2010 Proceedings

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Proceedings of the 17th Annual South Dakota

International Business Conference
September 30 October 3, 2010
Radisson Hotel

Edited By:
Willard Broucek
Jennifer Wegleitner
Kacie Richard

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Seventeenth Annual
South Dakota
Internati onal Busi ness Conference

Rapid City, South Dakota
September 30 October 3, 2010

Conference Proceedings

Hosted by:
Northern State University
Center of Excellence in International Business

ISBN: 1-883120-36-5 /
978-1-883120-36-8

Jennifer Wegleitner Willard Broucek, Ph.D.
Conference Coordinator Conference Chair

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Seventeenth Annual
South Dakota
Internati onal Busi ness Conference

S P O N S O R S

Black Hills Power
Rapid City, S.D.

Chiesman Foundation for Democracy, Inc.
Rapid City, S.D.

Gunderson, Palmer, Nelson & Ashmore, LLP

NSU Foundation

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A S P E C I A L T H A N K Y O U T O O U R

C O N F E R E N C E M O D E R A T O R S

Andrew Bertsch, Minot State University, USA

Willard Broucek, Northern State University, USA

Dwight Denman, Northern State University, USA

Larry Janssen, South Dakota State University, USA

Keun Lee, Northern State University, USA

Diane May, Winona State University, USA

Mitch McGhee, California State University, Stanislaus, USA

Celestino Mendez, Northern State University, USA

John Meyer, Northern State University, USA

Frank Moseley, Minot State University, USA

Klaus Oestreicher, University of Worcester, UNITED KINGDOM

Doug Ohmer, Northern State University, USA

Shahbaz Shabbir, COMSATS Institute of Information Technology, PAKISTAN

Han Kil Shin, Northern State University, USA

Stephen Thomas, University of Colorado at Denver, USA

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E X C H A N G E P A R T N E R U N I V E R S I T I E S

Banku Augstskola-School of Business and Finance Rga, Latvia
Capital Normal University Beijing, China
Capital University of Economics and Business Beijing, China
Dongguk University Seoul, Korea
Fachhochschule Schmalkalden Schmalkalden, Germany
Global Village Program Yonsei University at Wonju Wonju, Korea
Hanyang University Seoul, Korea
Hochschule Magdeburg-Stendal Magdeburg, Germany
International Business Academy Kolding, Denmark
Korea University Seoul, Korea
Kwandong University Gangneung, Korea
Myongji University Seoul, Korea
North China University of Technology Beijing, China
Okanagan College Okanagan, Canada
Pontificia Universidad Javeriana Bogot, Colombia
Pukyong National University Busan, Korea
Shanghai Institute of Foreign Trade Shanghai, China
Shanghai University Shanghai, China
Shanxi University Shanxi, China
Soonchunhyang University Asan, Korea
Sup de Co Amiens-Picardie Amiens, France
Tec de Monterrey, Campus Sonora Norte Sonora, Mexico
Universidad de Los Lagos Osorno, Chile
Universidad Mayor Santiago, Chile
Universit de Picardie Jules Verne Amiens, France
University of Hradec Krlov Krlov, Czech Republic
University of Jyvskyl Jyvskyl, Finland
Yonsei University Seoul, Korea
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THURSDAY,September30
th
2010
EventsonThursday,September30
th
,takeplaceattheRadissonHotelinRapidCity.
08:00am10:15am BUFFET BREAKFAST
EnigmaRestaurant
10:15am10:30am
Opening RemarksSecondFloorConferenceRoom
ConferenceChair:WillardBroucek,NorthernStateUniversity,USA
10:30am12:00pm SESSION 01
Eachpresentationwillbehalfanhourinlength
Focus on: InterdisciplinaryTopics

Session Moderator: WillardBroucek,NorthernStateUniversity,USA

Best Practices In Terminology Work

HansSchwarz,HochschuleMagdeburgStendal,GERMANY
Found in translation: A Library Outreach Program for International

Students
ToddQuinn,NorthernStateUniversity,USA
Developing Sport Business with Sport Management Studies The Finnish

Approach
RistoRasku,JyvskylUniversityofAppliedSciences,FINLAND
12:00pm01:30pm BUFFET LUNCH

EnigmaRestaurant
01:30pm03:00pm SESSION 02
Focus on: CulturalIssuesinManagement

Session Moderator:DougOhmer,NorthernStateUniversity,USA

Potlatch And Postmodern Consumption: Can A Synthesis Lead To A New

Understanding Of The Marketing Exchange?
DennisE.Clayson,UniversityofNorthernIowa,USA
Culturally Intelligent for Satisfied worker in multinational Organization: Role

of Intercultural communication
DongSooPark,YeungnamUniversity,KOREA
AbdoukhadreDiao,YeungnamUniversity,KOREA
Examination of Cultural Orientation on Gender Gap: Some Implications on

Workplace Regulation
DianeMay,WinonaStateUniversity,USA
HamidYeganeh,WinonaStateUniversity,USA
03:00pm03:30pm BREAK
Snackswillbeprovidedinhallway
Multimedia Presentations Completed by Northern State University Students
will be played during Break

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03:30pm04:30pm SESSION 03
Focus on:Law
Session Moderator: DianeMay,WinonaStateUniversity,USA

The Fair Services Law After Skilling: Its Future and What Every Business
Executive (and Business Professor) Should Know
DwightE.Denman,NorthernStateUniversity,USA
New legal forms for social enterprises: A comparison of structure options and
experiences in the United States and Great Britain
JaclynJ.Rundle,CentralCollege,USA

05:30pm KICKOFF DINNER
Reception and Dinner SecondFloorConferenceRoom
DinnerSpeakerPaulHorsted,DakotaPhotographic
TheBlackHillsYesterdayandToday
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FRIDAY,October1
st
,2010
EventsonFriday,October1
st
,takeplaceattheRadissonHotelinRapidCity,SDandattheMount
RushmoreNationalMemorial.
EnigmaRestaurant
08:30am10:00am SESSION 04 / Breakout Sessions
SheridanRoom
Focus on: Pedagogy/TeachingIssues
Session Moderator:CelestinoMendez,NorthernStateUniversity,USA
Internationalizing The Business School Curriculum: One University's

Experience
RubeeLiFuller,RooseveltUniversity,USAThomasHead,RooseveltUniversity,USA
RifatGorener,RooseveltUniversity,USAMarkHoltzblatt,RooseveltUniversity,USA
TanweerHasan,RooseveltUniversity,USAGordonPatzer,RooseveltUniversity,USA
RalphHaug,,RooseveltUniversity,USA
A Comparative Study of Learning Styles of Business Students in the United

States and the Dominican Republic.
BijayanandaNaik,UniversityofSouthDakota,USA
DebTech,DakotaStateUniversity,USA
MiguelinaFranco,UniversidadIberoamericana,DOMINICANREPUBLIC
AACSB/ACBSP/IACBE: The race to create an ISO for collegiate business

education or circling the wagons?
IreneHoule,AssumptionCollege,USA
DeerfieldRoom
Focus on: Accounting
Session Moderator:DwightDenman,NorthernStateUniversity,USA
Obstacles on the Path to Global Accounting Standards

LouellaMoore,ArkansasStateUniversity,USA
Tax Revenue Variation in Different Countries

MitchMcGhee,CaliforniaStateUniversity,Stanislaus,USA
TzuManHuang,CaliforniaStateUniversity,Stanislaus,USA
TerryCrain, UniversityofOklahoma,USA
Americans Working and Living Abroad: Tax Implications for U.S. Citizens
JoAnnBondhus,WayneStateCollege,USA
AngosturaRoom
Focus on: Finance/Marketing
Session Moderator: KeunLee,NorthernStateUniversity,USA
Corporate Governance and Stock Returns in Istanbul Stock Exchange

BasakTuranIcke,IstanbulUniversity,TURKEY
MehmetAkifIcke,IstanbulUniversity,TURKEY
YusufAyturk,IstanbulUniversity,TURKEY
Impact of Single Stock Futures on the Volatility of Underlying Indian Stocks

ThadavillilJithendranathan,UniversityofSt.Thomas,USA
RakeshGupta,CentralQueenslandUniversity,AUSTRALIA
Consumer Attitudes Towards Experiential Marketing: A Qualitative Study

From Turkey
EmrahCengiz,IstanbulUniversity,TURKEY
MuratErdal,IstanbulUniversity,TURKEY
GkhanYola,IstanbulUniversity,TURKEY
IrfanAkyuz,IstanbulUniversity,TURKEY

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10:00am10:30am BREAK
will be played during Break Room to be Determined
10:30am12:00pm SESSION 05 / Breakout Sessions
SheridanRoom
Focus on: Marketing
Session Moderator: HanKilShin,NorthernStateUniversity,USA

Store Image and the Effects on Consumers Purchase Intention: A Study

From Turkey
Developing Culturally-Targeted Marketing Strategies by Exploring

Consumer Decision-Making Styles (CDMS) on Ethnic Golfers Shopping
Behavior: An Empirical Study for Korean American Consumers
HanKilShin,NorthernStateUniversity,USA
JohnC.Barnes,UniversityofNewMexico,USA

Lateral Marketing in Retailing and a Study From Turkish Gas Station

Consumers
MuratErdal,IstanbulUniveristy,TURKEY

DeerfieldRoom
Focus on: Management
Session Moderator: MitchMcGhee,CaliforniaStateUniversity,Stanislaus,USA
Relationship In A Fair Trade Market: How To Create And Manage Value

MantiabaCoulibaly,SupdeCoAmiensSchoolofManagement,France

The CSR Policy Framework the State and the Rational for CSR in Serbia's
Context
VladimirPetkovski,UniversityofSs.CyrilandMethodius,MACEDONIA
AleksandarNikolov,NationalDemocraticInstitute,MACEDONIA
AngosturaRoom
Focus on: Economics
Session Moderator: LarryJanssen,SouthDakotaStateUniversity,USA

Impact of RTA and PTA on Bangladesh Export: Application of Gravity

Model
MuhammadShariatUllah,RitsumeikanUniversity,JAPAN
InabaKazuo,RitsumeikanUniversity,JAPAN
The Greenspan/Taylor Debate: The Estimated Importance of Saving and

Money in Interest Rate Movements
HillarNeumann,NorthernStateUniversity,USA
JohnMeyer,NorthernStateUniversity,USA

China's Sovereign Wealth Funds and the World Economic Crisis
StephenThomas,UniversityofColoradoDenver,USA
JiChen,UniversityofColoradoDenver,USA
12:00pm01:30pm BUFFET LUNCH

EnigmaRestaurant
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01:30pm02:30pm SESSION 06 / Breakout Sessions
SheridanRoom
Focus on: Interdisciplinary
Session Moderator: JohnMeyer,NorthernStateUniversity,USA

Twin Themes of Dr. Theodore W. Schultz: Relevance for 21

st
Century
International Agriculture and Business Development
LarryJanssen,SouthDakotaStateUniversity,USA
Gazing through the Looking Glass...Analysis of the Impact of The US Health

Care Reform Bill on the International Health & Business Landscape
BradBeauvais,UnitedStatesArmyBaylorPrograminHealthandBusinessAdministration,USA
SuzanneWood,UnitedStatesArmyBaylorPrograminHealthandBusinessAdministration,USA
MattBrooks,UnitedStatesArmyBaylorPrograminHealthandBusinessAdministration,USA
DeerfieldRoom
Focus on: Marketing/Management
Session Moderator: KlausOestreicher,UniversityofWorcester,UNITEDKINGDOM
Managing Up: Fight or Flight, the Power of Winning at Upward Cultural

Management Challenges
AllenBarclay,ColoradoStateUniversity,USA
HeidiBarclay,ColoradoStateUniversity,USA
Product And Business Innovation Of The Double Helix Model: Its

Application In Automobile Industry
KiChanKim,TheCatholicUniversityofKorea,KOREA
V.G.Girish,TheCatholicUniversityofKorea,KOREA
AngosturaRoom Multimedia Presentations Completed by Northern State University Students

02:30pm CLOSING REMARKS and Announcements for Keynote Dinner
04:30pm BusesdepartfromRadissonHotelforMountRushmoreNationalMemorial

06:00pm KEYNOTE DINNER
ReceptionMountRushmoreNationalMemorial
Reception(SponsoredbyNorthernStateUniversityFoundation)
06:30pm Dinner MountRushmoreNationalMemorial
07:15pm
KeynoteDinnerSpeaker BlakeMycoskie
FounderandChiefShoeGiverofTOMSShoes,Inc.
www.tomshoes.com
08:00pm Sponsor Recognition Ceremony
Shortlyaftertheeveningsactivitieshaveconcluded,thebuseswillreturnconferenceparticipantsto
theRadissonHotelinRapidCity.
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SATURDAY,October2
nd
,2010
EventsonSaturday,October2
nd
takeplaceattheRadissonHotelinRapidCityandattheCrazyHorse
MemorialandJewelCaveNationalPark.
EnigmaRestaurant
08:30am09:30am SESSION 07 / Breakout Sessions
SheridanRoom
Focus on: Marketing
Session Moderator:AndrewBertsch,MinotStateUniversity,USA

Environment & Marketing: A Study of Ethical Response Behavior in

Indian Consumers
KaramjeetSingh,PunjabUniversity,INDIA
M.Saeed,MinotStateUniversity,USA
AndrewBertsch,MinotStateUniversity,USA
Product Launch in a Declining Environment: The Blu-ray Disc -

Opportunities and Struggle
KlausOestreicher,UniversityofWorcester,UNITEDKINGDOM
NigelWalton,UniversityofWorcester,UNITEDKINGDOM
MichaelNewnham,UniversityofWorcester,UNITEDKINGDOM
DeerfieldRoom
Focus on: InternationalBusiness
Session Moderator: FrankMoseley,MinotStateUniversity,USA
Energy Issues and Policy In Turkey

FrankMoseley,MinotStateUniversity,USA
JamesOndracek,MinotStateUniversity,USA
Energy Issues and Policy In Switzerland

FrankMoseley,MinotStateUniversity,USA
JamesOndracek,MinotStateUniversity,USA
AngosturaRoom
Focus on: Marketing
Session Moderator: ShahbazShabbir,COMSATSInstituteofInformationTechnology,
PAKISTAN

Impact Of OCB On Brand Equity And Organizational Performance
ShahbazShabbir,COMSATSInstituteofInformationTechnology,PAKISTAN
FauziaSayyed,InternationalIslamicUniversityIslamabad,PAKISTAN
HansRdigerKaufmann
Blasphemy: A Hammer on Consumer Purchase Intentions and Brand

Loyalty in Pakistan
ShahbazShabbir,COMSATSInstituteofInformationTechnology,PAKISTAN
AmjadShamim,InternationalIslamicUniversityIslamabad,PAKISTAN

09:30am10:00am BREAK
will be played during Break Room to be Determined

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10:00am11:00am SESSION 08
SheridanRoom
Focus on: Management
Session Moderator: WillardBroucek,NorthernStateUniversity,USA
A Model Measuring Influential Factors and Employee Response toward

Change Management:A Test in the Telecommunication Companies
Operating in India
KaramjeetSingh,PunjabUniversity,INDIA
M.Saeed,MinotStateUniversity,USA
Strategies And Performance Of New Mexican Emerging Multinational

Enterprises
JosG.VargasHernndez,CentroUniversitariodeCiencias,MEXICO
DeerfieldRoom
Session Moderator: DougOhmer,NorthernStateUniversity,USA

Institutional Ownership, Growth Opportunities and Corporate Dividend;

Policy in Pakistan: An Application of OLS and Tobit Models
TalatAfza,COMSATSInstituteofInformationTechnology,PAKISTAN
HammadHassanMirza,COMSATSInstituteofInformationTechnology,PAKISTAN

Digital Television Adoption: An analysis of influencing factors in South

America
DebTech,DakotaStateUniversity,USA
JackWalters,DakotaStateUniversity,USA
AngosturaRoom
Session Moderator: StephenThomas,UniversityofColoradoatDenver,USA
The Political Context for US-China Economic Relations: A Case Study
based on Teaching American Government (Democracy) in China During the
Spring 2010
StephenThomas,UniversityofColoradoatDenver,USA

The Comparison Of Value At Risk On Sharia Based Stock And
Non-Sharia Based Stock (Case study on Indonesia Capital Market during
2005 2008)
AgungD.Buchdadi,StateUniversityofJakarta,INDONESIA

11:00am11:30am PREPARE FOR CULTURAL TOUR
Getchanged,grababoxlunchandhoponthebusforadrivetoCrazyHorseMemorialand
RushmoreCave.Pleasebesuretowearsturdywalkingshoesandbringalight
sweater/jacket.
011:30am LoadBusesattheRadissonHotel
12:00pm BusesdepartfromRadissonHotelforCulturaltourdestinations.
06:00pm Return to Radisson Hotel Dinner on your own! Enjoy the night in Rapid
City!
Shortlyaftertheafternoonsactivitieshaveconcluded,thebuseswillreturnconferenceparticipants
totheRadissonHotelinRapidCity.

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SUNDAY,October3
rd
,2010
Breakfastprovidedforconferenceparticipants.Haveasafetriptoyourreturndestination!
EnigmaRestaurant

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Confer ence Paper Di r ector y
TalatAfza/HammadHassanMirza 19
Institutional Ownership, Growth Opportunities and Corporate Dividend; Policy in Pakistan: An
Application of OLS and Tobit Models
KhosroAzizi/SalehGhavidel 33

The Employment Capacity in Iran Services Sector
HeidiBarclay/AllenBarclay 44
Managing Up: Fight or Flight, the Power of Winning at Upward Cultural Management
Challenges
BradBeauvais/SuzanneWood/MattBrooks 50
Gazing through the Looking GlassAnalysis of the Impact of the US Health Care Reform Bill
on the International Health & Business Landscape
JoAnnBondhus 65
Americans Working and Living Abroad: Tax Implications for U.S. Citizens
AgungD.Buchdadi/M.YasserArafat/TriHestiUtaminingtyas 78
The Comparison of Value at Risk on Sharia Based Stock and Non-Sharia Based Stock
(Case study on Indonesia Capital Market during 2005 2008)
EmrahCengiz/MuratErdal/GkhanYolac/IrfanAkyuz 88
Lateral Marketing in Retailing and a Study from Turkish Gas Station Consumers
EmrahCengiz/MuratErdal/GkhanYolac/IrfanAkyuz 98
Consumer Attitudes Towards Experiential Marketing: A Qualitative Study From Turkey
EmrahCengiz/GokhanYolac/IrfanAkyuz 105
Store Image and the Effects on Consumers Purchase Intention: A Study From Turkey
DennisE.Clayson 114
Potlatch and Postmodern Consumption: Can a Synthesis Lead to a New Understanding of the
Marketing Exchange?
MantiabaCoulibaly 129
Relationship in a Fair Trade Market: How to Create and Manage Value
DwightE.Denman 142
The Fair Services Law After Skilling: Its Future and What Every Business Executive (and
Business Professor) Should Know
RubeeLiFuller/RifatGorener/TanweerHasan/RalphHaug/ThomasHead/
MarkHoltzblatt/GordonPatzer
149
Internationalizing The Business School Curriculum:One Universitys Experience
IreneT.Houle 165
AACSB/ACBSP/IACBE: The Race to Create an ISO for Collegiate Business Education or
Circling the Wagons?

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BasakTuranIcke/MehmetAkifIcke/YusufAyturk 174
Corporate Governance and Stock Returns in Istanbul Stock Exchange
LarryJanssen 187
Twin Themes of Dr. Theodore W. Schultz: Relevance for 21st Century International Agriculture
and Business Development
ThadavillilJithendranathan/RakeshGupta 198
Impact of Single Stock Futures on the Volatility of Underlying Indian Stocks
KiChanKim/V.G.Girish 214
Product and Business Innovation of the Double Helix Model: Its Application in Automobile
Industry
DianeMay/HamidYeganeh 215
Examination of Cultural Orientation on Gender Gap: Some Implications on Workplace
Regulation
MitchMcGhee/TzuManHuang/TerryCrain 229
Tax Revenue Variation in Different Countries
LouellaMoore 235
Obstacles on the Path to Global Accounting Standards
FrankMoseley/AndrewBertsch/JamesOndracek 250
Energy Issues and Policy InSwitzerland
FrankMoseley/AndrewBertsch/JamesOndracek 255
Energy Issues and Policy InTurkey
BijayanandaNaik/DebTech/MiguelinaFranco 260
A Comparative Study of Learning Styles of Business Students in The United States and the
Dominican Republic
HillarNeumann/JohnMeyer 269
The Greenspan/Taylor Debate: The Estimated Importance of Saving and Money in Interest Rate
Movements
KlausOestreicher/NigelWalton/MichaelNewnham 270
Product Launch in a Declining Environment:The Blu-ray Disc Opportunities and Struggle
DongSooPark/AbdoukhadreDiao 293
Culturally Intelligent for Satisfied Worker in Multinational Organization: Role of Intercultural
Communication
VladimirPetkovski/AleksandarNikolov 310
The CSR Policy Framework the State and the Rational for CSR in Serbia's Context
ToddQuinn 319
Found in Translation: A Library Outreach Program for International Students

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RistoRasku 324
Developing Sport Business with Sport Management Studies The Finnish approach
JaclynJ.Rundle 325
New Legal Forms for Social Enterprises: A Comparison of Structure Options and Experiences
in the United States and Great Britain
HansSchwarz 343
Best Practices in Terminology Work
MuhammadShahbazShabbir/AmjadShamim 357
Blasphemy: A Hammer on Consumer Purchase Intentions and Brand Loyalty in Pakistan

ShahbazShabbir/FauziaSayyed/HansRdigerKaufmann 367
Impact of OCB on Brand Equity and Organizational Performance
HanKilShin/JohnC.Barnes 381
Developing Culturally-Targeted Marketing Strategies by Exploring Consumer Decision-Making
Styles (CDMS) on Ethnic Golfers Shopping Behavior: An Empirical Study for Korean American
Consumers
KaramjeetSingh/M.Saeed/AndyBertsch 382
A Model Measuring Influential Factors and Employee Response toward Change Management:
A Test in the Telecommunication Companies Operating in India
KaramjeetSingh/M.Saeed/AndyBertsch 400
Environment & Marketing: A Study of Ethical Response Behavior in Indian Consumers
DebTech/JackH.Walters 416
Digital Television Adoption: An analysis of influencing factors in South America
StephenC.Thomas 431
The Political Context for US-China Economic Relations: A Case Study based on Teaching
American Government (Democracy) in China During the Spring 2010

StephenThomas/JiChen 436
China's Sovereign Wealth Funds and the World Economic Crisis
MuhammadShariatUllah/InabaKazuo 447
Impact of RTA and PTA on Bangladesh Export: Application of Gravity Model
JosG.VargasHernndez 465
Strategies and Performance of New Mexican Emerging Multinational Enterprises
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I nsti tuti onal Owner shi p, Gr owth Oppor tuni ti es
and Cor por ate Di vi dend;
Poli cy i n Paki stan: An Appli cati on of OLS and
Tobi t Models
Talat Afza
Hammad Hassan Mirza

Abstract
Corporate dividend payout is not only the source of cash flow to the shareholders but
it also provides information regarding firms current and future performance. The
inconclusiveness of theories on perceived importance of dividend policy has made it among
the widely addressed issues in modern financial literature. The present study investigates the
impact of institutional ownership and growth opportunities on corporate dividend policy
based on the sample of 120 Listed Companies of Karachi Stock Exchange (KSE), Pakistan,
during 2002 to 2007. The estimated results, using OLS and Tobit regression models, suggest
that dividend payout of Pakistani companies are positively affected by growth opportunities,
proportion of shares held by insurance companies and profitability but negatively affected by
leverage. However, no significant impact of ownership by Modarbah companies, NIT and
miscellaneous institutions on dividend payout is observed. Large companies are less likely to
pay high dividends but the relationship of size with dividend payout remained insignificant.
Estimated results are robust to alternative proxy of dividend policy i.e. Dividend Intensity.

Key Words: Dividend Policy, Institutional Ownership, Growth opportunities, OLS, Tobit
regression.
Introduction
Corporate dividend decision is among the most important decisions a finance manager
has to take, since, the payout is not only the source of cash flow to the shareholders but it also
provides information regarding firms current and future performance. There is an emerging
consensus among financial researchers that companys dividend decision is affected by a
range of different factors. But no agreed upon set of factors, affecting dividend payouts, is yet
determined. The empirical findings on the determinants of payouts are inconclusive and many
times contradictory and the researchers seem confused on the importance of role played by
dividend payout in determining firms value. However, issues related to agency cost of
monitoring and its relationship with corporate payouts has gained significant importance
during the last few decades.
The existing literature supports the relationship between corporate ownership and
payout behavior due to reason that corporate owners are more efficient in controlling agency
problem than individual owners. Rozef (1982) argued that dividend provides indirect
controlling benefit where active monitoring of a firms management by its shareholders is
missing. Based on agency cost hypothesis, Easterbrook (1984) established that corporate
dividend policy should be designed in a way that it can mitigate the agency cost of
monitoring. This argument highlights the importance of ownership structure in designing
corporate dividend policy. A large number of studies (See For example, Shleifer and Vishny,
- 20 -

1986; Jarrell and Poulsen, 1987; Brickley, Lease, and Smith, 1988; Graves and Waddock,
1990) have argued that institutional investors, based on their professional decision making
power, are more vigilant in controlling the agency cost, because they have a benefit of
economies of scale in information gathering techniques. By employing human resources and
using sophisticated data analysis programs, they have better knowledge of evaluation of
firms performance and have an art of controlling managements affairs. If institutional
investors have a better control over managerial affairs then companies with a higher degree of
institutional owners may have a relatively less concern about agency problem and are
expected to pay less dividend.
Whereas, tax based hypothesis supports that institutions may have incentive in
receiving high dividend income based on the tax treatments. Although, in Pakistan corporate
dividend is subject to double taxation and capital gain is completely exempted from tax.
However, institutions taxable income does not include income from dividend therefore,
institutions are expected to prefer high dividend income. Many researchers have argued that
corporate investors tend to be attracted towards higher dividend. (see for example, Han, Lee
and Suk, 1999, Dhaliwal, Erickson and Trezevant, 1999, and Short, Zhang and Keasey, 2002;
Allen et al., 2000, and Short et al., 2002). Moreover, institutions are often subject to
restrictions in institutional charters (such as the prudent man rule), which, to some extent,
prevent them from investing in non-paying or low-dividend paying stocks.
The above two hypotheses may not be viewed as mutually exclusive because the
corporate dividend decision could be affected by both of them simultaneously. Furthermore,
based on the type of institution, the preference towards high or low dividend may change. For
instance, in firms where greater proportion of shares are held by banking companies, dividend
payout might be very low, because banks seek greater security for their debt (Amihud and
Murgia, 1997) in the form of high retained earnings while some other institutions like
insurance companies, may prefer regular and high dividend payout to fulfill their immediate
cash requirements (cited in Al-Malkawi, 2005). Moreover, during high growth phase,
companies tend to control their dividend payout differently. For example, some companies
would be reluctant to reduce dividend payout when growth opportunities are available to
them; rather they would be willing to increase payout to signal strong financial position to
market in order to maintain the market value of their shares, which could be beneficial for
them for equity financing. While other companies would reduce dividend during growth
phase in order to finance investment projects from internal sources, thus avoiding costly
external financing. The combination of institutions better monitoring and information
gathering abilities and the advantages offered by payouts to institutions (for example tax
exemption, prudent man) have led some researchers to suggest a strong interaction between
corporate payout policy and institutional holdings. However, very few studies have
considered the composition of institutional ownership as a determining factor of corporate
dividend policy. In context of Pakistan, little evidence is available regarding the impact of
institutional ownership on dividend payout of listed companies; therefore, the present study
investigates the role played by different institutional investors in determining dividend payout
of Pakistani companies.
Pakistan is a common law country, whose corporate practices are governed by
Companies Ordinance 1984 and Security and Exchange Ordinance 1969. But unfortunately,
the level of corporate governance in Pakistani companies is not as high as in developed
countries due to which Pakistani companies possess cross circular ownership or what is
called in modern corporate finance as pyramid ownership structure where one primary
owner dominates over the affairs of company. In such a situation, role of institutional owners
become more important in controlling agency conflicts as institutions are supposed to be
better informed than are individual investors. They not only devote resources to gathering
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information, but also sometimes they privy to corporate information that individual investors
do not have (see, e.g., Michaely and Shaw,1994).
The institutional investors in Pakistan mainly include insurance companies, mutual
funds, Modarbah companies and other financial institutions. Insurance sector is among the
rapidly growing sector of Pakistan, it not only contribute massively to society because risk is
inherited in all types of business transactions but also as managers of risk, insurance
companies help individuals and business to understand and handle risk efficiently (Afza and
Jam, 2010). National Investment Trust (NIT) is Pakistan, oldest and biggest mutual fund, it is
the market portfolio of all major companies listed at Karachi Stock Exchange (KSE). NIT is a
simple way of making investment and savings, it is affordable and provides professional
management of fund, diversification at a very low cost and convenience and suitable for
investors who wish to diversify their investment risk over a long-term investment horizon.
Modarbah is another rapidly growing institution of Pakistani market, the concept of
Modarbah requires provision of funds by one party and the management by the other.
Modarbah companies and Modarbah Control Ordinance was promulgated in 1980. The
business of Modarbah being based on profit and loss sharing according to the tenets of Islam
and required approval of religious board. In 1989, the basic concept of a Modarbah underwent
a change according to which the financer and their associates were required to contribute 50
per cent of the total capital and the remaining fund will be contributed by the general public.
The Modarbah Certificates are similar to other share certificates where their denominations
are subject to the same approach as for a common equity shares. However, the provision for
distribution of 90 percent of the profit and consequently the exemption of tax are among the
attractive features of Modarbah Certificate. The spectrum of activities of is so wide that if a
Modarbah is properly managed it can derive the benefits of Leasing Company, short terms
Morabaha advances, transactions in the capital market and a combination of other business.
According to Haqqani (1993) modarba is a unique business that has the advantage of tax
exemptions and it can be described as most attractive instrument at the present price levels.
Although, Institutional investors plays an important role in managing the affairs of business,
but unfortunately very few researchers have studied the impact of different institutional
investors on dividend policy of the company.
Furthermore, during high growth phase, companies tend to control their dividend
payouts differently. For example, some companies would be reluctant to reduce dividend
payout when growth opportunities are available to them; rather they would be willing to
increase payout to signal strong financial position to market in order to maintain the market
value of their shares, which could be beneficial for them for equity financing. While other
companies would decrease the dividend payout to finance investment projects from internal
sources thus avoiding costly external debts. Firms with high growth opportunities require
funds to timely capture the best available investment opportunity with cheapest source of
finance (retained earnings) therefore, during high growth phase firms would be reluctant to
pay high dividend during the high growth phase (Mayers and Majluf, 1984). On the other
hand, LaPorta et. al. (2000) have argued that, high growth firms are more in need of external
financing, therefore, in order to insure access to external capital market the firm might be
motivated to institute a good standing with stockholders through higher dividend payouts.
The present study has used a unique set variables representing institutional ownership,
which differentiate this paper from previous researches on dividend policy in Pakistan (for
example, Ayub, 2005; Ahmed and Attiya, 2009 and Nishat and Walliullah, 2010). The study
attempts to capture the impact of ownership by different institutional investors and growth
opportunities on dividend payouts. The estimated results are expected to provide an insight in
to the reason behind declining corporate dividends in Pakistani stock market.
- 22 -

Rest of the paper is organized as follows. In section 2 review of relevant literature is
presented. Section 3 gives the data and methodology. Whereas, statistical analysis is
presented in section 4. Last section concludes the discussion.
Literature Review
The existing literature on the determinants of dividend policy has its roots in the
seminal paper of Lintner (1956) and Miller and Modigliani (1961). Lintner (1956) found that
changes in earnings and existing divided rates are the most important determinants of a
companys dividend decision. Later on, Miller and Modigliani (1961) presented the
irrelevance proposition and proved that in a perfect capital market firms dividend decision is
not a thing of value at all. Regarding determinants of dividend policy, many researchers have
analyzed the impact of ownership structure on dividend payouts but the evidence on the
impact of proportion of shares held by different institutional owners on dividend policy is
very limited.
DSouza (1999), examined the agency cost, Market Risk, Investment Opportunities
and Dividend Policy. She used the Institutional holdings, beta and market to book value as
proxy for agency cost, market risk and investment opportunities respectively. The results of
the study clearly show a negative relationship between agency cost and market risk with
dividends payout. However, the estimated results do not support the negative relationship
between dividend payout policies and investment opportunities. The relationship between
dividend policy and investment opportunities for international firms in sample is found to be
statistically insignificant.
An empirically investigation using Multex Investor Database was conducted by Myers
and Frank (2004) on a sample of 483 firms. They applied OLS regression techniques to
analyze the impact of P/E ratio and Institutional ownership on dividend decision of
companies. They found that higher the Price to Earning ratio higher will be the corporate
payouts and higher institutional and insiders ownership lead to lower payout ratio. Based on
the results they established that managers have an incentive to reduce dividends in order to
increase the expected value of their stock options received as executive compensation.
However, debt to equity ratio was found to be positively related with dividend payout for
which they have argued that firms are willing to use debt to finance increasing dividends so
that a strong positive signal may be sent to investors regarding strength of future earnings
which helps companies to enhance reputation and maintain access to capital.
Elston et. al. (2004) examined the impact of Institutional Ownership on dividend
payout of 100 German companies from 1970 to 1986. Using Propensity Score Matching
(PSM) method, they found no significant impact of institutional ownership and banking
control on dividend payouts. However, the estimated results suggested that lack of tax
incentives, favoring dividend income serves to reduce the agency problem, resulting in better
alignment of institutional and minority shareholders interests. Major findings were consistent
with the facts regarding the nature of the German firms which reduce the agency cost of
conflicting interest between management and shareholders interest regarding use of free cash
flows by giving the right to management to retain significant percentage of the net profits of
the firms.
From developed economy of US, Grinstein and Roni (2005) examined the relationship
between institutional ownership and dividend payout of US public firms. Using Thomson
Financial Data base, they examined financial data of publically traded companies from 1980
to 1986 comprising of 79,010 firm year observations and found that although institutional
investors avoid firms that do not pay dividend, among dividend paying firms yet, they prefer
firms that pay fewer dividends. They also prefer firms that repurchase shares on regular basis.
- 23 -

However, higher institutional shareholdings and concentration of shareholdings do not
increase dividend payouts.
The ownership structure of 330 large listed UK firms was analyzed by Khan (2006).
Based on the estimated results she reported that ownership concentration has a negative
impact on firms dividend paying ability. She further analyzed ownership compositions and
reported that ownership by insurance companies is positively and individual ownership is
negatively related with dividend policy.
From emerging economy of India, Kumar (2006) investigated the impact of corporate
governance on dividend payouts. He used panel data of Indian firms from 1994 to 2000 and
found the firms financial structure, investment opportunities, dividend history, earning
trends, and the ownership structure are the most significant determinants of dividend
behavior. He reported that earning trends are positively and investment opportunities are
negatively related with debt-equity ratio, and an inverse relationship of institutional
ownership and dividend payout was observed in Indian companies.
Han et. al. (1999) studied the relationship between institutional ownership and
dividend payouts. Using the Tobit analysis they found positive relationship between
institutional ownership and corporate dividend policy. Results show that dividends are
positively related to institutional ownership, thus supporting the tax-based hypothesis that
institutional shareholders prefer dividends over capital gains because of the differential tax
treatment. Thus, their results support a certain type of dividend clientele.
From emerging economy of Pakistan, Ahmed and Attiya (2009) studied the
determining factors of dividend policy. Using a sample of 320 firms listed at KSE from 2001
to 2006, they first analyzed the Lintner, Fama and Babiak proposed models, which were the
extension of partial adjustment model, using Panel Regression. The estimated results show
that in Pakistan companies rely more on current earnings and past dividend to fix their
dividend payment. Secondly, they studied determinants of corporate payouts and found that
firms with stable positive net earnings pay larger dividends. Regarding ownership
concentration and market liquidity, a positive relationship of both was observed with dividend
payout ratio. However, no significant impact of growth opportunities was found on payouts.
Contrary to the existing literature they reported negative relationship of size with dividend
policy for which they argued that in Pakistan, large companies prefer to invest in their assets
rather then to pay dividends.
More recently, Nishat and Walliullah (2010) examined dividend behavior of 535
Pakistani firms during 1985 to 2005 based on Probit regression model. The estimated results
show that profitability, liquidity and firm leverage are the strongest and most influential
predictors of dividend behavior in Pakistan. Companies with higher equity pay fewer
dividends while large companies are expected to pay highre dividends. The results also
suggest that government ownership in companies increases the dividend payouts but
companies with surplus growth opportunities do not necessarily increase their dividend
payouts. They found financial reforms as positively related to the dividend decision based on
which they argued that secondary market development has a significant effect on dividend
decision.
From the above discussion on existing literature, one can understand the complexity of
dividend puzzle. Although institutional owners play a vital role in enhancing corporate
performance, but it is important to study the nature of business and preferences of such
institutional owners, which distinct them from each others. It does not seem justified to
analyze the role of institutional owners as a whole in determining corporate payout policy.
The present study particularly attempts to analyze the role played by different types of
institutional investors in determining corporate payout policy. To the best of authors
knowledge, no study to date has analyzed the impact of ownership by type of institution on
- 24 -

dividend payouts. Moreover, the impact of growth opportunities, size, leverage and
profitability is also explored in present study.
Data and Methodology
The data of 120 companies representing all major sectors of Karachi Stock Exchange
(KSE) has been collected for the period 2002 to 2007, using following criteria:
1. Company was listed at KSE during years 2002 to 2007.
2. Ownership data for at least 3years was available.
3. Should not be in loss in for the whole study period.
4. Should not have missed dividend payment for more then 3 years.
5. Should not be a state owned enterprise.
The data has been collected mainly from the published financial statements, annual
reports, publications of State Bank of Pakistan (SBP) and from daily quotations of KSE.

