-of-sample forecasting gains relative to the historical average. This fact is described by Welch and Goyal (2008) in Rapach, Strauss and Zhou (2009). However, recent studies try to deliver new estimation approaches that would be suitable for the use in practice and the ERP would be calculated as forward-looking. One of the new approaches is based on combination of several individual predictive regression models that are based on the financial variables well correlated with the macroeconomic indicators (dividend-price ratio, earning-price etc.) or directly with the macroeconomic indicators such as GDP, real net cash flows, inflation, term and default spreads, etc. The combination which is based on a weighted average seems to be more successful for the purposes of out-of-sample predictions than individual regression models. The combination forecast approach is well described in Rapach, Strauss and Zhou (2009). Another approach of forward-looking estimation is based on a relationship between expected returns and a production-based measure of the world business cycle. This approach is built on the thought that product and financial market integration is increasing which lead to the convergence across countries also in business cycles. As the basic measure and the explanatory variable in the regression model is used the ratio of the world’s capital stock to world output. 185


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The evidence of out-of-sample predictability of this ratio is presented in Cooper and Pristley (2012). ERP and private equity markets In the center of our attention consists in possible generalization of findings rising from the research based on the relation between stock market and macroenonomy for the purposes of the income valuation of the privately held companies. As long as we think about generalization of findings concerning relationship between macroeconomic indicators and ERP for the purposes of income valuation of privately held companies, we should start with a characterization of private equity market (PE). This area isn’t as well examined as the area of financial markets, but some basic characteristics are for example in Ernst, Koziol and Schweizer (2013). The important distinction in comparison to the financial markets consists in participants of the market. The typical group of participants (investors) is comprised of strategic investors and existing equity holders. Another group of participants consists of private equity funds which characteristic is closer to the character of participants of organized financial market, but it is obvious that expectations of both these groups concerning the ERP would be probably different from the expectation of participants of financial markets. Expectation concerning ERP or expected returns of private equity investors is the subject of study in Jagadeesh, Kräussl and Pollet (2009). Expected returns of private equity investment are measured through market prices of exchange traded fund of funds that invest in unlisted private equity investments and through the prices of listed private equity funds. The results of this study is that market expects unlisted private equity funds to earn abnormal returns of approximately 1 %, which surprisingly low in comparison to other studies based on data self reported by individual PE funds. Jagadeesh, Kräussl and Pollet (2009) offer also an explanation of this finding. The explanation consists in the possible reality that funds don’t report about bad investments, thus the self reported data could be biased. Another important conclusion of the Jagadeesh, Kräussl and Pollet (2009) is that PE fund returns exhibit positive correlation with GDP growth and negative correlation with credit spread. Important finding involve also the fact that market returns of listed fund of funds and listed private equity predict future changes in self reported book values of unlisted PE funds. This is an

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indicator that performance of listed fund of funds can be useful information for the purposes of estimation of expected returns in PE markets. Another characteristic distinction consists in the quality of information available for the investors for the purposes of their decision about the investment. In comparison to the financial market where the character and quality of information are a subject of standardization, in the PE market character of available information can dramatically change from case to case. Importance of the quality of information and its influence on the expected returns is a subject of great amount of theories and studies (e.g. Gollier and Schlee 2011 or Lehavy and Sloan 2008). The last important characteristic of PE market, we would like to mention in this paper is its local character. However the thought about increasing integration of financial markets can be useful, we think that mainly due to the nature of substantial group of participants of PE market the thought isn’t fully applicable in the PE. In other words according to our opinion the PE markets still hold their specific characteristics connected with the locality of PE market. It is necessary to say that many of the characteristics or more intuitive and wasn’t subjects of any empirical research. Estimation of ERP for the purposes of the income valuation of PE companies Earlier in this paper, we provided possibilities of estimation of ERP and also the commonly used method. There is nothing changed in the estimation of ERP for the purposes of the income valuation of privately held companies. ERP is usually estimated as a constant figure based on the difference between the historical returns of stocks and bonds (as a risk free measure). As such ERP isn’t sufficient measure of risk connected with the investment in the PE market, some additional adjustments are made. These adjustments are usually made on the level of the whole discount rate in form of additional risk premiums. These premiums are usually both firm specific and market specific or mixed. ERP estimation approach based on the historical returns, where the resulting ERP is a constant figure for each period of time of income valuation is in straight contradiction to the above mentioned finding regarding the correlation of macroeconomic indicators and business cycle and the required return. This contradiction is more obvious when the macroeconomic indicators are used for the purposes of estimation of future cash flow (typically GDP growth) as the financial plan counts for the changes in business cycle but the estimated ERP doesn’t.

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CONCLUSION Correlation between expected returns (or by extension stock prices) and macroeconomic indicators is well documented by great amount of studies that are largely based on individual regression analysis. Theoretical studies confirm also the ability of financial asset pricing models that are basis for the basic income valuation methods to explain such a relationship under the given assumptions. Concerning the relationship of the ERP and macoreconomy, Fama and French confirmed that the explaining variables that are based on the market prices (dividend-price ratio) and that are used to forecast the expected returns are correlated with business cycles, with higher expected returns in bad times. This conclusion is emphasized also in Cochran (2007) with additional notion saying that number of other authors documented that the price variables used for the purposes of forecasting of returns also forecast economic activity. Achilles heel of the empirical studies consists in the fact that the regression models show insample forecast ability but fail in delivering of relevant out-of-sample forecasts. However the necessity of forward-looking estimation of ERP is generally agreed. New possibilities that seems to be useful, concerning the relevant out-of-sample forecasting models were in recently offered e.g. by Rapach, Strauss and Zhou (2009) or Cooper and Pristley (2012), while practice in the area of ERP estimation doesn’t respond to these attempts. In the area of PE there is considerably lesser amount of studies, however existing studies confirm analogous relationship as in case of the financial markets. Results of study presented in Jagadeesh, Kräussl and Pollet (2009) say that PE fund returns exhibit positive correlation with GDP growth and negative correlation with credit spread. Important finding for the purposes of ERP estimation involve also the fact that market returns of listed fund of funds and listed private equity predict future changes in self reported book values of unlisted PE funds. Also in the area of PE there is a possibility of forward-looking estimation of ERP which would be based on the relationship with macroeconomic indicators. On the other hand in case of PE markets it is necessary to perceive specific characteristics of the market. As the important characteristic of PE market in relationship to the possible forwardlooking estimation of expected returns based on the regression model with macroeconomic 188


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indicator as explanatory variable, we consider the local character of PE market. Thus the regression model should be rather based on the local macroeconomic indicators. In this respect the broad knowledge of local economy environment seems to be essential. Knowledge of the local economic environment would be helpful for the purposes of estimation finding suitable macroeconomic indicators. In this regard the knowledge of character of economy (e.g. open and foreign market oriented economy in case of Czech Republic) or the local macroeconomic regulation (central banking monetary policy and its impact on the real economy) is important. PE area is in comparison to the financial market area unexplored and the study of particular characteristics of PE market and their relation to the macroeconomic indicators and impact on expected returns or by extension on fundamental value of privately held companies should be the subject of empirical studies.

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REFERENCES Bartov, E. (2008) Discussion of “Investor recognition and stock returns”, Springer Science+Business Media, Rev Acc Stud (2008) 13:362-368 Cochran, H. J. (2005) Asset pricing, Princeton University Press Cochrane, H. J. (2007) Financial markets and the real economy, Handbook of the equity risk premium Cooper, I., Priestley, R. (2013) The world business cycle and expected returns, Review of Finance (2013) 17: pp. 1029-1064 Damodaran, A. (2009) Equity risk premiums (ERP): Determinants, estimation and implications – A Post-crisis update, New York University Salomon Center and Wiley Periodicals Damodaran, A. (2007) Strategic risk taking, Wharton School Publishing Ernst, S., Koziol, Ch., Schweizer, D. (2013) Are private equity investors boon or bane for an economy? – A Theoretical analysis, European Financial Management, Vol. 19, No. 1, 2013, 180-207 Fama, F. E., French, R. K. (1989) Business conditions and expected returns on stock and bonds, Journal of Financial Economics 25 (1989) 23-49 Gollier, Ch., Schlee, E. (2011) Information and the equity premium, Journal of European Economic Association, October 2011, 9(5): 871-902 Gust, Ch., López-Salido, D. (2009) Monetary policy and the equity premium, Federal Reserve Board Hsing, Y., Hsieh, W. (2011) Impacts of macroeconomic variables on the stock market index in Poland: New evidence, Journal of Business Economics and Management, 2012 Volume 13(2): 334-343 Jagadeesh, N., Krüssl, R., Pollet, J. (2009) Risk and expected returns of private equity investments: Evidence based on market prices, National Bureau of Economic Research 190


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Lehavy, R., Sloan, G. R. (2008) Investor recognition and stock returns, Springer Science+Business Media, Rev Acc Stud (2008) 13:327-361 Lettau, M., Ludvigson, C. S., Wachter, A. J. (2007) The declining equity premium: What role does macroeconomic risk play?, Oxford University Press Maříková, P., Mařík, M. (2008) Diskontní míra pro výnosové oceňování podniku, Institut oceňování majetku, University of Economics, Prague Quayes, S., Jamal, A. (2008) Does inflation affect stock prices?, Applied Economics Letters, 2008, 15, 767-769 Rapach, E. D., Strauss, K. J., Zhou, G. (2009) Out-of-sample equity risk premium prediction: Combination forecasts and links to the real economy Shiller, J. R. (1981) Do stock prices move too much to be justified by subsequent changes in dividends? The American Economic Review Shiller, J. R. (1982) Consumption, asset markets and macroeconomic fluctuations, National Bureau of Economic Research, Working paper No. 838 Williams, A. P. (1995) The search for a better market expectation of earnings model, Journal of Accounting Literature

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EXAMINING THE IMPACT OF FDI ON SOCIAL DEVELOPMENT IN THE ASEAN 5 REGION.

Sridevi Narayanan Help University, Malaysia

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ABSTRACT While, empirical research has been widely undertaken to examine the economic impact of FDI inflows on the host or recipient country, this research paper examines the impact of FDI on the host country’s social development. As the social development context has many attributes; we used HDI (Human Development Index) as a proxy for social development. This study focuses on developing countries’ FDI inflows because developing countries are the main attraction for FDI destinations. Hence, the ASEAN 5 groupings are selected comprising Singapore, Malaysia, Indonesia, the Philippines and Thailand. Data for this study runs from a period of 2005 to 2014 and is extracted from the World Investment report (WIR), UNTAD and the UNDP. Henceforth, the purpose of this paper is to investigate whether along with economic benefits, there is a more sustainable development impact of FDI to the host country. A simple regression analysis is employed to examine the impact of FDI on social development at first for each of the countries separately and then jointly and the results yielded from the E-views 7 were mixed, showing positive significant impact on social development for FDI for all countries showed a positive impact but at varying degrees but at varying degree. Keywords: Foreign Direct Investment, Social Development, Human Development Index, Asean 5

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INTRODUCTION Foreign Direct Investment has been seen as a catalyst that brings positive economic impact to developing countries. This can be witnessed by the rapid economic development by recipient countries of FDI.FDI can be defined by the cross border movement of funds from developed countries seeking to reap optimal economic benefits from cheap labour, land and capital in less developed countries, thus making profitable returns on their investment ventures. UN definition for FDI is capital invested to other countries to achieve long-term economic benefits. Importance of FDI. As mentioned above being a catalyst of economic growth. FDI has been a source of capital in countries lacking it but has rich abundance of other factors. Therefore FDI has been regarded as an important engine of growth. The FDI recipient countries benefit from this inflow of capital in many ways; most commonly there are improved employment opportunities, increased tax revenues, higher GDP as well as spill overs of technological advancement. Total factor productivity can also be increased due to better technology and work culture. According to some early studies, FDI can benefit host countries as an agent of technology transfer and as an agent of transformation, (Llyod, 1996).The surge in FDI outflows from countries like Japan had created he first tier of newly industrialized economies (NIEs) like Singapore, Taiwan and South Korea. As these countries began to advance, they lose their comparative advantage as cost of production rise. Then FDI outflows will seek cheaper locations creating the second tier of newly industrialized economies such as Malaysia, Indonesia and Thailand. It can be noted that FDI outflows from developed countries into developing countries. In a way, it is a mobilization of funds from capital rich countries to resource rich, capital poor countries, thus bringing a balanced resource distribution to economic growth world-wide. Inarguably, FDI brings prominent economic benefits to the host countries. However, the benefits there in varies greatly across economic sectors namely, primary, secondary and service sectors. (Alfaro, A.chanda, S.Kalemli-Ozcan, & S.Savek, 2003) found that FDI has a positive effect on primary sector growth, a negative effect on secondary sector growth and an unambiguous effect on service sector growth.

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Furthermore, some researchers claim that FDI effects can be both positive and negative on host country depending on type of investment. FDI stands more favourably as a source of capital inflow compared to loans and portfolio investment as it had been proven to be more resilient in times of economic crisis. The 1997-1998 financial crises which hit the South East Asian Economies badly are a testimony to this fact. (Lougani & Razin, 2001) The same effect is also observed in the Mexico crisis and the Latin American crisis. Determinants of FDI The volume of FD inflows into certain regions in the world is notably large whereas inflows to other parts can be insignificant. The FDI inflows into South East Asia have been on the high, in particular to the ASEAN region. That is the reason for focusing this study on the ASEAN 5 countries. The common determinants of FDI into host countries are the macro economic variables such as inflation rates, cost of capital or interest rate, reliable and skilful workforce, relative wage rates, taxes, market size human capital and trade openness. Higher rates of inflation would mean higher cost of doing business, hence lowering FDI attraction. Similarly higher cost of capital will deter FDI attraction. A skilful workforce is a result of high human capital development which can is an outcome of good social policing with emphasis on education planning. Trade openness can be proxied by the net exports. A high the volume of exports and imports, signify ease of doing business and hence is an enhancement for FDI attractiveness. Besides, the macroeconomic variables being determinants for FDI motivation, institutional quality is also becoming an additional factor of importance in FDI motivation. Institutional quality comprises elements such as Rule of law, Voice and Accountability, Corruption, Transparency, Bureaucratic framework among others. ASEAN 5 The ASEAN 5 nation comprises of Singapore, Malaysia, Indonesia, Philippines and Thailand The ASEAN 5 countries were selected for this study, viewing those FDI inflows into the ASEAN region has been remarkably consistent and high over the last few decades. As to why the specific 5 countries were chosen was because in the HDI ratings, they fall into different 195


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categories of human development, giving a varied outlook at how these counties differ in their HDI ranking. Singapore is categorized as “Very High” taking the 9th place in World HDI ranking, Malaysia “High “sitting at 62nd position ,Indonesia ,89th position. Thailand at 10 8th place and finally Philippines at 117th place. Measurements of Development 1. GDP The GDP measure had been used as a measure of economic well-being as witnessed in many economic literature. The GDP is computed based on total output produced in an economy for a period of one year. Traditionally, the GDP is computed by summing up all expenditures made by the various economic sector which is GDP=C+I+G+X-However, it had received much criticism in that is a monetary measure and cannot accurately measure welfare as welfare also depends on non-monetary factors. Robert F. Kennedy once said that a country’s GDP measures “everything” except that which makes life worthwhile. Hence the welfare of a nation will not just depend on GDP growth but a host of other social factors. 2. Human Development Index (HDI) Is a composite index made up of three basic dimensions of human development namely, a long and healthy life, knowledge and a decent standard of living 3. “Social Progress index (SPI) comprises three main areas of measures that is •

Basic human needs – Nutrition and basic healthcare, shelter and personal safety

•

Foundations of wellbeing – Access to basic knowledge, access to information and

communication, health and wellness as well as ecosystem and sustainability • access

Opportunity- Personal right, personal freedom and choice, tolerance and inclusion and to advanced education ” Social Progress Imperative

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Brief Literature Review In a study done by (Sharma & Gani, 2004) over a period of 1975-1999, to investigate the impact of FDI on social economic progress measured by Human Development Index (HDI), the effects of HDI on human development showed that both developing and developed countries enjoyed a positive impact on HDI through FDI movements. Other past research on FDI and social development suggests that FDI can indirectly affect welfare through industry structure, technological spill overs and human capital development. (Agosin & R.Mayer, 2000) (Al-Sadiq, 2013) (Liu, D.Parker, K.Vaidya, & Y.Wei, 2011) (Zhang, 2001) have found that FDI generally have a positive impact on economic growth. According to (Perez-Sagura, 2014), in an article written on FDI and human development impacts, it was mentioned that when the governance issues are in place HDI-FDI relationships will be enhance (Agosin & R.Mayer, 2000) (Al-Sadiq, 2013)

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METHODOLOGY Data and Model Specification The data for FDI is extracted from the World Bank Database whereas the HDI data is extracted from the UNDP database. GDP data for the countries concerned were also extracted from the World Bank Database. Using these data, a simple OLS regression analysis is employed and its results were generated using E Views 7 Model specification •

HDI it = c(FDI it) + µ (Equation 1)

•

HDI= c (FDI) + µ(Equation 2)

•

GDP = c (FDI) + µ; (Equation 3)

Analysis of Results Graph 1 FDI inflows to ASEAN 5 Countries (Million US$) Year 2005-2013 The graph above shows that Singapore takes the lead in FDI receipts followed by Indonesia, Malaysia, Thailand and lastly the Philippines. Table 1 (Equation 1) Regression Results for Overall ASEAN 5 Countries. Dependent Variable: HDI

Variable

Coefficien t

Std. Error

t-Statistic

Prob.

C

0.346240

0.080465

4.302968

0.0001

FDI

0.099918

0.020386

4.901228

0.0000

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It can be concluded FDI has a significant effect on overall ASEAN countries for the given period as the probability is less than 0.05. The co-efficient of 0.99918 indicates that for every one per cent of FDI, the contribution to the HDI is 99.918% which is considered to be significantly high and this finding is consistent with results conducted by (Sharma & Gani, 2004) and others who found that FDI creates positive spill overs in technology and employment which translates into a higher Human Development Index. Table 2: Country Specific Coefficient of FDI on HDI in each of the ASEAN 5 Countries Dependent Variable: FDI (Equation 2) Country

Coefficient

Probability

Singapore

0.881667

0.000

Malaysia

0.76822

0.000

Thailand

0.662778

0.000

Indonesia

0.713778

0.000

Philippines

0.659556

0.000

All countries show the FDI significantly affects the HDI. However, the degree of the impact differs as indicated by the coefficient values. Singapore has the highest impact of FDI on HDI where a one per cent increase in FDI, ceteris paribus leads to a 88.1667% in HDI. Followed closely by Malaysia with a coefficient of 0.76822, Indonesia (0.713778), Thailand (0.662778) and Philippines (0.659556)

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Table 3 Country Specific Coefficient of FDI on GDP in each of the ASEAN 5 Countries Dependent Variable: GDP (Equation 3) Country

Coefficient

Probability

Singapore

6.0444

0.0053

Malaysia

4.81111

0.004

Thailand

5.87777

0.00

Indonesia

3.5888

0.0128

Philippines

5.2333

0.0001

All countries seem to exhibit a positive impact of GDP on FDI. Again Singapore takes the lead amongst the other ASEAN countries whereby the GDP tends to be very sensitive to FDI inflows, meaning FDI contributes greatly to GDP growth. This could be due to the favourable policy measures and macroeconomic management by the Singapore government. Table 4 Data table for Social Progress Index (SPI) Rank

Country

Social Progress

Basic Human Needs

Foundation of Opportunity Wellbeing

45

Malaysia

70.00

96.69

76.06

47.68

56

Philippines

65.86

66.76

69.17

61.63

59

Thailand

65.14

74.10

71.97

49.34

88

Indonesia

58.98

63.65

69.42

43.86

Source: Social Progressive Imperative * Data for Singapore is unavailable. From the table above we can observe that Malaysia which is leading in the first three indices but has a short fall in the opportunity index, being much lower than Philippines and Thailand.

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CONCLUSION The findings of this research are consistent with many FDI-GDP relationships found in numerous previous studies. Although the literature FDI-HDI is limited, this research confirms that FDI has a positive impact on HDI. However, it is observed that more established economies particularly Singapore tend to benefit more significantly in human development from FDI than its other counterparts in the ASEAN 5.This can imply that the Singapore government has used FDI contribution to GDP in the area of social development. This study has many limitations. One of which is the number of observations is limited to 9 years mainly due to unavailability of data for HDI although FDI data is more accessible.

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REFERENCES (n.d.). Retrieved from http;//unctadstat.unctad.org/ReportFolders/ (n.d.). Retrieved from http://hdr.undp.org/en/statictics/hdi (n.d.). Retrieved from http://www.socialprogressimperative.org/ Agosin, M., & R.Mayer. (2000). Foreign Direct Investment in Developing Countries: Does it crowd in domestic investment? UNCTAD discussion. Alfaro, L., A.chanda, S.Kalemli-Ozcan, & S.Savek. (2003). FDI and Economic Growth; the role of local financial markets. Journal of International Economics. Al-Sadiq, A. (2013). The Effects of Foreign Direct Investment on Private Domestic Investment Evidence from Developing Countries. Empirical Economics, 44(3), 421-439. Liu, X., D.Parker, K.Vaidya, & Y.Wei. (2011). the Impact of Foreign Direct Investment on Labor Productivity in the Chinese Electronics Industry. International Business Review, 10, 421-439. Llyod, P. (1996). The Role of Foreign Investment in the Success of Asian Industrilization. Journal of Asian Economics, 7, 407-433. Lougani, P., & Razin, A. (2001). How Beneficial is Foreign Direct Investment for Developing Countries. International Monetary Fund, 38. Perez-Sagura, A. (2014). FDI and Human Development; What is the Role of Governance? Santosa, W. (2014). Analysis of tje Impact of Foreign Direct Investment on Social Development in Indonesia and Other ASEAN Countries. International Conference on Business, Economics and Accounting. Sharma, B., & Gani, A. (2004). The Effects of Foreign Direct Investment on Human Development. Global Economic Journal, 4(2). Tintin, C. (2012). Does FDI Spur Economic Growth and Development? A Comparative Study. Institute for European Studies Vrije Universeteit Brussels. 202


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UNCTAD. (2007) Transnational Corporations and the Internationalization of R&D. World Investment Report. Wheeler, D., & Mody, A. (1992). International Investment Location Decisions; The case of US firms. Journal of International Economics, 33(1&2), 57-76. World Bank. (1999). Foreign Direct Investment in Bangladesh ; Issue of Long-run Sustainability. Bangladesh Country Office. Zhang, K. (2001). Does Foreign Direct Investment Promote Economic Growth? Evidence from East Asia and Latin America. Contemporary Economic Policy, 19(2), 175-185.

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CHANGING PROFESSIONAL IDENTITIES IN THE ENGLISH NATIONAL HEALTH SERVICE (NHS) ACUTE CARE: INSTITUTIONAL LOGICS AND HEALTHCARE COMMISSIONING

Zlatinka. Gougoumanova University of Essex/James Cook University Australia, Singapore Pinar Guven-Uslu University of Essex, United Kingdom

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ABSTRACT The objective of this research is to examine changing identities and organizational practices in instances in which multiple institutional logics compete, conflict, and complement one another in a mature institutional field. It explores the tensions among the professional logic, the relatively recent business logic, and the new governance logic in the field of acute healthcare in the English National Health Service (NHS). In particular, this research proposal addresses the theorization of medical professionals’ and other clinicians’ identities and commissioning practices. The focus is on the newly legislated entities in England called Clinical Commissioning Groups (CCGs). They are in charge of commissioning acute (and other) healthcare with a budget of about £65 billion. Upon completion, this study is expected to argue that available institutional logics and new structures in a mature institutional field alter professional identities and impact on organizational practices in significant ways. This study would contribute to the understanding of radical institutional change in the public sector and to the further development of the Institutional Logics Theory (ILT). It would do so by examining self-perceived and perceived by others professional identities and organizational practices and their relationships to various types of institutional logics. Twenty-one semi-structured in-depth interviews were conducted in two phases – from September 2012 to April 2013 (when the new CCG system took effect) and from April 2013 to September 2014. So far, seven CCG meetings with the public and NHS conferences have been attended.

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INTRODUCTION The NHS in England has been experiencing momentous reforms for a long time, but particularly so in the last few years (2010-2014). As the biggest public sector employer in Europe and one of the biggest employers in the world, the NHS provides healthcare services to millions of people in England. Nowadays, this general taxation-funded institution faces a plethora of serious challenges, most of which are also relevant to other developed Western countries (Erler et al., 2011; Lapsley and Schofield, 2009) – an ageing population, increasing public demands and expectations, and a fast development in medicine and technology. In today’s environment of financial austerity, healthcare professionals and institutions need to deliver services efficiently and effectively, given resource and capacity constraints (Blumenthal and Dixon, 2012). Any large-scale reform that affects the socially important NHS institution would be worthwhile investigating, especially in the current context of tight financial resources. Thus, this research focuses on a far-reaching restructuring within the NHS in England: the commissioning (mostly purchasing) reforms of acute (hospital or secondary) healthcare services of 2010-2014. Acute care commissioning mainly deals with the planning, purchasing, and contract monitoring of hospital healthcare services from providers (usually hospitals or NHS trusts) by commissioning bodies. The current Coalition government’s plan to reform the commissioning of acute healthcare was first announced in July 2010 in the White Paper Equity and Excellence: Liberating the NHS (Department of Health, 2010). After a consultation period with interested parties, the reform to acute commissioning, among other reforms,took effect on 1 April, 2013. This reform was a result of the enactment of the controversial Health and Social Care Act 2012 (hence, the Act). Objective of this research The objective of this study is to examine the nature of changing professional identities and organizational practices in instances in which multiple institutional logics compete, conflict, and complement one another in a mature institutional field. The public sector in general is a particularly fitting institutional setting for the above research objective because it is located in the interplay of numerous institutional forces – political, economic, and social. Financial constraints, such as the ones triggered by the 2008 credit crunch, are particularly apparent in the 206


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public sector. More specifically, the health sector is examined since it consumes a very large percentage of Western societies’ tax resources. To highlight the social and financial importance of the NHS, it is important to note for instance that the NHS in the United Kingdom (UK), including England, was allocated the biggest percentage of the overall UK public budget in 2011-12: of the total of £322.5 billion for all public services, the NHS was allocated an estimated £101.1 billion, followed by the Department of Education (£51.2 billion), the Department of Defense (£28.6 billion), and others (HM Treasury, 2012). The focus of this research is clinicians involved in the new NHS commissioning bodies called CCGs. The 211 CCGs in England are led statutorily by General Practitioners (GPs) who are local family doctors, but also by other clinicians (for example, nurses and specialist medical consultants). CCGs are important to study since they allocate billions of tax pounds worth of healthcare budgets each year to various healthcare providers. By the end of 2013, CCGs handled £65 billion, or 68%, of the £95 billion English NHS annual budget1. The remaining 32% were handled by non-CCG bodies; for example, by NHS England for primary care (GP services) and for specialized commissioning (the commissioning of rare and/or expensive to treat health conditions). The previous hospital commissioning bodies that were abolished by the Act, the Primary Care Trusts (PCTs), also channeled a large portion of the NHS budget. In 2011-2012 for example, PCTs were allocated close to £93.9 billion, or about 90%, of the total of £104 billion that the Department of Health spent on the NHS in that year (National Audit Office, 2013). In 2010-2011, this sum was £89.9 billion, or 89.5%, of the total NHS budget of £100.4 billion (National Audit Office, 2011). The changing nature of the professional identities of clinicians in CCGs is important to study for several reasons. Firstly, people spend a big part of their lives at the workplace and studying how they envisage themselves at the workplace, and how others conceive of their occupational roles, matters (Vough, 2012). Secondly, assigning by law new responsibilities to physiciansmeans assigning new accountabilities to them. Clinicians are not specifically trained to exercise significant budgetary, financial,and resource allocation roles. How these professionals handle their new duties may affect their everyday practices and self-concept, i.e. their self-identity

1

Please refer to:http://www.england.nhs.uk/2013/03/27/gp-commissioning/ [Accessed on 28 August, 2014].

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(Kenny, Whittle and Willmott, 2011). In turn, their sense of self may also affect the way they perform their new roles. Research questions To achieve the above-stated research objective, this research asks three theoretical research questions: RQ 1:What are the available institutional logics and structures that affect professional identities in the public sector? RQ 2:How do professional identities reflect on organizational practices in the public sector and vice-versa? RQ 3: Which organizational practices are perceived to be anomalous or appropriate by the clinicians involved in commissioning and by managerial healthcare personnel? Why might this be so? Contributions and rationale for this research Firstly, this research intends to contribute to theory since, to our knowledge, no other study using the Institutional Logics Theory (ILT), the theory used here, has been set in the context of commissioning in the contemporary NHS. Elements of the ILT(Friedland and Alford, 1991; Thornton, Ocasio and Lounsbury, 2012, etc.) have been used to study similar reforms in education (see for example,Ezzamel, Robson and Stapleton, 2012) and other fields. We hope that this research will contribute to the further development of the ILT by studying the dynamics between logics, structures, practices and identities in more depth. Secondly, although leadership issues and professional and managerial hybrids have been studied from the perspective of NHS providers (for example, Fitzgerald, Ferlie, McGivern and Buchanan, 2013), no study has so far explored the identities of medical professionals involved in CCG acute commissioning. Thirdly, no other study on CCGs, to our knowledge, has used indepth semi-structured interviews as a method of research. Most academic papers on CCGs have used secondary data only (for instance, Asthana, 2011).