Variables of the Study
The present study considers dividend payout (DPO) as the dependent variable, which
is a commonly used proxy of dividend policy; many financial researchers have used dividend
payout as a proxy of corporate dividend policy (See for example Gugler, 2003; Reddy and
Rath, 2005; Papadopoulos, 2007; Al-Malkawi, 2007; Ahmed & Attiya, 2009 etc.). However,
DPO is an accounting measure subject to be affected by corporate earning management
strategies. To avoid any biasness in results and for robustness of results we have also used
dividend intensity (DIVINT) as an alternative measure of dividend policy in Pakistan.
Institutional investors are generally attracted towards high dividends which might be
due to fiduciary reasons or prudent man rule. But based on the type of institution and nature
of its business, this prediction may be vague. For example, banks may like more security in
the form of assets and reserves maintained at the expense of low dividend payments whereas,
insurance companies and pension funds can be attracted towards high dividend because of
their cash requirements for settlement of claims etc. (Al-Malkawi, 2007). Therefore, the
impact of number of shares held by institutional investors as a whole on dividend payout
could be misleading. Based on the above argument, it does not seem intuitively appealing to
use institutional ownership in total as a determinant of payout policy. The present study has
segregated the institutional owners in to four major categories i.e. insurance companies,
modarbah companies, National Investment Trust, and miscellaneous companies which
include financial institutions, banks and other joint stock companies.
Firms future growth opportunities play an imperative role in determining corporate
payouts. Firms with higher growth opportunities require funds to timely capture the best
available investment opportunity with cheapest source of finance, because of which during
high growth phase firms would be reluctant to pay higher dividend. In order to capture firms
growth opportunities we have used Market to Book Ratio and it is expected to have a negative
relationship with dividend payouts. Moreover, existing financial literature reported size to be
inversely related with chances of bankruptcy (Ferri and Jones 1979; Titman and Wessels
1988; Rajan and Zingales 1995). Intuitively, larger companies due to the higher value of their
assets have more access to debt markets to borrow funds as compared to small companies.
Moreover, large size firms are more diversified and they also have regular and less volatile
cash flows, based on which they are capable of paying higher dividends. However, debt has
the tendency to leaver up shareholders return but it also brings liquidity risk to company.
When firm acquires debt, it commits itself to a fixed financial charge, interest, and repayment
of principal, failure to pay these charges can lead firm in to liquidation. To avoid which firm
has to maintain good liquid position and cash flows which ultimately effects dividend payout
- 25 -

negatively (Gugler and Yurtoglu, 2003; Aivazian et al., 2004). The present study uses total
liabilities to total assets to measure companies leverage which is expected to affect payout
negatively. Profitability, which shows the operational success of company, is the primary
source of fund generation, firms which have suffered losses over a long period of time are not
likely to pay dividend due to deficiency of funds or danger of bankruptcy. Therefore, firms
profitability is expected to have a positive relationship with dividend payouts. Firms Earning
per Share (EPS) is considered as a proxy of firms profitability. All variables have been
summarized in table 3.1.

Table 3.1: Variable Explanation
Dependent Variables Expected relationship
DPO Dividend Payout Dividend Per share/ Earning per share
DIVINT Dividend Intensity Total Cash Dividend / Total Assets
Independent Variables
INSUR Insurance companies Ownership Proportion of shares held by Insurance companies (+)
MOD Modarbah Ownership Proportion of shares held by Modarbah companies (+)
NIT National Investment Trust Ownership Proportion of shares held by NIT (+)
INST* Misc. Institutional Ownership Proportion of shares held by Misc Institutions (+)
GROW Growth Opportunities Market Value per Shares/Book Value of per share (-)
SZ Size Log of Assets (+)
LVRG Leverage Total Liabilities/ Total Assets (-)
PRFT Profitability Net Profit after tax/ No. of share outstanding (+)
* INST represents miscellaneous institutional ownership, which includes private companies, Financial Institutions, Joint Stock Companies,
Commercial Banks etc

Model Specification
In order to analyze the impact of ownership characteristics and growth opportunities
on dividend policy, five regression models are formulated. Model 1 below estimates the
impact of ownership by Insurance companies, growth opportunities and three control
variables i.e. size, leverage and profitability on dividend payout. Model 2 replaces the
ownership by insurance companies with the ownership by Modarbah companies, like wise
model 3 and 4 uses ownership by NIT and misc institutions respectively. Finally in model 5
the joint impact of all types of institutional investors ownership is estimated. To check the
robustness of results all models are re-estimated by using alternative proxy of dividend policy
i.e. Dividend intensity. The estimated models are as under:
(1)

(2)
(3)
(4)
(5)
(All variables have been explained in Table 3.1)
Estimation Techniques
Existing literature reveals that OLS is the widely used technique to investigate the
determinants of dividend policy (For example; Kumar, 2006; Al-Malkawi, 2007; Anil and
Sujjata, 2008; and Ahmed and Attia, 2009; Nishat and Walliullah, 2010). Therefore, the
it it it it
it it it it it it
PRFT LVRG SZ
GROW INST NIT MOD INSUR DPO

+ + + +
+ + + + = +
) ( ) ( ) (
) ( ) ( ) ( ) ( ) ( ) (
8 7 6
5 4 3 2 1 0
it it it it it it it PRFT LVRG SZ GROW INST DPO + + + + + + = ) ( ) ( ) ( ) ( ) ( ) ( 5 4 3 2 1 0
it it it it it it it PRFT LVRG SZ GROW NIT DPO + + + + + + = ) ( ) ( ) ( ) ( ) ( ) ( 5 4 3 2 1 0
it it it it it it it PRFT LVRG SZ GROW MOD DPO + + + + + + = ) ( ) ( ) ( ) ( ) ( ) ( 5 4 3 2 1 0
it it it it it it it PRFT LVRG SZ GROW INSUR DPO + + + + + + = ) ( ) ( ) ( ) ( ) ( ) ( 5 4 3 2 1 0
- 26 -

present study has used OLS as the primary statistical tool of analysis. However, in
considering dividend payouts it is important to note that firms can pay either a positive
dividend or no dividend, but in no case firm can pay a negative dividend. If the company is in
loss, its payout ratio, which is an accounting measure, will be a negative value, which is
against common understanding. In Pakistan, many companies do not pay dividends and even
those who pay dividends do not pay on regular basis and many of dividend paying companies
are in loss. This gives dependent variable (DPO) a special characteristic in that it takes two
outcomes. It is either equal to zero or positive. Dividend can never be negative (Al-Malkawi,
2007). To handle this issue, present study has also used Tobit model which is supported by
existing financial researchers (see for example Maddala, 1992; Anderson, 1986; and Huang,
2001)

Tobit model
Although, OLS is a widely used estimation technique in financial research, however, it
has a limitation in case where dependent variable is censored either from lower tail of
distribution or upper tail or both. It is also the case where observed value of dependent
variable is totally ignored and a representative value is recorded in place of it. In both cases
OLS technique will yield a downward-biased estimate of the slope coefficient and an
upwards-biased estimate of the intercept (Dougherty 2001). In order to control this biasness
James Tobin in 1958 has introduced an alternative technique which was later known as Tobit
model. The estimation generally, involves censoring of data from its lower tail; this implies
that DPO is censored to minimum of zero because a company can pay only positive dividend
or no dividend at all. The Tobit specification is as below:
Yit = 0, if y* it 0
= y*it , if y* it > 0
To estimate the maximum likelihood estimation (MLE) method is applied using
statistical softwares i.e STATA and EasyReg. International (Easy Regression International)
Statistical Analysis
Table 4.1 presents the summary statistics of all variables used in the analysis. The
table is dividend in to two panels. Panel A reports the mean and standard deviation for the
dependent and each of the independent variables. In order to ensure the absence of strong
multicolinearity among independent variables panel B presents the correlation coefficients
among variables. The highest correlation value is among growth and profitability i.e. 0.355
which shows that our model is not expected to be affected by multicolinearity problem.
Furthermore, we have also calculated the variance inflation factor (VIF) of each variable (not
reported) and Durbin Watson test of autocorrelation.

Table 4.1 Descriptive statistics
Panel A
Descriptive
Panel B
Correlation
Mean St.Dev DPO INSUR MOD NIT INST GROW SZ LVRG
DPO 0.2443 1.6431
INSUR 0.0202 0.0263 0.217
MOD 0.0182 0.0330 -0.040 0.109
NIT 0.0612 0.0658 -0.009 0.197 0.275
INST 0.1551 0.1861 0.030 0.286 0.172 0.001
GROW 4.8711 41.211 0.114 0.023 -0.126 -0.105 -0.020
SZ 22.375 1.3368 0.072 -0.073 0.151 -0.160 0.246 0.118
LVRG 0.5472 0.2371 -0.131 -0.060 0.009 0.050 -0.004 0.069 0.181
PRFT 13.975 1.6331 0.068 -0.048 -0.050 -0.083 0.002 0.355 0.160 -0.183

- 27 -

Table 4.2 presents the estimated results of five regression models using OLS
regression. Equation 1 shows the ownership by Insurance companies is positively related with
dividend payout and significantly related with dividend intensity which means that insurance
companies in Pakistan are interested in cash dividend. Due to the nature of their business,
insurance companies require regular cash flows in order to satisfy their claims, as a result
companies in which more shares are owned by insurance companies are more likely to pay
cash dividends, which is inline with the results of Khan (2006). Furthermore, dividend payout
is also positively affected by firms growth opportunities, which is against our hypothesized
relationship. The positive relationship of MBR shows that during the phase of growth
companies do not reduce their dividend payout, but instead try to signal good financial
position to their investors in order to acquire more equity to finance positive NPV projects.
This result is inline with LaPorta et. al. (2000) who argued that, high growth firms are more in
need of external financing, therefore, in order to insure access to external capital market the
firm might be motivated to institute a good standing with stockholders through higher
dividend payout. The present study uses three control variables. Firstly, size of company,
which was expected to have positive relationship with payouts but contrary to our
expectation, size has a negative but insignificant relationship with DPO. It shows that
company size does not determine the level of its payout. The relationship of size with payout
is arguable, as some researchers have reported negative relationship of size with payout (See
for example; Naceur, 2006; Avazian et. al., 2006; Ahmed and Attiya, 2009) while majority of
others researchers have reported positive relationship of size with corporate payouts (See for
example; Stacescu, 2006; Al-Malkawi, 2007 etc.).
Secondly, Leverage has a negatively relationship with corporate dividend payouts in
Pakistan, which is in accordance with our expectation. This shows that highly leveraged firms
have to maintain a reasonably good liquidity in order to pay regular interest and principal as
well therefore, cash dividend is not a good option for such companies, which is in line with
the results reported by Baker et. al.(2007) and hmed and Attiya (2009) but contradicts the
results of Mayers and Frank (2004) who have found leverage as a positive determinant of
dividend payouts. Profitability is positively related with dividend payout but the relationship
is significant with dividend intensity only.

Table 4.2: OLS-Regression estimates
In this table ordinary least square regression is used to explain dividend payout decisions. For measuring dividend policy two proxies are
used i.e. dividend payout (DPO) and dividend intensity (DIVINT). The explanatory variables are % shares held by insurance companies
(INSUR), % shares held by modarbah companies (MOD), % shares held by national investment trust (NIT),% shares held by miscellaneous
institutions (INST), future growth opportunities measured by market to book ratio (GROW), company size measured by natural log of assets
(SZ), leverage measured by total liabilities to total assets (LVRG) and finally profitability measured by earning per share (EPS).
Variables
Equation 1 Equation 2 Equation 3 Equation 4 Equation 5
DPO DIVINT DPO DIVINT DPO DIVINT DPO DIVINT DPO DIVINT
CONSTANT
0.584
(0.473)
[0.637]
0.022
(0.471)
[0.636]
0.051
(0.041)
[0.968]
0.040
(0.826)
[0.410]
1.904*
(2.472)
[0.015]
0.150**
(2.385)
[0.018]
-0.330
(-0.384)
[0.701]
0.012
(0.246)
[0.806]
2.208
(1.385)
[0.171]
0.215***
(3.188)
[0.002]
INSUR
0.032
(1.230)
[0.221]
0.003***
(2.629)
[0.009]
-----

----- -----

-----
0.063
(2.085)
[0.041]
0.001
(0.788)
[0.433]
MODR ----- -----
-0.021
(-1.048)
[0.297]
1.332E-2
(0.016)
[0.988]
-----

-----
0.008
(0.267)
[0.790]
0.001
(0.489)
[0.627]
NIT ----- ----- ----- -----
0.003
(0.553)
[0.580]
0.000
(-1.802)
[0.211]
-----
0.007
(0.405)
[0.687]
0.000
(-0.631)
[0.530]
INST ----- ----- ----- ----- -----
-0.003
(-1.422)
[0.156]
1.320E-6
(0.009)
[0.993]
0.004
(0.468)
[0.641]
0.000
(-1.279)
[0.205]
GROW
0.048*
(1.782)
[0.077]
0.008***
(7.630)
[0.000]
0.050*
(1.816)
[0.072]
0.008***
(7.084)
[0.000]
0.004
(0.989)
[0.324]
0.001***
(3.172)
[0.002]
0.006
(1.022)
[0.308]
0.002***
(5.100)
[0.000]
0.016
(0.610)
[0.544]
0.001
(0.582)
[0.562]
- 28 -

SZ
-0.000
(-0.014)
[0.989]
0.001
(0.272)
[0.786]
0.029
(0.490)
[0.625]
0.000
(-0.100)
[0.802]
-0.077**
(-2.114)
[0.034]
-0.005*
(-1.843)
[0.067]
0.045
(1.136)
[0.257]
0.001
(0.593)
[0.554]
-0.103
(-1.389)
[0.169]
-0.009***
(-2.846)
[0.006]
LVRG
-0.572
(-1.651)
[0.101]
-0.059***
(-4.130)
[0.000]
-0.596*
(-1.674)
[0.096]
-0.049***
(-3.363)
[0.001]
-0.119
(-0.608)
[0.544]
-0.031*
(-1.823)
[0.070]
-0.408*
(-1.723)
[0.086]
-0.048***
(-3.294)
[0.001]
0.618*
(1.735)
[0.087]
-0.017
(-1.167)
[0.247]
PRFT
0.000
(0.223)
[0.824]
0.000**
(2.022)
[0.045]
0.001
(0.393)
[0.695]
0.000***
(2.693)
[0.008]
0.003**
(2.074)
[0.040]
0.001***
(8.447)
[0.000]
0.001
(0.692)
[0.490]
0.001***
(6.259)
[0.000]
0.003
(0.756)
[0.452]
0.001***
(8.079)
[0.000]

R
2
0.069 0.456 0.063 0.410 0.073 0.418 0.037 0.300 0.198 0.719
Adj-R
2
0.034 0.439 0.028 0.392 0.042 0.402 0.016 0.287 0.105 0.691
Reg. Sum
2
6.263 0.200 5.753 0.171 2.447 0.280 4.476 0.352 4.832 0.130
Resd. Sum
2
84.774 0.201 84.693 0.191 31.135 0.350 117.829 0.512 19.594 0.045
D/W 2.044 1.954 1.663 1.907 1.962 1.349 1.952 1.022 2.047 1.398
F-Statistics 1.965 27.622 1.786 23.085 2.342 26.595 1.747 23.490 2.127 25.852
Sig. F 0.008 0.000 0.012 0.000 0.004 0.000 0.025 0.000 0.045 0.000
Parenthesis contain (t-Statistics); [P-Value] *** significant at level of 1%; ** significant at level of 5%; * significant at level of 10%;

In equation 2, we have replaced the insurance companies ownership with ownership
by Modarbah companies. Keeping all other variables same, it is observed that Modarbah
companies ownership does not significantly affect the dividend policy of the companies. This
could be due to the fact the Modarbah business is not well established in Pakistan and their
ownership proportions in other companies are very low because of which they do not have
much emphasis on corporate payouts.
Equation 3 and 4 present the impact of ownership by NIT and misc institutions
respectively and again found no significant impact of ownership by NIT and misc institutions
on dividend policy of Pakistani companies. NIT on average has a very nominal shareholdings
in listed companies of KSE, although it is a market portfolio having its shares in almost every
listed company in Pakistan but still due to it small voting power, NIT is unable to affect
dividend policy of the companies. Similarly, miscellaneous institutions which include banks,
joint stock companies and other financial institutions have on average high shareholdings in
companies shows no significant relationship with dividend payout and dividend intensity.
This result supports the findings of Grinstein and Roni (2005) who indicated that institutions
prefer firms that repurchase shares and higher institutional holdings do not cause firms to
increase their total payouts.
The joint impact of ownership of all institutional investors are estimated in equation 5
which reconfirms our previous findings where only insurance companies ownership, leverage
and profitability are observed as significant determinants of dividend policy of Pakistani
companies. However, the relationship of size with dividend intensity is found to be
significantly negative. In the context of dividend policy of Pakistani companies, Ahmed and
Attiya (2009) have also found that company size is negatively related with companys payout.
The possible reason for this negative relationship could be the preference of large companies
to retain dividends in order to avoid costly debt financing for investment in their assets.
Another explanation of negative coefficient of size could be the period of study i.e. 2002 to
2007, in which economy started recovering and reached to its boom, as Gross Domestic
Product (GDP) growth rate of Pakistan reached up to it ever highest level of 6.9% (in 2007)
which was also recorded as the highest GDP growth in Asia (Economic Survey of Pakistan,
2007-08). But unfortunately the ongoing terrorism, political instability and worst energy crisis
brought this rate down again to 5.8% in 2008 and Pakistans economy was hit by the worst
crises of its history (cited in Afza and Hammad, 2010). Therefore it can be assumed that,
large companies might be expecting this dramatic decline therefore they might have started
building up reserves instead of paying dividends. However, small firms being myopic tried to
attract investors through high dividend as they dont have easy access to external capital
markets (Afza and Hammad, 2010). The lower panel of each model explains the R2, Adjusted
- 29 -

R2 of the results along with Durbin-Watson test of autocorrelation. The F statistics of each
model in significant at the 1% level.
Table 4.3 presents the results from Tobit regression model based on maximum
likelihood estimation. The dependent variable DPO has been censored from the lower side i.e
the accounting value of dividend payout is either zero or positive. Based on the argument that
company can pay only positive dividend and cannot pay negative dividend, the censored
regression approach is adopted to check the validity of the results of OLS regression.
The results of first equation again depicts that insurance companies ownership is
positively related with dividend payout of the companies and companies which have growth
opportunities increase their payouts, but highly leveraged firms are less likely to pay higher
dividends. However, impact of ownership by Modarbah companies, NIT and miscellaneous
institution do not significantly affect corporate payouts in Pakistan, as represented in equation
2 to 4. Leverage remained a significant determinant of dividend payout in all equations except
the last equation. The over all results using Tobit model are more significant as compared
with the results from OLS regression. This suggests that Tobit model is more suitable in case
where dependent variable assumes either an upper or a lower limit and maximum likelihood
should be used for estimation rather than ordinary least square. Lower panel of each equation
gives the pseudo R2 value, Likelihood ratio, significance of chi square and log-likelihood.

Table 4.3: Tobit Regression Estimates
In this table Tobit regression model is used to explain dividend payout decisions. Dependent variable here in this model is dividend payout
(DPO) which has been censored from the lower side. The explanatory variables are % shares held by insurance companies (INSUR), %
shares held by modarbah companies (MOD), % shares held by national investment trust (NIT),% shares held by miscellaneous institutions
(INST), future growth opportunities measured by market to book ratio (GROW), company size measured by natural log of assets (SZ),
leverage measured by total liabilities to total assets (LVRG) and finally profitability measured by earning per share (EPS). Pseudo R in tobit
model is the similitude of R
2
in OLS model.

Variables Equation 1 Equation 2 Equation 3 Equation 4 Equation 5
CONSTANT
0.345
(0.71)
[0.480]
0.201
(0.39)
[0.695]
1.523***
(2.85)
[0.005]
0.449
(1.11)
[0.268]
0.389
(0.42)
[0.676]
INSUR
0.427***
(3.76)
[0.000]
----- ----- -----
6.620***
(3.27)
[0.002]
MODR -----
0.003
(0.34)
[0.737]
----- -----
0.003
(0.24)
[0.813]
NIT ----- -----
0.002
(0.67)
[0.503]
-----
0.000
(0.06)
[0.952]
INST ----- ----- -----
-0.149
(-1.19)
[0.237]
-0.037
(-0.74)
[0.463]
GROW
0.049***
(4.79)
[0.000]
0.052***
(4.74)
[0.000]
0.009**
(2.95)
[0.017]
0.007*
(1.84)
[0.067]
0.057**
(2.96)
[0.015]
SZ
-0.002
(-0.09)
[0.925]
0.004
(0.17)
[0.867]
-0.059*
(-2.42)
[0.050]
-0.003
(-0.817)
[0.865]
-0.017
(-0.41)
[0.686]
LVRG
-0.597***
(-4.51)
[0.000]
-0.468***
(-3.38)
[0.001]
-0.257***
(-1.98)
[0.000]
-0.433***
(-3.86)
[0.000]
-0.182
(-0.831)
[0.410]
PRFT
0.000
(0.07)
[0.944]
0.000
(0.26)
[0.794]
0.003***
(4.15)
[0.000]
0.004***
(3.60)
[0.000]
0.000
(0.05)
[0.960]

PseudoR 0.253 0.1564 0.1566 0.1275 0.3215
LR-CHI
2
62.41 37.93 37.11 45.25 43.09
Prob. CHI
2
0.000 0.000 0.000 0.000 0.000
Log-Likelihood 91.750 102.300 99.940 154.7481 45.463
Parenthesis contain (t-Statistics); [P-Value] *** significant at level of 1%; ** significant at level of 5%; * significant at level of 10%;

- 30 -

Conclusion
Although it is very importance to pay dividends for any corporation, but it is
unfortunate that in Pakistan corporate dividend payouts are very low both in terms of value
and number of companies. The number of dividend paying companies has been decreased
from 46% (2005) to 40% (2007) (KSE annual report, 2008). The primary objective of the
study is to investigate the reasons behind decreasing corporate dividend payments in Pakistan.
Furthermore, due to the inconclusiveness of empirical investigations regarding the role played
by institutional investor in determining corporate dividend payouts and the absence of such
evidences for an emerging economy like Pakistan has stimulated the need to conduct this
study. The data of 120 listed companies representing all major sectors of KSE has been
collected from 2002 to 2007 and analyzed using OLS and Tobit regression models. The
estimated results show that Insurance companies are interested in cash dividends, and
companies in which more shares are held by insurance companies are more likely to pay
dividends. However, no significant relationship of shares held by NIT, Modarbah and Misc.
Institutions with dividend payouts is observed. The relationship of growth opportunities with
dividend payouts is significantly positive which shows that Pakistani companies do not reduce
their payout to finance investment projects. Size of the company does not affect its payout
significantly, while highly leveraged (Profitable) companies are less (more) likely to pay high
dividends.
It is evident from the estimated results that insurance companies prefer dividend
paying companies, therefore, the companies in which insurance companies hold large number
of shares are more likely to pay higher dividends. However, NIT and Modarbah companies,
due to insignificant proportion of shares in each company, do not seem to have sufficient
influence on corporate payouts. Miscellaneous institutions including banks, joint Stock
Companies and other financial institutions which might have different preferences toward
dividends; separate analysis of these institutions might improve the significance of results.
Most of the institutional investor are government owned companies, which are interested in
plough back of profits rather then receiving cash dividends. Regarding growth opportunities,
Pakistani companies do not seem to decrease dividend payouts in a phase when they foresee
profitable investment opportunities. Most of the companies in Pakistan are small in size and
they dont have easy access to credit market, therefore, rely heavily on equity capital for
financing their investment and growth opportunities and reducing dividend during growth
phase can negatively affect the share value of the companies. Profitability, however, affects
the payout positively in Pakistan which is in line with the existing literature on dividend
policy. It shows that more profitable companies are more likely to pay high dividends. The
study also emphasized the use of Tobit model instead of OLS regression in case where
dependent variable assumes either an upper or lower limit.
Based on the estimated results it is suggested that corporate law authorities should
give incentives to institutional investors in the form of tax relaxations, conditioning on their
level of investments in share market, which will increase their interest in monitoring of listed
companies. The increased institutional ownership will help in improving the performance of
companies as a result not only investors confidence will enhance but also help in increasing
the corporate dividend payouts. The scope of this study is limited to 6 years data of 120
companies listed at KSE Pakistan, and therefore, represents the determinants of dividend
payouts of listed companies during the window period from 2002 to 2007 only. Future
researchers can improve the results of this study by classifying miscellaneous institutions in to
banking institutions, joint stock companies and associated companies. Furthermore, impact of
block holders and foreign companies ownership on dividend policy is yet to be explored.

- 31 -

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The present study is a part of MS dissertation of Hammad Hassan Mirza titled Determinants of Corporate
Dividend Policy in Emerging Economy of Pakistan

- 33 -

The Employment Capaci ty i n I r an Ser vi ces
Sector
Khosro Azizi
Saleh Ghavidel
Abstract
This study would like to fill the research gap from view of service activities by
focusing on the comparison of capacity of some selected countries for employment creation.
Therefore its aim is estimation of employment capacity in Iran services sector. The method is
using two indices, namely, the ratio of population to services sector employment and the ratio
of services sector employment to total employment. Then employment capacity in Iran
services sector has compared with 27 developed and developing countries (Benchmarking
Method). After it, the Taxonomy method has used to rank the 27 countries. In this study the
selected countries are developed and developing countries. The results showed that in Iran,
the higher capacity to job creation is in ''hotel and restaurant''," financial agencies", "estate
services" and "renting and business activities". But the capacity of job creation in public
services has completed.
This study determined that Iran service employment sector is similar to Saudi Arabia
and Egypt. Based on the results of the study, the researchers found out that if Iran wants to
reach to the suitable level of services sector and its subsectors, it has to make similar to South
Korea. To reach this situation, it must increases employment in services subsectors
including,'' hotel and restaurant'', ''financial agencies", " renting and business activities",
"retail and wholesale" and "estate" services. But it must decreases employment in "
transportation", storage", "public administration and defense", "compulsory social security"
and other services exclusive of education and health services.

Key Words: Employment, Benchmark Method, Taxonomy, Services, Iran, Countries
JEL: J01- J23

- 34 -

Introduction
In the middle of 1930s, in addition to first sector, namely, agriculture, fishery, hunting,
forestry, and second sector, namely, mine, industry, buildings, public activities, gas and
electricity, services sector was considered as a remainder sector and with non-productive
physical nature. This classification not only used by United Nations Organization, Monetary
International Found, and some other international organizations, but also many countries used
this classification in own national accounts. By this explanation, both developed and
developing countries were seeing services sector as an obstacle in the path of economic
growth. In developed countries the belief was that instead of reinforcement of services sector,
the industrial sector by total available possibilities must be reinforced.
In developing countries, also, the idea was that the only way to reach the progress
level that developed countries have obtained is entrance to the process of industrialization. In
short, services sector would be seeing as final way of employment in economy. General
understanding from services sector was so that this sector has low efficiency, diminishing
return to scale, slow speed of technological progresses and high income elasticity. But in
agriculture and industry sectors, the growth of technological progresses is fast, the return to
scale is increasing, the efficiency is high, but income elasticity is low. Because of such
understandings, theoreticians and economic policy-makers were not so interesting to services
sector. With this interpretation, development theoreticians accepted the importance of
infrastructural issues and seldom financial services in process development, but real value of
services sector was not known in process of development. After occurrence of services
revolution in developed countries, several characteristics of services sector changed. For
example, the look in which the services is not tangible, confronted with less importance.
Because services found a increasing role in value added of commodities. New technology,
also, caused that the property of non-storage changes in relation to many services. In the other
hand, new technology has caused some traditional services and many new services makes
transportable. Therefore, the necessity of being services producer and consumer at the same
location and time canceled for delivery of services.
Therefore, during spread of services sector, share of employment increased in services
sector and attracted the notice of the progressed countries to this matter that see structural
changes in economy. In result of these changes, new modifications, such as "services
revolution", "new services economics", "after-industrial government", and "multi-
industrialization" occurred that showed the role of services in economy. Historical trend of
motion of employment share in agriculture sector to industry, and then to services caused that
in the literature of economic development agricultural, industry and services sectors are
known as first, second, and third sectors respectively.
Literature Review
Clarck (1940) for the first time noticed to the role of services in economy. He showed
that among the countries, historically number of the firms that have activity at the first sector
is decreasing, but number of the active firms in the third sector is increasing. Baumol (1967)
showed in a research, that trend of productivity growth for labor force in services sector is
less than good sector and for this reason employment in the services sector is increasing.
After it the economists, such as Offer (1973), Dominique Anxo and Donald Storrie (2003),
Baumol (2002) and et al followed the reasons of increasing employment Share in services
sector. They, in sum, one can say that the reasons of increase in employment share of services
sector are growth of per capita income in the length of time, high income elasticity for
services products, growth of urbanity, low price elasticity for services products and obligation
- 35 -

to accomplishment of support programs to agriculture and industry sector. Now we refer to
some made studies about employment of services sector as follows:
J. Philpott (2001) investigated weightless economy. In this economy less people
employed producing visual goods. Therefore in these economies services sector that is
produced no-visual goods is a main source of employment growth. While the people
employed in services sector with creativity and producing thought and knowledge increase
visible goods too. In these conditions knowledge-economy is appeared.
P. lanjouw (1999) in a survey under the role of rural non-agriculture sector in
decreasing poverty in Ecuador shows that non-agriculture sector in Ecuador villages is
important in decreasing poverty and creation employment. This employment is related to
education and improvement of rural structural services.