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Fourthly, no other study has used elements of the ILTfrom the critical realist ontological perspective (Bhaskar, 1978; Collier, 1994; Sayer, 2000, etc.). Most ILT research undertakes a positivist stance on the nature of reality, i.e. that reality exists as is and that one needs to find ways to study and explain it. Bhaskar believes that reality has three domains – the ‘real’, the ‘actual,’ and the ‘empirical.’ Generative mechanisms, in his philosophy, underlie events, which in turn underlie experiences (Bhaskar, 1978). In this research, events, the personal experiences of the research subjects, and perceived causal mechanisms become known from the research interview data. Research philosophy and methods As to the research philosophy, this study uses the critical realist ontology of Roy Bhaskar, as already mentioned in the contributions section. It does not take a positivist or interpretivist (Berger and Luckmann, 1967) approach. One of the reasons for this is that critical realism takes into account the effects of structures (institutions, policies, and laws, just to name a few) on agents (individuals or organizations) and vice versa. This research employstwo qualitative research methods – in-depth interviews and nonparticipant observation. The use of multiple methods, or data triangulation, allows for the comparison of different forms of data (Gibson and Brown, 2009). Triangulation is particularly helpful ‘…for examining the same phenomenon from different points of view’ (Gibson and Brown, 2009, p. 59). The interview data come from 20 semi-structured interviews of up to 45 min. each with clinicians and non-clinicians involved directly or indirectly in acute commissioning in the English NHS. The interview subjects are divided into two sets: clinicians and non-clinicians (accountants and senior managers). Data also come from the observation of seven CCGmeetings with the public and NHS national conferences. The study is longitudinal in nature – it covers the periodfrom 19 September, 2012 to 3 September 2014. One reason for this isthat it was desired to obtain data both before and after the reforms became effective – 1April, 2013. The interviews were conducted at a time and place convenient to the research subjects.

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Review of the literature Ninety per cent of patient contacts in the NHS are said to occur in primary care (GP consultations). Except in emergencies and specialist referrals, patients in the UKusually see their GP first (Hausman and Le Grand, 1999). ‘Modern political rationalities and governmental technologies’ are linked to ‘the powers of expertise,’ remind Rose and Miller (1992, p. 173). Besides, GPs are seen as‘…general health experts with strong links to their local populations and a good degree of trust within their local communities’ (Geyer, 2013, p. 49). For these reasons many people, including the Coalition government, believe that GPs are ideally placed to understand the healthcare needs of their local populations. While making savings seems to be a promising side of GP commissioning, Gridley et al. (2012) question the assumption that GPs are the best placed individuals to commission in ways that meet quality standards and lead to equitable outcomes. These commentators posit that‘[t]here is little evidence to suggest that GPs will succeed where others have failed and a risk that, without top-down performance management, service improvement will be patchy, leading to greater, not reduced, inequity’ (Gridley et al., 2012, p. 87). The literature on identities is rich and diverse (Pullen, Beech and Sims, 2007; Lieblich and Josselson, 1994). Numerous studies have been published on cultural, ethnic, racial, gender, and work and professional identities. Identities, on a group level, may characterize several individuals or groups of individuals unified by a ‘we-feeling’ (Rao, Monin and Durand, 2003, p. 796). This social identification is seen by Ashforth and Mael (1989, p. 20) as‘…a perception of oneness with a group of persons…’ Professional identities assume belonging to a recognized professional body. According to The Collins Concise English Dictionary, a profession is‘an occupation requiring special training in the liberal arts or sciences, esp[ecially] one of the three learned professions,law, theology, or medicine.’ It is worth noting that the word ‘profession’ has been used in the literature as synonymous to ‘occupation.’ An occupation has not been officially recognized as a professional body. Larson (2013) and Walby, Greenwell, Mackay and Soothill(1994) observe that professions are occupations that enjoy special powers and prestige and note that society bestows these rewards on the professions because professionals have acquired special bodies of isoteric knowledge and 210


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techniques. In other words, there is a cognitive dimension attached to them. These knowledge and techniques are linked to the central needs and values of society (legal justice, health, financial accountability, etc.). The professions are expected to be altruistic and devoted to servicing the public (a normative dimension). Whether professionals always act altruistically is another question: the main issue with professional groups, according to Saks (1995, p. 3), is whether they‘…subordinate their own interests to the wider public interest in carrying out their work.’ The claim to altruistic ideals, continues Saks, is typical of most professions, especially those in the Anglo-American context. Besides, most codes of professional associations require the maintenance of high standards of practice and the delivery of impartial service. Two conceptions of work/occupational identities have dominated the literature on occupational work, including professional work (Halford and Leonard, 1999). With respect to the first conception, the type of work practiced is believed to determine the worker’s identity, i.e. ‘who we are’ is contingent upon ‘what we do.’ For instance, we treat patients; therefore, we are clinicians. We commission NHS services; therefore, we are commissioners. This concept of work identity, Halford and Leonard posit, is based on an ‘external’ imposition of identities. The authors note further that employing organizations ‘bend’ individuals’ aspirations, personal values, and identities toward these organizations’ own aims and aspirations. ‘While personal choice may play some initial role in the choice of occupation, from that point onwards individuals develop distinctive identities as a consequence of their structural location’ (Halford and Leonard, 1999, p. 103). Thus, according to the ‘We are what we do’ school of thought, work identity is a function of ‘structural’ location. This first approach has been particularly popular in industrial and economic sociology, note the authors. With respect to the second conception, ‘What we do’ is contingent upon ‘Who we are.’ Witman, Smid, Meurs and Willems (2011) find out that only when their medical colleagues consider clinical leaders to be wise men and women, are these same leaders able to influence the clinical activities of their work groups. Theory and theoretical framework The Institutional Logics Theory (ILT)used here is a relatively new sociological theory.It was pioneered by Friedland and Alford (1991). Ezzamel et al. (2012) for example have acknowledged the fact that many authors working with prior types of institutional theories have regretted the lack of organizational micro-practices as opposed to cognitive, normative and 211


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regulative macro-structures. The ILT fills this gap by taking into accountthe micro-foundations of organizational life, i.e. this theory is agency, not just structure, orientated. This research uses Thornton and Ocasio’s (2008, p. 804) definition of ‘institutional logics.’ Logics are‘…the socially constructed, historical pattern of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to their social reality…’The literature on ILT has studied dominant/central logics in institutional fields and orders and multiple logics present in a field or order (Dunn and Jones, 2010; Glynn and Raffaelli, 2013; Greenwood, Díaz, Li and Lorente, 2010). It is not enough that multiple logics exist within an institutional order or field. For logics to be activated, or brought into use, they need to be available to social actors (Thornton et al., 2012). Logics may compete (Kitchener, 2002; Vit, 2011) or conflict (Pache and Santos, 2010; Macfarlane, Barton-Sweeney, Woodard and Greenhalgh, 2013) with one another, as well. The theoretical framework used in this research is presented in Figure 1. It is a shortened and slightly modified version of Thornton et al. (2012, p. 136). The model depicts endogenous, i.e. internal, dynamics of practices and identities within organizations. The macro-, meso-, and micro- levels have been inserted in the margin, where fitting. ‘Macro’ refers to the field/sector level (healthcare), ‘meso’ – to the organizational level (CCGs), and ‘micro’ – to the individual level (clinicians involved in CCGs). The three research questions and the contributions to theory, practice, and policy/legislation have been placed where appropriate. ‘Professional’ rather than ‘[o]rganizational’ identity is studied here (unlike in the original model). ‘Institutional structures’ have been inserted instead of the ‘Appropriate practices and collective identities’ in the original model. Thus, the model takes into account the significant influence of the Act on CCG practices and professional identities. The last two modifications to the original model represent two additional contributions of this study to the four contributions listed above.

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Figure 1 Endogenous dynamics of practices and identities within organizations*

Macro level

Institutional Field Influences: Available Institutional Institutional Structures Logics RQ 1 Contribution to Theory

Micro level

Meso level

Micro level

Professional Identity** Contribution to Theory Contribution to Practice

RQ 2 Practices

Perceptions of Appropriate Variety

Perceptions of Anomalous Variety

Contribution to Policy/ Legislation

RQ 3

* The organizations of concern here are Clinical Commissioning Groups (CCGs). ** The professional identities of clinicans (mostly GPs) involved in acute care commissioning are of concern here. Adapted from: Thornton et al. (2012, p. 136)

Let us turn to the top box of Figure 1. Ezzamel et al. (2012) suggest that in UK education, three main logics are present – the governance logic, the logic of the professions, and the logic of business. The business logic was introduced by a 1980s legislation (Education Reform Act, ERA) that turned head teachers and school governors into business agents who had to compete with other schools for attracting students, while hiring good but‘affordable’ teachers. At this point of the research, it is expected that the answer to RQ1 would at least includethe governance, business, and professional logics. Since GPs are businessmen and businesswomen, i.e. independent contractors of the NHS, they have already been exposed to the logic of business. However, they have not been exposed to this particular type of business commissioning before. The Act mandates that all GPs in England 213


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become members of a CCG. Unlike previous types of healthcare commissioning,characterized by GP involvement,from the 1990s and 2000s (GP fundholding, Total Purchasing Pilots, and Practice-Based Commissioning), CCG commissioning is not voluntary. The neo-liberalist idea of making frontline workers, such as GPs, more accountable and responsible for the allocation and use of resources is very much present here. Regarding the circle in Figure 1, the data pertaining to RQ2 is hoped to contribute to theory and current practice not just in CCGs, but also in other public sector entities. Logics and structures shape professional identities and these identities shape organizational practices. Besides, organizational practices are also shaped by such logics and in turn, these practices shape professional identities. It is expected that there may be a circular relationship here. The two boxes at the bottom (‘Perceptions of Appropriate/Anomalous Practices’) are meant to help contribute to the crafting of new policy/legislation. There is an explanatory element in the answer to RQ3 (the question ‘Why?’). This element relies on the critical realist ontology – reality is ‘real,’ ‘actual’ or ‘experienced.’ The NHS managers and accountants interviewed are expected to perceive clinicians’ professional identity change or lack thereof differently than the clinicians. In other words, they are expected to experience levels of reality that are different from those experienced by the clinicians interviewed. Perhaps, managers and accountants are conditioned to seeing things differently than the clinicians due to their different kind of occupational training and experience.

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METHODOLOGY This research uses a qualitative methodology. Given financial and time constraints, a combination of convenience, maximum variation, and snowball sampling was used (Tracy, 2013). Firstly, it was convenient to invite participants from GP practices and CCGs located near the researchers’ place of work – the English counties of Essex, Norfolk, Suffolk, Great Yarmouth, Cambridgeshire, Sussex, Oxfordshire, London, and others. (convenience sample). Secondly, at the networking events of the NHS conferences attended, willing participants (either clinicians or non-clinicians) were informally invited for a research interview. This oral invitation was followed up by a formal invitation e-mail. Thirdly, immediately after the interviews, the interviewees were asked to provide some references (co-workers and other practitioners) that might be willing to participate in the research (snowball sampling). Access, particularly to clinicians involved in CCGs, was difficult. There was a relatively low response rate in this category perhaps due to the fact that commissioning was still new at the time of field work. It is possible that the clinicians invited did not have the time available for an interview, given their new, very important commissioning responsibilities. Some of the GPs interviewed used their lunch break for the interview – they were that pressed for time. The interviews were transcribed verbatim into Microsoft Word soon after they were conducted. The CAQDAS (Computer-Assisted Qualitative Data Analysis Software) MAXQDA 10 was used to code the interview data. The data coding, in the first coding cycle, was done following the ‘research question alignment’ coding method (Saldaña, 2013). ‘Simultaneous’ coding, also known as ‘overlap’ coding, was allowed. In the second cycle of coding, more specific ‘structural’ codes were assigned and used. This type of code applies ‘a content-based or conceptual phrase representing a topic of inquiry to a segment of data’ (Saldaña, 2013, p. 84). For example, RQ1_Professional logic, RQ1_Governance logic, etc. The interview data reduction was done using code segment weights. During the non-participant observation of CCG meetings and NHS conferences, notes were taken and any printed materials distributed to the attendees were collected. These were used as a basis of analysis of the CCG practices and professional identities. Theoretical, ontological, and

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methodological reflexivity concerns (Haynes, 2012) were taken into account during every stage of this research.

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CONCLUSION The objective of this research was to examine changing identities and organizational practices in instances in which multiple institutional logics compete, conflict, and complement one another in a mature institutional field. It explored the tensions among the professional logic, the relatively recent business logic, and the new governance logic in the field of acute healthcare in the English NHS. In particular, this research proposal addressed the theorization of medical professionals’ and other clinicians’ identities and commissioning practices. The focus was the newly legislated entities in England called CCGs. They are in charge of commissioning acute (and other) healthcare with a budget of about £65 billion. Upon completion, this study is expected to argue that available institutional logics and new structures in a mature institutional field alter professional identities and impact on organizational practices in significant ways. This study would contribute to the understanding of radical institutional change in the public sector and to the further development of the Institutional Logics Theory (ILT). It would do so by examining self-perceived and perceived by others professional identities and organizational practices and their relationships to various types of institutional logics. Twenty-one semistructured in-depth interviews were conducted in two phases – from September 2012 to April 2013 (when the new CCG system took effect) and from April 2013 to September 2014. So far, seven CCG meetings with the public and NHS conferences have been attended. The above research is still ongoing. Upon completion of the fieldwork, transcription, and coding, the data will be analyzed with the research questions and theoretical framework in mind. It is expected that the theoretical framework in Figure 1 will be expanded/modified further, based on the research findings.