The new wave in developing services sector
In all, there is a new wave in developing services sector in the world in which
countries have started a new horizon in the economic development path. In economic
development trend in developed countries and new-industrialized in the last two decades tree
horizon or wave are seeable. The first is development of physical goods. In this phase
agricultural, mineral, manufacturing, metals and chemical goods are produced with emphases
on increasing efficiency. The second is developing services. In this phase the services are
presented for consumers and producers traditionally and a lot of value added is produced. The
services include communications, retail, tourism, financial, structural, hospital, personal,
business services and so forth. The third is a new path that is known as information economy
or knowledge- based economy. In this phase the countries follow growth in longer term. But
in the second phase the countries follow growth in middle-long term. Therefore, the third
horizon or wave has a key role in making kind of economic policies and plans. In third
horizon new information technology, telecommunication, electronic commerce, research and
development, health and biotechnology, software production, highly knowledge intensive
industries, highly knowledge intensive services are important.
The impacts of services and reengineering in the third horizon or wave are as follows:
1. The costs of using goods and services and transaction cost are decreased and
economic efficiency is increased in result total factors productivity and after it,
economic growth is increased.
2. Decrement of transaction costs increases competition internationally and provides
growth of commodities exports.
3. Human capital and in result social welfare is increased.
4. The service firms are increased for capture of new markets.
5. Increasing economic growth, more job opportunities is created.
6. Developing information and knowledge-based activities employment of expert
individuals with high education is increased.
7. Although invention in traditional economy is exist but its growth in knowledge-based
economy is steeper.
Considering the above comparatives many countries have take effective steps in
direction of the third horizon or wave. As mentioned above, modern services are information
and knowledge-based and result of this process is development of knowledge-based activities.
Today reengineering of traditional services provides the possible of presentation of new
services with considerable rapid for consumers and producers. Express delivery of goods,
rapidity increase of business transactions, development of using internet and collective
relation possibilities in external and internal business transactions, increase of electronic
commerce, production of software and development of like activities in advanced countries
are along two main changes as follows:
- 36 -

1. Increase of employees share in services sector.
2. Increase of percent employees with high proficiency in services sector.
Increase of employees share with high proficiency in services sector has been
surveyed in study of Australia. In this study has been showed that the share of employees with
high proficiency in France, Germany, the USA, New Zealand, Australia, Finland, Japan, and
England has been increased during 1986-91. This result in countries with high unemployment
in graduated individuals from universities can be useful and applicable.
Methodology
In this study using benchmarking and taxonomy methods potential of creation
employment in Iranian services sector is estimated. For this reason the potential of creation
employment in services sub sectors is estimated on the base of two indices, namely first,
population to employment of services sector and second, share of employment of services
sector. In this direction employment data are used in separate diverse sectors in Iran and 26
selected countries in the world. The selected countries are composed of developed and
developing countries.
Findings of the Study
Analysis of the ratio population to services sector employment in Iran
The ratio population to employment in services sector refers to everyone employed in
this sector how much service activities present for population. If this ratio is bigger the
amount of presented services is smaller.
In the table 1 and 2, determining status of employment in services subsectors
including retail and wholesale, restaurant and hotels, transportation and storage, financial
agencies, estates and rent, public affair administration, health, remedy and education, and
After calculation the ratio population to employment for England, Norway, Canada,
Netherlands, Denmark, Finland, France, Germany, Japan, Italy, Austria, New Zealand,
Ireland, south Korea, Saudi Arabia, Greece, Bulgaria, republic Check, Mexico, malmsey,
brazil, Egypt, Philippine, Thailand, and Iran, was determined that in the subsector of retail
and wholesale, maximum and minimum ratio population to employment in countries Egypt
and Australia is 31 and 5 respectively. In other words, in Egypt per 31 individuals, one
individual is employed in retail and wholesale, but in Australia per 5 individuals one
individual is employed in these two sectors. While this ratio is 24 in Iran, that is, per 24
individuals one individual is employed in retail and wholesale sector and so the rank of Iran
among 27 selected countries is 25, and from this aspect Iran is like to Egypt.
Mean of the ratio population to employment among selected countries is 15. This ratio
in developed countries including 14 countries, namely, Germany, France, Japan, Canada,
Austrian, Finland, New Zealand, Netherlands, Denmark, Australia, Ireland, Italy, England,
and Norway is equal to 13 and in less developed countries, exclusive of Iran, is equal to 17.
The mentioned ratio in Iran is bigger than three mean above and therefore its situation is not
suitable. It is seemed that retail and wholesale commercial firms because of lack some jobs
and other restrictions such as, giving permission for foundation new guilds have less
developed.
In hotels and restaurant sector maximum and minimum the ratio population to
employment in Iran is equal to 427 and in Australia is equal to 20 respectively. Mean the ratio
population to employment in the selected countries is 64, in developing countries is 81 and in
developed countries is 49. The rank of Iran in this ratio is 27 and its situation is not suitable.
In transportation, storage and communications sector, maximum and minimum the
ratio population to employment is 85 for Saudi Arabia and 15 for Norway respectively. It is
- 37 -

equal to 42 for Iran that its rank is 18. The mean of mentioned ratio among diverse countries
is 40, in developed countries is 32 and in less developed countries is 49.The situation of Iran
in this ratio is rather better. Off course attention to increasing standard and quality of
transportation is necessary in Iran. In financial agencies sector maximum and minimum ratio
population to employment is 452 for Saudi Arabia and 29 for Australia respectively. This
ratio for Iran is equal to 291 and its rank is 24. This ratio, also, is not suitable for Iran.
Mean of the ratio population to financial agencies employed is 135. This mean for
developed countries and less developed countries is 64 and 218 respectively. Financial
agencies sector is important in modern economy and the suitable planning has a key role for
its improvement.
In estates sector maximum and minimum ratio population to employment is 292 for
Iran and 9 for Australia respectively. In this sector the situation of Iran is unsuitable and its
rank is 26.
In public affair administration, defense and compulsive social security sector
maximum and minimum ratio population to employment for Iran is 34 and its mean for
selected countries is 37. The situation of Iran in this ratio is very suitable. In other words, on
the base of world rates, job opportunities in this sector can be reduced.
In education, health, and remedy maximum and minimum the ratio population to
employment is 38 and 3 for Philippine and Norway respectively. This sector for Iran is 33 and
its rank is 26. The result shows that the situation of Iran in this ratio is unsuitable. In other
words education, health, and remedy sector have a potential for job creation.
In total services sector the ratio population to employment is 7 for Iran, while the
mean for all countries is 4 and the rank of Iran is 27 among selected countries. Additionally
table 3 shows the estimation of ratio population to desired employment in Iran on the base of
global means. After computation of population to desired employment in Iran during various
years, knowing total population of Iran one can compute the potential of employment creation
in services sector. (Tables 4 and 5)

Analysis of share of services sector employment in Iran
The share of services sector employment is the ratio of services employment to total
employment. On the base of table 6 the share of services sector employment in advanced
countries is higher than less-developed countries. This deference comes from some reasons as
follows:
1. Considerable development of mechanization with low employment and high
productivity for labor in agricultural sector in the developed countries.
2. Development of industries with high technology and capital intensive in developed
countries with high productivity for labor and capital.
3. Growth of per capita income in the developed countries and after it considerable
growth of services sector in hotels and restaurant, education, health and remedy,
financial agencies and generally new services sectors.
The highest share of services sector employment is 75.7% that it is belong to England
and the lowest is 36.4% that is belong to Thailand. This share for Iran is 47.4% with rank 25
among selected countries. Means the share of services sector employment of all countries is
62.9% that it is 54.6% in the less-developed countries and in the developed countries is
69.9%. The difference of share of services sector employment in Iran from the mean of all
countries is 15.5%.
In retail and wholesale sector Mexico has the highest share employment, that is,
23.9% and the lowest share is 11.9% that it is belong to Egypt. This share in Iran is 14.6%.
The mean of employment share of retail and wholesale sector in all countries is 16.1%,
namely, it is 1.5% more than its mean for Iran. In hotels and restaurant sector South Korea
- 38 -

with 9.1% has the highest employment share and Iran with 0.8% has the lowest employment
share. The mean of employment share in hotels and restaurant sector in all countries is 4.5%,
in developed countries is 4.4%, and in less developed countries is 4.7%. In this share Iran is in
the last rank among selected countries. In transportation and storage, Iran with 8.4% has the
highest share employment, namely, the first rank among selected countries, and Thailand has
the lowest employment share. The mean of this share in all countries is 6.1%. In financial
agencies sector Ireland with 4.5% has the highest employment share and Mexico with 0.7%
has the lowest share. Iran with 1.2% employment share in financial agencies sector is in rank
21 among selected countries. The mean of this share among all countries is 2.5% in developed
and less developed countries is 3.3% and 1.6% respectively.
In estates sector the Netherlands with 12.4% has the highest employment share and
Iran with 1.2% has the lowest share and the last rank. In public affair sector Saudi Arabia with
20.5% has the highest employment share and Thailand with 2.8% has the lowest share. Irans
rank with 10.3% share is third.
In education, health and remedy sector Norway with 32.5% has the highest
employment share and Thailand with 6.5% has the lowest share. Iran in this sector with
10.7% share is in rank 24.
There is observed that Iran from view of employment share of hotels and restaurant,
financial agencies, estates and education subsectors is not in a desired position. In the later
step by table 7 the desired employment share has forecasted for services subsectors.

Position determination of services sector employment in Iran comparing with other
countries
In this section the position of services sector employment in Iran is considered among the
selected countries. For this two variables of the ratio population to employment and also, the
services employment share are used as a same time. In ranking the countries, the method of
ranking taxonomy is used. The first variable is the ratio population to employment that its
high level indicates to undesired position. For this reason the inverse variable of the ratio
population to employment is used. The second variable is the employment share of services
sector.
In taxonomy method, at first the variables are converted to an index as following formula:

I
i
=
x
-x max
x max- x mIn

I
=
I
n

Where I is correspondent index with every variables, x is variable amount, x max is
maximum amount of considerable variable, x min is minimum amount of considerable
variable, n is the number of variables, and I final index of taxonomy that it is without any
unit. On the base of this index according to table 8 those countries that have higher ratio
employment to population and employment share, have higher, rank. According to
computation, the rank of selected countries from view of taxonomy index respectively, is
Norway, Australia, England, Canada, the Netherlands, Denmark, New Zealand, Finland,
Japan, Austria, France, Germany, Ireland, South Korea, Argentina, Italy, Greece, Check,
Saudi Arabia, Bulgaria, Mexico, Brazil, Malaysia, Egypt, Iran, Philippine, and Thailand. The
rank of Iran in this ranking is 25. The mean of the above index for all selected countries is
0.46 (Table 9). The rank of South Korea and Argentina is about this mean. Because of South
- 39 -

Korea is an Asia country, according to assumption its employment structure of services sector
is a suitable model for Iran.
Conclusion
1. In comparative of other selected countries the commercial units, retails and
wholesales, have more quantitative development.
2. In relation to hotels restaurant sector, financial agencies and estates subsector, rent and
business activities, there is high capacity for creation of employment in Iran.
3. The capacity for creation of employment in public and social services sector of Iran is
completed,
4. According to indices education and health subsectors in Iran have capacity for creation
employment and have more ability for job creation.
5. The ratio population to employment in total services sector of Iran is equal to 7, while
the mean of this ratio for selected countries is equal to 4. Therefore on the base of this
index one can expect more employment in services sector of Iran.
6. The comparative indices among selected countries indicates that Iran in relation to
employment of services sector and its subsectors is similar to Egypt and Saudi Arabia
, but for reach to optimum level, the structure of services sector and its subsectors
must be similar to South Korea. For this mean it is necessary that employment share of
wholesale and retail, hotels and restaurant, estates sectors, financial agencies, rent and
business activities increases and the share of transportation and storage, public affair
administration, defense and compulsive social security exclusive of health and
education decreases.
7. The rank of Iran among 27 selected countries from view of using capacity for creation
of employment in services sector is 25.
Recommendations
1. Based on the results of the study, the recommendation is that the necessary admissions
are issued in developing services activities, specially, in relation to new jobs.
2. The employment in transportation subsector in Iran nearly is like to international
norms, but in the case one can expect creation job opportunities in this subsector in
which transportation standards must be improved.
3. This study show that survey of job creation potential is necessary in every services
subsectors and separately research studies for them is recommended.
4. As the comparative comparison of employment share of services sector in various
countries shows, this share can be higher than the present one in Iran. Therefore, it is
recommended to economic programmers with consideration of Iran economic realities
provide the suitable infrastructures for development of services sector.
5. According to the ratio population to services sector employment in benchmark and
taxonomy method, the recommendation is that the government and public institutions
aid to issuing necessary admissions for developing hotels and restaurant activities,
financial agencies such as insurance and banking, health, remedy and education,
estates, rent and business activities.
6. Based on the results of the study, the researcher found out that South Korea is a
suitable model for Iran in relation to creation job opportunities in services sector.
7. New jobs in services sector and its autonomous subsectors are recommended.

- 40 -

Table 1: population and employment in service subsectors in some selected countries in 2004
(1000 individuals)

Table 2: The ratio population to employment in selected countries in 2004(%)
r
a
n
k

Country
Retail and
wholesale
Hotel and
restaurant
Transportation,
storage and
telecommunication
Financial
agencies
Estate,
rent and
business
activities
Public
affair,
defense and
compulsive
social
security
Health,
Remedy,
education
and so
forth
Total services
employment
Total
employment
1 England 14 48 31 50 19 31 8 3 2
2 Norway 7 33 15 48 10 16 3 1 1
3 Australia 5 20 16 29 9 18 5 1 1
4 Canada 11 31 27 47 16 38 9 3 2
5 The
Netherlands
13 52 35 57 16 29 8 3 2
6 Argentina 22 162 60 198 58 47 18 6 4
7 Denmark 13 78 29 66 22 33 6 3 2
8 New Zealand 11 43 34 66 18 35 9 3 2
9 Finland 18 70 30 104 20 38 8 3 2
10 French 18 72 38 88 24 26 11 4 2
11 Austria 14 36 34 58 25 32 11 3 2
12 Germany 16 68 42 64 25 29 10 3 2
13 Japan 11 37 32 80 19 55 11 3 2
14 Ireland 15 37 35 48 26 45 10 3 2
15 South Korea 13 23 35 65 25 62 13 3 2
16 Italy 16 60 50 87 33 30 15 4 3
17 Saudi Arabia 26 132 85 452 21957 19 21 6 4
18 Greece 16 39 44 109 49 36 19 4 3
19 Bulgarian 18 56 37 227 59 35 16 5 3
20 Czech
Republic
16 58 28 109 36 32 13 4 2
21 Mexico 10 43 54 357 69 56 21 4 2
22 Malaysia 16 38 51 111 61 37 24 5 3
23 Brazil 12 61 47 172 39 44 17 4 2
r
a
n
k

Country
Retail
and
wholesale
Hotel and
restaurant
Transport
ation,
storage
and
telecommu
nication
Financial
agencies
Estate,
rent and
business
activities
Public
affair,
defense and
compulsive
social
security
Health,
Remedy,
education
and so
forth
Total
services
employment
Total
employ
ment
Total
population
1 England 4338 1233 1904 1181 3158 1919 7468 21201 28008 59329
2 Norway 345 70 149 48 223 144 740 1719 2275 2281
3 Australia 1891 486 617 347 1135 567 2162 7206 9636 9941
4 Canada 2751 1007 1164 678 1918 828 3532 11878 15950 31630
5 The
Netherlands
1267 313 457 285 984 559 2038 5903 7952 16222
6 Argentina 1634 227 609 186 634 780 2042 6112 8571 36722
7 Denmark 406 69 186 81 248 164 834 1988 2810 5387
8 New
Zealand
359 94 119 61 218 114 436 1401 2017 4009
9 Finland 293 74 172 50 266 138 657 1650 2387 5212
10 French 3353 824 1593 677 2480 2299 5680 16906 24720 59762
11 Austria 593 227 238 140 327 254 723 2503 3744 8090
12 Germany 5011 1206 1971 1297 3276 2896 8008 23665 35659 82541
13 Japan 11900 3470 3940 1590 6880 2330 11690 41800 63290 127573
14 Ireland 260 108 113 83 154 90 388 1196 1836 3994
15 South
Korea
3805 2057 1376 738 1914 767 3726 14383 22557 47912
16 Italy 3531 953 1163 664 1728 1935 3847 13821 22134 57646
17 Saudi
Arabia
862 170 265 50 1 1213 1091 3652 5913 22528
18 Greece 698 283 249 102 227 303 591 2453 4104 11033
19 Bulgarian 436 141 212 34 132 221 495 1670 2922 7823
20 Czech
Republic
631 175 364 94 281 323 788 2656 4707 10202
21 Mexico 10079 2359 1889 287 1483 1816 4950 22863 42306 102291
22 Malaysia 1592 644 482 223 404 667 1028 5040 9888 24774
23 Brazil 14216 2893 3724 1026 4494 3990 10154 40497 80163 176596
24 Egypt 2161 301 1145 200 347 2025 2924 9103 18119 67559
25 Philippine 5788 798 2445 298 702 1450 2128 13609 31741 81503
26 Thailand 5452 2207 1068 304 634 1015 2331 13011 35712 62014
27 Iran 2761 156 1594 228 229 1955 2030 8953 18906 66392
- 41 -

24 Egypt 31 224 59 338 195 33 23 7 4
25 Philippine 14 102 33 274 116 56 38 6 3
26 Thailand 11 28 58 204 98 61 27 5 2
27 Iran 24 427 42 291 290 34 33 7 4
Table 3: The estimation of ratio population to desired employment in Iran on the base of
world mean
year
Retail
and
wholesale
Hotel and
restaurant
Transportation,
storage and
telecommunication
Financial
agencies
Estate, rent and
business
activities
Public affair,
defense and
compulsive social
security
Health,
Remedy,
education and so
forth
Total services
employment
2005 24 427 42 291 290 34 33 7
2006 23 353 41 270 265 34 30 7
2007 22 292 41 250 240 35 28 6
2008 21 241 41 231 216 35 26 6
2009 20 199 41 214 191 35 24 6
2010 19 165 41 198 166 36 22 6
2011 18 136 41 184 142 36 20 5
2012 17 113 41 170 117 36 18 5
2013 16 93 40 157 92 37 17 5
2014 16 77 40 146 68 37 16 4
2015 15 64 40 135 43 37 14 4
Table 4: The employment potential in services sector of Iran on the base of the ratio
population to employment (1000 individuals)
year
Retail and
wholesale
Hotel and
restaurant
Transportation,
storage and
telecommunication
Financial
agencies
Estate,
rent and
business
activities
Public
affair,
defense and
compulsive
social
security
Health,
Remedy,
education and so
forth
Total services
employment
2005 2814 159 1624 232 234 1992 2069 9665
2006 2992 194 1653 254 259 2000 2277 10237
2007 3178 238 1681 278 289 2007 2504 10856
2008 3379 292 1710 305 327 2015 2756 11545
2009 3592 358 1741 334 374 2023 3034 12309
2010 3820 439 1772 365 435 2031 3340 13162
2011 4063 539 1804 400 518 2040 3678 14119
2012 4323 661 1837 438 637 2050 4051 15201
2013 4599 812 1871 480 819 2059 4463 16427
2014 4893 996 1906 526 1133 2069 4916 17828
2015 5206 1222 1941 577 1809 2079 5415 19442
Table 5: The annual potential for creation of job opportunities in services sector of Iran on
the base of the ratio population to employment (1000 individuals)
Year
Retail
and
wholesale
Hotel and
restaurant
Transportation,
storage and
telecommunication
Financial
agencies
Estate,
rent and
business
activities
Public affair,
defense and
compulsive
social security
Health,
Remedy,
education and
so forth
Total services
employment
2005 178 36 29 22 25 8 208 572
2006 187 44 28 24 30 6 227 619
2007 200 54 30 26 37 8 252 689
2008 213 66 30 29 47 8 278 764
2009 228 81 31 32 61 8 306 853
2010 243 100 32 35 83 9 338 957
2011 260 122 33 38 118 10 373 1082
2012 276 150 34 42 182 10 411 1226
2013 294 184 35 46 314 10 453 1401
2014 178 36 29 22 25 8 208 572
2015 187 44 28 24 30 6 227 619

Table 6: The share of services sector in selected countries in 2004 (%)
R
a
n
k

Country
Retail
and
wholesal
e
Hotel and
restaurant
Transportati
on, storage
and
telecommunic
ation
Financi
al
agencies
Estate, rent
and business
activities
Public affair,
defense and
compulsive
social
security
Health,
Remedy,
education
and so
forth
Service
s
sector
share
- 42 -

Table 7: The estimation desired employment share of services sector of Iran on the base of the
world mean (%)
Year
Retail and
wholesale
Hotel and
restaurant
Transportation,
storage and
telecommunication
Financial
agencies
Estate,
rent and
business
activities
Public
affair,
defense and
compulsive
social
security
Health,
Remedy,
education
and so
forth
The share
of
services
sector
2005 14.6 0.8 8.4 1.2 1.2 10.3 10.7 47.4
2006 14.8 1.0 8.2 1.3 1.5 9.9 11.4 48.7
2007 14.9 1.2 7.9 1.4 1.7 9.5 12.1 50.1
2008 15.0 1.4 7.6 1.5 2.1 9.2 12.8 51.6
2009 15.2 1.6 7.4 1.6 2.5 8.8 13.6 53.0
2010 15.3 1.9 7.2 1.7 3.0 8.4 14.4 54.6
2011 15.5 2.3 6.9 1.9 3.6 8.1 15.2 56.1
2012 15.7 2.7 6.7 2.0 4.3 7.8 16.2 57.7
2013 15.8 3.2 6.5 2.2 5.2 7.5 17.1 59.4
2014 16.0 3.8 6.3 2.3 6.2 7.2 18.2 61.1
2015 16.1 4.5 6.1 2.5 7.5 6.9 19.3 62.9
Table 8: The estimation desired employment share of services sector of Iran on the base of the
world mean (%)
Country
The ratio population to
employment
The share of services
employment
The inverse of ratio population to
employment
Ranking taxonomy index
Norway 1.33 75.56 0.75 1.00
Australia 1.38 74.78 0.72 0.97
England 2.80 75.69 0.36 0.68
Canada 2.66 74.47 0.38 0.68
the Netherlands 2.75 74.23 0.36 0.67
Denmark 2.71 70.73 0.37 0.63
New Zealand 2.86 69.46 0.35 0.59
Finland 3.16 69.12 0.32 0.56
Japan 3.05 66.05 0.33 0.53
Austria 3.23 66.85 0.31 0.53
French 3.53 68.39 0.28 0.53
Germany 3.49 66.36 0.29 0.50
Ireland 3.34 65.14 0.30 0.50
South Korea 3.33 63.76 0.30 0.48
Argentina 6.01 71.31 0.17 0.47
1 England 15.5 4.4 6.8 4.2 11.3 6.9 26.7 75.7
2 Norway 15.2 3.1 6.5 2.1 9.8 6.3 32.5 75.6
3 Australia 19.6 5.0 6.4 3.6 11.8 5.9 22.4 74.8
4 Canada 17.2 6.3 7.3 4.3 12.0 5.2 22.1 74.5
5 The
Netherlands
15.9 3.9 5.7 3.6 12.4 7.0 25.6 74.2
6 Argentina 19.1 2.6 7.1 2.2 7.4 9.1 23.8 71.3
7 Denmark 14.5 2.5 6.6 2.9 8.8 5.8 29.7 70.7
8 New
Zealand
17.8 4.7 5.9 3.0 10.8 5.7 21.6 69.5
9 Finland 12.3 3.1 7.2 2.1 11.1 5.8 27.5 69.1
10 French 13.6 3.3 6.4 2.7 10.0 9.3 23.0 68.4
11 Austria 15.8 6.1 6.4 3.7 8.7 6.8 19.3 66.9
12 Germany 14.1 3.4 5.5 3.6 9.2 8.1 22.5 66.4
13 Japan 18.8 5.5 6.2 2.5 10.9 3.7 18.5 66.0
14 Ireland 14.2 5.9 6.2 4.5 8.4 4.9 21.2 65.1
15 South
Korea
16.9 9.1 6.1 3.3 8.5 3.4 16.5 63.8
16 Italy 16.0 4.3 5.3 3.0 7.8 8.7 17.4 62.4
17 Saudi
Arabia
14.6 2.9 4.5 0.8 0.0 20.5 18.4 61.8
18 Greece 17.0 6.9 6.1 2.5 5.5 7.4 14.4 59.8
19 Bulgarian 14.9 4.8 7.2 1.2 4.5 7.6 16.9 57.1
20 Czech
Republic
13.4 3.7 7.7 2.0 6.0 6.9 16.7 56.4
21 Mexico 23.8 5.6 4.5 0.7 3.5 4.3 11.7 54.0
22 Malaysia 16.1 6.5 4.9 2.3 4.1 6.7 10.4 51.0
23 Brazil 17.7 3.6 4.6 1.3 5.6 5.0 12.7 50.5
24 Egypt 11.9 1.7 6.3 1.1 1.9 11.2 16.1 50.2
25 Philippine 18.2 2.5 7.7 0.9 2.2 4.6 6.7 42.9
26 Thailand 15.3 6.2 3.0 0.9 1.8 2.8 6.5 36.4
27 Iran 14.6 0.8 8.4 1.2 1.2 10.3 10.7 47.4
- 43 -

Italy 4.17 62.44 0.24 0.42
Greece 4.50 59.78 0.22 0.37
Czech Republic 3.84 56.43 0.26 0.36
Saudi Arabia 6.17 61.76 0.16 0.34
Bulgarian 4.68 57.15 0.21 0.33
Mexico 4.47 54.04 0.22 0.30
Brazil 4.36 50.52 0.23 0.26
Malaysia 4.92 50.97 0.20 0.24
Egypt 7.42 50.24 0.13 0.18
Iran 7.42 47.36 0.13 0.14
Philippine 5.99 42.88 0.17 0.11
Thailand 4.77 36.43 0.21 0.06
Table 9: The share employment and the ratio population to employment in Iran and South
Korea
Index Country
Retail
and
wholesale
Hotel and
restaurant
Transportation,
storage and
telecommunication
Financial
agencies
Estate, rent
and
business
activities
Public affair,
defense and
compulsive
social security
Health,
Remedy,
education
and so forth
Total
employment
of services
sector
The ratio
population to
employment
in services
sector
South Korea 13 23 35 65 25 62 13 3
Iran
24 427 42 291 290 34 33 7
The mean for
27 countries
15 64 40 135 886 37 14 4
The
employment
share of
services
sector (%)
South Korea 16.9 9.1 6.1 3.3 8.5 3.4 16.5 63.8
Iran 14.6 0.8 8.4 1.2 1.2 10.3 10.7 47.4
The mean for
27 countries 16.1 4.5 6.1 2.5 7.5 6.9 19.3 62.9

- 44 -

Managi ng Up: Fi ght or Fli ght, the Power of
Wi nni ng at Upwar d Cultur al Management
Challenges
Heidi Barclay
Allen Barclay

Abstract
Management from most perspectives is the hierarchical process viewed from the top
down. In fact, research on the topic will produce study after study on how a manager must act or
behave to gain the maximum return from their employees (Kinicki & Williams, 2008, p. 40). In
other words, this research focuses on how to be a manager or a leader. Rarely do any of these
studies focus on the employee and what we as employees have control over. This paper intends
to explain how to provide the best return for the organization by identifying what employees
must do to provide maximum return on investment for their managers. The focus is on the
opposite perspective from typical management theory. The authors analyze how the employee
can use his or her skills to maximize the return they provide to management especially when
there may be cultural differences in the workplace.
Although managing or supervising others can and often is difficult, learning to manage
down to others is a far easier than the task of managing up. Managing the behaviors and
expectations of management is far more difficult and requires a certain set of skills. These skills
include knowing everything about who is in a supervising role, what employees can and cannot
change, and how an employees attitude will affect perceived performance. And if an employee
is not happy, over time, then leaving the position may be the best option. Remaining in a
position where an employee is unhappy is never a good situation for anyone.
To manage up means to use the same skills a manager would use to manage their staff,
i.e. planning, leading, controlling, and organizing (Kinicki, et al., 2008, p. 57) others to get
something done. This means the employee should take the same approach management would
use on getting the employee to complete tasks. This means taking control and literally managing
up.

Keywords: Management, Leadership, Employee Participation
Introduction
Management
Most organizations understand the primary goal of the workplace is to produce goods
and services (Rainbird, Fuller, & Munro, 2004, p. 126). Service according to Swanson (2007)
is the valued productive output of a system in the form of goods and services (p. 27). To
produce these goods and services an organization must have competent supervisors and
employees who provide the goods and/or services in ways that bring value to the organization
and who are able to train and develop productive employees. In addition, Rainbird (2004) states
that all too often it is assumed that there is a causal relationship from individual learning to
- 45 -

improvements in organizational performance (Rainbird, et al, p. 126). There is a tremendous
element of responsibility given to the leadership of organizations to foster effective relationships
for increased productivity.
Typically, a companys most expensive and important asset is their staff. Without
employees, most companies would no longer exist. This effect is noticed the most when a
companys union goes on strike. In the late 1990s, the UPS strike had wide spread turmoil when
their package deliverers went on strike. Without those employees, package deliveries virtually
came to a screeching halt. Had both sides not settled their differences, UPS would not have
survived without their employees for very long. In this instance it was the companys
responsibility to foster effective and fair negotiations in order to get their packages moving
again.
What is often overlooked is the opposite responsibility of the employees to foster the
same effective relationships with the leadership. Employees understand that no matter how
interested a supervisor is in their employees perspective, unless the employee has the ability to
build a relationship with the supervisor, there is a major gap in effectiveness. Meaning that
when a persons manners are merely an empty formality, they do little to build vital ties to
others (Bolton & Grover-Bolton, 1996, p. 114). Without this relationship, the best employee is
going to fall short of the supervisors objectives. Therefore, a key problem in organizations is
employees who lack an innate ability to effectively manage the expectations of their supervisor
and ultimately fail to unleash their own full potential because they underestimate a critical
component of the relationship.
Management from most perspectives is the hierarchical process viewed from the top
down. In fact, research on the topic will produce study after study on how a manager must act or
behave to gain the maximum return from their employees (Kinicki, et al., 2008, p. 40). In other
words, this research focuses on how to be a manager or a leader. Rarely do any of these studies
focus on the employee and what employees have control over. This paper intends to provide the
best return for their manager by identifying what employees must do to provide maximum return
on investment for their managers. The focus is on the opposite perspective from typical
management theory.
Learning to manage down to others is a far easier than the task of managing
up. Managing the behaviors and expectations of management is far more difficult and requires a
certain set of skills. These skills include knowing everything about who is in a supervising role,
what employees can and cannot change, and how an employees attitude will affect perceived
performance. And if an employee is not happy, over time, with the things that are not
controllable, then leaving the position may be the best option. Remaining in a position where the
employee is unhappy is never a good situation for anyone.
To manage up means to use the same skills a manager would use to manage their staff,
i.e. planning, leading, controlling, and organizing (Kinicki et al, 2008, p. 57) others to get
something done. This means the employee should take the same approach management would
use on getting the employee to complete tasks. This means taking control and literally managing
up.

Leadership Styles
It is important for the employee to understand that supervisors have many different
leadership styles and in addition, all people lead differently. Many times, work efforts fail
because supervisors and employees ideas of how things ought to be done are based on a miss-
- 46 -

match of leading and working styles. According to Changingminds.org; There are a number of
different approaches; or 'styles' to leadership and management that are based on different
assumptions and theories (changingminds.org, 2010). The style that leaders use is usually based
on a combination of their beliefs, values and preferences, as well as the organizational culture
and norms which encourages some styles and discourages others. Below are several different
leadership styles identified by many leadership authors:
Charismatic Leadership leads by personality and befriending employees
Participative Leadership hands on, works side-by-side with employees
Situational Leadership leads best under pressure, steps up during time of need
Transactional Leadership leads best in status quo the way things have been
Transformational Leadership works best with dynamic change
The Quiet Leader allows employees to handle on their own
Servant Leadership supports employees objectives
All leaders will tend to some combination of these styles, but most often will rely on one
of these styles as their main way to lead. Employees, who effectively manage up, will
understand these styles and learn how to flex to their supervisors style.
Tips for flexing your style:
1. Identify that this is not your preferred style
2. Teach yourself to work in supervisors style
3. Work with others who are successful in the other style
4. Try to change your style
Just identifying a managers leadership style is half the battle. For every leadership style,
there is a matching working style. Just as an effective leader will employ many different styles
in their work place to provide maximum productivity, employees need to also learn to flex their
style to fit their supervisor.

Employees Responsibility
Employees who enjoy where they work tend to be more productive and have
overall better communication interactions with their supervisors. These positive experiences
contribute to increased skills and knowledge retention. Tracey Warson states; you need to
develop relationships with others build relationships with people within the company because
thats how things really get done (Coughlin, Wingward, & Hollihan, 2005). Supervisors know
enough about their staff to create a working atmosphere which fosters engagement within the
organization. Increased engagement and loyalty for the organization saves the company in the
long run due to lower training and turnover expenses.
Employees are people, and as people, they have needs outside the organizations
operating agenda to feel vested in the organization and appreciated. Bill Brandt, who was the
Chairman and President of Boise Cascade, stated that after the organization went to a more
relationship-level of training, we can see more ownership and a greater feeling of responsibility
on the part of senior and middle management. We also see many small actions initiated within
teams, generating significant improvements in quality (Senge, Kleiner, Roberts, Ross, & Smith,
1994, p. 468). Employees need to foster this relationship-level in which he or she can show his
or her supervisor that they are important to the organization.
If the organizations employees are not willing to learn about the leadership and
understand what motivates them, they might not succeed in tapping their own full potential
during times of change or stress. Many change efforts fail not because the managers intentions
- 47 -

are incorrect or insincere but because the managers are unable to handle the social challenges of
changes (Bolman & Deal, 2008) including building successful relationships between employees
and supervisors. The more an employee can understand the perspective of his or her supervisor
in the workplace, the more engagement the employee will receive from the supervisor.
Another aspect related to learning about a manager, is the more an employee knows
about the leader, the less that employee will be surprised. This type of thinking is considered
planning and for employees, active planning is the key to success. Planning is coping with
uncertainty by formulating future courses of action to achieve specified results (Kinicki &
Williams, 2008). Knowing about a managers perspectives and fitting this perspective into an
employees plans for themselves will help most employees to become more effective which in
turn will be more beneficial for the organization.
Employees should know something about each person they work for to create a better
working environment. In an organization, most managers will not want to share everything with
their subordinates, nor will they want to divulge personal information that will leave them
feeling vulnerable. But, effective employees take time to create an open communication
environment with management. In learning organizations, individuals recognize that they can
glean important information from anyone regardless of their status (Johnson, 2001). Employees
will learn from each other and hopefully from the supervisor.
International Perspective
Crossing Culture
Managing up is not a Western phenomenon, this is something that crosses all
cultures. Wherever there are employers and employees, there is room for those employees to
learn to manage the relationship between themselves and their supervisor. Taking a genuine
interest in the organizations leadership improves the perceptions of feeling valued, listened to,
and understood by the employee. Supervisors are not usually asking employees to buy
something, but they are asking employees to buy into something. Leading an employee to learn
a new concept or system is essentially motivating employees to productively buy into this new
process. Meaning, leadership is defined as a process of influencing individual and group
activities toward goal setting and goal achievement (Mosley, Pietri, & Mosley Jr., 2005). An
effective employee learns to use the ability to foster a relationship with his or her supervisor to
follow the goals of the organization and to be more productive.
When a supervisor and/or employee come from differing backgrounds the barrier to learn
and work together may be even more difficult. There can be language, religious and social norm
differences. If an employee wants to be successful in this situation, the employee must learn to
work within the preferred style of those above them. If they cannot, whether it be because of the
international differences or whether it be personality differences, the employee must make the
decision to control their own destiny and either find their niche or move on to a different job.
Adjusting your behavior and attitude is one of the few things that a person has control
over in the workplace. Every day, the employee is the one who can go to work and either adjust
to the ever changing atmosphere or not. Learning what your supervisor is looking for in an
employee will help make this change more successful.

Globalization
Today, organizations are becoming more and more global. As the world shrinks and
companies grow, diversity becomes a more relevant topic (Barclay, 2010, p. 2). Many
- 48 -

employees view relationship building as a topic to avoid, like it is better to treat everyone the
same (Barclay, 2010, p. 2). All employees need to realize this is not true. Rarely do people,
including managers, enjoy being treated the same by all their employees. Many managers will
want and need to be seen as individuals. Diversity is the concept of dealing with people with
differences, keeping in mind that any time you have more than one person you will have
differences (Barclay, 2010, p. 2). In 35 Dumb Things Well-Intended People Say, Surprising
Things We Say that Widen the Diversity Gap, Maura Cullen (2008) says valuing diversity starts
off as something that we do and grows into something that we are (p. 42). Supervisors must to
respect the differences of individuals and only use what he or she knows for benefit of building a
relationship.
Learning to manage up does not imply becoming a different person; what it does imply is
to take a general interest in the people who work in the organization. It is about asking caring
questions. Cullen states Passion plus compassion plus action equal [the] essential components
for long term change (Cullen, 2008, p. 44) from employees toward supervisors.
Conclusion
Managing up is really another way to effectively manage a relationship with ones
manager or supervisor. Employees must learn to identify how their own manager leads and bend
or flex towards that leadership style. Today, more than ever, it is important for employees to
understand that success in the workplace is dependent on a persons ability to provide leadership
with effective productivity. But just being productive isnt enough; employees need to learn to
manage up. Working advice writer Penelope Trunk (2010) states that employees should learn to
effectively manage their supervisor by following these steps:
1) Know what matters to your boss
2) Learn to say no
3) Talk like your boss
4) Toot your own horn
5) Go to lunch with your boss
6) Seek new responsibilities
7) Be curious
According to Trunk Managing up is the best tactic for getting more interesting work,
more responsibility, and more sane work hours, because your boss is the one who can give you
this stuff (Trunk, 2010). She also states that [s]ome people think managing up is brown
nosing, but in fact, a lot of it is about humanizing the workplace. Managing up is about you
caring for your boss, and the result will be your boss caring for you (Trunk, 2010).

- 49 -

References:
Barclay, A., (2010). Economic Organization Culture. Journal of Management Research, 2(1), 1-5.
Bolman, L., Deal, T., (2008). Reframing Organizations, Artistry, Choice, and Leadership, San
Francisco, CA: Jossey-Bass.
Bolton, R., & Grover-Bolton, D., (1996). People Styles at Work, making bad relationships good and good
relationships better. New York: Amacom.
Changing Minds (2010). changingminds.org
Coughlin, L., Wingward, E., & Hollihan., (2005). Enlightened Power, How Women are Transforming the
Practice of Leadership. San Francisco, CA: Jossey-Bass.
Cullen, M., (2008). 35 Dumb Things Well-Intended People Say, Surprising Things We Say that Widen the
Diversity Gap
Johnson, C., (2001). Meeting the Ethical Challenges of Leadership, Casting Light or Shadow, Thousand Oaks,
CA: Sage Publications.
Kinicki, A. & Williams, B., (2008). Management, A Practical Introduction, Third Edition, New York,
NY:Mcgraw-Hill.
Mosley, D., Pietri, P., & Mosley Jr., D., (2005). Supervisory Management, the Art of Inspiring, Empowering,
and Developing People, Mason, OH: Thompson, South-Western.
Rainbird, H., Fuller, A., & Munro, A., (2004) .Workplace learning in context. New York, NY: Routledge.
Senge, Kleiner, Roberts, Ross, & Smith
Swanson, R. A., (2007). Analysis for Improving Performance: tools for diagnosing organizations and
documenting workforce development, Berrett-Koehler Publishers.
Trunk, P,. (2010). Advice at the intersection of life and work. Penelopetrunk.com

- 50 -

Gazi ng thr ough the Looki ng Glass
Analysi s of the I mpact of the US Health Car e
Refor m Bi ll on the I nter nati onal Health &
Busi ness Landscape
Brad Beauvais
Matt Brooks
Suzanne Wood

Abstract
Health care in the United States has historically and anecdotally been regarded as the
most advanced among industrialized nations. A more analytical approach has led to an
indication that U.S. health care is deficient in some metrics of analysis. The World Health
Organization (2000) ranks the United States low in critical areas such as infant mortality (21
st
)
and life expectancy (18
th
) and ranks the system 37
th
in overall performance (WHO, 2000). The
United States spending on health care far exceeds any other industrialized nation in the world;
accounting for over sixteen percent of GDP in 2008, and an expected twenty percent of GDP
($4.3 Trillion) by 2017 (OECD, 2009). Based largely on these circumstances, President Obama
signed into law the Patient Protection and Affordable Care Act (PPACA) on March 23, 2010.
The new legislation is a sweeping measure designed to expand access to health insurance, reduce
health care spending, expand federal fraud enforcement and transparency requirements, and
impose new taxes and fees on health industry sectors. What remains to be considered is the
impact the PPACA may have on the international healthcare community. In this paper we
specifically address the impact of the PPACA on the US healthcare industry and discuss possible
ripple effects within the international medical tourism marketplace.

"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I dont much care where--" said Alice.
"Then it doesnt matter which way you go," said the Cat.
"--so long as I get SOMEWHERE," Alice added as an explanation.
"Oh, youre sure to do that," said the Cat, "if you only walk long enough."
(Lewis Carrolls Alice's Adventures in Wonderland, Chapter 6)
Introduction
Much like the fictional Alice in Wonderland, the United States health care industry is on
a journeya very real journey of an undetermined destination and seeming lack of
comprehensive direction. With any other industry, the concerns would not be as high. However,
in the case of US healthcare, the implications of a directionless and troubled industry may have
far reaching and monumental consequence domestically and abroad.
- 51 -

Health care in the United States has historically and anecdotally been regarded as the
most advanced among industrialized nations. A more analytical approach has led to an
indication that U.S. health care is in trouble. The World Health Organization (2000) ranks the
United States low in critical areas such as infant mortality (21
st
) and life expectancy (18
th
) and
ranks the system 37
th
in overall performance (WHO, 2000). Likewise, the Institute of
Medicines To Err is Human (1998) and Quality Chasm (2001) reports numerous shortcomings
in the current U.S. healthcare infrastructure. The apparent less-than-optimal performance in
health care has been compounded by substantial costs. The United States spending on health
care far exceeds any other industrialized nation in the world; accounting for over sixteen percent
of GDP in 2008, and an expected twenty percent of GDP ($4.3 Trillion) by 2017 (OECD, 2009;
Siska, 2009).
Based largely on these circumstances, President Obama signed into law the Patient
Protection and Affordable Care Act (PPACA) on March 23, 2010. The new legislation is a
dramatic shift in US health policy designed to expand access to health insurance, reduce health
care spending, expand federal fraud enforcement and transparency requirements, and impose
new taxes and fees on health industry sectors. The President also signed a second bill into law on
March 30, 2010, the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act),
which includes a series of amendments to the PPACA, including substantive changes to the
PPACAs provisions regarding Medicare prescription drug coverage, Medicare Advantage and
fee-for-service payments, Stark law self-referral policy, and Medicaid matching payments,
among many others. Many provisions within the law will have a direct and material impact on
nearly every component of the health care delivery and financing systems in the United States,
including patients, payers, and providers, to include suppliers, and employers.
What remains to be determined is the impact the PPACA may have on the international
healthcare community. Based on the sheer size of the US health care industry, its logical that
the effects will be far-reaching and economically substantial. The ramifications of this
legislation will have significant global consequences across many of the facets of the health care
industry - impacting pharmaceuticals, physician education, medical devices and many others.
While each of these aspects will be important to a greater and lesser degree, in this paper we
specifically addresses the impact of PPACA on the growing issue of medical tourism.
The Concept of Medical Tourism
What is Medical Tourism?
Lunt and Carrera (2010) define the term as, the organized travel outside ones natural
healthcare jurisdiction for the enhancement or restoration of the individuals health through
medical intervention. While these authors have only recently forged this definition, it is clear
that medical tourism is not a new idea. As far back as the seventeenth century, the wealthy of
Europe traveled to spas and specialty hospitals along the Nile. However, only recently has
global travel been safe, fast, and inexpensive enough to warrant expansion of the medical
tourism service industry (Burkett, 2007). Medical tourism has subsequently extended far
beyond the spa experience to numerous health care related services such as in vitro fertilization
(IVF), hip replacements, heart surgery, holistic medicine, and many others.

Who?
Three major stakeholder groups have an interest in medical tourism: employers,
insurance companies and potential patients. Employers faced with increasing health care costs,
- 52 -

pressures on lowering insurance premiums, and requirements to provide coverage to more
employees have an interest in supporting medical tourism. Insurance companies with an interest
in pursuing lower costs in health care have launched medical tourism pilot programs (Hopkins,
Labont, Runnels & Packer, 2010). Finally, potential patients seeking cost effective and high
quality alternatives for various health care services in the US are increasingly seeking healthcare
in international locations.
As a group, employers present the largest potential among all stakeholders in the U.S.,
and therefore one of the most important for medical tourism providers. Offering employers
package deals and incentives, will allow medical tourism providers to reach a larger audience
and gain market share. In 2008, after conducting their own extensive research, executives with
Hannaford Brothers supermarket, offered to cover the hip replacement procedures for their
employees. Having the procedure completed at Singapores National University Hospital to
include travel for each patient and his or her spouse cost Hannaford Bros. $8,000 nearly
$122,000 cheaper than in the United States (Carroll, 2008). Earlier this year, IDMI Systems Inc,
offered an international medical travel option as an employee benefit. By offering this benefit,
the Georgia-based software developing company expects to cut their medical expenses by 80%
(Schappel, 2010).
Insurance companies see a benefit from the reduced treatment costs of medical tourism
(Deloitte Center for Health Solutions [DCHS], 2008). In 2007, BlueCross BlueShield (BCBS) of
South Carolina created Companion Global Healthcare, which assists patients in planning trips to
Bangkoks Bumrungrad Hospital for treatment. Furthermore, BCBS will cover follow-up visits
at Doctors Care centers located throughout South Carolina. In 2009, Anthem BlueCross and
BlueShield (WellPoint) supported a plan to send Serigraph, Inc employees to Apollo Hospitals
located in India for elective procedures. WellPoint manages the insurance plan, which covers
both travel and medical arrangements for beneficiaries.
Lastly, most American medical tourists seek treatment in various international locations
for a myriad of reasons ranging from economic to legal to spiritual (Cohen, 2010). US and
Canadian patients seek low-cost pharmaceuticals, dental care and physician services. Cash-
paying, uninsured Americans can find better deals on procedures south of the border, including
price quotes and package prices, which most American hospitals do not offer. Some Arizona
retirement communities establish regular bus tours to transport residents across the Mexican
border for prescription drugs and dental care while some health plans in Southern California
offer lower premiums and copayments to patients who use network providers across the border
in Tijuana.

Where?
American medical tourists most often seek care in Mexico and other Latin American
countries due to their proximity and convenience; however, increasingly US customers are
seeking care in locations in a global market-place.. India and Thailand are now promoting their
high-tech facilities for more serious procedures, including cardiac procedures as well as hip and
knee replacements. Other popular destinations include Singapore, Belgium, South Africa as well
as Central and Eastern Europe for low-cost medical and dental services (HealthAbroad.Net,
2010)
Mexico. Mexican physicians have gained significant market-share treating US patients
for all types of routine and elective care. Prices in Mexico are about 40 percent lower than in the
United States on average (cite?). Realization of this burgeoning demand has resulted in
- 53 -

numerous health care facilities being built in Mexican border towns to take advantage of these
recent transitions in consumer and payer demand. The Dallas, Texas based International
Hospital Corporation operates four Mexican hospitals while the Catholic faith-based partnership
Christus Muguerza is building and operating hospitals in Mexico that meet American
accrediatation standards. It has identified 40 communities along the U.S.-Mexican border where
it is planning or building facilities (Roig-Franzia, 2007). While medical tourism clearly applies
to episodic periods of care, some 40,000 to 80,000 American seniors live full time in Mexico. In
addition to health care at lower prices, many receive nursing home care at a fraction of United
States prices. In most areas of the United States, the cost of nursing home care can easily surpass
$60,000 per year. However, in Mexico, quality long-term care costs only about one-fourth as
much. For about $1,300 per month, a senior can get a studio apartment that includes laundry
service, cleaning, meal preparation and access to complete nursing care.
India. Despite the long travel time involved, India is a popular destination for medical
tourists. It arguably has the lowest cost and highest quality of all medical tourism destinations
and English is widely spoken. Several hospitals are accredited by the Joint Commission
International (JCI) and staffed by highly trained physicians. Prices can be obtained in advance,
and many hospitals bundle services into a package deal that includes the medical procedure and
the cost of treating any complications (Moser, 2005). Hotel accommodations are extra, but
hospitals often have hotel rooms or can offer discounts for hotels nearby.
Thailand. This popular destination for medical tourists rivals India in price and quality.
Thailands large tourist industry is one reason it has a better infrastructure and less prevalent
poverty than India (Althaus, 2007). Prices are typically higher than India, and Thai hospitals do
not offer fixed pricing. However, food and lodging during recuperation will be less expensive
than in India due to Thailands competitive tourism industry.3 Bangkoks Bumrungrad
International Hospital is a world-class private health care facility built for wealthy Thais, but
foreigners comprise more than one-third of its patients.
Singapore. English is widely spoken in this former British colony, located approximately
1,000 miles south of Bangkok. Singapore has modern, high-quality hospitals and is home to
three hospitals accredited by the JCI. Prices are higher than in Thailand or India but are
significantly lower than in the United States.
Central and South America. Mexico has been popular for some time with American
patients seeking primary and dental care. But to attract cash-paying American patients for
surgical services, health care systems are building hospitals and clinics with the high level of
service and amenities that American patients expect. For instance, Americans expect
professional medical staff and upscale private rooms in clean, modern facilities. They also expect
the same high-tech equipment that American hospitals would possess. Costa Rica is best known
for quality dental work, with prices one-third to one-half of those in the United States. Colombia
is a favorite destination for cosmetic surgery. Argentina and Brazil have long been known for
low cost plastic surgery, and more advanced treatments are becoming available. Plenitas is a
Buenos Aires-based boutique clinic that arranges medical travel. Although most of the services
provided are cosmetic surgeries, it also offers in vitro fertilization and bariatric (weight loss)
surgery. Nine Brazilian organizations have established a health care consortium to market Brazil
as a medical tourism destination to stakeholders in various countries (BBC, 2007).
Europe. Northern and Western Europeans have numerous opportunities to get lower-cost
medical and dental care. Germans favor Szczecin, Poland, less than 100 miles from Berlin, for
low-cost, high-quality dental work. Sopron, Hungary, less than an hours drive from Vienna,
- 54 -

Austria, caters to medical tourists. Sopron has more than 200 dentists and 200 optometrists,
several times as many as would be expected in a town of with a population of 20,000 people
(BBC, 2007).
Latin America. Costa Rica and Panama are popular destinations for medical travel.
Around 150,000 foreigners sought care in Costa Rica in 2006. This is amazing, considering that
Costa Rica is a country of less than 4 million people. By contrast, in 2006 just 250,000 foreigners
sought care in the United States a country with nearly 300 million more residents. Panama
has high quality health care, concentrated primarily in the metropolitan areas. Medical standards
at Panamas top hospitals are comparable to those in the United States. Many Panamanian
physicians were trained in the United States and Hospital Punta Pacifica in Panama City,
Panama, is an affiliate of U.S.-based Johns Hopkins International. Comparatively, however,
medical care in Panama is 40 percent to 70 percent less expensive than in the United States
(Keogan, 2007).

When & How Much?
Reports on the number of patients traveling abroad for health care over the past few years
are scattered, but all accounts appear to tell the same story. In 2005, approximately 250,000
foreign patients sought care in Singapore, and 500,000 traveled to India for medical care while
Thailand treated as many as 1 million foreign patients. A 2007 McKinsey & Company report
estimated the total to rise to $100 billion by 2012 (Moser, 2007). Internationally-known
hospitals, such as Bumrungrad in Thailand and Apollo in India, report revenue growth of about
20 percent to 25 percent annually. The foreign patients treated in these countries included some
of the 500,000 Americans who traveled abroad for medical treatment that year.

How?
How patients, insurers and providers integrate medical tourism as an option for their
health care is a diverse solution set and a complicated issue. In a survey conducted by the Center
for Medical Tourism Research (CMTR), over 75% of respondents utilized the Internet to
research medical tourism countries, facilities and providers (Vequist & Valdez, 2008). With
hospitals abroad maintaining user-friendly websites, the availability of online information from
both JCI and ISO, and a plethora of travel websites, medical tourists can reasonably plan the
details of their overseas medical travel.
Furthermore, patients who arent familiar with specific medical facilities abroad can
coordinate their treatment through medical travel intermediaries, such as Planet Hospital, Med
Retreat, and Medical Tours International. These firms work like specialized travel agents,
investigating health care providers and screening customers to assess those who are physically
capable enough to travel often using their own staff of health care providers to assess the medical
efficacy of procedures and help patients select physicians and hospitals. Clients of MedRetreat,
for example, can choose from a menu of 183 medical procedures from seven different countries.

Why?
Residents of countries with national health insurance, including Canada and the United
Kingdom, often travel to other countries, including the United States, because they lack timely
access to elective procedures due to health care rationing constraints in their domestic market. In
Canada, physicians cannot privately treat their fellow Canadians if those treatments are covered
by the government health plan. Also, national health systems sometimes deny treatment to
- 55 -

particular patients (for example, because of age or physical condition), and some treatments may
not be available to any patients because they are cost-prohibitive.
A second area of motivation that stimulates medical tourism centers on issues of legality.
The Food & Drug Administration (FDA) was established to ensure that drugs were safe for the
public to consume. However, the FDA approval process has slowed the timeframe to market for
drugs and medical devices. Thus, if patient desires to have a procedure done, or desire access to
the drugs they would otherwise not be able to obtain, the option of medical tourism provides a
route of access to care.
However, for most medical tourists, including those from the United States, the reason
for travel is purely financial. The relatively high number of uninsured and underinsured in the
United States coupled with an increasing demand for lifestyle procedures has fueled the
increase in demand worldwide. US patients can save up to 94% on surgeries like cardiac and
orthopedic procedures by traveling to other countries, including the costs of procedures and
hospital stay. Table 1 displays an indicative array of costs for several medical procedures at
locations across the globe. Fees for treatments abroad range from one-half to as little as one-
fifth of the price in the United States, on average. In some cases prices are 80 percent lower
abroad. Savings vary depending upon the destination country and type of procedure performed.

Medical Procedures and Average Costs in Four Countries

Procedure Avg Cost
US
Avg Cost South
Africa
Avg Cost
Thailand
Avg Cost
India
CABG (bypass) 110,000 29,000 14,000 8,000
Double Valve Replacement 180,000 35,000 11,000
Heart Pacemaker / defibrillator 60,000 25,000 9,000 7,500
PTCA with stent 70,000 22,000 9,500 7,500
Pediatric Cardiac Surgery 100,000 33,000 N/A 9,100
Hip Replacement (single) 130,000 24,000 12,000 8,500
Hip Resurfacing (single) N/A N/A 9,000
Knee Replacement (single) 60,000 19,000 9,500 7,500
Spinal Fusion 90,000 32,000 8,700
Tummy Tuck 15,000 12,500 6,500 4,500
Laproscopic Gastric Banding 50,000 20,000 9,000 7,600
Major Dental Implants 30,000 19,000 9,000 7,000
Source: GlobalMedNetwork, 2010
Why Are Foreign Hospitals Able to Offer Lower Prices?
Prices for treatment are lower in international locations due to a number of factors:
Fewer Regulations. United States health care regulations prevent domestic hospitals from
developing the types of collaborative arrangements that many international hospitals use. For
instance, facilities abroad can arrange health care provider compensation to incentivize the
provision of efficient care, but domestic hospitals usually cannot. Physician compensation
arrangements in American hospitals cannot violate the rigidly structured Stark laws which were
created to prohibit kickback arrangements. Foreign hospitals are also free to directly employ
- 56 -

physicians which is a practice prohibited in many states. For instance, physicians in India
provide a certain number of hours per month in return for a guaranteed fixed fee. Patients are
then able to select the hospital based on reputation and then choose an appropriate doctor who
works with the hospital (Herrick, 2007).
Price Transparency and Package Pricing. A significant criticism of healthcare
organizations in the United States is no definitive prices for services. Even when they are
disclosed, the resulting figures are often meaningless. Patients who ask potential providers to
quote a price are likely to be disappointed. In fact, many consumers have little idea of the true
cost of medical treatments. However, within the international health care environment, access to
pricing information is readily available. Bundled or packaged prices for the entire healthcare
experience are commonly provided to medical travel intermediaries that help patients compare
prices and determine provider quality. As a result, international medical centers and clinics
routinely quote prices in advance and look for ways to attract patients based on quality while at
the same time maintaining pricing parity with other providers across the globe (Porter &
Teisberg, 2006).
Few Cross-Subsidies. In many American hospitals, revenues from some service lines are
used to cover the costs of providing treatments to other patients in other service lines. This cross-
subsidization is possible because some medical procedures produce more revenue than it costs to
provide them. For example, the revenue from heart catheterization procedures or diagnostic
imaging might subsidize indigent health care or cover the costs of operating the emergency
room. This implies that revenues from the heart procedure exceed costs while the emergency
room may be operating at a loss. This is sustainable so long as the local competitive and
political environment allows the cross-subsidization to occur. However, a provider who does not
cross-subsidize could offer the cardiac treatment for a lower price or could make a profit
charging the same as efficient specialty hospitals. Nonprofit community hospitals complain that
specialty hospitals skim off lucrative surgeries but do not provide the services that community
hospitals do, such as emergency departments and charity care for the uninsured. This has led to a
moratorium on new specialty hospitals in the Medicare program (Booth, 2004).
Streamlined Services. Foreign medical providers are much more likely to operate a
highly efficient and clinically focused production facility. Typically these are specialized
clinics and hospitals where tasks have been optimized for the highest efficiency minimizing
staff and patient non-value-added activity while concurrently minimizing cost. For example,
Fortis Healthcares Rajan Dhall Hospital in New Delhi uses a business model that combines the
personalized service of the hotel industry with the industrial processes of an auto production
plant - both industries in which the hospitals senior executives have experience. Rajan Dhalls
vice president for operations spent years working for the Hilton hotel chain. He describes their
hospital as a hotel providing clinical medical excellence. Fortis chairman, Harpal Singh,
brought his experience from the automotive industry where emphasis on streamlining the
production processes to shave costs and gain pricing advantage is a central tenet of success and
gaining competitive advantage. As a result, both gentlemen have led the hospital towards the
provision of services in such a way that everything can be performed quickly and efficiently
(Herrick, 2007).
Limited Malpractice Liability. International malpractice litigation costs are also lower in
other countries than in the United States. While American specialty providers might pay in
excess of $100,000 annually for a liability insurance policy, a physician in Thailand spends about
$5,000 per year. The difference might be tied to the fact that in Thailand a victim of negligence
- 57 -

is not compensated for noneconomic damages. As a result, the number of malpractice claims
and malpractice awards are far lower than in the United States circumstances replicated time
and time again across the globe (Roth, 2006).
Labor costs. On average, United States hospital labor costs consume over half of annual
operating revenue. This is due to a number of factors, inclusive of competition for clinical staff
(e.g. nurses, techs and physicians), labor union pressures and state and federal government
regulations. In contrast, wage rates and other labor costs associated with health care
organizations are far lower overseas. While extensive data was not immediately available
pertaining exclusively to the healthcare industry, anecdotal evidence is telling. For example, at
Fortis Hospitals in India, physicians earn nearly 40 percent less than comparable doctors in
America. Similarly, median nurses salaries are one-fifth to one-twentieth of those in the United
States while the wages of unskilled and semiskilled labor are also far lower. This fact alone
makes it much less expensive to staff and operate hospitals abroad (Berger, 2005).
Fewer Third-Party Payers. Free markets forces of any kind fail to operate effectively in
the presence of bureaucratic oversight. This is particularly true as the concept applies to the US
health care industry. In the United States, third parties (insurers, employers and government)
pay for about 87 percent of all health care delivered. This effectively means patients spend only
13 cents out of pocket for every dollar spent on their behalf for health care services. As one
might expect, when consumers are not economically liable for services rendered on their behalf,
they do not shop like a reasonable cost-conscious consumer would when spending their own
money. This means that providers who serve them rarely compete for their business based on
price; therefore moral hazard is the normal operating process. In contrast, a far higher
percentage of health care delivered in international locations is self-financed. As an example,
patients pay 26 percent of health care spending out of pocket in Thailand, 51 percent in Mexico
and 78 percent in India (WHO, 2010). When patients control more of their own health care
spending, providers are more likely to compete for patients based on price and consequently
have more price-competitive private health care markets.

Quality
More than 120 overseas hospitals are accredited either through the Joint Commission
International (JCI) or The International Organization for Standards (ISO). In fact, almost 150
hospitals abroad are dual-accredited by both organizations (Herrick, 2007). In addition to
international hospitals seeking accreditation, many physicians at these facilities develop and
retain U.S. board certification. Many of the surgeons were trained in the United States, Canada
or Europe. Medical travel intermediaries such as Planet Hospital and Med Retreat provide
comprehensive profiles on their affiliated physicians. Profiles include past and recent education,
accreditation and residencies (Med Retreat, n.d; Planet Hospital, n.d.). With the online
availability of information for both overseas institutions and their physicians, medical tourists
can make an informed decision on where to receive health care.
Despite the apparent advantages that the medical tourism industry appears to enjoy in the
modern environment, challenges exist. Coordination of care between domestic and foreign
providers is arguably the most pressing concern. Many U.S. physicians are reluctant to treat
patients for follow-up care following overseas surgical procedures. The assumption is that U.S.
physicians are held liable for complications experienced by patients undergoing surgery at
foreign health care facilities. Unfortunately, specific data isnt available as to how many patients
receiving care overseas experience complications upon returning to the U.S. since most medical
- 58 -

malpractice suits are settled out of court (Vequist & Valdez, 2010). Furthermore, the legal rights
of American patients receiving health care overseas varies by country and not fully understood.
It is apparent that international laws and regulations pertaining to medical liability are not as
stringent as those found in the U.S. and assign minimal malpractice compensation when found to
be warranted. Since medical tourists have few legal rights in the event of medical malpractice,
one option is to purchase a medical malpractice policy that covers botched procedures (Herrick,
2007).
With these challenges in mind and based on the emerging volume of the industry, the
American Medical Association (AMA) established the following set of guidelines to help
provide some structure to the industry. Specifically, the AMA specified the following:
Medical care outside the U.S. should be voluntary.
Financial incentives to go outside the U.S. for care should not inappropriately
limit diagnostic and therapeutic alternatives, or restrict treatment or referral
options.
Financial incentives should be used only for care at institutions accredited by
recognized international accrediting bodies.
Local follow-up care should be coordinated and financing arranged to ensure
continuity of care.
Coverage for travel outside the U.S. for care must include the costs of follow-up
care upon return.
Patients should be informed of rights and legal recourse before traveling outside
the U.S. for care.
Patients should have access to physician licensing and outcomes data, as well as
facility accreditation and outcomes data.
Transfer of patient medical records should be consistent with HIPAA guidelines.
Patients should be provided with information about the potential risks of
combining surgical procedures with long flights and vacation activities (American
Medical Association, 2008).
The Impact of Health Reform Within the United States
As discussed in the preliminary sections of this paper, the cost of healthcare delivery in
the United States is accelerating at an unsustainable rate that neither the American people nor
government can afford. Presumably, President Obamas recently signed Affordable Care Act
(ACA), health insurance companies are held more accountable and are incentivized to lower
health care costs. The ACA was also legislated to guarantee more health care choices while
enhancing the quality of health care for all Americans. Understanding how these objectives will
be put into place is not necessarily easy to define; however, as the Act will not be implemented
all at once. Portions of the law have already taken effect while other changes will be
implemented beginning 2014 and beyond.
The passage of Healthcare Reform has made sweeping changes and has changed
healthcare as we know it in America. Very few people in the US, including government officials,
employers, and insurance companies understand its true impact or have read the entire
Healthcare Reform legislation. Unfortunately, even after reading the Healthcare Reform bill,
there are many unanswered questions. The bill creates new governmental entities whose duties
will be to create new regulations, rules and guidelines of how Healthcare Reform will be
- 59 -

implemented and to what defined benefit levels. It will take several years for industry
participants to fully understand the full affect Healthcare Reform will have on their business.
Ironically, healthcare Reform will most likely drive up the costs of health insurance in the
US to an unsustainable level. Why? First, Healthcare Reform did not create a public option or a
government plan, so the insurance marketplace will still be run by private industry. Second, one
major tenet of Healthcare Reform is the waiving of pre-existing conditions. Third, the legislation
eliminates annual and lifetime limits. Fourth, the bill expands dependent coverage to age
twenty-six, providing level or equal premiums for those who are sick or healthy. Fifth,
Healthcare Reform creates essential benefits. Sixth, Healthcare Reform also lowers the
insurance premiums for the elderly Americans artificially and raises it for younger Americans,
specifically at a three to one ratio. Elderly Americans cannot be charged more than 3 times that
of a younger American, even though actuarially they should be charged five to six times the
price of a younger American. Lastly, the legislation mandates the creation of health insurance
exchanges where Americans can purchase health insurance and mandates the purchase of health
insurance by Americans under threat of financial penalty.
While all of these initiatives are individually appealing from a healthcare consumer
perspective, it all ultimately has to be financed. For the sake of brevity, we will not be discussing
each of these, but instead will discuss two of the major design flaws with the current Healthcare
Reform: 1) waiver of pre-existing conditions, and 2) the mandate to purchase health insurance.
First, the waiving of pre-existing conditions clauses which start in 2010 for children and 2014 for
adults will drive up the costs of health insurance in the US. For those who are sick and have
health conditions, this can be a positive step forward, because there are many Americans who
were previously denied health insurance because of a pre-existing condition or who could not
afford to purchase health insurance because of the high premiums. For many of these Americans
health insurance and health care were inaccessible and unaffordable which resulted in the
worsening of their health conditions and eventually later in life much higher medical expenses.
Also, many of these Americans did not have access to preventative services to catch serious
health conditions at an early stage, due to lack of access to proper health care. For these
Americans, the waiving of the pre-existing conditions clauses and the lowering of health
insurance premiums, which will be subsidized by healthy Americans that will have their
insurance rates increased, will provide them access to more affordable healthcare for the first
time. Unfortunately, there are also some negative side effects to this. Notably, insurance
premiums for individuals who are healthy will increase in order to subsidize sicker Americans
who have pre-existing conditions. Thus, for the preponderance of Americans, the cost of
insurance will increase regardless of the availability of competitive exchanges (Edelheit, 2010).
Secondly, Healthcare Reform does not properly incentivize Americans to purchase health
insurance. The fines for not purchasing health insurance in 2014 start at $95, and increase each
year. Compared to the expected increase in health insurance premiums over the next ten years,
the fines, which were originally meant to force the majority of Americans to buy health
insurance, are small and will fall short of their intended goal. This would mean many Americans
can make the decision to not purchase health insurance, not engage in healthy lifestyles or
behaviors or focus on preventative medicine and instead wait until they are sick and then
purchase guaranteed-issue health insurance with no pre-existing conditions clauses at a fair
subsidized price by the healthy. This penalizes Americans who have engaged in healthy
behavior and lifestyles and who have planned and paid for health insurance every month in
anticipation of one day possibly becoming ill or sick. People who have always paid for health
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insurance and maintained a healthy lifestyle are in actuality being penalized in the form of their
now mandated health insurance premiums. Perhaps most importantly, the current structure
allows for millions of Americans to opt out of carrying insurance which debases the
legislative plan to finance the reform initiative.
In the end, before Healthcare Reform it was estimated that by 2020 health insurance costs
for a family of four would range between $30,000 and $40,000 per year. Under Healthcare
Reform, these health insurance costs are likely to be higher. While Healthcare Reforms
intention was to insure more Americans, it may actually have a reciprocal effect of creating more
uninsured due to artificially inflating health insurance costs without substantially incentivizing
mandated insurance.

The Impact of US Health Reform on the Future of US Medicine & Medical Tourism

For the United States, the underlying influence of Health Reform will serve as an impetus
towards accelerated globalization of the US health care industry. This can reasonably be
expected to encompass both the export of patients abroad (medical tourism) and import of
medical services (outsourcing). In essence, the resultant effect of fostering increased competition
and efficiency in the United States health care market. Princeton University health economist
Uwe Reinhardt has stated that the effect of global competition on American health care could
rival the impact of Japanese automakers on the U.S. auto industry forcing domestic producers
to improve quality and to offer consumers more choices (Price, 2006).
Inbound Medical Tourism and foreign patients who travel to the US for medical care
should see very little effect as a result of Healthcare Reform at least in the short term. For
years, foreign patients have traveled to the US to gain access to high quality health care at
American hospitals such as The Cleveland Clinic, The Mayo Clinic and many others. Healthcare
Reform does not appear to raise the cost of care for foreign patients or restrict access to medical
care. This can be expected to continue and inbound medical tourism in to the US should continue
to remain available and perhaps continue to grow for the foreseeable future. In reality, we may
see hospitals in the US prefer treating foreign patients over domestic patients due to the expected
decline in reimbursement levels for Medicare. US hospitals may turn to making up the lost
revenue by attracting and catering to foreign patients who typically pay full retail prices for
medical care. However, this phenomenon will not last forever. Victor Lazzaro Jr., CEO of the
medical travel coordinator Bridgehealth International explains,
Even if reform does succeed in reducing costs, providers here will never be able
to match the lower prices patients can pay for equally good healthcare services in
places like India or Mexico because the cost of doing business is more expensive
in the U.S. Our bricks and mortar cost more, our drugs and devices cost more,
and our nurses and physicians are paid more. We will not in the foreseeable
future be able to compete on those issues and close the gap." (Rhea, 2009)
Apart from attempting to increase inbound patient travel, many US healthcare systems
and providers will seek to reduce medical costs in any way possible. This will increasingly
induce the outsourcing of medical tasks to skilled professionals abroad when the physical
presence of a physician is unnecessary. This can include long-distance collaboration
incorporating the services of foreign medical staff into the practices of American medical
providers. Information technology makes this possible. For example, telemedicine the use of
information technology to treat or monitor patients remotely by telephone, web cam or video
- 61 -

feed is becoming common in areas where physicians are scarce. It gives rural residents access
to specialists and will probably become the preferred way to monitor patients with chronic
conditions. Outsourcing often results in lower costs, higher quality and greater convenience.
Some clerical tasks, such as medical transcription entering physician notes and dictation into
a patients electronic medical record are already outsourced. American hospitals increasingly
use radiologists in India and other countries to read X-rays (Wachter, 2006) As we move
forward, other medical tasks that dont require the physical presence of a physician may also be
considered for outsourcing to lower-cost doctors abroad. For example, the British National
Health Service (NHS) is considering using doctors in India to read some lab tests and MRI scans
(BBC, 2004).