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REFERENCES Ashforth, B. E., &Mael, F. (1989).Social Identity Theory and the organization.Academy of Management Review, 14(1), 20-39. doi: 10.5465/AMR.1989.4278999 Asthana, S. (2011). Liberating the NHS? A commentary on the Lansley White Paper, “Equity and Excellence.”Social Science & Medicine, 72(6), 815-820. doi: http://dx.doi.org/10.1016/j.socscimed.2010.10.020 Berger, P. L., &Luckmann, T. (1967).The social construction of reality: A treatise in the sociology of knowledge. London: Penguin. Bhaskar, R. (1978). A realist theory of science. Sussex: Harvester Press. Blumenthal, D., & Dixon, J. (2012). Health-care reforms in the USA and England: areas for useful learning. The Lancet, 380(9850), 1352-1357. doi: http://dx.doi.org/10.1016/S01406736(12)60956-8 Collier, A. (1994). Critical realism: An introduction to Roy Bhaskar’s philosophy. London: Verso. Department of Health (2010).Equity and excellence: Liberating the NHS. London: Stationery Office. Dunn, M. B. and Jones, C. (2010). Institutional logics and institutional pluralism: The contestation of care and science logics in medical education, 1967-2005. Administrative Science Quarterly, 55(1), 114-149.doi: 10.2189/asqu.2010.55.1.114 Erler, A., Bodenheimer, T., Baker, R., Goodwin, N., Spreeuwenberg, C., Vrijhoef, H. J. M., . . . Gerlach, F. M. (2011). Preparing primary care for the future – perspectives from the Netherlands, England, and USA. Zeitschrift für Evidenz, Fortbildung und Qualität im Gesundheitswesen, 105(8), 571-580. doi: 10.1016/j.zefq.2011.09.029 Ezzamel, M., Robson, K., & Stapleton, P. (2012). The logics of budgeting: Theorization and practice variation in the educational field. Accounting, Organizations & Society, 37(5), 281-303. doi: http://dx.doi.org/10.1016/j.aos.2012.03.005 218


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Fitzgerald, L., Ferlie, E., McGivern, G., & Buchanan, D. (2013).Distributed leadership patterns and service improvement: Evidence and argument from English healthcare.Leadership Quarterly, 24(1), 227-239. doi: 10.1016/j.leaqua.2012.10.012 Friedland, R., &Alford, R. R. (1991). Bringing society back in: Symbols, practices, and institutional contradictions. In W. W. Powell, & P. J. DiMaggio (Eds.).The new institutionalism in organizational analysis (pp. 232-263) Chicago: University of Chicago Press. Geyer, R. (2013). The complexity of GP commissioning: Setting GPs “free to make decisions for their patients” or “the bravest thing” that GPs will ever do. Clinical Governance: An International Journal, 18(1), 49-57. doi: 10.1108/14777271311297957 Gibson, W. J., &Brown, A. (2009).Working with qualitative data. London: Sage Publications. Glynn, M. A., &Raffaelli, R. (2013). Logic pluralism, organizational design, and practice adoption: The structural embeddedness of CSR programs. In M. Lounsbury, &E. Boxenbaum, (Eds.).Institutional logics in action, Part B, Research in the sociology of organizations, Vol. 39B(pp. 175-197).Bingley: Emerald Group Publishing. Greenwood, R., Díaz, A. M., Li, S. X., &Lorente, J. C. (2010).The multiplicity of institutional logics and the heterogeneity of organizational responses.Organization Science, 21(2), 521-539. doi: doi:10.1287/orsc.1090.0453 Gridley, K., Spiers, G., Aspinal, F., Bernard, S., Atkin, K., & Parker, G. (2012). Can general practitioner commissioning deliver equity and excellence? Evidence from two studies of service improvement in the English NHS.Journal of Health Services Research & Policy, 17(2), 87-93. doi: 10.1258/jhsrp.2011.010176 Halford, S., &Leonard, S. (1999). New identities?Professionalism, managerialism and the construction of the self.In M. Exworthy and S. Halford (Eds.).Professionals and the new managerialism in the public sector(pp. 102-120). Buckingham: Open University Press. Hausman, D., &Le Grand, J. (1999). Incentives and health policy: Primary and secondary care in the British National Health Service. Social Science & Medicine, 49(10), 1299-1307. doi: 10.1016/S0277-9536(99)00204-X 219


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Walby, S., Greenwell, J., Mackay, L., &Soothill, K. (1994).Medicine and nursing: Professions in a changing health service. London: Sage Publications. Witman, Y., Smid, G. A. C., Meurs, P. L., & Willems, D. L. (2011). Doctor in the lead: Balancing between two worlds. Organization, 18(4), 477-495. doi: 10.1177/1350508410380762

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THE RELATIVE PROFITABILITY OF FAMILY DOMINATED BANKS IN BANGLADESH Tasmina Mahbub Manchester Business School, United Kingdom Kate Barker University of Manchester, United Kingdom Kent Matthews Cardiff University, United Kingdom

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ABSTRACT There is a growing consensus in the literature that family dominated ownership has a positive effect on non-financial firm performance. However, what little has been researched on the effect of family domination on the performance of banks shows no consensus. This paper examines the relative profit performance of family dominated banks in Bangladesh in the context of competing hypotheses of bank market structure. Using panel estimation we model profit performance of banks and show that the principal drivers are efficiency and non-performing loans. We also find that family dominated banks are less efficient and less profitable and that the source of the weaker performance is its lending practices and non-performing loan position and the practice of soft crony capitalism. Keywords: Bangladesh banking market, profit performance, family dominated banks. JEL Codes: G21, G28

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INTRODUCTION The Bangladesh banking system has undergone unprecedented changes over the past three decades where the country moved away from state control to a market-based open economy by adopting a more stabilized, liberal and deregulated programme under the influence of the World Bank and the IMF. The industry had opened up to greater competition through the entry of new private banks and more liberal entry of foreign banks by the initiation of Financial Sector Reforms Programme (FSRP) in 1991. Over this period the performance of its banking sector will have been impacted by the reforms. Also in Bangladesh, the commercial banks are classified into three generations depending upon their year of incorporation. The earliest generation (Generation 1) are banks that are largely dominated by family shareholding. The literature on family dominated ownership of corporations suggests that such firms have certain advantages that result in superior performance. Principally, the absence of agency problems means that the preferences of management and shareholders are aligned resulting in low asymmetry of information and moral hazard issues. However, it can be argued that this line of reasoning does not extend to banks. Family dominated ownership of banks is different. While in the former case the family has equity invested in the enterprise, in the case of banks, the family is able to influence loan advances to personal and wider family benefit in excess of the equity invested. The expropriation of bank assets leads to low performance and profitability. This paper aims to test the hypothesis that family dominated ownership of banks exerts a negative influence on bank performance. The paper is organised in the following way. The next section describes recent trends in the Bangladesh banking market. Section 3 reviews the literature on bank profitability and the role of family dominated ownership. Section 4 outlines the data the methodology and the results. The final section concludes. Banking in Bangladesh Bangladesh's financial system is dominated by banks where the banking sector accounts the most of total assets of the financial sector. At present, the banking sector of Bangladesh is constituted by 4 State Owned Commercial Banks (SOCBs), 5 Specialized Development Banks (SDBs), 30 Private Commercial Banks (PCBs) and 9 Foreign Commercial Banks (FCBs). 225


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Regardless of differences in their sizes and scope of activities, the main assets of all banks are loans and advances and investment in government securities while main liabilities are time and demand deposits. Prior to 1982, the SOCBs were the dominant players in the banking sector; however, after privatization and the emergence of the PCBs in 1982, the relative position of the SOCBs faded. In 2011 a total of 47 scheduled banks comprising 7664 branches rural and urban branches, Tk. 4855.1 billion of total assets and Tk. 3721.9 billion of deposits are operating in Bangladesh under full control and supervision of Bangladesh Bank (Reserve Bank). Table 1, outlines the distribution of assets, deposits and branches in 2011. Table 1: Distribution of Assets, Deposits and Branches (in 2011) Type of No Asset Deposit No of Branches % of Total Branches Banks 4 4 30 9 47

Amount 1384.3 295.4 2854.6 320.8 4855.1

% 28.5 6.1 58.8 6.6 100

Amount 1044.9 183.4 2266.5 227.1 3721.9

% 28.1 4.9 60.9 6.1 100

Urban 1243 157 1805 62 3267

Rural 2161 1225 1011 0 4397

Total 3404 1382 2816 62 7664

SOCB SDB PCB FCB Industry Source: Bangladesh Bank Website, 2012 (www.bangladesh-bank.org)

Urban 36.52 11.36 64.10 100 42.63

Rural 63.48 88.64 35.90 57.37

Total 100 100 100 100 100

Private Commercial Banks (PCBs) were established in the decades of 1980's and at present, there are 30 local PCBs operating in Bangladesh. PCBs are classified under two (2) categories based on their operations regarding interest charging structure – conventional and Islamic. At present, 23 conventional PCBs operate in the banking sector of Bangladesh and 7 Islami Shariah based banks that operate according to Islami Shariah based principles. PCBs are classified under 3 generations based on their year of establishment. First generation banks are those established between 1982 and 1990. Second generation banks are those established between 1991 and 1998. Third generation banks are those established after 1998. The first generation PCBs started its journey in 1982 when the ownership and control was

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transferred from public to private sector. In total 8 banks are considered as 1st generation2 PCBs where 6 are conventional PCBs and 2 are Islami Shariah based PCBs. The 1st generation PCBs was established following the amended rules and regulation of Bangladesh Bank Ordinance, 1972. Poor training and regulation gave the first generation banks little in the form of guidance on lending criteria or proper corporate governance. The incentive system for the banks stressed disbursements rather than recoveries and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986 and the rate on industrial loans was even worse. On the other hand, the lending rates on priority sectors were kept deliberately low, which did not cover the risk and cost. Thus, financial repression was the main cause for poor performance where interest rate ceiling and high NPLs and overall lower profitability. Following pressure from the IMF to strengthen internal bank management and credit discipline, the Banking Companies Act 1991 was enacted and 1st generation PCBs took license to operate under the new laws. In general 1st generation banks had a larger capital base, a larger client base and higher reserve than 2nd and 3rd generation banks. But one additional feature that separates generation 1 banks is that they have a corporate governance structure of a board of directors with family connections. Bank Profitability and family ownership The context of understanding the effect of ownership structure on bank profit performance is the determinants of bank profitability. In the main the literature relating to bank profitability follows the structural approach of the Structure-Conduct-Performance (SCP) hypothesis, the Efficient 2

st

1 Generation Conventional PCBs are 1. AB Bank Ltd, 2. National Bank Ltd, 3. The City Bank Ltd, 4. United st Commercial Bank Ltd., 5. Pubali Bank Ltd. and 6. Uttara Bank Ltd. whereas 1 Generation Islami Shariah based PCBs are 1. Islami Bank Bangladesh Ltd and 2. ICB Islamic Bank Ltd.

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Structure (EFS) hypothesis and the Relative Market Power (RMP) hypothesis (Gilbert, 1984). These hypotheses investigate whether a highly concentrated market causes collusive behaviour among the larger banks, resulting in superior market performance and whether it is the efficiency of larger banks that enhances their performance. The SCP model is concerned with questions about the trilateral connection which relates the three poles of structure, conduct and performance. Traditional SCP framework suggests that the possibility of collusive behaviour increases when the market is concentrated in the hands of a few firms and the higher the market concentration is, the larger the profitability of the firms of that industry. The assumption is that the degree of concentration exerts a direct influence on the degree of competition among firms where highly concentrated market will lower the cost of collusion and foster tacit and/or explicit collusion on the part of firms. As a result of this collusion, all firms in the market will earn monopoly rents. The SCP hypothesis assumes a causal relationship running from the structure of the market to the price setting behaviour of firms and ultimately to profitability through the market power channel. Demsetz (1973) formulated an alternative explanation and proposed the Efficiency Structure (EFS) Hypothesis. Applied to banking sector, this hypothesis stipulates that a bank which operates more efficiently than its competitors gains higher profits resulting from low operational costs and holds an important share of the market. Consequently, differences at the level of efficiency create an unequal distribution of positions within the market and an intense concentration. Since efficiency determines market structure and performance, the positive relationship between these two seems superficial. The Efficient Structure (ESF) Hypothesis posits that concentration reflects firm-specific efficiencies (Berger, 1995). Since more efficient firms are expected to capture a higher market share, one way of distinguishing between the market power and efficient structure hypothesis is to include both market share and concentration in the profitability equation. If concentration then becomes insignificant, this goes against the SCP hypothesis and refers that market share has influence on profitability. In contrast to the ESF, the Relative Market Power (RMP) hypothesis argues that banks with a higher market share and well-differentiated products exert more market power and earn higher 228


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profits, independent of how concentrated the market is (Shepherd, 1986). It is uniquely the banks with a large market share and diversified products who exert their market power to determine prices and make profits. Consequently, under the RMP hypothesis, individual market shares accurately determine market power and market imperfections. The RMP hypothesis is empirically proved when concentration introduced in the explanatory equations of performance is found non-significant in contrast to market share which should be positively and significantly correlated with price and/or profitability. Nevertheless, it is not obvious that employing market structure in these equations produces unambiguous results. A bank with a strong position in the market may either reinforce its domination over the market or achieve a higher efficiency. RMP hypothesis posits that the more efficient firms earn supernormal profits. A consequence of greater efficiency could be higher output. The empirical evidence for each of these hypotheses is mixed. A large number of studies find evidence in support of the hypothesis that market concentration enhances banks’ profitability. In a survey of studies Gilbert (1984) found that 32 out of 44 studies found supporting evidence for the SCP. Since then numerous studies have confirmed this finding (Bourke, 1989; Molyneux and Thornton, 1992; Lloyd-Williams et al., 1994). However, contrary findings by Gillini et al (1984), Smirlock (1985) and Evanoff and Frontier (1988) found evidence in support of the ESF hypothesis, while studies of the RMP are unable to distinguish between competing hypotheses (Lloyd-Williams and Molyneux, 1994, and Molyneux and Forbes, 1995). Typically researchers use external measures of efficiency as an independent variable to distinguish between the RMP and ESF hypotheses . Studies on bank profitability in Bangladesh reflect the consensus of mixed findings. Samad (2008) tests the SCP and ESF hypotheses and finds support for the ESF model. In contrast Ahamed (2012) using a 3-bank concentration ratio finds strong support for the SCP hypothesis which is supported by Sayeed et al (2012) who use a HHI measure of concentration. Ownership structure is also viewed as an important determinant of firm performance. The relationship between the ownership structure and profitability is based on Agency Theory of Jensen and Meckling (1976). According to the Agency Theory, a principal-agent relationship exists between the owners and the managers where both differ in terms of preferences. In case of banks, managers with different capital structures tend to choose different activities which are sometimes conflicting from the view of the Board of Directors (BODs). Agency theory argues 229


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that directors seek to maximize their own personal benefit and thus take actions that are advantageous to themselves but detrimental to shareholders (Tricker, 2009). The literature on the effects of family dominated ownership of firm performance is both voluminous and contrary. The arguments that suggest that family dominated boards, alleviate the free-rider problem associated with atomistic shareholders; lower information asymmetry between the Board and senior management; less short-termism as family shareholders maximise the wealth of future generations, will have positive relationship with performance. However, family dominated firms may be subject to conflicts of interest between controlling and minority shareholders, resulting poor managerial decisions and misappropriation of resources . There is a burgeoning literature on the relationship between ownership and bank performance . But little has been researched, particularly in the emerging economies, on the effects of family dominated ownership on bank performance. In the case of banks, it can be argued that the leverage associated with conventional commercial banks leans the motivation towards the expropriation thesis than the maximisation of intergenerational wealth. Surifah (2013) finds that family dominated ownership of banks in Indonesia perform poorly compared with government and foreign owned banks, but Abdul-Rahman and Reja (2015) finds only a weak negative relationship between family ownership and profitability.