The availability of lower-cost, offshore treatment options could save U.S. patients,
employers and insurers billions of dollars and reduce spending within the U.S. health care system
(Mitka, 2009). At the same time, increased international competition for qualified medical
personnel could raise labor costs in all global markets. If foreign medical students, physicians
and nurses currently in America choose to work overseas, there will be increased shortages of
workers in some medical specialties in the United States, and wages for these workers will rise.
This is especially likely in areas of medicine not easily outsourced such as the inherently local
practice of emergency room medicine (Herrick, Booman & Rupak, 2007)

With the forthcoming changes in the US healthcare industry brought about by Health
Reform, medical tourism is likely to experience explosive growth over the next three to five
years, followed by continued slower period of development due to capacity constraints. Because
of the potential for skyrocketing health insurance costs, many employers and insurance
companies will start to implement medical tourism as one of the only effective means to contain
the growth in healthcare costs. The legislations waiving of pre-existing conditions and requiring
sick and healthy Americans to pay the same price for health insurance effectively destroys the
underwriting process and can put an employer or insurance company in a difficult financial
position. Medical tourism provides a hedge/protection against this because if an insured patient
utilizes the medical tourism benefit, it will lower medical claims costs associated.
Medical tourism is one of the most important steps towards globalization of healthcare.
The industry has grown up to a point where it is becoming common practice to advise patients on
where they should travel for treatment, handle all their travel arrangements, teleconference with
physicians and send medical records . American medical insurance programs have encouraged
policyholders to travel abroad for the purpose of seeking treatment. Health insurance companies
such as Aetna, Blue Cross/Blue Shield of South Carolina, Blue Shield of California, and United
Group Programs are beginning to reimburse for some out of the country treatments. Companion
Global Healthcare Services Inc. was the first insurance company in the United States to create a
subsidiary specifically to provide the option of overseas medical procedures for its client
companies and brokers (York, 2008).
Conclusions
This paper has addressed the numerous factors influencing the development and growth
of the medical tourism industry over the past several years. With increased demands for
inpatient, outpatient, dental, and cosmetic surgery due to increasing globalization and increased
acceptance by employers and insurance companies, medical tourism has successfully
transitioned from a cottage industry to an acceptable alternative for care that is safe and cost
effective. In March 2010, the Patient Protection and Affordable Care Act and the reconciliation
bill were passed into law. The implications of this legislation are only now beginning to be fully
- 62 -

understood, with significant potential impact on virtually all sectors of the US economy
individuals, businesses, insurers, and all levels of government.
In our preliminary review of the legislation we have identified several factors that can be
expected to have an explosive influence on the growth of medical tourism and outsourcing of the
medical services. As employers, insurers, hospitals and patients begin to encounter increased
cost pressure, many among these constituent groups can be expected to continue to seek medical
tourism as a viable alternative. We expect that each of these groups will continue to turn towards
creative methods that will meet patient needs, meet quality standards and delivery meaningful
cost savings in the provision of health care services. Based on the factors considered in this
paper, we expect that we will see significant growth in the medical tourism industry
particularly in 2014 and beyond when the majority of the U.S. Healthcare Reform legislation
changes take effect, and the largest increase in health insurance costs are expected to occur.
Pending any significant restrictions imposed on an international basis, US Healthcare Reform
will accelerate the growth of the Medical Tourism industry across the globe. Much like Alice
wandering through a mystical and dangerous Wonderland, the US healthcare industry is on a
journey of known origin but indeterminate destination. One thing is certain; we are in for an
interesting ride.

- 63 -

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Amer i cans Wor ki ng and Li vi ng Abr oad:
Tax I mpli cati ons for U.S. Ci ti zens
JoAnn Bondhus

Much has been written about the effects of globalization on the U.S. economy. Many of
these discussions have described the negative consequences of, what were once American jobs,
moving overseas. These consequences include longer periods of unemployment, loss of income
growth, loss of benefits and loss of opportunities for advancement. Many of these out-sourced
jobs have been low-skill, low-pay jobs. In recent years, however, observers have noted that
some higher skilled jobs, such as computer programming and tax preparation, are also being
outsourced to other countries.
Many of these jobs will not be coming back. Certainly other types of employment
requiring different skills will replace many of the jobs that have been lost. Greater
opportunities, however, may be available to U.S. citizens if they can follow employment
opportunities in other countries. Most of these opportunities will come from employment with
U.S.-based or multi-national corporations. If U.S. jobs can be out-sourced, then perhaps, U.S.
workers can be out-sourced as well.
The number of U.S. citizens that live abroad has been variously estimated to number
between 4,000,000 and 10,000,000 persons. The best estimates from the U.S. State Department
suggest the true numbers are probably between 5,000,000 and 6,000,000 persons. (U.S. State
Department Statistics, 2006) According to State Department statistics, U.S. citizens live in 160
countries around the world with the largest numbers living in the Western Hemisphere and in
Europe. (U.S. State Department Statistics, 2006) These estimates are subject to some dispute
because attempts to conduct census counts of U.S. citizens abroad have largely been
unsuccessful with very low response rates. Some of these U.S. citizens are dual citizens who
may be characterized as accidental Americans; those who have little cultural or historical ties
to the U.S. An example of an accidental American would be a child born in the U.S. to parents
who are foreign students studying in the U.S. Often these children return to their parents home
country at a young age and may never return to the U.S. Other of these citizens living abroad
are retired U.S. workers who seek a lower cost-of-living to improve the quality of their
retirement. Costa Rica, Panama, and Mexico are popular destinations for these Americans.
(David Dixon, 2006) Others are students studying abroad. The balances of U.S. citizens living
abroad (excluding military and U.S. government employees) are working either for corporations
doing business internationally or are self-employed outside the U.S. The exact numbers are
unknown, but there are over 300,000 individual tax returns that are filed annually claiming the
foreign earned income exclusion and over 2,000,000 individual returns claiming a foreign tax
credit. (Internal Revenue Service SOI Statistics, 2010)
The U.S. income tax system is unique in the developed world by its requirement that U.S.
citizens pay tax on their world-wide income.1 (Internal Revenue Code, 1986 as amended) This
applies to both earned income and unearned income such as dividends, interests, rents, and
royalties. The Internal Revenue Service has been more aggressive in collecting taxes on earned

1
IRC 61(a)
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income, however, because tracking unearned income from foreign sources can involve
jurisdictional issues that may make collection problematic.
Other countries in the developed world with an income tax use a territorial system of
taxation. To be subject to taxation by the home country, the citizen must have earned the income
within the geographical borders of the country. The territorial rules also apply to foreign
nationals working within the country. Earnings sourced from outside the country are exempt
from taxation. This is true even if the country in which the citizen is employed is one with low
or no taxation based upon income. Thus, citizens of high-tax countries, such as those in Western
Europe, may incur a substantial tax benefit by working outside of their home country.
For U.S. citizens working abroad, the combination of worldwide and territorial taxation
can present the potential burden of double taxation. The same income may be taxed by the host
country and the U.S., creating an unsustainable level of taxation. This potential burden may
discourage U.S. citizens from seeking opportunities abroad. Many companies that employ U.S.
citizens to work overseas enter into tax equalization agreements with those employees. In
effect the employer guarantees that the assignment overseas will not cause a reduction in the
employees after-tax income. The consequences of double taxation are shifted to the employer;
this, in turn, may make employment of U.S. citizens more costly than hiring employees of other
nationalities.
The U.S. tax laws purportedly are designed to be neutral on the issue of working within
the U.S. or outside the U.S. Tax treaties the U.S. has entered with a large number of countries
exempt U.S. workers from local taxation if they are in the country for a short period of time
(usually 183 days or less). There are also special provisions in these treaties for students and
teachers studying and working abroad. For those not covered by a tax treaty, Congress has
enacted legislation to provide some relief. The foreign earned income exclusion and the foreign
tax credit provisions of the Internal Revenue Code (discussed below) are supposed to achieve
this neutrality so that U.S. citizens working abroad are neither burdened with additional taxes nor
benefited by living in low-tax countries. In practice, because of the myriad tax laws
internationally, this neutrality may be a difficult goal to achieve in individual cases.
The history of the U.S. income tax system as it related to foreign sources of income
demonstrates an inherent conflict between two competing policies. One policy articulated by a
number of Congressional committees is the desire to encourage U.S. citizens to work abroad in
order to improve the competitiveness of U.S. businesses overseas. The other, perhaps more
central policy, is to maximize revenues for the federal government in ways that do not incur the
wrath of the majority of taxpayers. The tax gap between the taxes that should be collected based
upon estimates of economic activity and the actual tax receipts is estimated to be in excess of
$345 billion annually. (Administration, 2009) $123 billion of the tax gap is projected to come
from uncollected tax revenues from foreign sources and between $40 and $70 billion of that
amount from noncompliance by individual U.S. taxpayers (Administration, 2009). Since a small
percentage of American citizens are working abroad, increasing revenues from them through
taxation may be a more politically palatable way to increase needed tax revenues.
History of Section 911
Concern about double taxation for U.S. citizens working abroad became an issue
shortly after the ratification of the 16th Amendment. In 1926, Congress passed a revenue bill
(then 913) that excluded foreign income from federal income taxation if the taxpayer had been
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outside the U.S. for at least six months.2 The provision was subsequently amended in 1932 and
1951 to deal with the perception that U.S. citizens working outside the U.S. were receiving a
windfall by not being subject to U.S. taxation while also avoiding taxation in their host country.3
Efforts to address these perceived abuses resulted in changes in the original section to (1) require
that the U.S. citizen be a bona fide resident of the foreign country for the entire taxable year or
being physically present in the country for 17 out of 18 consecutive months; and to (2) limit the
amount of the exclusion to $20,000. The $20,000 limit was increased to $35,000 if the taxpayer
had resided in the country for 3 or more years.
The section underwent further modifications in 1978 and 1981. The 1981law repealed
913 and replace it with 911.4 The House Ways and Means Committee justified the changes
which raised the exclusion to $75,000 by stating:
The committee believes that it is necessary to change the tax law to encourage Americans
to work abroad to help promote the export of U.S. manufactured goods and services. Reducing
the tax burden on Americans working abroad will make American enterprises more competitive
in foreign markets. The committee feels that a broad range of activities by Americans abroad
benefit the U.S. economy and should be encouraged.5 The legislation increased the exclusion in
increments of $5,000 up to $95,000 in 1986.6
The Tax Reform Act of 1986, again reflecting concerns about windfalls to U.S. citizens
working abroad, reduced the amount of the exclusion to $70,000 with annual adjustments for
inflation. In 2010 the maximum exclusion is $91,500.7 The section has been subject to continual
examination by Congress and there have been unsuccessful attempts to repeal the section as a
means to reduce tax receipt deficiencies.
Section 911 Eligibility
A taxpayer must be a qualified individual to elect to exclude foreign earned
income. 8To be qualified, a taxpayer must either be (1) a bona fide resident of a foreign country
or (2) live in the foreign country for 330 days in a consecutive 12-month period (physical
presence test). Earned income includes salaries, wages, professional fees and other amounts paid
for personal services. It also includes sick leave pay, vacation pay, and guaranteed payments
made to partners.9 It does not include pension or retirement income, social security payments,
or distributions of dividends or entity profits10. It also does not include payments by the federal
government to its employees who are posted overseas. 11 Nor does it include payments to
military personnel stationed outside the U.S. The earned income must come from services
performed while living in a foreign country or countries.12

2
P.L. 69-20, 44 Stat. 9
3
P.L. 720154, 47 Stat. 169 and P.L. 82-183, 65 Stat. 452
4
The Economic Recovery Tax Act of 1981, P.L. 97-34m 95 Stat. 172
5
H.R. Rep. No. 97-291m at 60 (1981)
6
P,L. 99-514, 100 Stat. 2085
7
P.L. 109-222
8
IRC 911(a)
9
Regs. 1.911-3(b)
10
IRC 911(b)(1)(B)
11
IRC 911(b)(1)(B)(ii)
12
Regs 1.911-3(a)
- 68 -

The section does not define how residency in a foreign country is established, but case
law has given some guidance. In Sochurek v. Commissioner13, the Seventh Circuit Court of
Appeals listed a number of factors that should be considered in deciding whether residency had
been established These include ,but are not limited to:
the taxpayers intention
the establishment of a home for an indefinite period
marital status and residence of the taxpayers family
nature and duration of the employment
nature, extent, and reasons for temporary absences from the foreign home
payment of taxes to the foreign country
participation in the activities of the community on social and cultural levels
the treatment of the taxpayers income tax status by his employer
For example, in Schonenberger v. Commissioner,14 the court held that a U.S. airline
pilot had established residence in France. The court relied upon the factual findings that he had
rented an apartment in Paris, spent all of his off-duty hours in France, and had assimilated into
French culture. The fact that he did not pay any French income taxes and was based, for
employment purposes in New York, did not mitigate against finding bona fide residence. Other
courts have found residency established even where the taxpayer was immune from taxation
through a tax treaty and exempt from some local laws.
If the taxpayer cannot establish bona fide residency in the foreign country, the taxpayer
may, nonetheless, claim the exclusion by meeting the physical presence test. To qualify, the
taxpayer must be physically present in the foreign country or countries for at least 330 full days
during a consecutive 12-month period. 15 The 330 days do not have to be consecutive and can
be interrupted by days spent in the United States.16 Eligibility is determined on an annual basis
so the taxpayer may use the physical presence test one year and the bona fide resident test in
another.
The exclusion is computed on a daily basis. Thus if a taxpayer is not a bona fide resident
for each day of the year, or is not physically present in the foreign country for all days of the
year, the amount of the exclusion must be reduced. For example, if a taxpayer is not a bona fide
resident of the country and is physically present for only 340 days during the tax year, then the
exclusion would be reduced to $85,233 ($91,500 x 340/365).
A common misperception is that a U.S. taxpayer does not need to file an income tax
return if the taxpayer qualifies for the exclusion and all earned income is from foreign sources.
In fact, the taxpayer is only eligible for the exclusion if Form 2555 or Form 2555EZ is attached
to the taxpayers return. 17
In addition, the election of the exclusion is continuous for succeeding tax years where the
taxpayer is eligible for the exclusion. If the taxpayer is eligible for the exclusion, but chooses
not to use it in lieu of the foreign tax credit, the taxpayer will be barred from electing the

13
Sochurek v. Comr., 300 F.2d 34 (7
th
Cir., 1962)
14
Schoneberger v. Comr., 74 T.C. 1016 (1980); See also Jones v. Comr., 927 F.2d 849 (5
th
Cir., 1991); Meals v.
U.S., 110 F.Supp. 658 (N.D. Cal., 1953)
15
IRC 911(d)(1)(B)
16
Regs. 1.911-2(d)(2)
17
Regs 1.911-7(a)(1)
- 69 -

exclusion again for the succeeding five years unless permission from the Internal Revenue
Service is obtained.18
Housing Expenses under 911
Section 911 also provides an exclusion for foreign housing expenses paid for by an
employer and included in the gross income of the employee.
19
This exclusion is designed to
address the burden of having multiple residences as a result of working abroad and also to
address the high housing costs in some foreign locales such as London, Hong Kong, and Tokyo.
Amounts eligible for the exclusion include rent, utilities, household repairs, and parking.
20
It
does not include the cost of purchasing a home or making improvements on that home, the cost
of furniture, domestic help, mortgage payments, or interest or taxes on the home (deductible
under 163 or 164).
21
To be excludible, the amounts must be reasonable. Generally, the
exclusion applies to only one home, although exceptions exist if adverse living conditions related
to the foreign assignment justify a second residence for a spouse and/or dependents.
22

Housing costs are only excluded to the extent that they exceed a base amount which is
defined in 911 as 16% of the maximum foreign earned income exclusion.
23
. For 2010, the base
amount is $14,640. In addition, legislation in 2005, established an overall cap on the housing
exclusion of 30% of foreign earned income.
24
For 2010, the cap is $27,450. Thus the maximum
exclusion for housing for 2010 is $12,810 ($27,450 - $14,640) The Treasury has discretion,
however, to adjust the cap to reflect geographical differences. The Treasury has increased the
maximum allowable in cities such as Tokyo, London, and Hong Kong where housing costs are
extremely high.
25
The exclusion is computed on a daily basis and must be reduced for periods
when the taxpayer is either not a bona fide resident of the country or is outside the country or
countries.
26

As an illustration, if a single taxpayer with no dependents, who has been physically
present in a foreign country at all times during 2010, has total foreign earned income, including
employer-reimbursed housing expenses, of $122,000, and has total foreign housing expenses of
$19,000 (included above), the housing exclusion amount would be $4,360 ($19,000 - $14,640).
Assuming no other sources of income, the taxpayers adjusted gross income (AGI) would be
computed as follows:
Gross income (including housing) $122,000
Foreign earned income exclusion (91,500)
Housing exclusion (4,360)
AGI $26,140
Employees who are not reimbursed by their employers are not eligible for the housing
exclusion. They can, however, take a deduction for housing costs in computing adjusted gross

18
IRC 911(e)(2) and Regs. 1.911 -7(b)(1)
19
IRC 911(a)(2)
20
Regs. 1-911--4(b)(1)
21
Regs. 1-911 -4(b) (2)
22
IRC 911(c)(3)(B)
23
IRC 911 (c)(1)
24
IRC .911 (c)(2)
25
See Notice 2010-27
26
IRC 911(c)(1)
- 70 -

income.27 Similarly, self-employed individuals are entitled to take an above-the-line deduction
for housing costs subject to the 911 limitations. Disallowed amounts may be carried over to the
succeeding year.
TIPRA
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)
28
has had
significant implications for U.S. citizens working overseas. The effect of the legislation has
made working in foreign countries much less attractive. The Act made two significant changes
which negatively affected the benefits of 911.
The first change, discussed above, was to change the way that the housing exclusion was
calculated. Prior to TIPRA, the base amount was 16% of the annual salary of a grade GS-14,
Step 1, U.S. government employee. There was no upper limit on the exclusion once the base
amount had been exceeded. The new law changed the base amount to 16% of the maximum
foreign earned income amount.
29
In addition, a 30% cap was imposed on the housing amount
exclusion.
30
This was done because prior law limited housing costs to a reasonable amount.
Congress believed that the vagueness of the term reasonable encouraged some taxpayers
working overseas to choose housing that would be considered lavish by U.S. standards.
31

The second, and more significant change, was the adoption of a stacking rule in
computing tax liability. The rule requires that amounts of foreign earned income not excluded
be taxed at the marginal rate that would have applied had the exclusion not been elected.
32
To
compute the tax liability, the tax liability without the exclusion is calculated first. The tax
liability on the exclusion amount is calculated and subtracted from the first amount. The
rationale for this change was to create a level playing field between U.S. citizens living abroad
and those living at home.
For example, a single taxpayer in 2010 with taxable income of $200,000, all earned in a
foreign country, would experience a considerable tax increase over the tax liability under prior
law. The taxpayers taxable income after the exclusion would be $108,500. Under prior law the
tax would be computed as follows:
$8,375 x .10 $838
(34,000 8,375) x .15 3,843
(82,400 34,000) x .25 12,100
(108,500 82,400) x .28 7,308
Total Tax $24,089
Under TIPRA, tax liability would be computed as follows:
$8,375 x .10 $838
(34,000 8,375) x .15 3,843
(82,400 34,000) x .25 12,100
(171,850 82,400) x .28 25,046
(200,000 171,850) x .33 9,290

27
IRC 911(c)(4)
28
P.L. 109-222
29
IRC 911(c)(1)
30
IRC 911 (c)(2)
31
Background Fact Sheet on Section 911, U.S. Senate Finance Committee, May 25,2006
32
IRC 911(f)
- 71 -

Total Tax $51,117
Less Tax on $91,500
$8,375 x .10 $838
(34,000 8,375) x .15 3,843
(82,400 34,000) x .25 12,100
(91,500 82,400) x .28 3,003
Total Tax $31,333
The taxpayer would pay an additional $7,244($31,333 -24,089) under current law. On the first
dollar of non-excludible taxable income the marginal rate would be 28% rather than the 10% rate
under prior law. U.S. citizens particularly hard hit by TIPRA are those living in low-tax
countries such as those in the Middle East and Eastern Europe.
901: The Foreign Tax Credit
Taxpayers who are not eligible for the exclusion under 911, or who will choose not to
elect the exclusion, can elect to take a credit against the taxpayers U.S. income tax liability for
taxes paid or accrued to a foreign country. 33 In some cases, the credit will provide greater relief
from double taxation than the foreign earned income exclusion. The taxpayer, however, cannot
elect the credit for income excluded under 911. The credit can apply for foreign tax liability
allocable to taxable income above the exclusion amount.
The foreign tax credit is equal to the amount of income taxes paid to the foreign country
subject to the foreign tax credit limitation. The limitation is computed by multiplying foreign
source taxable income to worldwide taxable income times the precredit U.S. income tax
liability:34
Foreign source taxable income
Worldwide taxable income X Precredit U.S. income tax liability
For example, if a single taxpayer has taxable income of $200,000 from foreign sources, $250,000
of all sources including U.S. sources, an income tax liability to the foreign of $80,000, and a U.S.
income tax liability of $69,615, the credit would be limited to

$200,000
250,000 X $69,615 = $55,692

Disallowed excess credit: (80,000 55,692) $24,308
Excess credits may be carried back one year and forward 10 years.
35

In order to take the credit, the foreign taxes must be creditable. To be creditable, the tax
must be a tax that is considered to an income tax or equivalent in the U.S. sense. (i.e. that it is
likely to reach net gain in the normal circumstances to which it applies).
36
For example, taxes
imposed and subject to withholding on gross income are treated as creditable, Many forms of
taxation by other countries, however, do not meet the requirement that they are equivalent to an
income tax. For example, property taxes, sales taxes, and value-added taxes are not treated as

33
IRC 901(a)
34
IRC 901(b)
35
IRC 904(c)
36
Regs.19012(a)(3)
- 72 -

creditable.
37
A soak-up tax, a tax that is dependent on the availability of a credit for the tax in
another country, is not creditable. Amounts paid for social safety nets, such as social security,
unemployment, disability, are not usually considered creditable.
38
Wealth taxes imposed upon
the taxpayers net worth are not creditable
39
. Taxes that are not creditable can, in some cases, be
deducted as itemized deductions. A taxpayer may also elect to deduct foreign income taxes as an
itemized deduction in lieu of taking the credit.
Recent legislation, the Education, Jobs, and Medicaid Assistance Act, signed by
President Obama on August 26, 2010 has added additional limitations on the credit.
40
A new
limitation which may have the significant impact on U.S. citizens is a provision that income
taxes paid to the host country on income that is not recognized for federal income tax purposes,
such as deferred compensation arrangements, will not be creditable until the income is
recognized under U.S. tax rules.
Exclusion v. Credit
Taxpayers must elect to either use the exclusion or the tax credit up to the exclusion
amount. For amounts exceeding the exclusion amount, the credit may be used for tax liability
related to the excess taxable income above the exclusion amount. In making the determination
as to whether to use the credit or the exclusion, an individual taxpayer should compute the tax
liability separately using both approaches. As a general rule, however, the following guidelines
may apply:
If the taxpayer is subject to no foreign income taxes or the amount of their foreign earned
income is less than the exclusion amount, the exclusion should always be chosen. The exclusion
also makes sense if the taxpayer has very high housing costs.
If the taxpayer is subject to foreign taxes, their foreign earned income exceeds the
exclusion amount, and the foreign tax rate is lower than the U.S. tax rate, then the exclusion is
preferable.
If the taxpayer is subject to foreign taxes and the foreign earned income exceeds the
exclusion amount, but the foreign tax rate is equal to or exceeds the U.S. tax rate, then it is
preferable to forego the exclusion and claim the foreign tax credit.
For example, if a single taxpayer with no dependents in 2010 had foreign income of
$150,000 and was subject to a foreign income tax with an effective rate of 15% on U.S.-
computed taxable income, the exclusion would provide a better outcome (assuming the taxpayer
is eligible for the maximum exclusion):
With Exclusion Without Exclusion
Wages (all foreign source) $150,000 $150,000
911 exclusion (91,500) 0
SD and Exemption (9,350) (9,350)
TI 49,150 140,650
U.S. Tentative Tax 13,762 33,091
Foreign Tax Credit (7,373) (21,098)
U.S. Tax Liability 6,389 11,993

If, however, the same taxpayer was subject to a foreign income tax with an effective rate
of 40%, the credit would provide a better result\

37
Regs. 1-901 -2(a)(2)
38
Regs. 1-901-2(a)(2)(i)
39
Rev. Rul. 76-5356, 1976-1 C.B. 224
40
H.R. 1586 211
- 73 -

U.S. citizens living in low-tax countries, such as those in the Middle East or Eastern
Europe, generally benefit more from the exclusion than the credit. Those living in high-tax
countries, such as those in Western Europe, generally benefit more from the credit. One caveat,
however, that the taxpayers must keep in mind in choosing to forego the exclusion in favor the
tax credit. If the taxpayer had taken the exclusion in the previous year, a revocation will prevent
the taxpayer from using the exclusion for a period of five years after the year of the revocation
unless permission is obtained from the IRS.

Employment Taxes
U.S. citizens working abroad may also be faced with complex rules governing their
obligation to contribute into the Social Security system through the FICA tax. As a general rule,
most U.S. citizens want to be subject to the tax because they want their earnings credited by the
system to increase the amount of their retirement benefits. They may also be subject to social
security-type taxes in the country in which they reside. The employment-related taxes similar to
FICA in many countries, especially Western Europe, have tax rates that are substantially higher
than those in the U.S. U.S. citizens abroad may pay these taxes, but may not reside in the taxing
country long enough to qualify for benefits. In addition, employers who have entered tax
equalization agreements with their employees will be liable to pay these additional taxes. The
additional taxes paid by the employer represent additional income to the employee who then has
greater taxable income so that the employer and employee are stuck in a circular relationship.
If a U.S. citizen works abroad for an American employer, the citizen is subject to
FICA.
41
This does not include a U.S. branch of a non-U.S. corporation.
42
It does include,
however, a foreign subsidiary of a U.S. parent corporation if the subsidiary is a disregarded
entity for federal income tax purposes.
43
The entity is disregarded if it is a flow-through entity
(i.e. LLC or partnership) or the parent and subsidiary file a consolidated return. It is important to
note, however, that income excluded under 911 is not subject to FICA taxes.
If the U.S. citizen works abroad for a foreign corporation, then different rules apply. If
the foreign corporation is an affiliate of a U.S. corporation (but not a disregarded entity as
described above), the U.S. corporation may elect to subject the employees of the affiliate to the
FICA tax.
44
Practically, because of the high cost of employing U.S. citizens, foreign affiliates
often choose not to make this election. A citizen working abroad for an employer who is neither
an American employer nor a foreign affiliate of a U.S. corporation is exempt from the FICA
tax and cannot elect to be subject to it.
45

41
IRC 312(b)
42
PLR 8834069
43
Notice 99-6, 1999-3 I.R.B. 12

44
IRC 3121(I)
45
Id.
With Exclusion Without Exclusion
TI $49,150 $140,650
U.S. Tentative Tax 13,762 33,091
Foreign Tax Credit (13,762) (33,091)
Tax Liability 0 0
FTC Carryover 5,898 23,169
- 74 -

To diminish the likelihood of double taxation, the U.S. has entered into social security
totalization agreements with 24 countries.
46
A totalization agreement provides that an employee
may not be subject to a social security tax imposed by the U.S. and the other country at the same
time. Only one of the countries may impose the tax. It also provides that if an individual who
has paid social security taxes to both countries, but does not qualify for benefits from either
country under its rules, may still qualify for benefits from both countries. U.S. law provides that
an individual is not entitled to coverage under a totalization agreement unless the individual has
at least six quarters of coverage under the U.S. system.
47

Every totalization agreement, with the exception of the agreement with Italy, has a
detached worker exception. This permits an employee sent from his/her home country by an
employer domiciled in the home country, to be subject to the social security tax in the home
country rather than the host country. To be considered a detached worker under these
agreements the worker should not be expected to reside in the host country for more than five
years.
48
A worker who anticipates residing in the host country for greater than five years would
not qualify as a detached worker and would be subject to the general rules under the applicable
totalization agreement. The agreement with Italy does not impose a five-year limitation. U.S.
citizens working for American corporations in countries without a totalization agreement may be
subject to double taxation.

The Heroes Earnings Assistance and Relief Act (The Heroes Act)
Some U.S. citizens have responded to the perceived unfair treatment of foreign income
by renouncing their U.S. citizenship. The numbers of persons doing so are small. In 2009, 753
persons gave up their citizenship, more than doubling the number in 2008. (Bachman, 2010)
Those renouncing their citizenship often have citizenship in other countries or can afford to
purchase economic citizenship in the few Caribbean countries that sell citizenship status
49
.
Prior to the enactment of The Heroes Act on June 17, 2008, tax treatment of those
renouncing their citizenship was governed by 877 of the Internal Revenue Code. A covered
expatriate was subject to an alternative income tax regime. To be covered an expatriate had to
(1) have been a U.S. citizen within the last ten year period immediately preceding the tax year,
(2) have had an average annual net income tax liability for the five years prior to expatriation of
greater than $145,000 [Income Tax Liability Test], have a net worth of $2,000,000, or (3) failed
to certify under penalty of perjury that he had met the requirements of the Code for the five
preceding tax years.
50
The covered expatriate is subject to alternative expatriate income tax
graduated rates. This means that the expatriate would be subject to a higher tax rate on U.S.

46
The 24 agreements in effect in 2010 include Australia, Austria, Belgium, Canada, Chile, Czech Republic,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, Luxemburg, the Netherlands,
Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom
47
42 USC 233(c)(1)(A)
48
Social Security Online: U.S. International Social Security Agreements

49
E.g. St.Kitts and Nevis and Dominica
50
IRC 877(a)(2)
- 75 -

sourced income than the tax which would be imposed generally on nonresident aliens.
51
In other
words, the U.S. sourced income would be taxed as if the taxpayer was still a U.S. citizen. In
addition, if the former citizen were in the U.S. for greater than 30 days during the tax year, all
income, regardless of source, would be subject to U.S. taxation.
52
Section 877 provided
exceptions for dual citizenship and for minors.
53

The Heroes Act (877A) changed the approach for dealing with expatriation from that of
taxing certain post-expatriation income to imposing a general exit tax on the gain inherent in the
taxpayers world-wide assets. This change was effective for those citizens renouncing their
citizenship on or after June 17, 2008. The section requires that property of the expatriate is
deemed sold on the day before the expatriation for its fair market value (mark-to-market sale).
54

This unrealized gain or loss must be taken into account in the tax year of the expatriation. The
first $627,000 (2010) of gain is excluded from taxation.
55

The Act also has gift tax and estate tax implications for former U.S. citizens. Gifts and
estate distributions from former U.S. citizens are taxed at the highest marginal rate (currently
45%). The tax is imposed upon the U.S. donee or heir. The Act can make it very expensive for
an expatriate to forfeit their U.S. citizenship to avoid U.S. taxation.

Proposed Legislation
Continued concern about the tax treatment of foreign earned income is reflected in recent
legislative proposals. Interestingly, these proposals have bipartisan support. None of the
proposals, however, have been referred to the floor of Congress by the House Ways and Means
Committee or the Senate Finance Committee.
A bill entitled the Working American Competitiveness Act was introduced in 2007 by
Senator Jim DeMint (R-SC), co-sponsored by Christopher Bond (R-MO) and Charles Hagel (R-
NE) to extend the exclusion under 911 to all income earned abroad.
56
The bill would put U.S.
citizens in a position similar to citizens of other industrialized countries. The bill died in
committee. An identical bill with the same name was introduced into the House of
Representatives by Representative Gregory Meeks (D-NY) and co-sponsored by Rep. Ron Paul
(R-TX).
57
The Ways and Means Committee has taken no action on the bill.
In the Senate, a comprehensive bill designed to simplify and increase the fairness of the
federal income tax system, The Bipartisan Tax Fairness and Simplification Act of 2010, was
introduced by Senator Ron Wyden (D-OR).
58
The bill is co-sponsored by Senators Begich (D-
AK),Bennett (R-UT),
and Bond (R-MO). As part of this comprehensive overhaul of the income tax system, the bill
would eliminate the foreign earned income exclusion as part of the package of reforms to reduce
marginal rates and increase the standard deduction amounts. In addition, it would impose an
additional limitation on the foreign tax credit by requiring that the credit be computed on a per
country basis rather than on an aggregate basis. Opponents of the bill argue that these two
provisions would substantially increase the tax liability of American workers abroad and add a

51
IRC 877(b)
52
IRC 877 (c)(2)
53
IRC 877(e)(2)
54
IRC 877A(a)(1)
55
IRC 877A(e)(3)(A)
56
Senate Bill 1140, 110
th
Congress
57
H.R. 1798, 111
th
Congress
58
Senate Bill 3018, 111
th
Congress
- 76 -

further disincentive to companies considering employing those workers in foreign settings. The
bill is still in committee and it is unlikely that such a comprehensive reform would be enacted
without substantial revision.
The Obama Administration has not taken a formal position on the tax treatment of U.S.
citizens working abroad. In its proposed budget for 2011, however, the Administration has made
reforming taxation of international transactions a priority
59
. Some of its proposals would make it
more difficult for U.S. corporations with foreign operations to defer taxes on foreign income and
would impose greater limitations on the foreign tax credit. Indirectly, this could make the
employment of U.S. citizens abroad less attractive given the high cost those employees. A stated
goal of the proposed budget is to reward those companies who invest and create jobs in the U.S.
rather than those who make investments and create employment opportunities abroad.
Conclusion
U.S. citizens who choose to work abroad face tax challenges that citizens of other
industrialized countries do not. Employers who employ them often face additional costs in
equalizing their compensation to those of employees of other nationalities. Hiring U.S. citizens
for assignments overseas may be unappealing as a result. U.S. citizens may not have the same
opportunities to participate in the benefits of globalization because of these constraints.
Given the concern about budget deficits, it is unlikely that Congress will provide tax
relief to U.S. citizens working abroad to put them on an equal footing with their foreign
counterparts any time soon. As the effects of globalization continue to shape the world
economy, however, the tax treatment of these citizens will certainly need to be revisited.

59
Budget of the United States Fiscal 2011
- 77 -

Bibliography
Administration, T. I. (2009). A Combination of Legislative Actions And Increased IRS Capability and Capacity
are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap. U.S. Government.
Bachman, H. (2010, April 20). Why More U.S. Expatriates are Turning in Their Passports. Time .
David Dixon, J. M. (2006, September). America's Emigrants: US Retirement Migration to Mexico and
Panama. Retrieved July 20, 2010, from Migration Information Source:
www.migrationinformation.org/feature/display
Internal Revenue Code. (1986 as amended). Mason, OH: Southwestern Cengage Learning.
Internal Revenue Service SOI Statistics. (2010, June 18). Retrieved June 18, 2010, from Internal Revenue
Service: www.irs.gov
U.S. State Department Statistics. (2006). Retrieved July 19, 2010, from U.S. State Department Website:

- 78 -

The Compar i son of Value at Ri sk on Shar i a Based
Stock and Non-Shar i a Based Stock
(Case study on I ndonesi a Capi tal Mar ket dur i ng
2005 2008)
Agung D. Buchdadi
M. Yasser Arafat
Tri Hesti Utaminingtyas
Abstract:
This study aims to compare between maximum losses that could be arising to sharia
based stock and non-sharia based stock investment due to the differences characteristic of these
stocks. As the consequence of Conditional Variance Phenomenon, this study will use EWMA
model and GARCH model. The finding show that EWMA model provides better performance
and gives more conservative of VAR value than GARCH model. It is also shown that Sharia
based stock is riskier during February to March and May to July. Finally, this study tries to give
information on risk characteristic in Indonesias Capital Market.

Keyword: Value at Risk, EWMA model, GARCH Model, Indonesia Capital Market
Background
Stock price fluctuation in Indonesia during 2005 2008 was shown so highly. After
giving a profit more than 20% until 2007, the return of stocks plumped down in 2008 and it
provides huge loss to most investors. One way to avoid it is by doing some risk management. By
monitoring the risk in investment, people could hedge the value of the assets and create the
optimum portfolio equal to their ability in absorbing the risk. Therefore, measurement of risk is
considered important in this regard. Yet, only few people have an adequate knowledge in risk
management. Central Bank of Indonesia also supports the implementation of risk management
by adopting the regulation to banks in Indonesia in 2008. This legislation led to the development
of the concept of VAR in the thriving banking institutions. However, it does not happen in non-
banking institutions
Fardiansyah (2006) states the Value at Risk (VAR), one of risk measurement method, is
very popular and used widely by the financial industry worldwide. Volatility, normally assumed
to be fixed along the time, is needed in calculating VAR. Then, Some studies in Indonesia show
a normal distribution and the unconditional variance assumption is less appropriate to be applied
in financial market movements. Situngkir and Surya (2006) find it is better to calculate VAR
with considering on skewness and kurtosis value. Pohan (2004) indicates that stock mutual funds
returns during 2001 2002 do not follow a normal distribution and also finds heteroscedastic
phenomenon on it. Karahap (2005) also finds similar results to Pohans on foreign currency
portfolios.
Another interesting thing in Indonesia is the rapid growth of sharia-based capital markets.
This is probably only plausible since the largest Muslim population lives in Indonesia.
- 79 -

Nevertheless, sourced from Pramesti (2005), derived from Karim Business Consulting (2003), it
is found that about 75% potential capital market investors are floating market loyalist. In other
words, these investors spend the money in Islamic capital markets when there are potential
benefits. Knowing that sharia based stocks has special characteristic, in this paper; we try to
observe the risk faced in sharia based stock.
The following section of the paper is organized as follows. In section 2, we provide a
brief literature review concerning to Value at Risk Analysis. Section 3 describes the
methodology of this paper. Section 4 describes the results. And section 5 describes the
conclusion and remarks for the future research.
Literature review
VAR definition taken in this paper is cited from Jorion (2001) which indicates VAR as a
measurement of the worst expected loss over a given horizon at a given level of confidence.
Mathematically the formula of
W VAR = ) (
which asset value is W, return of the asset
follows normally distribution with mean and standard deviation of the return is . Mean value
could be omitted under assumption the window period of observation is short enough, daily.
Then, the formula can be simplified as
W VAR = ) (
. Value of corresponds to the level
confidence chosen. For example, = 1.65 is used for 95% level of confidence. Similarly to
Bodie (2002), when the asset does not follow normally distribution, variable replacing standar
variable of is used and determined with Cornish Fisher Expansion, which
) 1 (
6
1
2 '
=
.
Variable
refers to skewness coefficient of the asset.

Dealing with conditional variance phenomena that the variance of the asset is not
constant over the period, it is proposed to use moving average, GARCH and Risk metric
methodes.
Exponentially Weighted Moving Average (EWMA)
As it is noted on Jorion (2001), The model calculates standard deviation at date t as a
function of return of the asset on previous date t-k. Then, The RiskMetric model suggests using
decay factor to calculate the deviation. The factor shows how the impact of the previous
volatility to the next forecasted deviation. The formula is:
1 1
2
) 1 (

+ =
t t t
r (1)
The value of is between 0 to 1 and the higher the value the longer time needed for the
volatility decays to its mean value. The value of is determined by obtaining the best value root
mean squared error (RMSE), which produces the smallest error between the value of random
variables and volatility at the same time. The formula used

2
1
2
| 1
2
1
) ) ( (
1
=
+ +
=
T
t
T T T
r
T
RMSE ..(2)
where :
) ) 1 ( )) 1 /( ( (
2
| 1 t T T
X t t F + =
+

F(t/t-1) = forecasted value of variance at t-1
Generalized Autoregressive Conditional Heteroscedasticity (GARCH)
- 80 -

Quoted from Alexander (2001) it is noted that GARCH model, which is initially
developed by Engle (1982) and Bollerslev (1986), is calculated using the following formula,

=

=

+ + =
q
i
t i
p
i
t i t
r
0
2
1
0
2
1 0
2

..(3)
Which :
0>0, 1,.., p, 1, ., q 0
0 = slope q = lag volatility coefficient
p = error coefficient at time p t-1 = deviation at time t-1
rt-1 = return at time t-1
The plain model of GARCH (1,1) is commonly used in calculating volatility since it is
very ease in the implementation. Figures (1.1) shows only 1 error and the coefficient of lag 1
coefficient used in determining the volatility or mathematically:

2
1
2
1 0
2

+ + =
t t t
r
.(4)
The greater value the more reactive the current volatility to the previous market
information yields. The greater value the more influence of the previous volatility on current
volatility. In this model the parameters and together specify the persistence level of the
volatility of the assets. Whether the sum of value and is greater, The time of the estimated
volatility affected by the price movement needed is longer.
GARCH models is relatively better in compared to EWMA model in several factor, i.e :
Firstly, the model is more responsive any price movement in data series. In addition, the
GARCH model has greater average volatility value and need more time to back toward the
average value after exposed by stock price instability which is more fit to actual condition in
financial market.
Comparing the both model, which
EWMA :
2
1
2
1
2
) 1 (

+ =
t t t
r
, and
GARCH (1,1) :
2
1
2
1 0
2

+ + =
t t t
r
;
It is found that and in GARCH model are similar to and (1- ) in EWMA model
respectively. Then, it seems that EWMA model is a GARCH model which + = 1 and o = 1.
Previous Research
Sourced from Tarigan (2006), it is noted several studies that compares EWMA and
GARCH model. First, Chan and Kroly (1991) on the Japanese stock market data from 1977 to
1970 years indicate EWMA method is better than the GARCH methods, although the data is fit
(suitable) with GARCH form. Kuen and Hoong (1992) find, for the Singapore stock market,
EWMA methods are more suitable than GARCH. Karahap (2005) concluded, for calculating risk
in the Indonesian foreign echange, it is more appropriate to use GARCH (1.1). Furthermore,
Buchdadi, et all (2008), for the optimum portfolio in LQ45 in Indonesia, find EWMA model is
more suitable than GARCH model.
Data
Data needed is stock return which is transformed from daily stock price obtained from
Indonesia Stock Exchange (BEI). Window period chosen is 2005 2008 since it was noted very
high volatility in stock price movement. It is expected to give a comprehensive point of view to
- 81 -

the characteristic on investment in Indonesia. Sharia based stocks which meet Islamic law in
business are selected whether it is included on Jakarta Islamic Index (JII) during 2005 2008.
Business in or related to drug, prostitution, alcohol, tobacco, and conventional bank which used
interest rate on the business are prohibited in Islamic law. . Then, non-sharia stocks are defined
to those which are broke Islamic law in business and included in LQ45, the most liquid and the
best ferformance in BEI, during the window period. Based on the availability on data, there are 8
stocks in each sharia and non-sharia based stocks. Sharia based stocks consist of 3 mining
company, 2 manufacture companies, 1 pharmacy company, 1 in telecommunication industry, and
1 in retail industry. While, non-sharia based stocks are consist of 2 in cigarette industry and 6 in
financial industry.
Methodology
Two models, EWMA and GARCH, are used in this study. For EWMA model, I try to
find the best value of by using formula 2. I also use the value of = 0.94 which is proposed
by RiskMetric in calculating VAR on daily price basis. In addition, for GARCH model, I
develop ARMA model by trial and error to construct the most parsimonious model which has
conditional variance on its residual. Then VAR is calculated for 5% confidence interval, on daily
basis, for each Rp 1,-.
In this research, I validate the model using Kupiec test, Performance test based on
proportions of failures (TNoF). In this model, the number of volatility which excesses the VAR
value is counted as an error or an overshoot. The probability of N errors follow the binomial
process according to the formula:
N N T
p p N T Binomial

= ) 1 ( ) , (

Then, Likely Ratio (LR) test used to examine confidence interval of the model. So, LR
were p=p* :

N
N T
N N T
T
N
T
N
p p p N LR
+ =

1 log 2 ) *) ( *) 1 log(( 2 *) , (

The proportion of errors have a chi-squared distribution with degrees of freedom = 1.
Result and Discusion
Descriptive Statistics
The closing price of each company is transformed to daily return. In summary, the data
obtained is 8 shares for each category are presented in Table 1.
Table 1. Descriptive statistics
Non Syariah RMBA PNLF GGRM BBRI BNII BNGA BMRI BCA
Mean 0.001681 -0.000478 -0.00106 0.000615 0.000803 0.000136 0.000156 0.000984
Median 0 0 0 0 0 0 0 0
Maximum 0.133531 0.270429 0.210156 0.173663 0.338774 0.156003 0.182322 0.126752
Minimum -0.208755 -0.225083 -0.14009 -0.11583 -0.41616 -0.16252 -0.13858 -0.10622
Std. Dev. 0.031388 0.039423 0.028485 0.030488 0.033899 0.031123 0.031381 0.024148
Skewness -0.230907 0.392686 1.197933 0.283874 -0.61133 0.069138 0.346446 0.033017
- 82 -

Kurtosis 7.965779 9.918144 14.51909 6.358873 37.19246 7.10992 7.583734 6.232783
Jarque-Bera 1020.798 1989.599 5681.386 476.2626 48044.16 694.0377 882.015 429.1007
Probability 0 0 0 0 0 0 0 0
Observations 985 985 985 985 985 985 985 985
Alpha 1.710491 1.53323 1.304332 1.56416 1.818629 1.625201 1.546374 1.635468

Syariah UNVR UNTR TLKM PTBA KLBF INTP BUMI BNBR
Mean 0.000971 0.000709 0.000429 0.001646 -0.00027 0.000355 0.000213 -0.00141
Median 0 0 0 0 0 0 0 0
Maximum 0.179048 0.182322 0.116921 0.182322 0.421728 0.127262 0.202783 0.693147
Minimum -0.13431 -0.24454 -0.10451 -0.28768 -0.10725 -0.16779 -0.38612 -0.52452
Std. Dev. 0.022359 0.03434 0.023394 0.037329 0.029618 0.029344 0.037164 0.049276
Skewness 0.516435 -0.02867 0.106609 -0.5259 3.688357 -0.36332 -0.86614 1.638121
Kurtosis 10.93416 9.764071 5.819395 11.71636 50.54169 5.97268 17.74295 57.21302
Jarque-Bera 2627.396 1877.9 328.1056 3163.542 94996.19 384.3485 9043.753 121064.1
Probability 0 0 0 0 0 0 0 0
Observations 985 985 985 985 985 985 985 985
Alpha 1.498053 1.653004 1.614549 1.794343 0.596411 1.74813 1.89106 1.179206
Source: Elaborated data
From Table 1, it can be seen all samples are not normally distribution abnormal indicated
by probability values for Jargue-Bera test of 0%. Thus, the value of must be evaluated using
Cornish Fisher Expansion which also has been presented in the table. It also known that the
return of RMBA has the largest average of return. In contrast, in average GGRM provide the
smallest return to the investor. While, the most fluctuative return comes from PNLF.
VAR Analysis
Formation of Conditional Variance Model
By trial and error, conditional Variance models are developed and be tested using Park
test to see if there are conditional on the residual variance model. The model presented in the
following table:
Table 2 Conditional Variance Model
Saham NS Conditional Variance Model Saham Syariah Conditional Variance Model
BBRI AR(2), MA(2) BUMI AR(2), MA(2)
BCA AR(23), MA(23) INTP AR(31), MA(31)
BMRI AR(1) BNBR AR(14), MA(14)
RMBA AR(1) KLBF AR(18), MA(18)
BNGA AR(29), MA(29) PTBA AR(16), MA(16)
BNII AR(1), MA(1) TLKM AR(22), MA(22)
PNLF AR(2), MA(2) UNTR AR(26), MA(26)
GGRM AR(11), MA(11) UNVR AR(1), MA(1)
Source: Elaborated data
From the table it is known that the whole model is then in heteroskedastis. So, standard
deviations () is calculated by EWMA and GARCH approach.
- 83 -

EWMA
The results of calculations are presented in the following table:
Table 3. EWMA Model
Non Syariah maksimum Overshoot Overshoot =0.94
BBRI 0.54 91* 143
BCA 0.55 84* 144
BMRI 0.53 97* 138
RMBA 0.54 84* 116*
BNGA 0.49 88* 152
BNII 0.60 80* 135
PNLF 0.52 114* 153
GGRM 0.50 127 195
Average 0.53
Syariah
BNBR 0.46 141 161
BUMI 0.48 45* 114*
INTP 0.56 79* 134
KLBF 0.39 313 320
PTBA 0.58 63* 124
TLKM 0.54 88* 155
UNTR 0.59 77* 129
UNVR 0.49 93* 144
Average 0.51
Source: Elaboorated data, ** = 5% confidence interval *= 10% confidence interval
From the table it is found that the EWMA models by calculating the optimum RSME has
a number of overshoot smaller than using the EWMA model with = 0.94. The results also show
that most of EWMA by calculating optimum RSME pass in 5% of confidence interval. The
results of this study differ from what is found by Buchdadi, et al (2008) that indicate EWMA
model with = 0.94 gives a better numer of overshoot. Perhaps it is because of the differences
on the object and methodology. On Buchdadi, et al (2008) the optimum portfolio is developed by
Markowitzs method, while this paper determines the EWMA value of each individual stock. By
constructing the optimum portfolio, the distribution follows normally shape which is fit to the
assumption of EWMA model
Furthermore, in average the value of of non-sharia stock is greater than sharia stock.
It means non-sharia stock is more persistence to previous price volatility. Perhaps it is related to
behavior of Islamic investor since speculative trading in capital market is prohibited upon
Islamic law in business. However, it need further research to confirm the hypothesize.
GARCH (1.1)
The results of calculation using GARCH (1,1) are presented in the following table:
Table 4.GARCH (1,1)
Non Syariah Koefisien Koefisien Overshoot
BBRI 0.0716 0.9142 75*
BCA 0.1048 0.8556 87*
BMRI 0.2838 0.5492 137
RMBA 0.0748 0.8809 78*
BNGA 0.1991 0.7280 95*
BNII 0.3022 0.5641 86*
PNLF 0.1987 0.5844 164
GGRM 0.2569 0.6535 145
Average 0.1865 0.7162
Syariah
BNBR 0.1087 0.4798 246
BUMI 0.0601 0.9403 30**
INTP 0.0984 0.8445 85*
KLBF 0.6949 0.5385 258
- 84 -

PTBA 0.2832 0.7242 44*
TLKM 0.0953 0.8788 77*
UNTR 0.1484 0.8267 60*
UNVR 0.1544 0.6491 148
Average 0.2054 0.7352
Unlike the EWMA method, the results using GARCH (1,1) for sharia stocks give the
average value of , which shows the persistence level of a model, greater than the average value
of for non-sharia based stock. The results also show the performance of the GARCH model,
which is shown by the average number of overshoots, is not better than EWMA model.
However, it is premature to conclude that the persistence level of stock depend on the
measurement method. So, one more time we propose further study to make the confirmation to
this study results.
Comparison between EWMA and GARCH model
To compare both model the previous calculation are put down on the following table:
Table 5. Comparison of the result of VAR Calculation
Non Syariah VAR EWMA VAR GARCH (1,1) Overshoot
EWMA
Overshoot GARCH
(1,1)
BBRI 0.0397 0.0386 91* 75*
BCA 0.0327 0.0303 84* 87*
BMRI 0.0393 0.0319 97* 137
RMBA 0.0434 0.0393 84* 78*
BNGA 0.0421 0.0369 88* 95*
BNII 0.0440 0.0396 80* 86*
PNLF 0.0483 0.0341 114* 164
GGRM 0.0277 0.0246 127 145
Average 0.0397 0.0344 96 108
Syariah
BNBR 0.0419 0.0187 141 246
BUMI 0.0535 0.0591 45* 30**
INTP 0.0428 0.0369 79* 85*
KLBF 0.0130 0.0158 313 258
PTBA 0.0500 0.0541 63* 44*
TLKM 0.0319 0.0303 88* 77*
UNTR 0.0437 0.0443 77* 60*
UNVR 0.0276 0.0188 93* 148
Average 0.0381 0.0348 96 108
From the table it is shown that VAR of EWMA model is greater that VAR of GARCH
(1,1) model. Non-sharia stocks consistently provide greater VAR value when EWMA model is
used. Yet, inconsistent results shown in sharia based stock since there are 4 stock has bigger
- 85 -

value of VAR when GARCH (1,1) model is used. However, Based on the number of overshoot,
EWMA model produce better in confidence level interval. The results of this study, then,
supports conducted Buchdadi, et al (2008), Chan and Karoly (1991), and Kuen and Hoong
(1992). Moreover, it can be said that VAR value of non-sharia stock is greater than VAR value
of sharia stock. In other word, potential loss in non-sharia stock investment is bigger than
investment on sharia stock.
In addition, this study write down the graphs depicting average VAR for stock and non-
Islamic sharia along the year.
Figure 1 VAR Value for Each Month

From the figure 1, it is known in February the average value of VAR reaches a minimum
value while the maximum value is happened in October. There is a possibility that this is related
to the January Effect in which there are abnormal yields in January. In addition, comparing both
model in calculating VAR, it is riskier to invest on sharia stock on February to March and on
May to July. The rest of months are the time to invest on non-sharia stock. However, these
finding still need further research yo validate the phenomenon. For example, it needs study about
the relationship between time to spend the money on sharia stock and the condition of the market.
Perhaps, in bearish market it is good to invest on sharia stock. Or, it is actually in contrast?
Conclusions and Recommendations
This study gives an overview of the usage of several methods of calculating VAR in
Indonesian stock market. The method is discussed primarily EWMA and GARCH (1,1) model as
the consequence of conditional variance phenomenon found. The results show the EWMA model
give better performance than GARCH (1,1) model. EWMA model also shows greater value of
VAR and gives more conservative on risk measurement. It means for a conservative investor
EWMA model is fit to be implemented in managing the risk. Then, under the assumption the
EWMA model is better, it is riskier to invest in non-Sharia based stock than Sharia based stock.
Recommendations
Several recommendations arise due to some limitations on this study
1. Trial and error method in developing Conditional Variance can make a non optimum
model. So, it is recommended to use a computational software to find the optimum model.
-0.055
-0.05
-0.045
-0.04
-0.035
-0.03
-0.025
J
a
n
F
e
b
M
a
r
A
p
r
M
a
y
J
u
n
J
u
l
A
u
g
S
e
p
O
c
t
N
o
v
D
e
c
VAR
B
u
l
a
n
NS EWMA
S EWMA
NS GARCH
S GARCH
- 86 -

2. Stress testing as it is suggested on Jorion (2001) should be implemented in the next
research.
3. For the investor, by knowing the VAR value of the asset the optimum portfolio that is fit
to the risk characteristic can be made through risk budgeting process that releases the
stock when the price movement is so volatile.
4. For Indonesian Capital Market Regulator, since it is important to give a clear information
on investment risk, we propose to make a regulation to disclose the VAR value of the
stock.

- 87 -

References
Alexander, Carol; Sheedy elizabeth; and Koenig, David R., 2004, The Professional Risk Manager's
Handbook , PRMIA
Bodie, Zvi; Kane, Alex; and Marcus, Alan J., 2002, Investment , NewYork, McGraw-Hill
Buchdadi, AD, 2008, Penghitungan Value at Risk Portofolio Saham Perusahaan Berbasis Syariah dengan
Pendekatan EWMA (Studi Empiris Terhadap Saham - Saham yang Tergabung Dalam JII Selama 2005
2006), Jurnal Akuntansi Keuangan Indonesia , Vol. 5 No. 2, Departement Akuntansi FEUI,
Jakarta
Buchdadi, AD; Ahmad, GN; Mardiyati, U.; 2008, Analisis Value at Risk Portofolio Saham LQ45 dengan
pendekatan EWMA dan GARCH selama Tahun 2002 2006, Laporan Penelitian Dosen Muda ,
Dirjen Dikti Departemen Pendidikan Nasional, Jakarta
Fardiansyah, Teddy, 2006, Penerapan Manajemen Risiko Perbankan Indonesia , PT Elex Media
Komputindo, Jakarta
Febrian, E. and Herwany, A., 2009, Volatility Forecasting Models and Market Co-Integration: A Study on
South-East Asian Markets, Indonesian Capital Market Review , Vol. 1, No. 1, no. 1, Faculty of
Economics UI, Depok, West Java, Indonesia
Jorion, Philippe, 2001, Value at Risk , 2
nd
ed., McGraw-Hill, New York
Jorion, Philippe, 2005, Financial Risk Manager Handbook , John Wiley and Sons Inc., New York
Kurniawan, T. and Aziz, HA, 2007, Modelling the Volatility of Shari'ah Index: Evidence from the Kuala
Lumpur Shariah Index (KLSI) and the Jakarta Islamic Index (JII), Proceeding on The International
Conference on Islamic Capital Markets , IRTI-IDB, Jakarta
Karahap, Andi R., 2005, Perhitungan Value at Risk (VAR)-Foreign Exchange Risk Menggunakan Pendekatan
EWMA, GARCH, dan Monte Carlo Simulation, Karya Akhir , MMUI, Jakarta
Pohan, Daulat HH, 2004,Estimasi Volatilitas Return Reksadana Saham Sebagai Pertimbangan Keputusan
Investasi (Perbandingan Model EWMA dan GARCH), Karya Akhir , MMUI, Jakarta
Pramesti, Muthia, 2005, Perbandingan Investasi pada Instrument Syari'ah dan Optimalisasi Portofolio, Karya
Akhir , MMUI, Jakarta
Purnomo, Slamet E., 2005,Perhitungan Value at Risk Obligasi Fixed Income dengan Menggunakan
Pendekatan RiskMetics, Karya Akhir , MMUI, Jakarta
Riano K.,Andi, 2005,Perhitungan Value at Risk-Foreign Exchange Risk Menggunakan Pendekatan EWMA,
GARCH, dan monte carlo Simulation (Studi Kasus Bank X), Karya Akhir , MMUI, Jakarta
Situngkir H. dan Surya Y. 2006, VAR yang Memperhatikan Sifat Statistika Distribusi Return , Bandung FE
Institute, Bandung
Sugiyono, Prof., Dr.; 2008, Metode Penelitian Bisnis , Penerbit Alfabeta, Bandung
Tarigan, Rudi H., 2006, Peramalan Imbal Hasil Saham Sektor Tekstil dan Garmen di Bursa Efek Jakarta
Dengan Menggunakan Model ARCH/GARCH, Karya Akhir , MMUI, Jakarta
Tri Jatmiko, Fajar, 2006, Pengukuran Value at Risk Risiko Nilai Tukar dengan Estimasi Volatilitas EWMA
dan GARCH (studi kasus pt bank pqr), Karya Akhir , MMUI, Jakarta
Watsham, Terry J.; and Parramore, Keith; 1997, Quantitative Methods in Finance , 1
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www.bi.go.id, , November 2008
www.finance.yahoo.com , Maret 2009

- 88 -

Later al Mar keti ng i n Retai li ng and a Study fr om
Tur ki sh Gas Stati on Consumer s
Emrah Cengiz
Murat Erdal
Ahmet Sekerkaya
Irfan Akyuz

Abstract
Lateral marketing as defined by Kotler and Trias de Bes (2003); is a work process
which, when applied to existing products or services, produces innovative new products and
services that covers needs, uses, situations, or targets not currently covered and, therefore, is a
process that offers a high chance of creating new categories or markets.
The gas stations have been redeveloped within the perspective of lateral marketing and
have become the owners of a more multi-functional retailer identity instead of being plain retail
channel members providing fuel. This situation led to some changes and developments in terms
of consumers gas station preferences which revealed a movement of differentiation on products
and services offered by those stations.
The aim of this study is to understand lateral marketing applications effects on both the
consumer and the retailer. In this study, a model which was developed to determine the factors
that affect the car drivers preferences of gas station brands has been investigated. The research
has been conducted through face-to face survey technique on 384 car drivers in Istanbul. The
results displayed statistically significant relations between the respondents demographic
characteristics and gas station preferences regarding consumer choice.
Introduction
Competition in the gasoline sector, fluctuation of the oil prices and ongoing standardized
marketing mix created the need for differentiation and redevelopment for gas stations to
accommodate the consumers economical and socio-cultural evolution.
Gas stations who adopt the lateral marketing perspective diversify the products and
services from gross gas to consumers through the station market in 24 hours principle. On the
other hand, consumers prefer some kind of differentiation in gas products like that of lateral
marketing offers.
This study aims to understand lateral marketing applications effects in gas stations both
from the consumers and the stations perspectives. For that purpose, face-to-face surveys were
conducted on 384 car drivers in Istanbul. Questionnaire form was designed from current
literature and through in-depth interviews. Results point out some statistically significant
relations between demographic characteristics and gas station preferences regarding consumer
choice.

- 89 -

Literature Review
As a result of the fluctuation in oil prices; the competition in the sector, in order to
allocate the financial risk and to get re-organized for the modern customer, differentiation has
become vital for gas stations. According to Bonoma(1994); .gasoline retailing can be
described as the failure of differentiation, in that brand preference is notoriously difficult to
develop something that has all the differentiating possibilities of the ice business. At that point,
lateral marketing view can offer some solutions, for the ice businesses.
Lateral marketing defined by Kotler&Trias de Bes(2003); is a work process which,
when applied to existing products or services, produces innovative new products and services
that cover needs, uses, situations, or targets not currently covered and, therefore, is a process that
offers a high chance of creating new categories or markets. We have to describe vertical
marketing for better understanding. it works inside a market definition, applying
segmentation and positioning, modulating the current product or service in order to create
varieties(Kotler&Trias de Bes, 2003). According to Kotler&Trias de Bes(2003), comparison of
vertical and lateral marketing can be summarized as in Table 1.

Table 1: Comparison of Vertical and Lateral Marketing
Vertical Marketing Lateral Marketing
It is based on The set of needs, persons, and situations or uses
of our product
Our mission, innovating from what we want to
be as a company
The discarded needs, persons, situations or uses
of our product
Being open to redefine our mission if necessary,
but innovating from our current offer
It works Vertically, following the marketing process Laterally, out of the marketing process
In an early stage it allows Development of markets and conversion of
potential customers into current customers
Creation of markets, categories, or subcategories,
and capability of reaching targets/situations
nonreachable with the existing products
In later stage it allows Low incrementality, but it is an easy-to-sell
novelty
High incrementality, but it is a more risky option
Its source of volume is Market share of product competitors, and the
conversion of potential customers and
situations into current ones
Totally incremental, without affecting other
markets, or by taking from many other categories
market share of generic competition
It is appropriate when. Early stage of the life cycle of a market or
product(growing phase)
Low-risk strategies
Low resources available
For defending markets by fragmenting them
Mature stage of the life cycle of a market or
product

High-risk strategies
High resources available
For attacking markets from outside them(with
subtitutes)
It is current responsibility of Marketing departments Not always marketing departments, but of;
- creative agents
- entrepreneurs
- small and medium companies
- engineers, R&D departments
Lateral marketing differentiates by organizing, thinking and achieving with non-
traditional ways. As Horska&Sparke(2007) stated that; in the medium of the lateral innovation,
the marketer may be able to accelerate product acceptance. From this point of view, marketers
must know the relevant and perspective consumer insight to create the right buyer benefits
and to deliver the consumers the right reason why causing them to buy the product. Lateral
marketing concept gives new options for understanding consumer, redefining benefits and
choosing the right buying reasons especially for the businesses that are in mature stages.
Crossing those problems and applying lateral marketing solutions changed gas stations from
ordinary gas delivery retailers to profit centers. Evolution of gas stations can be summarized as;
In the early 1980s, a petrol glut brought on a price war that squeezed profit margins and
put small operators out of business. The big oil companies realized that they had to revise their
- 90 -

corporate aims. For the first time they began to take their shops seriously as profit centres.
Tobacco, fan belts and accessories were edged aside by food and drink-chocolate bars and
fuzzy drinks at first, sandwiches and coffee later. The shops became convience stores and
eventually, in residential areas, late opening mini supermarkets(Davies, 2004).
The main source of turnover for a petrol station operator is in after sales business.
There are several reasons for this: cars nowadays consume significantly less petrol, and the
commission an operator of a petrol station earns per litre of petrol is decreasing(Lamberts,
1997). Kotler&Trias de Bes(2003) sides that the shops of gas stations are today generating an
important percentage of the total earnings of these companies, since the margin of a gallon of
gasoline is near 1 percent and the average margin of the store goods is above 50 percent.
the non-petrol retailing segment of the station has evolved from being the secondary
focus to primary focus of the business; station operators are now retailers first and petrol
dispensers second. The main reason why petrol station operators throughout Europe have had to
learn to be retailers is the increasing cost of complying with stricter environmental legislation
and falling margins on the sale of petrol(Lamberts, 1997). Lateral marketing provides new
income streams by applying non-petrol retailing concepts as markets, food, cafes etc.
In other words, for gas stations, the profitability of the going concern is normally a fairly
direct function of gas sales volume. Other income streams, such as those from the convenience
store or a car wash, are often a fairly direct function of gas sales; the more gas volume, the
greater the volume of convenience store sales and car washes(Smalley, 1999). These
perspectives also point out that lateral marketing is a complement of vertical marketing.
As Steth et.al.(1999) stated that acquiring a product or service requires time and effort.
The effort includes the distance the customer has to travel to acquire the products, the hours of
operation during which the customer may conduct the exchange transaction, the ease with which
the customer can locate the merchandise, and the ease with which the customer can acquire title
to (i.e., ownership of) the product or service and consummate the exchange. Convenience value
refers to savings in the time and effort needed to acquire the product.
Concept of convenience is important for the customers. Shopping in a petrol forecourt
avoids the stressful search for a parking space in the city and also the time spent queuing at
supermarket checkouts. There are plenty of customers who are willing to pay for that kind of
convenience. This is another reason why the petrol forecourt is being transformed from the
classic filling station to a multifunctional business (Lamberts, 1997). Convenience results from
a combination of various factors as Smalley (1999) mentioned that site size, number of fuelling
stations, site location, prevailing traffic speed, required U-turns and on-site parking.
As much as the products and services offered at the station, convenience of the station in
terms of its location (town center or motorway) and the size of the station are two other
important criteria that effect the profit. For a station to have a convenient location there are some
inevitable elements which are necessary as summarized in National Petroleum News (1997) as;
service island layout, store layout, ease of facility ingress/egress, overall appearance and
cleanliness, uniformed personnel, professional signage, gasoline price clearly posted, service
island canopy, car wash, vacuum and/or free air hose, telephone etc.
Determining the gas station customers characteristics depend on many variables as
Tsamboulas et al.(2006) mention: the number of passengers in vehicle, the type of vehicle, the
trip purpose, stop reason etc. And also, for defining the gas station consumers, as any consumer,
demographic characteristics and socio-cultural features can be other dimensions. But more
specifically, the consumer buys on impulse from a forecourt shop, he/she is also attracted by
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the convenience of the shop(Lamberts, 1997). In general, non-petrol products and services
create impulse buying behavior which increase the profits of the station. Lateral marketing
applications may be furnish higher sales and profits for gas stations.
Methodology
Sampling
The purpose of this study is to understand lateral marketing applications effects on both
consumers and retailers. Sample was selected from car drivers living in Istanbul. In this study,
quota sampling which is one of the non-probability sampling techniques, was used. Automobile
brands were used as quotas (can be seen in table 2). Before fulling quotas, three filter questions
asking respondents own car brand that he drove (belongs to him/her or not(not registered for
commercial purpose), whether this car was described as automobile in Turkish laws (not LCV,
SUV or etc.) and whether the respondent himself was the gas buyer of that specified car.
Choosing a non-statistical sample implies some problems on results generalizability; it is mostly
cited that researchs explorative side is greater than descriptive side.

Table 2. Distribution of Sampling

Frequency Percentage
Alfa Romeo
1 ,3
Chrsyler
1 ,3
Dacia
1 ,3
Daihatsu
1 ,3
Rover
1 ,3
Subaru
1 ,3
Suzuki
2 ,5
Volvo
2 ,5
Chevrolet
3 ,8
Mazda
3 ,8
Mitsubishi
3 ,8
Seat
3 ,8
Audi
4 1,0
Kia
4 1,0
Citroen
5 1,3
Lada
5 1,3
Nissan
5 1,3
Skoda
5 1,3
Other Brands
5 1,3
BMW
9 2,3
Mercedes
12 3,1
Honda
13 3,4
Peugot
15 3,9
Hyundai
20 5,2
Toyota
23 6,0
Ford
25 6,5
Volkswagen
25 6,5
- 92 -

Opel
32 8,3
Fiat
74 19,3
Renault
81 21,1
Total
384 100,0
The research has been conducted through face-to face survey technique on 384 car drivers in
Istanbul. The summary of demographics are shown as in Table 3.
Table 3. Summary of Demographics
Research Design
Variables that used in this study were selected from both literature and from the results of
the in-depth interviews. Questionnaire form had been pretested on 50 car drivers. Some
questions were eliminated for convenience of respondents and preventing the misunderstandings.
According to pre-test results, final questionnaire form was formed of 6 parts which included 28
questions to measure 70 variables. First part the aim was to understand consumers gas station
brand choice ( fuel type, favourite station brand, second gas station brand preference etc).
Second part was constructed to investigate the importance of non-petrol services in favorite
station with 4 point scale (1 = not important, 4 = very important). The third part was built as a
four-point-scale to determine buying behavior not only in terms of favorite gas station brand, but
also in terms of the factors which affect the drivers gas station preferences generally ( number of
fuelling stations, service time, personnels uniforms etc). The fourth part it is aimed to
understand the consumers information sources about gas station brand again with 4 point scale
(tv, radio, w.o.m). Fifth part drivers and cars features were discovered with open-ended
questions (cars brand, cars age, drivers total drive experience.) The last part of questionnaire
it is aimed to discover drivers demographic characteristics.(age, gender, income) In this
research a 4 point asymmetric scale was used as 4 = very important, 3 = important, 2 = neutral
and 1 = not important. An asymmetric scale employed due to the fact that there was no
significant difference between not important and not very important.
Limitations
Some limitations of the research need to be noted. First, since the purpose of the study is
to understand lateral marketing applications in gas stations for consumers and retailers side,
using a non-statistical sampling can imply some problems on generalization. Second, because of
research costs, studying with larger and different samples cant be realized. And finally, results
Income Percent

Age Percent Education Percent
Upper 46,6

18-33 45,6

Uni. or advanced 43,8
Middle 43,0

34-49 40,1

High school 45,8
Lower 10,4

50 + 14,3

Primary school 10,4
Total 100,0

Total 100,0

Total 100,0

Marital Status Percent

Gender Percent

Occupation Percent
Married 61,2

Male 79,9
Private/Public 66,4
Single 39,8

Female 19,1
Other sectors 33,6
Total 100,0

Total 100,0
Total 100,0
- 93 -

of this study could not reflect all car drivers perceptions towards lateral marketing neither in
Istanbul nor Turkey.