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METHODOLOGY This study takes a balanced panel of 34 commercial banks from 2001-2012. The data was collected from the Bureau Van Dijk Bankscope database and individual bank statements. As a measure of profitability both return on assets (ROA) and return on equity (ROE) have been used widely in the literature. In the case of Bangladesh, the incidence of negative profits and negative equity for a number of banks made the ROE measure unreliable and thus we concentrate on ROA. The data used in estimation are separated into bank specific, industry specific and macroeconomic variables. Industry specific variables are the Herfindahl-Hirschman Index (HHI) of market concentration, the k-bank concentration ratio (CRk) and market share (MS). Macroeconomic variables included real GDP growth, inflation and the real rate of interest. Bank specific variables are defined in Table 2 below which also presents a snapshot of the data used. A novel feature of the data is that X-efficiency is estimated using a bootstrap method in Data Envelopment Analysis with operational costs and fixed assets as inputs and net interest revenue and non-interest revenue as outputs3. Table 2: Data definition and summary statistics 2001-2012 Definitions

Notation

Mean

SD

Min

Max

Profitability

Net profit (Before Tax)/ Total Asset %

ROA

0.9434

2.363

-21.97

6.06

Credit risk

Net NPL / Total Loans

NPLRAT

.1024

.2589

0

4.273

Credit risk

Loan Loss Provisions/ Total Loans

LLPRAT

.0152

.0509

-.0096

.9559

Liquidity Risk

Liquid Asset /Total Assets

LARAT

.1714

.0914

0

.8722

Capital Adequacy

Equity /Total Assets

EQTA

.0587

.0869

-.7721

.6887

Risk Assets

Total Loans /Total Asset

TLTA

.6475

.1266

0

1.3756

Funding

Total Deposit / Total Asset

TDTA

.8467

.1048

0

1.5478

Bank Specific

Measures

3

For a full explanation see Mahbub (2014), chapter 3

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Macro

Industry –Related


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Size

Log of Real Asset

LNRAST

10.33

1.24

0

12.77

X- Efficiency

Technical Revenue Efficiency

EFF

.8415

.1807

.1145

1

Management costs

Operational expenses/ Assets

OHEFRAT

.0228

.0124

0

.1852

Family-board

Gen 1 Banks = 1, others = 0

GEN1

.3236

.4684

0

1

Concentratio n

HerfindahlHirschman Index (assets)

HHI

735.8

200.6

459.5

1105

Concentratio n

Concentration Ratio of 5 Banks (assets)

CR5

48.05

6.658

37.21

57.98

Market Share

Individual bank market share based on assets

MS

.0294

.0361

0

.2445

SOCB

Government Banks denoted as 1 while others 0

OWNRSP

.1176

.3226

0

1

Inflation

Current period inflation rate (consumer prices)

INF

6.91

2.37

1.93

10.33

Economic Growth

Real Gross Domestic Product

RGDP

5.94

.64

4.42

6.71

Real Interest

Inflation adjusted Rate of Interest (%)

RINT

8.70

2.79

4.17

14.03

The model that was estimated follows the framework of Smirlock (1985), Scott-Frame and Kamerschen (1997) and others as shown below: 𝑛 𝜋𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝑅𝑘 + 𝛼2 𝑀𝑆𝑖,𝑡 + 𝛼3 𝐸𝐹𝐹𝑖,𝑡 + ∑𝑚 𝑗=1 𝛽𝑗 𝑋𝑗,𝑖,𝑡 + ∑𝑘=1 𝛾𝑘 𝐺𝐸𝑁1 ∗ 𝑋𝑘,𝑖,𝑡 + 𝑢𝑖,𝑡 (1)

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Where 𝜋𝑖,𝑡 represents ROA of bank i in year t, the first three independent variables are as in Table 2 above, 𝑋𝑗,𝑖,𝑡 are the j bank variables, GEN1 represents the dummy variable that identifies the generation 1 (family dominated boards) and 𝑋𝑘,𝑖,𝑡 are a subset of the bank-specific variables. If the traditional SCP hypothesis holds 𝛼1 > 0 and 𝛼2 = 0. If the ESF model holds 𝛼1 = 0 and 𝛼2 > 0. If the RMP hypothesis holds independently of MSi,t 𝛼3 > 0. If family-dominated boards exert a negative influence on bank profitability then the coefficients associated with the interactive variables 𝛾𝑘 < 0. The modelling strategy is general-to-specific by which the preferred specification is obtained through a series of variable deletions. Pooled estimation is tested against fixed effects and random effects and then if fixed effects is not rejected the testing proceeds with fixed effects against random effects. Table 3 presents our final results.

Table 3: Panel estimation; Dependent variable ROA; ‘p’ values in parenthesis. Variable

Pooled

Fixed Effects

Random Effects

Intercept

-6.03 (.017)**

2.207 (.489)

-5.985 (.017)**

NPLRAT

-1.667 (.001)***

-1.421 (.000)***

-1.172 (.001)***

LARAT

-1.717 (.061)*

-2.152 (.026)**

-1.726 (.059)*

EQTA

8.311 (.000)***

3.568 (.005)***

8.278 (.000)***

LNRAST

.8627 (.000)***

.3820 (.094)*

.8609 (.000)***

CR5

-.054 (.158)

-.079 (.027)**

-.054 (.155)

MS

-23.72 (.000)***

-19.83 (.007)***

-23.67 (.000)***

RINT

.2310 (.008)***

.2073 (.010)***

.2310 (.008)***

EFF

1.687 (.001)***

.7582 (.162)

1.675 (.001)***

OHEFRAT

-95.41 (.000)***

-98.68 (.000)***

-96.69 (.000)***

GEN1*NPLRAT

-1.083 (.383)

-4.213 (.002)***

-1.096 (.377)

GEN1*OHEFRAT

5.736 (.461)

-59.94 (.000)***

5.582 (.72)

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ACEB Conference Proceedings ̿𝑅̿̿2̿ = 0.6807

www.academy.edu.sg ̿𝑅̿̿2̿ within = 0.6194

̿𝑅̿̿2̿ within = 0.5449

F(33, 361) = 4.42***

LM 𝜒12 = 10.25**

*** significant at the 1%; ** significant at the 5%; * significant at the 10%

The second column shows the results from pooled estimation, the third from one-way fixed effects and the fourth column from random effects. The final row of the third column shows the F test for the deletion of the fixed effects which rejects its removal. The LM test in column 4 shows that the random effects cannot be rejected against the pooled. The large differences in some of the coefficients between the FE and RE estimates render the Hausman test inconclusive. The similarity of the coefficients in the RE and pooled which has been rejected in favour of FE makes us favour the fixed effects results. Concentrating on the fixed effects results, we can at once reject the traditional SCP hypothesis as the CR5 variable exerts a negative effect on profitability4. In contrast to Ahamed (2012), we find no support for the SCP hypothesis. Similarly, we find no support for the ESF hypothesis in contrast to Samad (2008). The efficiency variable is positive but not statistically significant which means that our results do not provide any strong evidence that can distinguish between the ESF and the RMP hypothesis. The two interactive variables with GEN1 (the generation one – family dominated boards) exert an independent negative effect of profitability confirming the hypothesis that allowing for all other factors the generation 1 banks perform poorly against the other commercial banks5. The two specific variables identify the source of the difference in performance. Family dominated boards have higher NPLs and higher overhead costs than other banks6.

4

A similar result was obtained using HHI. A difference in means test show that the mean NPLs of generation 1 banks is significantly higher than NPLs of other banks (t = 6.73) and similarly the cost-asset ratio for generation 1 banks is higher than other banks (t = 4.64). 6 This result is supported by interview data reported in Mahbub (2014) chapter 5. 5

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CONCLUSION This paper has examined the performance of family dominated ownership of banks in Bangladesh within the context of the SCP-ESF-RMP models of bank profitability. The results are tantalising in that there would appear to be some evidence of profitability under-performance by family dominated banks. In passing, this study has also shed light on the conventional SCPESF-RMP hypotheses of bank profitability. In contrast to previous studies the results provide no support for the SCP and ESF models and only weak support for the RMP model, suggesting a more complex market structure performance in the Bangladesh banking industry. The results are tantalising in that the under-performance of generation 1 banks is consistent with the argument that family dominated banks influence lending to maximise the welfare of the family group – hence the higher NPL history. Also family dominated banks may encourage managerial ‘feather bedding’ by tolerating higher operational costs per asset. However, these suggestions are also consistent with the view that the post-privatization was a learning period that culminated in many mistakes resulting in an overhang of NPLs for generation 1 banks that generation 2 and 3 banks were able to avoid. The higher costs of the generation banks could also be due to the wider branch network they inherited on privatization. Clearly further research needs to be done to isolate the family influence on the corporate governance of particular banks. Until such research is conducted the results presented in this paper remains only tantalisingly indicative.

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REFERENCES Abdul Rahman A N A and Reja A F M (2015), ‘Ownership structure and bank performance’, Journal of Economics, Business and Management, 3, 5, 483-487, doi 10.7763/JOEBM.2015.V3.232 Ahamed M (2012), ‘Market structure and performance of Bangladesh banking industry: A panel data analysis’, Bangladesh Development Studies, XXXV, 3, 1-17 Berger, A. N. (1995). ‘The Relationship between Capital and Earnings in Banking.’ Journal of Money, Credit and Banking, 27(2): 432–456 Berger A, Clarke G, Cull R, Klapper L and Udell G (2005), ‘Corporate governance and bank performance: a joint analysis of the static, selection, and dynamic effects of domestic, foreign and state ownership’, Journal of Banking and Finance, 29, 2179-2221 Bourke, P. (1989), ‘Concentration and other determinants of bank profitability in Europe, North America and Australia’, Journal of Banking and Finance 13, 65-79. Cahine S and Goergen M (2014), ‘Top management ties with board members: How they affect pay-performance sensitivity and IPO performance’, Journal of Corporate Finance, 27, 99-115 Demsetz, H. (1974), ‘Two Systems of Beliefs about Monopoly’, in Goldschmid, H (ed.) Industrial Concentration: The New Learning, Boston: Little, Brown. Evanoff, D. and D. Fortier (1988). ‘Re-evaluation of the structure-conduct-performance paradigm in banking’, Journal of Financial Service Research 1, 277-294. Gilbert, R. Alton (1984), ‘Bank Market Structure and Competition: A Survey’, Journal of Money, Credit and Banking, 4 - part 2, November, pp. 617-45. Gillini T, Smirlock M and Marshall W (1984), ‘Scale and scope economics in the multi-product banking firm’ Journal of Monetary Economics, 13, 393-405 Jensen, M. and Meckling, W. (1976) ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’. Journal of Financial Economics, 3, pp. 305-360.

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Lloyd-Williams, D., Molyneux, P. and J. Thornton (1994). ‘Market structure and performance in Spanish banking.’ Journal of Banking and Finance 18, 433-443. Mahbub T (2014), Essays in the efficiency and performance of Bangladesh banking, Manchester University unpublished PhD thesis Megginson W (2005), ‘The economics of bank privatization’, Journal of Banking and Finance, 29, 1931-1980 Molyneux, P., and Forbes, W. (1995), ‘Market Structure and Performance in European Banking’, Applied Economics, Vol.27, pp.155-59. Molyneux, P., and Thornton, J. (1992), ‘Determinants of European bank profitability: A note’ Journal of Banking and Finance 16, 1173-1178. Samad A (2008), ‘Market structure, conduct and performance: Evidence from the Bangladesh banking industry’, Journal of Asian Economics, 19, 181-193 Sayeed M A, Piyadasa E and Hoque M (2012), ‘Bank profitability : the case of Bangladesh’, International Review of Business Research Papers, 8, 4, 157-176 Scott-Frame W and Kamerscen D R (1997), ‘The profit-structure relationship in legally protected banking markets using efficiency measures’, Review of Industrial Organization, 12 922 Smirlock, M. (1985). ‘Evidence on the Non Relationship between Concentration and Profitability in Banking’ Journal of Money, Credit and Banking, 17(1): 69-83. Surifah (2013), ‘Family control, board of directors and bank performance in Indonesia’, American International Journal of Contemporary Research, 3, 6, 115-124 Tricker, R.I. (2009) Corporate Governance: Principles, Policies and Practices, An International Review, Oxford University Press

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THE ROLE OF VENTURE CAPITAL FOR ENTREPRENEURSHIP IN LESS DEVELOPED ECONOMIES Thomas Straub School of Management Fribourg, Fribourg, Switzerland Stefano Borzillo SKEMA Business School, Paris, France Alexandru Caragea Bucharest University of Economic Studies, Bucharest, Romania Aron Jinaru Bucharest University of Economic Studies, Bucharest, Romania Roxana Voicu-Dorobantu Bucharest University of Economic Studies, Bucharest, Romania

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ABSTRACT In this paper, we conceive an entrepreneurial learning model – the action learning loop (A-LL) which highlights the essential role that social instructors and venture capital investors could play in triggering a sustainable development in less developed economies. We take the case of Romania to test the utility and relevance of our model in the Romanian context. In addition, we provide findings that stem from a comparison between Romanian potential entrepreneurs and potential entrepreneurs from France and Switzerland. Finally, we conclude that the A-LL model demonstrates a promising utility.

This work has been supported by SNF and UEFISCDI within the Romanian-Swiss Joint Research Project IZERZ0 _142306 / 1 “The Role of Venture Capital to Support Entrepreneurship”.

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INTRODUCTION After analyzing the outcomes of international aids (different schemes, programs, donors, etc.) for developing regions (Africa, Asia, Latin America, even Eastern Europe),some economists who worked in the IMF and World Bank (e.g. Esterly [10], Stiglitz,[31] etc.) reached the conclusion that these remedies failed to achieve the growth they were expected to reach. For instance, Esterly [10] stressed„We now have statistical evidence to back up theories of how the panaceas (international / foreign money for growth) failed and how incentive-based policies can work. Incentives can change and start countries on the road to prosperity. It won’t be easy. Incentives are not themselves a facile panacea”.Moreover,Stiglitz [31] claimed„ … [w]hat separates developed from developing countries is not just a gap in resources, but a gap in knowledge.…policies that transformed their economies and societies into learning societies would enable them to close the gap more rapidly, with market increases in incomes …but rather than promoting the learning sectors the policies foisted on developing countries by, say, the international economic institutions, have actually discouraged the learning sector (industry) in many developing countries”. Let us turn to Romania now. Romania is a very special case of an economy that is undergoing a huge restructuring process. The process began 25 years ago, and was generated by the transition from a command economy to a free market economy. This command economy wasinstituted by the nationalization of almost all means of production. It was dominated by autarchic ambitions in which private initiative was completely absent and, even more, completely banned and ideologically blamed,for more than 50 years. In the transition process (from a command economy to a free market one), unlike the very broad spectrum of technical and intellectual competencies and skills that were formed in the context of an autarchic socialist economy, the entrepreneurs had to relearn the entrepreneurship virtually from zero, taking into consideration an acute shortage of financial resources and domestic private capital. This process, however, could not be driven and strategically planned. This was due to the typical entrepreneurial learning, which involves metacognitive components that are essential for experiential training, and for which environment plays a crucial role. So without entrepreneurial learning,individuals cannot form a coherent set of complex motivations, attitudes and skills that differentiate them from other key players (managers, technicians, etc.) of a performing economy. 240


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Despite a pretty good capacity to form technicians and specialists in Romania, there still is a dysfunction in the process of formation of a Romanian entrepreneurial class, skilled enough to be competitive in a globalized world economy. This is evidenced by the fact that, according to different EU and global entrepreneurship and innovation measures and indexes published over the last few years, Romania is still in the same precarious situation. Indeed, Romania is positioned last in the annual rankings of comparative evaluations such as the Global Entrepreneurship Monitor, the Global Competitiveness Report, the Innovation Union Scoreboard, the Global Venture Capital & Private Equity Country Attractiveness Index, etc. Furthermore, one of the most sensitive socio-economic indicators is the fact that the Romanian economic environment still generates anegative balance flow of high skilled people, a continuous decline of researchers and inventors, aswell as apoor development sector of knowledge intensive services.These facts indicate that the Romanian economic environment is perceived as a repellent force for categories such as professionals, private investors, and entrepreneurs, for example. In reality, it is precisely this category of economic agents that could potentially contribute to the sustainable path of economic development of Romania.Another bad news is that in the last 10 years, Romania lost, by migration flows, 129 specialists - per hundred thousand inhabitants - according to our processing of Eurostat data [34]. There had also been a decline of 11.2 researchers - per hundred thousand inhabitants - according to our calculations [countries dates World Bank - [36]. Last but not least, Romania has the fewest researchers per hundred thousand inhabitants (82.8), and the least knowledge intensive firms (per hundred thousand inhabitants) in the EU [35]. All these poor indicators generate a major repellent force for venture capital investors, both in terms of perceived risk and in terms of operating costs. Concretely, this means a very low potential for generating start-up viable projects that would lead to a consistent deal flow for business angel investor type and/or early stage venture capital. Venture capital still has a very weak presence in the Romanian economy.Further on, there is a deficit of investment in the training of human resources, which becomes permanent and amplifies the competitive gap sources. So a high percentage of the best specialists migrate every year out of the country,thus generating added value to other economies and not to the Romanian economy. The economic context described above highlights a vicious circle in which taxpayers' money allocated to education does not generate an impact over the critical threshold required to start a 241


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sustainable development.Lack of capital for innovative start-ups reduces the chances of the occurrence of a critical mass of competitive entrepreneurs. This leads to a reduced capacity to exploit the training of specialists. So, a non-competitive economic environment, with a negative brain balance, and with an inadequacyin the formation of an entrepreneurial performance culture, is considered as a repellent force for angel investors and venture capitalinvestments.To break this vicious circle, it is required, on the one hand,to get access to financial resources for innovative startups, and on the other hand, to get some special training programs for potential entrepreneurs and other economic agents. Supported by a conceptual model and a quantitative research, this paper argues that such resources for start-up projects should be allocated through mechanisms of venture capital and not by bureaucratic state judgment.