Findings

The internal consistency of the data was evaluated by reliability analysis as shown in
Table 4.
Table 4. Reliability Analysis Results
Scale Items Cronbach Alpha Coefficient
The importance of non-petrol services in favourite station (Scale 1) 7 ,760
The importance of the factors that affect the car drivers preferences
of gas station brands (Scale 2)
23 ,816
Information sources (Scale 3) 7 ,767
As known, the minimum value of Alpha coefficient is expected to be 0.6 on exploratory
research, while the minimum value of it is expected to be 0.7 for descriptive ones (Hair et al,
1998). According to that results it can be mentioned that the level of internal consistency of this
study is satisfactory. The summary statistics for the scales can be seen in Table 5.
Table 5. Summary Statistics
Mean Std.Dev.
Scale 1
Shop in station 3,02 ,894
Restaurant in station 1,88 ,824
Caf in station 1,92 ,813
Car wash in station 2,87 ,962
Free air-water hose in station 3,39 ,753
Oil change in station 2,73 1,094
Tire fix in station 3,05 ,970
Scale 2
Trust to gas station brand 3,57 ,662
Distance to home 2,84 ,886
Distance to work place 2,61 ,961
Distance to daily route 3,21 ,786
General landscape 2,95 ,801
Number of fuelling station 2,73 ,907
Ease of entrance 3,15 ,792
Ease of exit 3,14 ,800
Service time 3,17 ,776
Private label fuel 2,49 1,074
Sales promotions 2,41 1,070
Shop in station 2,88 ,925
Restaurant in station 1,92 ,835
Caf in station 1,95 ,810
Toilets in station 3,30 ,813
Phone in station 2,23 1,056
Car wash in station 2,84 ,918
Free air-water hose in station 3,24 ,768
Oil change in station 2,74 1,030
Tire fix in station 2,99 ,927
Personnels product knowledge 2,95 ,889
Personnels courtesy 3,45 ,692
Personnels uniform 2,95 ,908
Scale 3
Television 2,66 1,027
Radio 2,26 ,987
Newspaper 2,42 ,967
Web 2,09 ,954
W.O.M. 2,81 1,106
Magazines 1,92 ,856
Bill-board 2,08 ,947
- 94 -

According to the purpose of the study, the relationships between scales and respondents
demographic profiles was tested with Chi-Square Analysis at 0.05 significance level that 28
relations discovered and summarized in Table 6.

Table 6. Summary of Chi-Square Analysis Results
Gender with Age with Education with Occupation with
Oil change in
favourite station
Oil change in
favourite station
Restaurant in favourite station Caf in favourite station
Distance to home Sales promotions Caf in favourite station Distance to home
Distance to daily
route
Shop in station Oil change in favourite station Distance to work place
Sales promotions Oil change in
station
Sales promotions Restaurant in station
Toilets in station Television Restaurant in station Caf in station
Restaurant in station Radio Caf in station Phone in station
Radio Internet Phone in station Tire fix in station
W.O.M. W.O.M. Personnels product knowledge Bill-board
Bill-board Magazines Bill-board W.O.M.
Bill-board
Female drivers give more importance to oil change in favorite station, distance to home
distance to daily route and w.o.m than male drivers. Other variables rate similar for the two
genders. Drivers among 18-33 ages rate sales promotions, shop in station, oil change in station
higher than other age groups. And also it can be mentioned that 18-33 ages mentioned that they
gather information from TV, radio, internet, wom, magazines and bill-boards, but a negative
correlation discovered in age and information sources. Drivers which have lower education level
give more importance to sales promotions, restaurant in station, caf in station and personnels
product knowledge than others. Finally, as can be seen in table 6, we can assert that lateral
marketing applications as caf, restaurant etc are important as other gas station
products/services considering the demographics.
Acquiring to a more specific understanding, an exploratory factor analyses conducted to
the factors that affect the car drivers preferences of gas station brands (scale 2). According to
,754 KMO result and Barletts Test significance in 0,000 contiuned the analyses and 23 variables
were reducted to 7 factors that explain %62,981 of total varience as can be seen in Table 7.
Table 7. Rotated Component Matrix(Varimax rotation)

Component

1 2 3 4 5 6 7
Ease of entrance ,895
Ease of exit ,885
Number of fuelling station ,710
Service time ,581
Tire fix in station ,764
Oil change in station ,718
air-water hose in station ,718
Toilets in station ,436
Restaurant in station ,852
Caf in station ,849
Phone in station ,492
Distance to work place ,836
Distance to home ,804
- 95 -

Distance to daily route ,728
Personnels uniform ,778
Personnels courtesy ,767
Personnels product knowledge ,613
General landscape ,456
Sales promotions ,691
Car wash in station ,671
Shop in station ,539
Private label fuel ,726
Trust to gas station brand ,690
According to the results of factor analysis, seven factors named as;
1.Factor ( Convenience of Station) : 4 variables: ease of entrance and exit, number of fuelling
station and service time.
2.Factor ( Non-Petrol Services) : 4 variables: tire fix in station, oil change in station, air-
water hose in station and toilets in station.
3.Factor ( Lateral Services) : 3 variables : Restaurant in station, caf in station and phone in
station.
4.Factor ( Place ) : 3 variables : distance to work place, distance to home and distance
to daily route.
5.Factor ( Personnel and Appearance of Station) : 4 variables: personnels uniform,
personnels courtesy, personnels product knowledge and general landscape.
6.Factor ( Shopping Benefits ) : 3 variables: Sales promotions, car wash in station and shop
in station.
7.Factor ( Station Brand) : 2 variables : private label fuel and trust to gas station brand.
The highest mean scores were achieved for factor personnel and appearance of station.
Second for non-petrol services and third for convenience of station. Lateral services factor
hasnt got high scores like other factors so we consider that gas stations in Turkey had some
problems about standardization of lateral services. For example, a caf or a restaurant cant be
found in every gas station. Because of that, maybe, consumers knowledge about lateral services
of stations is not enough to affect their choice.
Conclusion
Results show some significant relationships between gender, age, education and
occupation with consumers gas stations preferences and information sources. Also this study
proposes that there are seven factors that named by authors, can be affect consumers choices.
Before mentioning about summary of results and directions for future researches, some
limitations of the study should be recognized. Generality of the research is limited due to the size
and technique of the sample as a result of time and cost affects. Also this study cant reflect all
car drivers perceptions towards lateral marketing neither in Istanbul nor Turkey. But all of these
factors cant limited a chance for understanding the lateral marketing applications both
consumers and retailers sides for the future research.
According to the factors created from the importance of the factors that affect the car
drivers preferences of gas station brands scale, personnel and appearance of station, non-
petrol services and convenience of station have come out to be the most important factors.
Stations as retailers, have to create values on that factors firstly to create a chance for drivers
- 96 -

stop. After that, lateral applications can be placed for attracting the customer. But in Istanbul,
were detected problems about standardization of lateral services which decrease the knowledge
level and expectation of drivers. For more income, station managers must balance the
traditional and lateral services. Coupons or gift vouchers can be delivered for encouraging
drivers to lateral applications or lateral applications can create some advantages like free car
wash. Shops product variety or cafs and restaurants menus have to be designed on 24 hours
basis for better convenience value.
This study has some implications for the future research. For example, a new research
can be conducted to compare the differences of consumers perceptions between the gas stations
in cities and on motorways. Purpose of the trip and type of vehicle can be investigated for
discovering the effects on preferences. Researchers could also focus on stations brand
awareness or personalities influencing the consumers choices. And finally, a new research can
be covered all Turkish Gas Station Market.

- 97 -

References
Anonymous. (1997). Whos Best In The Trade At Customer Satisfaction?. National Petroleum News, 89, 7,
53 55.
Bonoma, Thomas V.(1994). Marketing Colors: Als Gas Town. Marketing Management, Vol.3, Iss.3, 16 25.
Davies, Colin. (2004). Lessons at the Roadside. Architectural Research Quarterly, Vol.8, No.1, 27 37.
Hair, Joseph F., Tatham, Ronald L., Anderson, Rolph E., Black, William, (1998). Multivariate Data Analysis.
5
th
edition. Prentice Hall.
Horska, Elena and Sparke, Kai.(2007). Marketing Attitudes Towards the Functional Food and Implications for
Market Segmentation. Agricultural Economics, Vol.53,No.8, 349 353.
Kotler, Philip and F.Trias de Bes, (2003), Lateral Marketing: New Techniques for Finding Breakthrough
Ideas, New Jersey, John Wiley &Sons Inc.
Lamberts, Winfried.(1997). Petrol Forecourt Retailing in Germany. European Retail Digest. Iss.13, 29 34.
Smalley, Steven P.(1999). Measuring the Convenience of Gas Stations. The Appraisal Journal. Vol.67, Iss.4,
339 345.
Steth, Jagdish N., Banwari Mittal and Bruce I.Newman, (1999),Customer Behavior, Consumer Behavior and
Beyond, USA, Dreyden Press.
Tsamboulas, Dimitrios; Evgenikos, Petros&Strogyloudis, Micheal-Aggelos.(2006). The Financial Viability of
Motorway Rest Areas. Public Works Management&Policy, Vol.11, No.1, 63 77.

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Consumer Atti tudes Towar ds Exper i enti al
Mar keti ng:
A Quali tati ve Study Fr om Tur key
Emrah Cengiz
Murat Erdal
Gkhan Yolac
Irfan Akyuz

Abstract
Nowadays communicative skills have become vital in the market in order to understand
both consumers and competitors. In this context, experiential marketing is an important
alternative method to create more interaction between consumers and enterprises.
Sheu et al.(2009) described; Experiential marketing is a methodology, a concept that
moves beyond the traditional features-and-benefits marketing. According to Schmitt(1999), to
achieve that; experiential marketers view consumers as rational and emotional human beings
who are concerned with achieving pleasurable experiences.
The aim of this study is to explore consumer attitudes towards experiential marketing. In
regards to that purpose, an exploratory research was used. Data was collected through focus
group discussions. According to the findings, gender and product type are important areas for
implementing experiential marketing strategies.

Introduction
Changing in market structure affects both competition conditions and economic progress
in a mutual way. Because of the changing environment, reaching to customer is being harder day
by day especially with traditional marketing tools. Companies have to understand the conditions
firstly, than find new ways for communicating with its customers. Pine&Gilmore (1998)
conceptualized those conditions as experience economy and pointed out the critical side as;
While prior economic offerings - commodities, goods, and services are external to the buyer,
experiences are inherently personal, existing only in the mind of an individual who has been
engaged on an emotional, physical, intellectual, or even spiritual level.
Nowadays, rational behavioral side in consumptions description began to decrease as
Hollbrook&Hirschmann (1982) stated that; Consumption has begun to be seen as involving a
steady flow of fantasies, feelings, and fun encompassed by what we call the "experiential view."
So, for creating company-customer interactivity and sustaining that in experience economy,
traditional marketing perspective cant provide solutions anymore. In that stage, experiential
marketing view may give a chance to firms to survive.
The aim of this study is to explore consumer attitudes towards experiential marketing.
This qualitative study with focus group interviews aims to be one of the pioneer studies in
experiential marketing research on which there is little evidence of research in Turkey.
Literature Review
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Traditional marketing has provided a valuable set of strategies, implementation tools
and methodologies for the industrial age. Now that we have entered a new era, it is necessary to
shift attention from the features-and-benefits approach advocated by traditional marketing to
customer experiences (Schmitt 1999). A new era is named by Pine&Gilmore (1998) as
experience economy. At that point, experience economys characteristics are summarized by
Petkus (2004); modern economies have evolved from the delivery of commodities to the delivery
of goods, from goods to services, and are in the process of evolving to the delivery of
experiencesas services become increasingly commodities, customer perceptions of competitive
advantage diminish, as does satisfaction the delivery of experiential market offerings involves
engaging customers in a memorable way all actions of the organization contribute to the
performance of the experiential market offering.
The main element of experiential marketing and experience economy is experience.
Experince can be defined as the total outcome to customer from the combination of
environment, goods, and services purchased (Lewis&Chambers,2000). According to
Pine&Gilmore (1998), an experience is not an amorphous construct, it is as real an offering as
any service, good, or commodity. Businesses usually create special stages for customers to
experience through different stimulations, including environments, atmospheres, and layouts
(Yuan&Wu 2008). And also the experiences created can be many things moving, thought-
provoking, attention-grabbing or just plain enjoyable as long as they are authentic and true
(Jackson 2009). According to these definitions, companies have to create offers with true and
memorable experiences for customers. Because as Yuan&Wu (2008) mentioned that;
companies sell not just products but, more importantly, good memories and experiences. On the
other hand, the customer is no longer interested in buying a product. The product, in fact, is
no more than an artifact around which customers have experiences (Prahalad&Ramaswamy
2000).
Before creating experiences by using experiential marketing concept for customers,
companies need to understand what customer experience is. In the literature a wide definition
proposed by Gentile et al. (2007) as; The Customer Experience originates from a set of
interaction between a customer and a product, a company, or part of its organization, which
provoke a reaction (LaSalle and Britton, 2003; Shaw and Ivens, 2005). This experience is strictly
personal and implies the customers involvement at different levels (rational, emotional,
sensorial physical and spiritual) (LaSalle and Britton, 2003; Schmitt, 1999). Its evaluation
depends on the comparison between a customers expectations and the stimuli coming from the
interaction with the company and its offering in correspondence of the different moments of
contact or touch-points (LaSalle and Britton, 2003; Shaw and Ivens, 2005). In summary,
consumption experience can be represent as a structure which relies on customer expectations,
not based on rational human behaviour, can be create in different levels and requires a close
interactivity between company and customer.
Experiential marketing, which is the experience economys most important instrument,
can be defined in many ways in literature. Williams (2006) described that experiential
marketing is about taking the essence of a product and amplifying it into a set of tangible,
physical, interactive experiences which reinforce the offer. Yuan&Wu (2008) cited that
experiential marketing can be seen as a marketing tactic designed by a business to stage entire
physical environment and the operational processes for its customers to experience. According
to Atwal&Williams (2009), experiential marketing essentially describes marketing initiatives
that give consumers in-depth, tangible experiences in order to provide them with sufficient
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information to make a purchase decision. Kotler&Keller (2009) stated that a large part of local,
grassroots marketing is experiential marketing, which not only communicates features and
benefits but also connects a product or service with unique and interesting experiences.
Despite different points of view, experiential marketing is a relatively new method to
create interactions between companies and customers by reinforcing the offer with in-depth,
tangible, interesting, memorable, true and unique experiences. By the experiential marketing
view, companies can find new ways from customer satisfaction to product development process.
Advantages of experiential marketing can be illustrated;
Creating experience is important to retaining existing customers and attracting new ones
(Yelkur, 2000). Prahalad&Ramaswamy (2000) argues that; the realization that the product is
subordinate to the experience will force managers to throw their old assumptions about product
development out the window. Williams (2006) mentioned that experiential marketing drove
faster results than traditional methods, with consumers suggesting it led to quick positive
purchase decisions. Leighton (2007) pointed out that this experiential view of consumer
decision making may be a better representation of consumer choice where less tangible,
hedonistic variables may be significant predictors of behavior. Gentile et al. (2007) supported as
experience plays a fundamental role in determining the customers preferences, which then
influence their purchase decisions. Yuan&Wu (2008) argued that experiential marketing and
experiential value contributing to customer satisfaction.
Drawing from extant literature, characteristics or dimensions of experiential marketing
seem to be studied in many ways. But also there are some common points. According to
Pine&Gilmore (1998) experiences have two dimensions as customer participation and the
connection (environmental relationship, that unites customers with the event or performance).
Pine&Gilmore(1999) categorized experiences by using that dimensions and named as
entertainment, educational, esthetic and escapist. Schmitt (1999) offered two essential
concepts for experiential marketing are strategic marketing modules (sensory experiences-
SENSE, affective experiences - FEEL, creative cognitive experiences-THINK, physical
experiences, behaviours and lifestyles-ACT, and social-identity experiences that result from
relating to a reference group or culture RELATE) and experience providers. Gentile et al.
(2007) proposed seven components for customer experience are sensorial, emotional, cognitive,
pragmatic, lifestyle and relational. Yuan&Wu (2008) measured experiential marketing by sense
perception, feel perception, think perception, and service quality.
Earlier studies, as mentioned above, in the literature, are generally based on giving a
selected product, place or a specific experience and its effects on customer. But in this study, in
order to explore consumer attitudes towards experiential marketing applications, the study focus
is wider than a specific product in order to due to have participants broadened insights.
Methodology
Research Design
Two focus groups were created for exploring consumer attitudes towards experiential
marketing applications. Participants were selected by using a non-statistical sampling technique
as judgemental sampling from upper income class, between 30-35 ages, living in Istanbul and
who derived benefit from experiential marketing applications at least. Groups were segmented
by gender of the participants which 6 females were clustered in Group 1 and 6 males in Group 2.
Some demographic features can be seen in Table 1.

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Table 1. Demographics of Participants
Group Participant Age Occupation Income(monthly) Education Martial
Status
1 P 1 30 Doctor 10.000 TL + University Single
1 P 2 32 Lawyer 15.000 TL.+ University Married
1 P - 3 32 General Manager 15.000 TL.+ MBA Married
1 P 4 35 Bank Manager 10.000 TL.+ MBA Married
1 P - 5 33 Architect 10.000 TL.+ University Single
1 P - 6 35 HR Manager 15.000 TL.+ Doctorate Married
2 P - 7 32 Engineer 10.000 TL.+ University Single
2 P 8 33 Brand Manager 15.000 TL.+ MBA Single
2 P - 9 33 Financial Manager 15.000 TL.+ MBA Single
2 P - 10 30 Banker 10.000 TL. + University Married
2 P - 11 30 Otel manager 10.000 TL. + University Single
2 P - 12 34 Administrator 15.000 TL. + University Married

Focus group discussions had started with the definition and concept of experiential
marketing by the moderator for creating a broadened perspective. Also, he was careful not to
prompt with examples such as consisting a specific brand or place. During the second phase,
moderator asked five main questions as;
a) Which experiential marketing applications did you derive benefit from?
b) Why did you derive benefit from experiential marketing applications?
c) In which product type, do you think experiential marketing applications can be more
important and why?
d) When you think your buying process, which elements can affect your decision except
experiential marketing applications?
e) Also after being pleased of the experiential marketing applications, have you ever
discontinued your buying and why?
First focus group discussion lasted for 95 minutes and second one did last for 90 minutes.
During the discussions, participants were encouraged to talk freely. These discussions were
recorded for transcribing later.
Findings
Participants answers are classifed as descending order for each question below. First
question aimed to understand participants awareness about experiential marketing applications
as can be seen in Table 2.
Table 2. Experiential Marketing Applications Encountered
1.Focus Group Female 2. Focus Group - Male
Cosmetics (Perfume, Shampoo) Sports Equipment(Exercise Bike)
Small Home Appliances(Hair stylers, epilatior) Car
Food ( chocolate, pudding) Electronics(Game console,cell phone,games)
Car Food(meat products, chocolate)
Clothes
Books and magazines
Electronics (Cell Phone,Notebook)
According to the first question, we noticed that variety of experiential marketing
applications perception is limited especially for males. Female participants ranking variety is
greater than males. We consider that female buying behavior process complexity and shopping
style differences between men vs. women may affect that variety. For example, as a common
experience area, one of the female participants mentioned that she usually bought a food product
after tasting it, but any of males did not validate that. Also one of the married male participants
mentioned that tasting a food product only had helped his hunger during shopping with his wife.
- 102 -

Second question was asked to encounter experiential marketing applications as draw on
Table 3.

Table 3. Reasons for Encountering Experiential Marketing Applications
Learning new products/concepts/trends Understand the quality of products
Preventing cognitive dissonance Gaining trust by using product
Gaining trust by using product Faster buying decisions
Just spend time in any shop Preventing cognitive dissonance
Second questions results showed that female participants gave more importance to
knowledge for preventing cognitive dissonance and following trends more than males.
Spending time in any shop is an interesting proposition and reflects the shopping style
differentiation mentioned in first question as well. Males seemed more rational decision makers
than women as experiencing the product/service due to understanding the quality, gaining trust
or faster buying decisions. We can also mention males rationalism because of Preventing
cognitive dissonance is not significant for males as females.

Table 4. Product Type
Cosmetics Car
Jewelery Electronics
Clothing Food Products
Food Products White Goods
White Goods Sports Equipment
Electronics
As seen on Table 4, gender effects on product type is very strong. Both of two focus
groups perception had a hedonic side. But female participants ranking as cosmetics, jewelry
and clothing has a stronger hedonic reflection than men. Males ranking has nearly same hedonic
disposition except food products because of marital status and as mentioned before like a rest
point can be caused that.

Table 5. Buying Decisions Affects Except Experiential Marketing
Brand trust Brand Trust
W.O.M. Price
Sales Representative Quality
Price W.O.M
According to fourth question that aimed to understand the factors which affected
participants buying decision process other than experiential marketing applications are brand
trust, price and W.O.M. Female participants were differentiated with sales representative
effect. Males were affected from more rational outcomes as price and quality.

Table 6. Reasons for Discarding Buying Decision
Dissension of Price vs. Quality Dissension of Price vs. Quality
Trust on Sales Representative Degree of need
Hygienic conditions especially in food
Mood
Last question was about discarding buying decision after pleasing experiential marketing
applications. Female participants performed more balanced status between hedonic and
rationalist in that question as dissension of product-quality and hygienic conditions especially
in food against trust on sales representative and mood. Male participants rationalism with
- 103 -

dissension of product-quality and degree of need was stronger. Five of the males had a
common point in only experienced the products if they had thought to buy.
Conclusion
Due to the nature of qualitative studies, there is a problem about generalization of the
results such as this study. In addition selected upper income group of consumers between 30-35
ages by judgmental sampling in this study have been another issue in terms of generalization of
the results. Despite all these constraints, it can be said that the results of this study carries
important clues for future studies in the field of experiential marketing.
According to the results, consumers benefit experiential marketing applications in a wide
range from gathering information about products and services to prevent cognitive dissonance.
However it can be mentioned that experiential marketing categories which benefit consumers are
relatively limited. Although female consumers are more involved than male consumers, it has
been identified that experiential applications such as product category and purpose of use are
similar to each other. The emergence of this situation can be explained due to the limited
experiential marketing applications in Turkey.
Except experiential marketing practices, it has been determined that brand trust, WOM,
price and sales representatives are important factors for female consumer. It is remarkable that
sales representatives are also important factor after price and quality to give up buying even
though experience product or services for female consumers. To provide real and memorable
experiences company must emphasize the role of sales representatives.Dinleyin
Hedonic and rational purchasing behavior of female and male consumer must be
considered to be held for experiential marketing applications. While companies try to create
more hedonic experiences for female consumers simultaneously try to create more rational
experiences for male consumers.
For further studies in this area, it can be recommended that different income levels and
age groups take in to consideration. Moreover consumer groups can be compared regarding to
have experience marketing applications or not. Finally to reduce cognitive dissonance, the effect
of experiential marketing can be examined.
- 104 -

References
Atwal, Glyn and Alistair Williams(2009). Luxury Brand Marketing The Experience is Everything!, Brand
Management, Vol.16, 5/6, 338 346.
Gentile, Chiara; Nicola Spiller and Giuliano Noci(2007). How to Sustain the Customer Experience: An
Overview of Experience Components that Co-Create Value with Customer. European Management
Journal, Vol.25, No.5, 395 410.
Jackson, Kevin(2009). Influencing Behaviour Towards a Brand Through Experiential Marketing and
Sponsorship. Journal of Sponsorship, Vol.2,No.2, 164 169.
Kotler,P.&Keller, K.L.(2009), Marketing Management,13
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Stor e I mage and the Effects on Consumer s
Pur chase I ntenti on: A Study Fr om Tur key
Emrah Cengiz
Gkhan Yolac
Irfan Akyuz
Abstract
Store image refers to consumers global impression of retail store. In this context,
consumers purchase intentions can be influenced by the store image. So it encompasses many
characteristics such as physical environment of the store, product and service quality. Today,
store image is one of the main reason for companies to achieve and sustain competitive success
For this reason retailers must understand importance of store image to compete with worldwide
stores globally.
On the hand purchase intention can be define as plan to purchase a special goods or
service in the future. In the other words purchase intentions explains consumer preferences and
buying behavior. Consumers purchase intentions have a direct relationship with store image.
This relationship between store image and purchase intention have been investigated in the
related literature.
The purpose of this paper is to investigate the store image and the effects on consumers
purchase intention. A survey is designed to obtain consumers purchase intention and store
image. The paper also empirically tests for relationship between store image and consumers
purchase intention. Data were gathered in Turkey.
Introduction
Store image and purchase intention have been important concepts in marketing among
both academicians and practitioners. In todays global market which is changing and developing
so rapidly both store image and purchase intention still have growing interest.
Store image will help consumer to get better understanding of the retail store and making
buying decisions. On the other hand, positive store image will help company to obtain higher
levels of marketing performance. For instance, store image will increase profitability through
increased sales. In other words, positive store image associated with consumers whole
impression on a retail store, reduces company risks by directing customers for buying products.
Purchase intention focuses on consumers global evaluation of a product, service and
attitude towards a brand. Moreover purchase intentions are related with future buying and store
image effects on purchase intention are so important. Better store image can lead retailer to
understand the effects of consumers purchase intentions.
The purpose of this study is to understand the relationship between store image and
purchase intention in the retail stores in Turkey.

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Literature Review
Store Image
The concept of store image is described as The store personality or image the way in
which the store is defined in the shoppers mind partly by its functional qualities and partly by an
aura of psychological attributes in a pioneering study by Martineau (1958). Over time, this
definition which has been extensively used in literature (Doyle and Fenwick,1975;
Lindquist,1975 ; James et al.,1976; Jain and Etgar1977; Sirgy and Samli,1985; Zimmer and
Golden,1988-; Van der Heijden and Verhagen,2004).
The American Marketing Association (AMA) describes store image from two different
perspective (Chen et al.;2009). The first description depends on consumer behavioral perspective
and other one depends on retailing. From the point view of consumer behavior perspective AMA
defines store image as the total of what consumers think about a particular store. According to
some authors store image is consumers global impression of a retail store (Zimmer and Golden
1988; Keaveney and Hunt,1992). From retailing perspective store image is defined as a
shoppers mind. This definition is about the stores physical environment. Some academicians
have different points of view about store image. These are from cognitive perspective (Kunkel
and Berry,1968) and affective factors perspective (Mazursky and Jacoby1986). Researchers
explained multiple aspects and dimensions of store image. Store image identified as a
combination of a stores tangible or functional and intangible or psychological attributes
(Stephan S.Porter,1997). Lindquit(1974) and Zimmer and Golden(1988) evaluated some
dimensions of store image (quality of goods, customer services, physical environment and
atmosphere of the store). Store image is defined by Bloemer and Ruyter (1998) as the complex
of consumers perceptions of a store on different attributes. Store image, according to Schiffman
and Kanuk (2007) influences the perceived quality of products and decisions of consumers as
where to buy.

Purchase Intention
Purchase intentions have been widely used in regarding consumer research and consumer
behavior literature. Purchasing represents what consumers think about their willingness to buy
(Blackwell, Miniard and Engel, 2001). According to these authors purchase intention is a kind of
subjective judgment that is related for future buying behavior. In other words, purchase intention
is a cue for what consumer would like to buy in the future. Another definition of purchase
intention is shortly, the possibility for consumers to buy a product (Dodds, Monroe and Grewal
1991). According to Shao, Baker and Wagner(2004) purchase intention refers to buy a product or
to patronize a service firm. Some authors agree that willingness to buy is defined as the
likelihood that the buyer intends to purchase the product (Grewall, Monroe,and Krishan, 1998;
Dodds ,Monroe and Grewall, 1991). Morwitz,Johnson,and Schmittlein (1993) and Sheppard,
Hartwick and Warshaw (1988) stated that purchase intention is an reasonable agent for an actual
purchase.
In informal in-depth interviews conducted by Mano (1999), as to reasons leading to
shopping , a lot of consumers said that , in addition to buying what they need, they shop
because they may enjoy browsing, bargain hunting , learning about the marketplace, or,
simply, because they enjoy shopping, per se. These consumers also said that they shopped in
order to escape boredom or their everyday problems, to hangout, to see and be seen, to
meet people to avoid people, or to kill time. So, relationship between store image and purchase
intentions can be used to predict actual purchase behavior.
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Methodology
Sampling and Data Collection
Our sample consists of both men and women who were interested in purchasing product from
both shopping center and outlet center. In this study convenience sampling was conducted. The
data were collected at the end of August 2010 via e-mail. 250 questionnaires were sent by e-mail.
In all, 238 questionnaires were completed but 12 questionnaires were eliminated. The age range
of the respondent mode was 29-38 years. Of the respondents 47,9% were male and 52,1%
female. Summary of demographics can be seen in Table 1.

Table 1. Summary of Demographics
Income
Percent
Age
Percent
Education
Percent
1500TL less 54,1

18-28 37,4

Uni. or advanced 79,4
1500-4000TL 36,2

29-38 41,6

High school 17,2
4001 TL+ 9,7

39 + 21,0

Primary school or less 3,4
Total 100,0

Total 100,0

Total 100,0

Marital Status
Percent
Gender
Percent Occupation Percent
Married 55,4

Male 47,9
Private/Public 68,0
Single 44,6

Female 52,1
Other sectors 32,0
Total 100,0

Total 100,0
Total 100,0
Aim of this study is to determine the relations between store image and purchase
intension in shopping centers and outlet centers. At the same time, this study investigates
consumers store image perceptions between two kinds of retail stores.
Measurement
Measures validated in prior research were used.
Store Image. Store image were measured based on seven items scale, adopted from
Grewal et al.(1998).The scale assessed consumers perception of the store including dimensions,
such as service, product quality, atmosphere and shopping experiences. Items were measured by
a 5 point scale which 5= strongly agree to 1=strongly disagree.
Purchase Intention. Purchase intention were measured on a three items scale, adopted
from Dodds, Monroe, and Grewal (1991) and Grewal et al.(1998). Items were measured by a 5
point scale which 5= strongly agree to 1=strongly disagree.
Scale items and descriptive statistics can be seen in Table 2. The highest mean is found in
knowledgeable salespeople variable in two scales. Also, helpful salespeople and good
overall service are ranked respectively after the first variable. But variables scores are greater
in Scale 1 than in Scale 2.

Table 2: Descriptive of Scale Items
Mean Std. Deviation
Scale 1 (Shopping Center Store Image)
The shopping center store image..
Would be a pleasant place to shop A1 4,18 0,83
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Attractive shopping experience A2 4,06 0,83
Good store image A3 4,21 0,77
Good overall service A4 4,25 0,76
Carry high quality merchandise A5 3,89 0,94
Helpful salespeople A6 4,40 0,75
Knowledgeable salespeople A7 4,52 0,79
Scale 2 ( Outlet Center Store Image)
The outlet center store image..
Would be a pleasant place to shop C1 4,04 0,91
Attractive shopping experience C2 3,86 0,88
Good store image C3 4,00 0,87
Good overall service C4 4,07 0,84
Carry high quality merchandise C5 3,77 0,94
Helpful salespeople C6 4,34 0,78
Knowledgeable salespeople C7 4,45 0,77
Limitations
According to the non-statistical sampling technique, results can not be generalize. On the hand,
this research has an exploratory side as descriptive side as well. Data were collected via internet
and so that gave way reaching the customers who were using internet. According to this situation
this studys results cant reflect the opinions neither Istanbul nor Turkey, but also it has a chance
for pioneering future studies, especially in Turkey, by investigating the effects of store image on
purchase intention.
Findings
Scales reliability was tested by reliability analysis with SPSS 17.0 programm as can be shown in
Table 3.
Table 3. Shopping Center Store Image Scale
Scale N of Items Cronbachs Alpha Coefficient
Shooping Center Store Image 7 ,801
Outlet Center Store Image 7 ,816

According to the reliability analysis results, level of internal consistency can be accepted
(Nunnally and Bernstein, 1994).
Depending on this studys aim, Pearson Correlation Analysis was conducted to determine
the relations between store image and purchase intension both of shopping centers and outlet
centers. In Table 4, we discovered 13 significant relations between store image variables and
purchase intention variables. Only Helpful salespeople and Knowledgeable salespeople
variables had no significant relations with purchase intention. We considered that these variables
can be main factors which consumers think a retailer have with no excuse like a hygiene
factor. B2 variable has the strongest purchase intention expression but despite this generally has
weaker relations between store image variables. In pari materia also can be said that would be a
pleasant place to shop and attractive shopping experience had a lower purchase intention
probability than other variables for shopping centers consumers. Good store image, good
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overall service and carry high quality merchandise variables relatively, could cause a better
purchase intention probability.

Table 4. Correlation Between Shopping Center Store Image and Purchase Intention
B1 B2 B3
A1 Pearson Correlation 0,206 0,130 0,132
Sig. (2-tailed) 0,001 0,045 0,042
Sig. (2-tailed) 0,000 0,017 0,046
Sig. (2-tailed) 0,020 0,003 0,003
Sig. (2-tailed) 0,355 0,002 0,001
Sig. (2-tailed) 0,136 0,032 0,007
Sig. (2-tailed) 0,112 0,465 0,532
A7 Pearson Correlation 0,086 -0,069 -0,074
Sig. (2-tailed) 0,188 0,286 0,255
B1 = I would consider buying this product at this store.(Low probability)
B2 = I will purchase this product at this store. (High probability)
B3 = There is a strong likehood that I will buy this product at this store.(Average
probability)

Investigating the relations between outlet centers store image and purchase intention,
findings were differentiated. For instance, would be a pleasant place to shop variable evaluated
with a higher probability by outlet centers consumers than shopping centers consumers. Also,
helpful salespeople and knowledgeable salespeople variables had a significant relation with
purchase intention as not discovered in first correlation analysis as can be seen in Table 5.
Good store image and carry high quality merchandise variables has a greater relation with
purchase intention than shopping centers. Only attractive shopping experience and good
overall service variables had similar relations with purchase intention. In other words,
consumers expectations and purchase intention probabilities changed from shopping centers to
outlet centers especially in salespeople variables (C6-C7), good store image and carry high
quality merchandise variables.

Table 5. Correlations Between Outlet Center Store Image and Purchase Intention
D1 D2 D3
C1 Pearson Correlation 0,147 0,211 0,248
Sig. (2-tailed) 0,023 0,001 0,000
Sig. (2-tailed) 0,000 0,003 0,002
Sig. (2-tailed) 0,029 0,005 0,018
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Sig. (2-tailed) 0,371 0,001 0,000
Sig. (2-tailed) 0,006 0,000 0,000
Sig. (2-tailed) 0,017 0,362 0,286
Sig. (2-tailed) 0,001 0,869 0,633
B1 = I would consider buying this product at this store.(Low probability)
B2 = I will purchase this product at this store. (High probability)
B3 = There is a strong likehood that I will buy this product at this store.(Average
probability)
According to the secondary purpose of the study, Paired Sample T-Test was conducted to
determine the differences between shopping centers and outlet centers store images at %95
confidence level.
H
0
: There is no significant difference between shopping centers store image and outlet
centers store image.