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METHODOLOGY How do entrepreneurs learn? We based our argument on the observation that entrepreneurs are very special typesof thinkers and learners. Entrepreneursuse specifically nonlinear (intuitive, creative, emotional, informal, action-oriented) thinking and learning styles, and rarely linear (analytical, rational, logical) approaches. From a pragmatic perspective, entrepreneurship can be viewed as a way to respond to environmental, cultural, social, legal, economic, financial, managerial, technical, etc. challenges. That is, it can be viewed as an action-learning process in which the ‘will factor’ plays a major role, and in which specific intrinsic (passion) and extrinsic motivations are decisive. As Lebret [16] shows, the (innovative) entrepreneur needs “passion and ambition; [a] pioneering spirit which accepts uncertainty and risk-taking, which tolerate failure; innovation via a trial and error process; [a] feeling of urgency and patience from the social environment; rapid growth and [a] critical mass; motivation, hard work, connections, personal networks, mentors; ...experienced teams backing the founders and motivated by [an] optimized capital structure”.In addition to learning and assimilation of specific knowledge and practices, emotional aspects those related to the will, confidence and courage, whichcannot be treated purely rationally in formal education - are essential features to be cultivated during entrepreneurial education. Therefore the entrepreneurial learning is viewed from a broader perspective, in order to capture the unassisted learning components (informal), and the metacognitive specificity of entrepreneurs. In this respect, we believe there is a need to develop a model of ‘action learning’ to better understand the entrepreneurial learning process. We present this model (The Actionlearning loop)in the next section.

The Action-learning loop (A-LL) The A-LL model allows an understanding of the dynamics of the complex interaction between motivating and motivation in learning action. In addition, the model is an adaptation of two other models: one developed by Colceag [5] and another one elaborated by Caragea [3]. A. The first portion of this cognitive process has a Piaget-type architecture. Learning a new ability (1) occurs on the assimilation layer. Once developed, the new ability is transferred 243


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{T} to the ‘enactive’ (enactment) level where an experiential/experimental behavior on the (dis)integration layer puts it into practice. This (dis)integration layer comes into conflict with the old cognitive structures/routines, which can be deconstructed/disintegrated; in some cases, cognitive lacunas can be emphasized. This process leads to a validation/valorization {V} of the new cognitive experience, after which, the accommodation and concretization process of the new cognitive acquisition occurs on the embodiment level (3), by means of what Piaget [22] calls the “équilibrationmajorante”. The latter is a process dictated by a need for cognitive optimization, through which, as Broche et al. show [2], this process naturally results (more or less consciously) in "the introduction of a new maximum compatible with the maximum preservation of acquisitions already validated". The result is a leap in the ability to respond to new demands expected/required {E} at the enactment level, coupled with jumps in performance (4). This time, however, we can refer to the success or failure of the learning sequence – of the cost-benefit ratio after the learning process. The learning sequence requires an inherent investment effort, and strongly influences the mood for and the attitude to attempt new learning sequences. B. The second part of the illustrated process highlights the effects and consequences of success that is beyond expectation, one that is below expectations, and of failure (integration failure and/or failure to accommodate the new ability that was superficially learned earlier, and/or failure due to insufficient cognitive prerequisites). b.1 Any personal success or failure is inevitably emotionally perceived and is embodied, in an integrative or disintegrated manner (depending on the case), according to the pre-existing mood (5). Successes and failures therefore inevitably affect mood (this sequence is therefore depicted as a distinct cognitive process).Further, the successes or failures of others deeply affect the audience, sometimes even more than the protagonists who have experienced these. For instance, can you think of the many times that the audience at a competition is even sadder than the competitor who loses a competition? b.2 On the other hand, it is known that mood affects attitude (6) towards learning but cannot change this attitude permanently, unless favorable circumstances occur to at least encourage a switch to the enactment level. Such circumstances should facilitate the expression of 244


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additional intrinsic motivation, which a successful experience and the perception of the possibilities {V} to enhance the learning effort’s efficiency should create. Further, the change of attitude towards the learning goals and towards the behavior requirements {E} - which the goals and requirements inherently impose - facilitates the entire learning process. For example, Rogers [26] found that the learning climate change exerts a particularly strong influence on the attitude towards learning. Tenenbaoum [32] shows that a change in attitude leads individuals to temporarily choose to pay more selective attention, in the sense of targeting an objective, which facilitates theassimilation ofthe learning material. "What he will learn is determined in part by his readiness to receive" remarks Mill. [19] in respect of this process. Finally, any measurement based on a questionnaire or an interview, even if it measures aspects related to skills, only measures the knowledge acquisition already validated, and not new abilities. b.3 A learning process can take place with or without the assistance of a mentor (teacher, instructor, trainer, etc.). If the process is assisted, the tutor – to a lesser or greater extent – takes control of the sub processes located at the (self)-regulating level {V, T, E}. For example, he may interfere with sub-process {E} by imposing topics, documentary sources, thresholds, performance targets, and even the learning style or practice. In respect of the sub-processes {T}, a supervisor can decide on switching exercises, a workout, etc., can provide performance role models that should be followed, or can mitigate the impact of the transfer of failures in a bad mood state. b.4 Intervention in the sub-process {V} is, however, often limited. At this point, the pedagogy interferes with psychotherapy and psychological counseling. This occurs especially if the“équilibrationmajorante” fails, or in the cases of neuroticism associated with a transition from the actual level of personal development to the next one - which was emphasized by Dabrowsky [7]. In the case of a sub-process {V}, the easiest method of intervention is by encouraging and creating the right climate for enjoyment, or for mitigating the influence of a bad mood on attitudes towards learning. With regard to unassisted (informal) learning, learners mostly make these interventions subconsciously, sometimes consciously, especially in the case of those who manage or have previously learned to use a second reflective loop learning. In this case, learning becomes a type of action research, a process with two feedback loops [1]. 245


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The importance of A-LL model for understanding the entrepreneurial learning process As noted previously,entrepreneurs are inclined to learn in an unassisted and metacognitive manner. By seeking niches and new situations in which to learn, they are actually action researchers in the sectors of the socio-economic reality - in which they evolve, and which are poorly explored. Therefore, in their case, assisting learning is geared towards accelerating learning,how to learn, and how to conduct action research in frameworks others than those specific to formal education. For entrepreneurs, the best way to learn is from practice to conceptualization, and not vice versa. In Romania, entrepreneurship education is overwhelmingly focused on conceptual exercises, and is far removed from practice. This explains entrepreneurship’s lack of performance in general, and especially lack of innovative entrepreneurship.This model allows a better understanding of the feedback and control mechanisms through a learning process that can be modulated, stimulated, or inhibited in assisted and unassisted processes. If we consider society and the socio-economic environment as factors that constrain or facilitate some learning processes rather than others (what essentially makes a teacher?), we generally see the interests and intentions of a culture. To do so, we need to take into account the content of paragraphs b.3 and b.4 to understand intervention through incentives and/or inhibitory elements {V} (in the background layer of dis(integration) and at the (self)regulating) levels when intentions and interests interfere with educational factors. And if we define culture from an epigenetic perspective as “a set of abilities and practices that allow members of one generation to learn and change and to pass the results of that learning on to the next generation” [11], we see that we cannot really talk of unassisted processes; the social instructor, namely the culture, constantly interferes with any learning process.

The key role of social instructor played by Venture Capital We can regard any business as a cognitive process which performance is aimed at passing the exam of activity report, whether it requires mainly a financial profit, a certain social and/or environmental impact, or a mix of both.

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Venture capital (VC) intervenes in a business when there is an internal motivation to grow, which requires a capital contribution. The capital that venture capital supplies is more than money. VC also enters a business with a new body of valuable knowledge aimed at increasing the scale: specific expertise and a portfolio and collateral trust relationship. This is attractive for any entrepreneur. There is also a part that only appeals to a certain category of entrepreneurs – VC requires new standards for working and management to be adopted in exchange for capital. VC acts as a very strict educator. And this role is enacted even before the investment negotiations have been completed. Consequently, entrepreneurs that really seek VC always “learn their lessons” in advance.This occurs especially in the early stages of a pre-start-up (and a start-up)that wishes to attract VC, although few start-ups succeed. The presence of VC in a region is socially perceived as a “wanted examiner”. This affects entrepreneurs, giving them an opportunity to consistently write exams with real stakes. These stakes are so enticing that they accept the new rules and make an effort to meet the VC exam’s requirements – their unassisted learning becomes more systematic, better structured and thematically more focused. Moreover, they become more aware of the necessity of non-formal education (consulting, mentoring, training, etc.), therefore actively searching for such opportunities. From this perspective, VC: 

accelerates and catalyzes the healthy growth of learning processes and/or impacts entrepreneurship.



creates demand for a broad suite of knowledge-intensive services.

VC’s potential influence on the entrepreneurial environment is more efficient and more impact effective than any other investor, who is likely to act bureaucratically and rigidly, and only attractsinvestors with money and not with components beyond capital. We thus see that the absence of VC in a region affects all three essential nodes on the (self)regulating level of the entrepreneurial, continuous action-learning process: valuing {V}, exigency {E} and the transfer of best practices {T}. Also, the VC players are more interested in advertising their business on the performances they have facilitated. This publicity is more credible in the eyes of others than in the case the sponsor is only the state. The examples of performance provided can help to the morale and the enthusiasm of other potential entrepreneurs and thereby positive reactions to 247


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entrepreneurial initiatives are provided.The process and the facts presented here are valid for all forms of profit-oriented and/or impact investments that function on the operating principles of VC. In order to apply the A-LL model, we sought a questionnaire designed to be considered valid in developed countries,from the perspective of entrepreneurial experience. In this search, we started from the premise that the effectiveness of entrepreneurial learning processes is finally demonstrated by the entrepreneurial potential of those people who have the intention, at least as an alternative, to try out an entrepreneurial career. We chose a questionnaire similar to the one that the Business Development Bank of Canada offers as a tool for self-evaluation [33]. This questionnaire contains 50 questions for which the answers are requested to be given according to a Likert scale, from 1 to 4 (1 = totally disagree; 4 = totally agree). The questionnaire aims to characterize the entrepreneurial profile of aninvestigated population, from three main perspectives: 1) motivations, 2) attitudes, and 3)aptitudes. It’s important to notify that each perspective focuses on two or moreaspects that arerelevant for the A-LL model(at least if they are all sensible qualities in relation to the mood and/or to the personal performance antecendents of the potential entrepreneur) The specific aspects of the questionnaire that enable the characterization of the three perspectives mentioned above, are: Motivations • Need for achievement/success: the desire to progress, excel, and perform. • Power/control appeal: the desire to lead and influence. • Need for challenges/ambition: constantly looking for ways to take on different projects, to achieve dreams and constantly manifesting a need to learn. • Self-sufficiency/freedom: being able to make decisions independently – linked to mood and to the quality of learning (accommodation), demonstrated by performances. Attitudes

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• Perception of acting on one’s destiny: it is typical for entrepreneurs to believe that they can influence events through the actions they take. • Action oriented: the fundamental characteristic of an entrepreneur. Aptitudes • Perseverance/determination: the capacity to persist in one’s efforts to find solutions to problems – which dependents on mood. • Self-confidence/enthusiasm: a person with self-confidence knows his own value, and is optimistic about his/her ability to achieve something he/she started/initiated. • Tolerance towards ambiguity/resistance to stress: the capacity to tolerate ambiguity and to handle and manage the stress created by uncertainty. • Creativity/imagination: being curious, inquisitive, and able to anticipate and to imagine various solutions to a problem. In our analysis, we ranked and compared these elements. Our analysis revealed a potential for a weak profile of entrepreneurial (with weak performance), which wasshown by different groups. The analysis was done in terms of hierarchical ranking. This rankingwas obtained by applying a score calculated as the average of non-entrepreneurial responses. This was done after normalization to a unit interval and implementation of the responses, so that the value “1”indicated a pronounced entrepreneurial weakness. First, the questionnaire was handed to a large group of students who participated in an optional business training program. The students were from three regions of Romania. We collected 385 valid completed questionnaires. The first analysis of theanswers led to the conclusion that the three groups are statistically indistinguishable, from the ‘entrepreneurial weakness’perspective. The main ‘weaknesses’ of the entrepreneurial profile, revealed in this first step of the research, were related to:

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motivations – specifically the aspects “being able to make decisions independently

(freedom)” and “the desire to progress, excel, perform ... (success)” ·

aptitudes - specifically those related to the “capacity to tolerate ambiguity and to handle

and manage the stress created by uncertainty (resistance to stress)” These first findingsfrom this Romanian sample suggest there is distrust in the respondents’ own ability to complete tasks and reach goals, or to attain specific performances. This manifests itself as a lack of desire combined with a lack of ability to tolerate ambiguity, and to handle and manage the stress created by uncertainty. Thus, this can be translated as an indication of a “bad mood” in relation to entrepreneurial attitudes. If we consider‘motivation’ as a process that is used to allocate the energy neededto maximize the satisfaction of needs, the above situation becomes clear. The environmental uncertainty and the difficulty of obtaining resources for start-up entrepreneurship are particularly great. This is particularly true if a region or a country is poor, and if the social and economic environment is unstable because the transition is not yet complete. All of these are true for Romania, which has the second lowest GDP/capita in the EU. The personal effort involved in a start-up in Romania is much higher and this leads to demotivation, which includes aspects such as the "need for achievement". In this first step of the research, the element that caught our attention the most was the following situation: of the eight questions (in the questionnaire), for which participants’ responses were predominantly non-entrepreneurial (with a score greater than 0.5), the first four are linked to motivations. Of these four, one is related to "self-sufficiency" and one to "need for achievement" (in terms of a financial resource). The remaining four questions are about the "need for achievement", and were located in positions 9, 28, 36, 40 of the total of 50.

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Table 1 - The main non-entrepreneurial characteristics of the Romanian sample Entrepreneurial

Entrepreneurial Weakness Score

Answer

1

0,68

I really enjoy situations where there are rules to respect

2

0,68

Today, without a lot of money, we cannot take on a whole Motivation Need for achievement lot

3

0,64

I always worry about what others will think before doing Motivation Self-sufficiency something important

4

0,62

I have no problem working for someone else

5

0,59

“taking risks is like buying a lottery ticket”: it's a question Attitude of chance”.

Perception of acting on one's destiny

6

0,57

I am (not) fairly at ease in difficult situations*

Perseverance

7

0,52

I have a hard time functioning in uncertain or ambiguous Aptitude situations

Tolerance of ambiguity

8

0,52

I prefer using the good old ways of doing things

Creativity

Rank

Factor characteristic Motivation Self-sufficiency

Motivation Self-sufficiency

Aptitude

Aptitude

It has emerged as a valid hypothesis that improving the access to finance for the potential young Romanian entrepreneurs’ could radically increase (by improving the mood) their motivation for entrepreneurship. Consequently, this could trigger a positive reaction that could lead to society encouraging the process of entrepreneurial learning, and contributing to develop a significantly more efficient entrepreneurial culture. To assess whether the same hierarchy of "entrepreneurial weaknesses" is kept also in similar groups from developed countries that have a tradition of entrepreneurship uninterrupted by a communist episode, here is what we did in the second step of the research: we choose to investigate a heterogeneous regional group of 67 students from France (57 respondents) and Switzerland (10 respondents), using the same questionnaire.The hierarchy and the scores for the first 26aspects of entrepreneurial potential, ordered by entrepreneurial weaknesses are given in Figure 2.As one can easily observe, the two hierarchies are different. Despite the reduced sample of respondents in France and Switzerland, we can say that the differences that are larger than 10 positions in the hierarchy and 15 percentage score-points may be interpreted as consistent statistical results. 251


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We can also observethe difference related to 1) the motivational perspective in terms of the “need of achievement” and to 2) the weight of those that manifested the belief that “today, without a lot of money, we cannot take on a whole lot”. This is just the issue that led us to the prescriptive hypothesis, which statesthat improving the access to finance for the potential young Romanian entrepreneurs’ could radically increase (by mood improving)their motivation for entrepreneurship. We believe that as a consequence, this could trigger a positive reaction that could lead the society to encourage the process of entrepreneurial learning, and to develop a significantly more efficient entrepreneurial culture.One can say that this second research (conducted with the French and Swiss sample) highlights this aspect,and reveals the most relevant weakness of the Romanian sample in terms of entrepreneurial potential. In addition to the above aspect, by comparing the Romanian sample with the Franco-Swiss one, we consider statistically relevant enough the following findings: 

Firstly, we find that compared to the Swiss-French sample, Romanian potential entrepreneurs (the Romanian sample) prefer to a large extent to “be their own boss” and to have “the final say”.



Secondly, we find that compared to the Swiss-French sample, Romanian potential entrepreneurs are less inclined to lead or to influence others.



Thirdly, the Romanian potential entrepreneurs assert excessively the entrepreneurial will to build things that will be recognized publicly. They also disagree more than the SwissFrench potential entrepreneurs that a certain level of stress could stimulate them, and claim that they are a lot less effective in stressful situations. While respondents of the Swiss-French sample assert that they are fairly at ease in difficult situations, the Romanian respondents manifest less determination by asserting the opposite.

In our opinion, what stems from these results is a picture of an entrepreneurial culture that is in deadlock in Romania. This is demonstrated by the data on the reality of the lack of performance of Romanian entrepreneurship, presented in the beginning. However, this deadlock seems to reveal a certain rationality, according to which the option of impacting entrepreneurship (growth and / or social and / or environmental) is repressed, or is seen with a certain degree of reluctance. At its base lies, probably, a logic derived from a lack of money and experience. Lack of money and experience are caused by the inefficiency of the EU structural 252


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funds, which are allocated by the state. This rationality, translated into two sentences,could be illustrated as follows: From the “need of achievement” perspective, I notice that although “I want to build something that will be recognized publicly”, however I clearly see that, today, “without a lot of money, we cannot take on a whole lot”. Therefore, I think if I choose to take action, the lack of money in our country would put me in a very difficult situation and I am not at ease in “fairly difficult situations”. This wouldbring more risks, and for me, “taking risks is like buying a lottery ticket”: it's a question of chance”.

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CONCLUSION Looking at the whole picture in terms of the model described by A-LL, we argue that one can draw a general conclusion, prescriptive by nature.The conclusion is that to achieve a sustainable development of entrepreneurship and to capitalize on the existing intellectual know-how, Romania needs, on the one hand, an influx of financial resources and, on the other hand, startups with an injection of risk management expertise. Both can be bought simultaneously in reality, only through venture capital (VC) market mechanisms. Also, as shown in the A-LL model section,there is a great potential to accelerate the processes of entrepreneurial learning. In supporting the idea of using venture type mechanisms to accelerate the development of entrepreneurship, there is a remarkable and successful example – the “Yozma” (Hebrew for "initiative") government VC development program in Israel. Such an approach requires a strategic program and coordination processes by which formal learning and informal learning should be harmonized and coherent, while taking into account the need for rebuilding the confidence and improving the ‘mood’ of potential entrepreneurs.For this, our suggestions for the longer run,are that Romania focuses on building university-industry-government relations, and involves the media in diffusing the outcomes of these collaborations. To improve Romania’s poor entrepreneurial situation in the shorter run, we preconize that the Romanian State and companies use venture type mechanisms to finance regional development. More precisely, we argue that impact investments and VC could offer, in a first stage, the necessary “cultural entrepreneurial kickoff” in Romania. In a second stage, impact investments and VC could offer a more effective and efficient investment framework than the one prevailing in the actual Romanian state: a purely bureaucratic one.

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organiques et les processus cognitifs, Paris: Gallimard (Idées) 23. Pinker, Steven (2002) – The Blank Slate: The Modern Denial of Human Nature, Viking 24. Prinz, Jesse J. (2012) – The Conscious Brain How Attention Engenders Experience,

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32. Tenenbaoum, Samuel (1959) – ”Carl R. Rogers and Non-Directive Teaching”,

Educational Leadership 16: 296, February 33. Web site (2013) of Business Development Bank of Canada

www.bdc.ca/EN/advice_centre/benchmarking_tools/Pages/entrepreneurial_self_assessm ent.aspx 34. Web Site (2014) of Eurostat,

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Figures

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DIVIDEND POLICY AND FACTORS THAT AFFECT DIVIDEND POLICY IN VIETNAM STOCK MARKET

HAI NGUYEN VIET International School Vietnam National University, Vietnam TAI KHUAT THAI International School Vietnam National University, Vietnam VAN TA International School Vietnam National University, Vietnam THUY ANH TONG International School Vietnam National University, Vietnam NGUYET ANH NGUYEN International School Vietnam National University, Vietnam NGOC HOANG International School Vietnam National University, Vietnam

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INTRODUCTION 1.

NECESSITY AND SUMMARY OF FINDINGS

In corporate finance there have three basic decisions: financing, investing decisions and the dividends paid decision. All of these decisions must be consistent with the goal of maximizing corporate value. In Vietnam, the company has not clearly visualized the nature of dividend policy and not fully aware of the importance and the impact of dividend policy on corporate value paid. Dividends paid by companies are still spontaneous, not long-term policy. Due to that reason, we need to have the study which clarify dividend policy, how to build up the dividend policy as well as evaluating its importance for every company. On the other hand, under the management perspective, issues in the dividends paid by the company also require the authorities to understand the nature to governance and enact appropriate legislation. This paper goes deep into learning about general dividend policy of 60 companies on the Vietnam stock market in 5 years from 2009 to2013. My team have spend much time to focus on the factors that affect the dividend policy such as inflation, annual interest rates of bank, tax policy, earnings per share, ...After choosing, filtering and using regression models, the group has come up with a visualize statistical model showing clearly a trend in payments while providing meaningful analysis of the statistics. But, significantly and most importantly is “Lag1” variable: dividend rate of preceding year's company. Our group have accessed and tested many econometric models based on the original model is the correlation between dividend ratio (Dividend rate) and Lag1. From the four models have been tested, our group following the accepted model that have highest explain for dividend ratio: Div=0.5134+0.000012×Lag1 x Earnings per share. 2.

NEW FEATURES

• Project is the continuation of many research papers, master thesis in recent years about the general situation as well as the dividend paid data. • Project has given synthesis and statistical analysis of dividend payments. • Project quantify some key elements and put them into the econometric model to find the best which is highest explains the correlation as well as the impact they have on 260


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dividends policy. •Project analyzed the impact variables Lag1: dividend rate of the preceding year of a company and its influence on dividend payout policy.

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Part 1: BASIC THEORY 1.1. DEFINITIONS: 1.1.1. What is dividend? Dividends shall be considered as a part of the profit after tax of enterprise given to shareholders. 1.1.2. The definition of dividend policy (Dividend policy) Dividend policy is fixed policy which distribute between retained earnings to be reinvested and dividend payments to shareholders. 1.2. DIVIDEND POLICY MEASUREMENT Currently there are three indicators used to measure the dividend policy, which is the dividend rate dividend payout ratio and dividend yield. 1.2.1. Dividend rate Dividend rate =

∑total value of annual dividend ∑total value of common shares

1.2.2. Dividend payout ratio Rates of return paid dividends as a percentage of net profit is drawn for payment to shareholders as dividends. The calculation formula: Dividend payout ratio =

Total value of annual dividend Net Profit after tax

1.2.3. Dividend yield Dividend Yield reflects how much money an investor would earn from individual dividend per one common stock based on the market price. Value of one dividend

Dividend yield= Current market price of one common share 1.3. DIVIDEND PAYMENT PROCESS For most businesses, Board of management are convened quarterly or semiannual meeting to assess business results achieved by the business and decided to pay for next semester. The dividend payment will be applied according to the forms of reporting and payment in the following order: Declaration date, ex-dividend date, record date and payment date. -Declaration date is the date on which notices will be announced to pay dividends at some point in the future

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-Ex-dividends date is the date on which the investor receives the transfer of shares from existing investors will not been titled to dividends previously published will be paid in the future. -The record date is the date that the company will prepare a list of shareholders entitled to receive dividend will be announced. -The payment date is the date that the form of cash or stock dividend will be forwarded to each shareholder. 1.4. ROLE OF DIVIDEND POLICY -A tool to ensure benefits for shareholders: The majority of shareholders have invested in the company is expected to pay dividends, so the dividend policy directly affects the income of the shareholders. On the other hand, the company paid dividends maintain stable or unstable, regular fluctuations directly affect the volatility of the stock value of the company on stock market. -A tool to impact the growth and development of the company: Dividend policy involves determining the amount of cash dividends paid for the shareholders. Therefore, it is closely linked to the funding and investment policy of the company. The distribution of dividend decided the profits will be kept more or less, this affects internal capital funding to expand its business in the future. On the other hand, the dividends paid will reduce retained earnings for reinvestment, thus affecting the demand for capital from outside the company. 1.5. DIVIDEND PAYMENT METHOD In general, there are four common methods of dividend payments: cash dividends, stock dividends, property dividends and stock repurchase in which the first two methods are the most common. 1.5.1 Cash dividends Cash dividend is a type of dividend payment that the company takes from its profits and share to investors in the form of cash, usually via electronic funds transfer or a printed paper check. Advantages: - Investors demand for stocks with high liquidity. Hence, cash dividends are favorable for the shareholders in the use for the purposes of personal consumption. - In the case of Vietnam, cash dividend is paid to shareholders will be tax exemption

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- The procedures are quick and simple compared to other payment methods. Disadvantages: -Cash dividend reduces cash assets, and then it leads to a reduction of the total company asset. This thing can affect the rate of new investment projects of the company. 1.5.2 Stock dividends Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation or another corporation, such as its subsidiary corporation. Advantages: -This thing does not affect directly to solvency and cash required for investment. - Increasing the number of shares of company. - Short-term investors can benefit from the difference price when the stock price increases. Disadvantages: -Dilution of executive powers because of change in the stock ownership. -Incurred costs of new shares. -Reducing par value of each share. - Decreasing Earning per Share 1.5.3 Property dividends Property dividends are those paid out in the form of assets involve finished products, real estate or shares of other companies owned by the enterprise. However, it hardly occurs in reality. Advantages: This kind is used when a company cannot pay dividends to shareholders by other ways Disadvantages:

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The company cannot pay dividends by cash or stock, this leads to reduce credibility of the company, and so stock price can decline. 1.5.4 Stock repurchases Stock repurchase may be viewed as an alternative method to pay dividends in that it is another way of returning cash to investors. Advantages: -Many companies initiate a share repurchase at a price level that management deems a good entry point. This point tends to be when the stock is estimated to be undervalued. (Dan Strumpf, 2014) - Avoid dilution of control Disadvantages: -Reduce the amount of cash as well as solvency - Because of risk-averse behavior, the investors do not prefer this method. 1.6. FACTORS AFFECTING THE CHOICE OF DIVIDEND POLICY NOW As mentioned dividend policy, people often refer to payment policies and methods of payment. In a business, dividend policy maybe affected by the following basic elements: legal restrictions, the impact of taxes, liquidity needs, profit stability, growth opportunities of capital, inflation and price protection avoid dilution. The specific impact of each factor on decide of a dividend policy will be analyzed below: 1.6.1. The legal limit: Based on the Enterprise Law No. 60/2005/QH11 November 29, 2005, and before assigning dividend policy, corporate should consider the legal limit following: • Limit weakened capital: can’t use corporate capital (including surplus capital and equity) to pay dividends. Dividend paid to common shares was determined based on the net profit was generated and the dividend payments are deducted from the retained earnings of the company. •Limiting net profit: Dividends are paid from net profits now and in the past. This is to prevent owners withdraw the initial investment and weaken the position of the safety of corporate 265


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creditors. •Limit the loss of liquidity: Can’t pay dividends when the business is unable to pay (debt is greater than assets), to ensure the priority right of creditors against the assets of the business. In addition, joint stock companies only pay dividends to shareholders when the company completed its tax obligations and other financial obligations as prescribed by law; provision funds to offset enough for earlier losses as prescribed by law and the company's regulation; immediately right after paying off dividends, still guarantee payment of all debts and other property obligations due. 1.6.2. Effect of tax: Under the impact of the tax when given dividend policy, firms need to consider the difference between the income tax levied on capital gains and dividend income. If income from capital gains tax greater than dividends, enterprises should pay more dividends. In contrast, if capital gains tax is smaller, businesses should not pay more dividends or pay dividends in the form of stock repurchase. 1.6.3. Liquidity needs: Dividends paid out mean cashflow go out; therefore, the liquidity of the business depends on the asset which have high liquidity, especially cash. 1.6.4. Stability of profit: A business with a history of stable earnings generally willing to pay higher dividend than business have profit fluctuations over the years. Also, with stable profits, enterprise easier to implement stable cash dividend policy. 1.6.5. Capital growth opportunities: The general business, especially the company which rapid growth in the early stages of the operation, there is often has need of capital to fund for investment projects. Normally, companies can raise capital from retained earnings or a bank loan, one alternative is to issue stock. The selection of the type depends on the cost of capital. In imperfect markets, issuance costs impact on dividend policy of the company. Specifically, if the issue cost is high, instead of issuing new shares, firms may turn to use retained earnings; this means that the dividend is reduced. Similarly, higher interest rates may also indirectly lead to lower dividends. However, if the dividend payout ratio is lower interest rates, the business will have difficulty in attracting investors. 266


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1.6.6. Inflation: In theory, in the inflationary environment, businesses need to keep more profit after tax to maintain its operational capacity. 1.6.7. Protection against diluting the price: The decision to retain earnings, dividend payments may also depend on the funding decision, the optimal capital structure of the business. Price dilution risk, or the interests of the owners as a percentage of dilution, occurs when firms issue new shares because shareholders don’t buy or can not buy at the rate accordingly. So, there are few firms choose lower rate of dividend payments to avoid the risk of diluting the price (for avoiding issuing new shares due to capital need). Above are few basic factors impact directly or indirectly on the dividend policy. In fact, the impact of taxes and inflation in a number of companies proved to be contrary to the theory. The reason is that dividend policy is not only affected by the factors mentioned above but also the shareholder structure, the form of ownership, firm size, the ability to generate profit, characteristics of business development, bank interest rates. To achieve a best dividend policy, the board of management should consider and weigh all the factors. 1.7. DIVIDEND POLICY AND BUSINESS VALUE ACCORDING TO THE THEORY OF M & M According to M & M, dividend policy does absolutely not affect the value of the enterprise that enterprise value depends on the investment decision. This conclusion of M & M is based on the assumption of an efficient and perfect capital markets. - No tax: under this assumption, the investors don’t bother whether they will receive dividend or capital gains income. - No transaction costs: this assumption implies that investors in securities of companies pay little or no dividend payments can be resold (no cost) any shares of any they want to sell to convert capital gain into income. - No issue cost: if the business does not have to pay the cost of issuing for the issuance of new securities, they may be acquiring the equity needed with costs, not whether they retain profit or

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pay dividends. Sometimes the payment of dividends leads to demand periodically sale of new shares. - Investment policy and fixed funding: whether firms have excess money they cannot bring that money go to further investment that can only buy back shares or dividends only. When lacking of money, the enterprise will not be able to borrow more money that can only issuing additional shares to fund its new projects. In the M&M model enterprises have to build a plan for their investment and this plan does not change in the future. The plan also specifies that investment will need how much debt and how much capital from retained earnings, the surplus of the profits will be paid in the form of dividends. PART II: DIVIDEND POLICY OF 60 LISTED-COMPANIES ON VIETNAM STOCK MARKET There are 3 criteria to examine the capability of dividend payment: Dividend rate, dividend payout ratio, dividend yield. We choose 3 criteria: Dividend rate (dependant variable) and effected variable include: Interest rate, Inflation, Growth rate, EPS, Lag 1 (dividend ratio in previous years). By regression model, we choose the effect variable which has the highest persuasive and affection. 2.1.1. Stock exchanges data in Ho Chi Minh City (VNX) - VN30 VN30 index published by VNX, this index is calculated based on three criteria: market capitalization, float rate and the value of the transaction; consists of 30 stocks of companies listed on VNX which have the highest market capitalization and liquidity (80% of total market capitalization and 60% of the total market trading).VN30 will help investors assess the market more accurately than the VN index, avoid phenomenon distorted: Over 300 stocks listed on the VNX is divided into 11 main sectors, VN30 has represent from 9 sectors, accounting for about 80% of total market capitalization and 60% of market liquidity. Thus, its representation is clear, both industry, capitalization and liquidity representatives, actually become a useful tool for index funds... So, within our research we will focus on the 30 companies in the VN30. 268


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Data of dividend payment on the VNX of VN30 through 5 years Dividend data has been compiled from the prospectus of 30 companies and the stock market news of VNX since 2009-2013.

Chart 2-1. The situation of dividend payment of companies on the VNX from 2009 - 2013 14

Number of company

12 10 8

Năm 2009

6

Năm 2010 Năm 2011

4

Năm 2012 2

Năm 2013

0 0% - 5%

5% - 10%

10% - 15% 15% - 20% 20% - 25% 25% - 30%

>30% Dividend rate

Source: synthetic Looking at the number of companies at dividend payment rate on graph, we see the company paying the dividends 5-15% is majority over the years. In particular, the payment of dividends of 5-10% is the most popular over the years. Especially in 2013, there are so many of companies choose to pay a dividend of 5% - 10%. Dividend at 20-25% is quite rare, but there are some companies maintain to pay high dividends eventually (from 25% to over 30%).

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Chart 2-2. Structure of dividend payment of companies on VNX from 2009 - 2013 100% 90% 80%

Proportion (%)

70% >30% 25% - 30% 20% - 25% 15% - 20% 10% - 15% 5% - 10% 0% - 5%

60% 50% 40% 30% 20% 10% 0% Năm 2009

Năm 2010

Năm 2011

Năm 2012

Năm 2013

Source: synthetic Through percentage structure in each year of the group in the chart, it can be seen clearly the choice of listed companies to pay dividends. First we saw a lot of big changes in four segments from 0% to 20%. In 2009, most of companies pay dividends at 5-10% and tended to decrease in the next two years before returning to the old proportion. 10-15% segment has remained relatively stable over the years from 20-30% of the company. 2011 was the only year when most of companies pay dividends at a high level (15-20%) before returning to old trends with less than 10% of the survey companies pay 15-20%.Generally, a dividend payout ratio of listed companies in recent years is reasonable; both ensure the stable development of the company and attract the attention of investors through dividends. Dividend payout ratio over the years in VNX By collecting EPS disclosure of listed companies VN30 over the years on the stock market, we calculate the ratio of profits to pay dividends (DPS / EPS).

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Chart 2-3. Dividend payout ratio in VNX from 2009-2013

12

Năm 2009

10

Number of company

Năm 2010 8

Năm 2011 Năm 2012

6 Năm 2013 4

2

0 0% - 20%

20% - 40%

40% - 60%

60% - 80%

80% - 100%

>100% Dividend payout ratio

Source: synthetic The graph shows the majority of companies have dividend payout ratio from 0 to 60%. Many companies have dividend payments at 20-40% and 40-60%, about 50% of the companies surveyed. There has been an emergence of companies with dividend payout ratio higher than80% from 2011, but not much. Year 2013 has 4 company pay the rates of 80-100% and in 2011 and 2012, 3 companies pay more than 100%. Overall, dividend payout ratio of listed companies in VNX is still mostly within reasonable rate, guaranteed rate of retained earnings and profits to pay balance for sustainable development of the enterprise. However, some companies have chosen a high dividend policy, even in excess of retained earnings, violates the principle of payment of dividends on profits and not affect equity. Over payment also put pressure on the payment of dividends in the following year. Dividend Yield of VNX30 through years

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Gather the stock price of the company at the end of the year. Then, we take the dividend divided by the stock price to calculate the dividend yield to reflect the relative recovery of capital from the stock dividend over the years.

Chart 2-4. The situation of dividend payment of companies in VNX from 2009 -2013

18 16 Năm 2009

12

Năm 2010

10

Năm 2011

8

Năm 2012

Number of company

14

Năm 2013

6 4 2 0 0% - 5%

5% - 10% 10% - 15% 15% - 20% 20% - 25% 25% - 30%

>30%

Dividend yield

Source: synthetic We see an average dividend yield of 3.66% in 2009 and mutate in 2011 of 9.33% before going down to 4.94% in 2013 (Appendix 7). Through the chart above, we can see that majority companies have a dividend yield of 0% -5%, from 15 companies in 2009 reached up to 17 companies in 2010 and back to 15 companies in 2013. Dividend yield from 5% -10% was recorded for 5 companies in 2009 and surge to 11 companies in 2011 before returning to 5 companies in the next year. At a rate of greater than 20% was noted by 2 companies or no company pay that high rate.

2.1.2. Stock exchanges data in Hanoi city (HNX) - HNX30

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The number of dividend was collected from financial statement of 30 companies and news of HNX in 2009-2013. However, in progress it can’t full 100% due to these reasons: -

The data is not public fully through years.

-

There are lots of companies not paying dividend. However, by collected database

we could found the visible trend in dividend choosing-decisions.

Graph 2-5. Dividend rate at HNX (2009-2013) 12 10

SL công ty

8 Năm 2009 Năm 2010

6

Năm 2011 4

Năm 2012 Năm 2013

2 0 0% - 5% 5% - 10% 10% - 15% 15% - 20% 20% - 25% 25% - 30%

>30%

Dividend rate

Looking at the number of companies at each level, we can realize that the companies pay at 515% at mostly; while 10-15% is popular through years; especially, in 2012 many companies pay at 10-15%. Rarely companies pay at 30% and no one pays higher.

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Graph 2-6. Structure of dividend payment at HNX 20092013 100%

Tỷ trọng %

90% 80%

>30%

70%

25% - 30%

60%

20% - 25%

50%

15% - 20%

40%

10% - 15%

30%

5% - 10%

20%

0% - 5%

10% 0% Năm 2009

Năm 2010

Năm 2011

Năm 2012

Năm 2013

The graph clarifies the companies choose % dividend payment at what level is. Firsly, there are significant changes at 0-20%. In details, in 2009 the majority pays at 0-5% and has the downward trend continuously within 4 years. In 2012 is the only year when mostly (48%) companies pay at 10-15%, and only slide to 36%. Generally, the rate lies at the appreciated level comparing with VNX due to focusing on 15-20% Dividend rate at HNX

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Graph 2-7. Dividend payout ratio at HNX in 20092013 16 14

SL công ty

12 10

Năm 2009

8

Năm 2010

6

Năm 2011

4

Năm 2012

2

Năm 2013

0 0% - 20%

20% - 40% 40% - 60% 60% - 80% 80% - 100%

>100% Dividend payout ratio

The graph shows us the dividend rate through years is stable at the level of 0-20%. Almost companies pay at the range of 20-40% and 40-60%. It appears the companies which has the dividend rate at 80-100% (20010) but rarely. Remarkably that the number of companies pay at 100% over the one compared with VNX. Especially, in 2012 there are 6 companies pay over 100%.

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Graph 2-8. Dividend yield at HNX in 2009-2013 25

SL Công ty

20 Năm 2009

15

Năm 2010 Năm 2011

10

Năm 2012 5

Năm 2013

0 0% - 5% 5% - 10% 10% - 15% 15% - 20% 20% - 25% 25% - 30%

>30% tỷ suất cổ tức

The dividend yield leveraged from 4.76% up to peak in 2011 with 10.48% before slide down 5.62% in 2013 The graph illustrated that the companies which pay at 0-5% take account mostly, form 21 companies (2009) then going down 15 companies (2013). The dividend yield from 5-10% is recognized for 4 companies in 2009, then increasing in 2013. At the yield over 20%, there is only one company or no one paying at such high rate. 2.2. ANALYSE THE FACTORS AFFECTING THE DIVIDEND POLICY OF 60 VIETNAM LISTED COMPANIES: 2.2.1. Correlations between Dividend rate, inflation rate, EPS and interest rate: Theoretically, high inflation economy requires enterprises to raise their capital and cash in hand, therefore push up the level of retained earnings. This leads to dividend reduction. From investors’ perspective, high inflations means unsustainable development and higher risk. They take this under great consideration when investing in real estate or gold rather than stock, especially when there is dividend cut.

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In addition, high inflation might result in other macro fluctuations like: decline in foreign investment for fear of risk or of high bank interest rate. Table 2.4 indicates the correlation between inflation and bank interest rate (R= 0.901597). Reality proved that during 2008, high inflation rate associating with contractionary fiscal policy push the interest rate to approximately 20%. In that case, enterprises faced difficulties in external financing. Thus, many chose to remain dividend rate reasonable enough to attract investors. That may lead to some consequences and ideally, high inflation rate goes with lower dividend policy to ensure companies’ sustainable development. Practically, inflation- interest rate correlation has been proven based on the most 60 popular enterprises on Vietnam stock exchange and Vietnam CPI index from 2009 to 2013 on 2 tables below. Table2.4.Correlations between 6 factors (EPS, Dividend rate, Interest rate, Inflation, Lag1 and Growth rate of profit)

Source: authors summarize Table2.5: Average dividend rates on 2 exchanges and national CPI from 2009 to 2013 2009

2010

2011

2012

2013

CPI

6.52% 11.75%

18.13%

6.81%

6.04%

Average dividend rate on HNX

7.78% 10.84%

7.49%

8.02%

6.57%

Average dividend rate on VNX

7.2%

12.63%

11.37%

10.66%

11.59%

Source: authors summarize

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Table 2.4 shows the correlation between dividend rate and inflation rate is 0.05412. This figure is positive and less than 0.3, which implies the weak correlation. In the past 5 years, Vietnam witnessed high CPI (all above 6%), especially in 2010, the CPI was 11.75% and 18.13% in 2011. The according average dividend rate on HNX was high in 2010 (proportional to CPI) but lower to 7.49% in 2011 (adversely proportional). Meanwhile, the average dividend rate on VNX both showed proportional correlation with CPI: 11.59% and 12.63%, in turn. Therefore, reality in Vietnam mostly proved the opposite way of paying dividend: high inflation leads to high dividend rate. Besides inflation, this research also touches the correlations between dividend rate and other factors: EPS, interest rate,... Table 1 presents the correlation between dividend rate and EPS equals 0.417039. For interest rate factor, the research shows the correlation between dividend rate and interest rate was very weak (correlation= 0.0361819) For those reasons, it is implied that the dividend rate has the main connection with EPS, and other correlations are still weak. 2.2.2. Econometric models for dividend rate rationale: Econometric models are constructed to find the optimal model with highest level of explanation for dividend rate rationale. The model applies R and R Square references: If

R < 0,3If

R Square < 0,1

If

0,3 ≤ R ≤ 0,5 If

0,1 ≤ R Square ≤ 0,25

Medium correlation

If

0,5 ≤ R ≤ 0,7 If

0,25 ≤ R Square ≤ 0,5

Relatively close correlation

If

0,7 ≤ R ≤ 0,9 If

0,5 ≤ R Square ≤ 0,8

Close correlation

If

0,9 ≤ R

0,8 ≤ R Square

Very close correlation

If

Low correlation

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Econometric model 1: Regression analyses for 2 variables: Dividend rate and Lag1

P value of this model is very small (