Table 6. Paired Sample T-Test Results

t df
Sig.
(2-tailed) Mean Std. Deviation
Std. Error
Mean
Pair 1 A1 - C1 0,13866 0,73612 0,04772 2,906 237 0,004
Pair 2 A2 - C2 0,20168 0,73582 0,0477 4,228 237 0,000
Pair 3 A3 - C3 0,21429 0,6498 0,04212 5,087 237 0,000
Pair 4 A4 - C4 0,18067 0,73843 0,04787 3,775 237 0,000
Pair 5 A5 - C5 0,12605 0,77465 0,05021 2,51 237 0,013
Pair 6 A6 - C6 0,06303 0,66261 0,04295 1,467 237 0,144
Pair 7 A7 - C7 0,07143 0,70497 0,0457 1,563 237 0,119

According to the Paired Samples t-Test results, 5 significant differences were found as
seen Table 6. The null hypothesis accepted which means consumers evaluate the store images of
shopping centers and outlet centers similarly in pair 6 and 7. For a depth understanding, sample
statistics were shown in Table 8.
Table 7. Paired Sample Statistics
Mean N Std. Deviation
Pair 1 A1 4,1807 238 ,83497
C1 4,0420 238 ,90842
Pair 2 A2 4,0630 238 ,83199
C2 3,8613 238 ,88213
Pair 3 A3 4,2101 238 ,76720
C3 3,9958 238 ,86905
Pair 4 A4 4,2521 238 ,75995
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C4 4,0714 238 ,84140
Pair 5 A5 3,8950 238 ,94215
C5 3,7689 238 ,93748
Pair 6 A6 4,4034 238 ,74990
C6 4,3403 238 ,77795
Pair 7 A7 4,5168 238 ,79405
C7 4,4454 238 ,77075
Consumers shopping centers store image perceptions are higher than outlet centers
store image. Another words, carry high quality merchandise, good overall service, good
store image, attractive shopping experience and would be a pleasant place to shop variables
means greater in shopping centers than outlet centers. But also consumers expectations about
helpful salespeople and knowledgeable salespeople are important and very close for both
shopping centers and outlet centers.

Table 8. Shopping Centers Independent Sample T-Test Results
Levene's Test for Equality of
Variances

t-test for Equality of Means

F Sig. t df Sig. (2-tailed)
A1 Equal variances assumed 0,00134 0,970 0,247627 236 0,804
Equal variances not
assumed
0,247281 232,78 0,804
Equal variances not
assumed
0,802394 222,22 0,423
A3 Equal variances assumed 2,902114 0,089 -0,51512 236 0,606
Equal variances not
assumed
-0,51144 221,82 0,609
Equal variances not
assumed
-0,21366 226,15 0,831
Equal variances not
assumed
-0,26945 221,34 0,787
Equal variances not
assumed
-0,86729 233,97 0,386
Equal variances not
assumed
0,630921 205,42 0,528

As seen on Table 8, an independent sample t-test was conducted for comparing the
differences between male and female consumers store image perceptions. The results showed
that there were no significant differences between two groups in evaluating shopping centers
store image. Also another independent sample t-test used for outlet centers store image
comparison by gender and found no significant difference between two groups as well. In
generally, it can be mentioned that female and male consumers evaluated shopping centers store
image and outlet centers store image as similar.
Conclusion
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The retail store image is a combination of many different attributes. These are
environmental factors, services, and so on. Different stores have different images. Retail store
image can influence consumers buying decision. Positive relationship between store image and
consumer purchase intentions is important (Grewal et al., 1998). Store image affects purchasing
decisions, such that the better the store image, the better the perceived shopping environment and
service quality, consequently lending greater credibility.
Good store image, good overall service and carry high quality merchandise variables
were evaluated more important than other variables by shopping centers customers. On the other
hand, salespeople variables have a greater importance in outlet centers customers purchase
intention. Also outlet centers customers pointed out that a pleasant place to shop variable had
an important affect on their purchase intention. In this context, customers purchase intentions
and expectations change depending on retailers type. In addition, it can be said that outlet
centers managers have to behave more consciously regarding salespeople.
The differences between outlet centers and shopping centers store images were
investigated. As a result of this investigation these differences which mentioned above were
underlined. Especially shopping centers customers expectations are higher than outlet centers
customers. However, in both of customer types salespeople are perceived as an important
variable. Surprisingly, both female and male customers evaluate store image similarly.
As a conclusion, there is a relationship between store image and purchase intention both
of shopping centers and outlet centers retail store. This study also examined that differences
between shopping centers and outlet centers store image. This study shows that the relationship
between store image and purchase intention is positive as stated in past research.
Our study provides directions for future research in the area of store image effects on
purchase intentions. Future research must investigate effects of location, brand image and price
sensitivity on purchase intention rather than only the store image effect. And finally, a new
research can be implemented for other types of retailing.

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Potlatch and Postmoder n Consumpti on: Can a
Synthesi s Lead to a New Under standi ng of the
Mar keti ng Exchange?
Dennis E. Clayson
Abstract
The Native American peoples of the Northwest engaged in a system that appears on the
surface to be an exaggerated form of conspicuous consumption, but with cultural and economic
differences that may clarify our own societys penchant for waste. The key ingredient in this
system was a potlatch. In the potlatch, status was conferred upon an individual or family
based on how much they could give away. In other words, a persons status was determined not
only by the material properties he could control, but also by his ability to survive after making
a very public display of the amount he could lose. This system is contrasted with the Western
postmodern concept of consumption and gift-giving and is found to be dissimilar in a number of
ways. Still, a better understanding of cultural differences in exchange practices would benefit
both theory and research in modern conspicuous consumption.
Background
The present study investigates the phenomenon of conspicuous consumption and gift-
giving from a potlatch model. Specifically, the ritual gift-giving of the indigenous peoples of
northwestern North America is reviewed to contrast and compare two systems from entirely
different cultures that appear on the surface to be related.
Before the current recession, examples of conspicuous consumption appeared regularly in
the news. A Manhattan establishment was selling ice cream sundaes for $1,000 each. The
dessert consisted of five scoops of ice cream rolled in 23-karat edible gold leaf. Apparently there
were customers, because in three years, roughly 100 of the sundaes were sold (Knadler 2007).
Not to be outdone, a Sri Lankan resort was charging $14,500 (in a country with an estimated per
capita income of $4,700) for what it called the world's most expensive dessert, a fruity
confection topped with a chocolate sculpture and a gigantic gemstone (Mercury News 2007).
For the traveler, the Atlantis Bridge Suite has a top rate of $25,000 per night, according to their
reservations site, while the President Wilson Hotel in Geneva will provide a suite for 26,500
Euros per night.
It has been reported (Grossman 2008) that some wealthy families will spend tens of
thousands of dollars for childrens parties. There are certain companies that will arrange each of
these events, which usually take as long as six weeks to plan and cost as much as $10,000. FAO
Schwarz, the New York City toy retailer, rents out its store several nights a week for parties. The
base cost is $25,000. Even more extreme is the $10 million that former defense contractor David
H. Brooks of Long Island reportedly spent in 2005 on his daughter's bat mitzvah. The Sultan of
Brunei reportedly celebrated his 50th birthday with a party that cost $27.2 million in 1966
dollars. American socialite Paris Hilton supposedly celebrated her birthday with a worldwide
extravaganza that cost $75,000 per guest (Ellis 2009).
- 115 -

Chelsea Clinton was married this summer in a wedding estimated to have cost over $2
million and radio host Rush Limbaugh married for the fourth time in a lavish affair that included
over 400 guests being serenaded by Elton John, who reportedly received a million dollars for his
services (Silverman 2010). Fifty additional security guards had to be hired just to protect the
affair. It is interesting to note that most sources politically sympathetic with the Clintons or with
Limbaugh did not mention the cost of the weddings.
Other examples of excess spending involve more common people in functions that are
infrequent but shared by most people within a given culture. The average cost of a wedding in
the United States increased 73 percent between 1990 to 2005 (White 2007). Just before the latest
recession, U.S. couples spent $20,398 on average for their weddings, while their wedding budget
was typically 50% less than the amount spent. This does not include the cost for a honeymoon or
engagement ring (Cost of wedding 2009). The New York Times reported one wedding at which
the flowers alone were priced at $27,435. The bride didnt like the color of the flowers and sued
the florist for more than $400,000 in restitution and damages (CNN.com 2007). These examples
are not restricted to the United States. It is estimated that the average cost of weddings in the UK
and in Ireland now exceed $30,000 (Wong 2005). According to The Wedding Report, an
analysis by an Arizona-based research firm, the average amount couples are spending on their
wedding is expected to drop because of the economy, decreasing at least 10%, but still costing
about $21,814 in the western part of the United States (Overfelt 2009).
Prom night for high school students is currently costing parents $3,000 and up (Reese &
Strauss 2004).
On the other side of life, the cost of a funeral has become one of the three or four most
expensive consumer purchases that an average family will make. Traditional funerals can cost
upwards of $15,000 (Funeral planning 2009), with the basics of funeral, casket, and vault costing
about $6,000 before any other extras are added (Funerals 2009).
There are several explanations given to explain what is happening in these examples. One
suggests that hedonistic materialism seen in post-industrialized mass culture socializes people to
maximize consumption and personal pleasure. An alternative explanation states that individuals
are demonstrating their wealth and position by what they can afford to waste. The third is a
combination of the two, which would state that individuals are gaining hedonistic satisfaction
and at the same time, demonstrating their social status by what they can consume. Over 100
years ago, Thorstein Veblen published a book describing what he called conspicuous
consumption. People could gain status and rank by consuming goods that others could not
afford. Veblen (1902) suggested that instead of rank being shown by strength, aggressiveness,
resources, and lineage typical of societies based on scarcity, it could now be established by
consumption. He mentioned the potlatch as an example, making it equivalent with balls and
other social activities. Although both conspicuous consumption and potlatch are mentioned in
marketing sources and occasionally in advanced classes such as Consumer Behavior, is this
comparison valid? A detailed analysis of both will show that conspicuous consumption and
potlatch, while appearing similar on the surface, are distinct ritual systems. The similarities
appear primarily because of cultural confusion (Ringel 1979).
Potlatch
Historical Perspective
The peoples of the northwestern coast of North America had a unique culture, complete
with an economic and property system that was singular among Americas indigenous peoples.
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There were numerous tribal groups, starting with the Tlingit, who occupied the straits and islands
that now constitute the southern part of Alaska. Descending south, there were the Haida on
Queen Charlotte and Prince of Wales Islands, the Tsimshian, the Haisla (Heiltsuk), the Bella
Coola (Nuxalk), the Kwakiutl (Kwakwakawakw), the Nootka (Nuu-chan-nulth) on the western
shores of Vancouver Island, and the Salish (Xwe Nal Mewx) on the inner side of British
Columbia, roughly in the area of modern day Vancouver.
In the United States, the Olympic Peninsula was the home of the Makah, Klallam,
Quileute, Quinault, Twana, and Chemakum. Geographically, the Peninsula was so isolated by
water and recent glacierization that 35 unique species of plants and animals are found only there
(Wray 2003). Even though there was considerable trade and interaction between these tribes and
the northern tribes, their history and traditions have been largely ignored.
In general, except during exceptional times, these tribes had one of the highest material
standards of living of any North American indigenous peoples. They lived in an area of
abundant food both from the land and especially from the sea. They had plentiful natural
resources and highly skilled craft persons who turned various wood, copper, and animal products
into functional objects and works of art. The tribes had highly developed storage techniques, and
were known for being hardworking and entrepreneurial, creating extensive trading systems
(Codere 1966). Because of this abundance, during the wet and cool winter months, some tribes
stopped almost all economic activity and became preoccupied with the ceremonial.
This surplus did not seem to produce a leisure class, but it did make possible a defining
characteristic of the culture. The peoples of the Northwestern Pacific coast were remarkable in
their preoccupation with social rank, which seemed to infuse all aspects of life. Most social
positions were hereditary and even though numerous (there were about 600 positions of status
with the Kwakiutl), there were not enough to go around. The importance of these positions to
someone outside the culture is difficult to put into adequate perspective. Status and property, as
in a Western culture, went hand in hand, but the nature of property to the indigenous people was
different. Property to the Coastal tribes consisted of physical objects such as boats, but more
importantly, it also consisted of names, songs, dances, stories, and social associational patterns
that determined everything from work conditions to marriage. Even supernatural spirits appeared
only to those who had the proper hereditary claims (Codere 1966). Land was not considered to
be property, but the right to use that land for any given purpose was proprietary. To a large
extent, these positions were maintained through a property distribution of the potlatch (Rosman
& Rubel 1972).
The potlatch was a social event that marked every important aspect of life. Death, the
transfer of hereditary power, marriage, coming of age ceremonies, change in family status,
naming, recording of oral history, and even warfare were occasions for a potlatch. In some
instances, a potlatch was required to right an insult or even an embarrassment. William Beynon
recounts an incident in which he was addressed in a potlatch by a deceased uncles name, but he
had not yet assumed the name in a formal potlatch so this was perceived as an insult. About the
same time, a group of clansmen were caught between the piles of a bridge in a boat until the tide
went out. Some observers remarked, We saw a wolf hanging up under the bridge (Beynon
2000, p. 9). The clan was obliged to give a feast at which he could assume the uncles name and
the insult of the bridge incident could be wiped away.
Any given potlatch might take months or years to prepare. The basic social structure of
the Coastal tribes consisted of an extended family group, or numaym. At its core, the potlatch
reaffirmed the social, political, and economic activity of an extended family. Unlike the
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leadership positions of a Plains Indian group, a tribe had many chiefs, each essentially a head
of a family group. The chief with the most status could gain power over other heads of
households. The closest analogy with which we may be familiar would be a godfather in a
Sicilian family. The potlatch was the primary means to bear witness, record changes in family
status, and distribute wealth (Mellish 2002). Those invited to a potlatch were obligated to
reciprocate in a potlatch of their own or lose status.
The primary function of a potlatch was not to give away wealth but to validate claims. As
stated by Roth (2002), the giving of goods is a ceremonially and politically necessary component
of the ceremony, but its primary purpose was (is) the symbolic business of keeping names and
other sacred privileges and powers moving from one generation to another. Feasts are formal
events hosted by a House, they are the venue within which the group presents its rights for
validation by guest chiefs, and they mark all changes in social structure (Beynon 2000, p. 31).
Or as Barnett (1938, p. 249) so simply observed, the potlatch is a congregation of people,
ceremoniously and often individually invited to witness a demonstration of family prerogative.
The gifts given to guests serve as a type of payment for serving as a witness (Wolcott 1996). As
a daughter of a Haida chief expressed to the writer, why wouldnt a person be paid to witness
and validate an important event?
Hoyt-Goldsmith (1997) describes a modern potlatch held in the 1990s among the
Tsimshians. There was a feast every night for over a thousand people. On the first day of the
potlatch a small ceremonial totem pole was raised, followed on the last day with a large
memorial pole, which took an entire summer to create. Each night, property was named and
dedicated. New members were adopted into the tribe and given names, and dances and songs
were displayed. Every person who attended was given a gift. Each night a selected house
donated money that was distributed to attendees who were not members of that family. This
distribution seemed to be rather static, with no particular family benefiting. However, donations
were seen as a method of honoring family ancestors. In fact, these modern potlatches were
mostly symbolic, and functioned mainly to reinforce group identity and tribal history and pride.
As an example of the symbolic nature of a potlatch, a short list of what can be validated
as property from the Tsimshian perspective is given below in Table 1.
In addition to their social and political ramifications, potlatches were a fundamental
element of a complex economic system. To fail to invite someone of high rank could be taken as
an insult (Adams 1973). If invited in the proper fashion, a numaym (a group headed by a chief,
members of which are typically related patrilineally or matrilineally through a mother, aunt, or
wife of a chief) could not refuse to attend without creating an insult that could lead to war.
The wealth received during the potlatch obligated the recipient to have a potlatch of their
own and return the wealth with interest, or lose status and position. The system at its best
constituted a redistribution of wealth, and also constituted a type of insurance program, but with
prohibitive interest rates. Using a blanket as a unit of exchange might create the following

Table 1 Property as Seen by the Tsimshian
House: The corporate group that has the rights and responsibilities: among the Tsimshian
people, only a matrilineal house can transact the business related to names and crests. Common
to all tribes, this business must be conducted at a public feast, which will be witnessed by the
chiefs of other houses.
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Crests: Images which encapsulate and provide visual record of the major historical events
experienced by the ancestors of the group; mechanisms for managing crests include careful
arrangement of marriages, adoptions, and public proclamations of successors and their rights.
Halait: Power demonstrations: Specific non-crest powers owned by Houses, which can
be dramatized in ceremonies. Halait powers can be symbolized by dances, masks, puppets, etc.,
all of which demonstrate spiritual powers. They can also include riddles and jokes. These
portrayals of halait powers require a certain level of understanding that connect generations. A
child may see only surface events, young people grow and experience more, including
performing. Eventually their comprehension is deepened and the significance of the metaphors
reveals itself to each persons understanding and the spiritual force of each performance and its
link to the power of the House becomes manifest (Beynon 2000, p. 29).
Naxnoxs: Inherited named performance privileges.
Adaox: The verbal record of the events, usually evoked in songs; family-owned history
of the origin, migrations, settlements of the Houses, and how the clan obtained their crest and
powers. They are the effective deeds to territories, names, and crests.
Ayuks: The named specific powers or privileges drawn from the adaox to which a house
has rights or claim, and which may be represented in a physical form such as robes, totem poles,
and other regalia. The physical objects themselves are called dzepk.
Scenario: A gave B two blankets. The next year B is obligated to give A four blankets.
In the 3
rd
year, A gives B eight blankets. B now must find 16 blankets to give to A in year five
(from a biography of Charles Nowell, Ford 1941). This is essentially a 100 percent APR, and
even with a dramatic increase in wealth, the demands are unlikely to be met over a long period of
time. It is essentially a credit system that is somewhat similar to the current American penchant
for debt. It was, however, very efficient in producing hierarchal structures dependent upon
wealth. Property could not only serve to maintain status, it could also be used to destroy
enemies. This was especially true with the Kwakiutl, for which the word for potlatch was p!Esa
which literally means to flatten (Codere 1966), but was less true for some other tribes. It has
been suggested by American conservatives that President Reagans approach to the Soviet Union
was to outspend them to the point of defeat. This would have been easily understood in a culture
of potlatch.
The potlatch system did not collapse, because it contained a safety valve in the form of
symbolic currency. Unique to this culture was a copper. A copper was literally a thin,
shield-shaped copper plaque that was painted and decorated. Some were two or three feet tall
and about a foot wide. Each was unique and each had a name. Its value was totally derived from
its history, not by any intrinsic worth of the copper itself. Each copper, known by its name,
and much like modern currency, reflected the total value of the transaction it represented.
Herskovits (1952) referred to them as depository of value, and they could be seen as analogous
to bank notes. As long as two rivals could match each other, the system was profitable to both
at a rate of return. Evidently one rival would simply destroy a copper. If his rival could not
match this with a similar destruction of credit by throwing it into a fire or into the sea, he was
disgraced, even though he might still be wealthier in actual property (Codere 1966). Thus,
potlatching not only constituted a redistribution of wealth, but it could also include the
destruction of property to re-establish the reality upon which that wealth was based.
Preparation for a Potlatch could be complex and long lasting; in some cases, the
preparations could go on for years. Not only would the house be engaged, but gifts and
contributions for the potlatch could be received from related houses and family. Even here, the
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symbolic and ceremonial functions can be complex. Beynon (2000) itemized the gifts that came
into a single potlatch, some of which, in addition to those outlined above, are so traditional that
they have names. For example, there is ademnaks, which is a contribution in honor of ones
spouses crest that is not returned or repaid. Another gift can be given to honor ones fathers
crest, and the grounding gift, which is given so that all guests will be gifted equally at the
Potlatch. There are contributions which must be paid back to the givers, and those for which one
would never expect a repayment. It is one of the duties of chiefs and elders to know the complete
protocol, and make sure there are no breaches of tradition and etiquette. When asked by the
writer how all this could be known, a Haida replied that the elders and chiefs simply knew.
Although there was an obligation for guests to reciprocate gifts received in a potlatch,
ironically to Western thought, it was not necessarily thought of as an exchange of wealth, but as
a method of retaining those goods that should never be exchanged, i.e., obligations to ones own
numaym ancestors to retain hereditary prerogatives and their halaits (Mauss 1967; Roth 2002).
As Roth proclaims, For Tsimshians, the spirit is not in the gift but in the name, in the land, and
in the heirloom, to be bequeathed to a successor but never given away (p. 127). The complete
nature and obligation of the gifts show the symbolic and ceremonial nature of the transaction.
Everything is tied together human, animal, land, object, and symbol. It is as if everything has
a personality, or soul or power, and that is a permanent possession of a clan.

Change
These examples are taken mostly from the nineteenth and twentieth century accounts
written by non-indigenous or Westernized writers. There is some evidence that potlatch was
changed into a more negative system by European contact. There were two central reasons for
this change. First, the indigenous peoples of the Northwest were entirely economically self-
sufficient. They supplied their own goods and, in the potlatch, their own economic drama. The
traditional goods were remarkably standardized because of culturally determined standardization
of shape, form, and function, and each carried important symbolic significance (Ringel 1976).
Furthermore, most of these goods could be produced by almost any member of society. The
Europeans introduced new items that could be used as units of exchange, such as blankets,
clothing, iron, and muskets, all of which could be seen as valuable property, but each being
beyond the capability of local production. These items broke the connection between object and
symbol. A skin was not only a covering, it conveyed the mythical and spiritual relationship
between man and animal. A blanket was just a blanket. Second, disease literally decimated the
Coastal tribes, destroying social orders and emptying holders of hierarchical rank much as did
the plagues earlier in Europe, but to a much more dramatic extent. It has been estimated that the
pre-contact native population in this region was over 250,000. By the 1920s, the Canadian
government gave a count of slightly over 30,000 total survivors. Table 2 shows the decline in the
Kwakiutl population, which wasnt arrested until 1924. It has been estimated that only 6.1 to
4.3% of the pre-contact population remained (Codere 1966).

Table 2 Population Decline of the Kwakiutl: 1830 to 1925

Year Pandemic Canadian Census Count
1830 24,000 (estimated)
1837 Smallpox
1853 7,000
1876 Smallpox
1877 Smallpox 3,000
1880 2,500
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1881 Measles VD
1882 Measles VD 2,264
1884 1,889
1890 Influenza 1,898
1891 Influenza
1892 Influenza 1,678
1903 Pneumonia TB
1904 1,317
1908 Measles
1910 1,238
1924 TB 1,039 _

This decline was felt in other tribes as well. In a personal conversation, a member of the
Makah people recounted that his nation, which once had villages of several thousand each, was
once reduced to less than 400 people. Instead of eliminating cultural expression, the population
decline seemed to exaggerate certain tendencies already present. This was especially true among
the Kwakiutl. There is evidence that it stimulated potlatching, The population decline, contrary
to the usual and reasonable expectations, seems actually to have contributed toward Kwakiutl
success in maintaining cultural identity (Codere 2000, p. 61). This, however, was not seen
universally. Potlatch customs among the various tribes differ. The Makah of western Washington
State is of special interest. The traditional literature never mentions potlatch with the Makah, but
in private conversation with tribal members, I have been told that potlatch was a tradition, a
position reinforced by Wray (2003). This tribe is of special interest for four reasons. Potlatch
establishes power linkages; many of the more northern tribes have hereditary lines through
sisters sons. A chiefs oldest sisters oldest son would replace the chief, not his own sons. There
were other arrangements, but many went through a womans lineage and through a system of
cross-cousin marriage (Rosman and Rubel 1971). Such arrangements, in and of themselves, have
been seen as creating long cycles of exchange (Levi-Strauss 1943), but as in our own society, the
Makah are banned from marrying cousins. Second, status with the Makah is tied strongly to
whale hunting. Harvesting whales conferred status in a complicated system that had many of the
aspects of a potlatch. Hence, status systems were more complex, again reflecting our own
culture. Third, potlatch was perhaps introduced in modern times as a means of maintaining and
demonstrating tradition and identity. This conjecture would explain why the literature is mute on
Makah potlatching. Fourth, there have been extensive archeological findings in the last forty
years, and the Makah culture has been re-evaluated and seen in a new positive and self-affirming
light. The Makah potlatch might offer a perspective closer to our own cultural understanding,
while the current interest in Makah research should offer sources previously unavailable to
marketing theory for future study.
In 1884, the Canadian government made potlatches illegal. This has been seen as an
example of protestant narrow-mindedness, and cultural insensitivity. To a certain extent this is
true, but not entirely. By the 1880s, European contact with the Coastal tribes was already over a
hundred years old. The native cultures appeared well on their way to collapse. Actually, in
comparison to some other North American tribal cultures, the Coastal tribal culture was
remarkably robust and resistant. The Paiute and Goshute cultures of central and eastern Nevada,
which had remained moribund for millennia, collapsed almost instantaneously with initial
contact. Nevertheless, the potlatch that settlers and missionaries saw had arguably become a
negative shadow of the original. Canadians in this period record seeing children and families
going hungry and suffering from the cold after ceremonial potlatches destroyed food, blankets,
and tools needed for survival. It was not just settlers and missionaries that asked the government
to stop potlatches; in 1883, a church group in Victoria, including Indian chiefs from three tribal
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areas petitioned the government to control the practice (LaViolette 1973). It had become a
system that was devouring itself (Farb 1968). The ban was not lifted until 1951 (Bracken 1997).
Marketing Economics
The antipathy of Europeans toward the potlatch can be seen as a response to cultural and
conflicting economic theories. During much of European history, wealth consisted of ownership
of physical goods. In fact, holding physical possessions over long periods of time conferred
status. Production was inefficient and costly. One of the primary functions of war was to
increase wealth by confiscation rather than production. In the last part of the nineteenth century,
Europeans were living in a time when standards of physical wealth were rapidly changing due to
new methods of production created by changes in technology. They did not understand a system
in which property was given away for status. To them, this was equivalent to destroying wealth,
which was becoming increasingly equivalent to destroying labor, which, by extension, could be
seen as destroying lives. The Industrial Revolution brought with it the realization that wealth
could be produced through labor aided by the energy of machines, created, purchased, and
backed with capital. Marxism became popular, in part, because it emphasized the role of labor in
producing wealth. Europeans in the 1880s did not understand an economy of surplus. In
addition, materialism had a negative connotation among Westerners, suggesting the subversion
of traditional religious values and negative long-term consequences for both society in general
and individuals in particular (Burroughs and Rindfleisch 2002).
In our current post-industrial society, goods can be produced almost at will. John Deere
Corporation, for example, could conceivably produce every heavy farm tractor needed in the
entire world by making a few adjustments. It has become remarkably easy to produce almost
anything. Surplus or shortages have become primarily a matter of price, not of production, or
for that matter, even labor. This is true even for raw materials. Current marketing economics
maintain that there is no fixed supply. When asked how much petroleum exists on the planet,
economist Thomas Sowell replied that it depends upon its price (Sowell 2000).
According to current marketing theory, the economy is maintained primarily through free
exchanges. Marketing itself is defined as the process that meets individual and group needs and
wants through creating and maintaining these exchanges (Bennett 1995). All aspects of
production are defined by this interaction. A product is the thing exchanged, and it exists not
necessarily for a primary need or any intrinsic value, but primarily to create an exchange. In
fact, most products in a modern post-industrial society consist of services, ideas, and the social
repositioning of status and influence in a pattern that the Coastal tribes might well recognize.
Wealth is created in this exchange process, the value of which can be approximated by
how much wealth the trading partners are willing to share to have the exchange arranged for
them. Writing a book can serve as an example. The same manuscript may be worth nothing, or it
may be worth a million dollars, depending not on its production, but on exchanges that are
produced with and for the book. Most authors find it well worth their effort to find a good agent
and a publisher that will make it as easy as possible for people to learn about and purchase the
book.
Conspicuous Consumption and Gift-Giving
In Veblens 1902 book, he described what he called conspicuous consumption. He
maintained that there was a rise in a punctilious discrimination that outlined qualitative
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excellence in certain foods, drinks, entertainment, leisure, and goods. Instead of rank being
demonstrated through traditional means, it could be established by consumption. It could be
argued that with an increase in surplus, conspicuous consumption became more ostentatious and
more evenly practiced across social classes (OCass and Frost 2002; Prendergast 2003). Like the
potlatch, many of these occasions are tightly controlled by tradition and precedent. For example,
it is possible to find formal (punctilious) outlines of who pays for the 31 stated expenses in a
modern wedding (Knight Ridder 2002).
Economists are mixed in their response to conspicuous consumption. Some are negative,
arguing that the demand for status goods do not confer direct utility as normal goods do.
Consequently, they divert resources away from investments in the manufacture of more material
goods and services in order to satisfy consumer preoccupation with relative social standing and
prestige (Cooper, et al. 2001; Mason 2000). Their arguments echo the reasons the Canadian
government gave for banning potlatch over 120 years ago. Not everyone agrees. Rauschler
(1997) found no impact on an economy, negative or positive, with conspicuous consumption.
Mason (1998) argues that the desire in both economics and marketing to mathematically express
all relationships may be hiding important aspects of status consumption. In fact, goods that
would serve as status symbols must be relatively scarce, which insure huge profits derived from
demand characteristics within the exchange. The demand will increase supply that may be
detrimental to social welfare. On the other hand, it could be argued that in a society of surplus,
high demand for status objects creates increased production, thus benefiting everyone. This was
the argument of domestic theorist Christine Frederick, the consulting household editor of the
Ladies' Home Journal, who in 1929 said, the way to break the vicious deadlock of a low
standard of living is to spend freely, and even waste creatively (Lupton & Miller 1992). The
U.S. Luxury Excise Tax of 1990 offers a negative example. The politically popular tax added to
the cost of boats, aircraft, jewelry, and furs. In response, the rich simply switched to other
products, or went offshore to purchase. Manufacturers began to produce other products, or laid
off workers. The tax increased unemployment, and failed to significantly increase revenue, or to
curb status seeking. It was repealed in 1993.
Conspicuous consumption has been seen in Western culture as a manifestation of
materialism, which was simply defined by Richins and Dawson 1992) as a set of centrally
held beliefs about the importance of possessions in ones life [p.308]. Research has found that
materialistic consumers appear to believe that it is impossible to achieve status recognition or
happiness without having sufficient or appropriate possessions. They place more emphasis on
publicly consumed and expensive items and are more likely to value them for their public
meanings of success and prestige. They are also more likely to use socially sanctioned objects to
signal their status. Typically, a product is found to be best at status signaling if it has two
characteristics: 1) it must be a product that is often used by other people in communicating
social status, and 2) the price must be high. Materialistic emphasis on status has been identified
in product satisfaction studies. It has been found that materialistic shoppers are less satisfied by
products with conveyed high status, but their materialism was unrelated to product satisfaction
for products that were not status signaling. They were more likely to see a product in a negative
light not because it failed a utilitarian function, but because it failed to convey social status and
prestige (Wang & Wallendorf 2006). In our culture, this comes with a considerable personal
cost because of dissonance between materialism and other conflicting values found in the
Protestant Ethic and elsewhere. Materialism appears to have long-term negative consequences.
More materialistic individuals are less happy, and more unsatisfied with their life. They have a
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greater risk of psychological disorders, and have been found to be more neurotic, anxious,
depressed, and have lower levels of self-actualization and vitality. In general, they have been
found to have lower self-esteem than people who are less materialistic (Burroughs & Rindfleisch
2002).
There is evidence that conspicuous consumption is not just a matter of materialistic
satisfaction. Hirschman (1990) looked at the phenomena of utilizing consumption as a method to
achieve secular immortality (a condition in which achievements culminate in legendary status).
She found that it incorporated three aspects: 1) conspicuous consumption, 2) collecting art and
antiques, and 3) control of nature. An example could be found in the castle that William
Randolph Hearst built on the California Big Sur. It featured 56 bedrooms, 61 bathrooms, 19
sitting rooms, 127 acres of gardens, indoor and outdoor swimming pools, tennis courts, a movie
theater, an airfield, and the world's largest private zoo. It was lavishly appointed with art, and
everything was done with a Greek or Moorish motif.
A relevant area that has been studied intensively is the phenomena of gift-giving. Early
theorists emphasized the reciprocity of gifts and looked at gift-giving as a type of obligating
exchange. According to Mauss (1925), gift-giving has three obligations: 1) to give, 2) to receive,
and 3) to repay, and it is reciprocity that motivates the process. According to this view,
exchanges were not without social implications. Giving too much, too little, or too late could
strain relationships between givers and receivers. Only gifts to status subordinates (paper
carriers, postal carriers, etc.) required no expectation of equivalent return. As Sherry (1983)
explains, it is essential to gauge the motivation, intention, reaction, and status of each
exchange partner relative to the other [p.160]. This appears to be very similar to a potlatch
model. Current theory, however, expands the notion of gift-giving and identifies three
approaches to the exchange: 1) economic, looking at economic factors more than social factors,
2) reciprocity, and 3) a social exchange model which highlights sacrifice and pleasing another
person (Joy 2001). Some anthropological thinkers have suggested that only in indigenous
societies does the gift appear as a total social fact without regard to other aspects, but Geiser
(2006) found in a study of Napster interactions a system of pure gift-giving seemingly designed
just to maintain a culture and social organization. Belk and Coon (1993) identified cases in
which gifts were given with no expectation of reciprocity because one person simply likes or
loves another person. It has also been found that while many people assume that the more they
spend on a gift, the more it will be appreciated, that is many times untrue. Givers in one study
spent more on gifts to impress a recipient with their caring, not their wealth, and recipients
preferred gifts that they really needed or that had special personal meaning, regardless of price
(Flynn & Adams 2009).
There is also a connection between ritual and exchange that has been recognized for
decades and has its origins taken from an extensive foundation in the social sciences (see Bell
1997 for a detailed and comprehensive review). Ritual is primarily a cultural aspect of life and
while all cultures have ritual activities, the specifics of the ritual itself are highly contextual
within a culture. Global marketers learn early such differences in something as common as the
morning ritual. Eighty-four percent of Polish consumers shower or bath at night, while 92% of
Mexicans shower in the morning (Brady 2007).
Although modern marketing theory has the tools in place to look at conspicuous
consumption, by the 1980s, the meaning of consumption had not been adequately reflected in
theory and textbooks (Jacoby 1984). Currently, advocates of Consumer Culture Theory or CCT,
state that consumption and its involved behavioral choices and practices are a type of social and
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cultural phenomena, as opposed to psychological or purely economic phenomena, but still
maintain that the body of theoretical knowledge about consumption and marketplace behaviors is
inadequate (Arnold & Thompson 2005).
Comparison
Although Veblen and some marketing texts utilize potlatch as a type of conspicuous
consumption, there are some distinct differences.
1. Validation. One of the primary purposes of a potlatch was to validate a change in status,
privilege, and/or ownership. The participants, by accepting the gifts, were witnesses to
the change and agreed to validate it by their presence at the potlatch. With indigenous
societies, which did not have formal laws and officers of the law, there was always a
method of validation which would hold societal weight and conformation. In the Old
Testament, for example, when Boaz wanted to marry Naomi, the daughter-in-law of
Ruth, he went to the city gate and gathered ten elders to witness and validate his claim.
The text states, And all the people that were in the gate, and the elders, said, We are
witnesses (Ruth 4:11). As demonstrated by the marriages of Clinton and Limbaugh,
conspicuous consumption may involve numerous witnesses, but they are there primarily
as celebrants rather than binding witnesses.
2. Hierarchical maintenance. One of the primary functions of a potlatch was to maintain and
demonstrate hierarchical position of a person or family. This writer can think of no
similar function of conspicuous consumption. Having the largest house, the most
expensive automobile, or the largest diamond ring can demonstrate status, but it differs
from the potlatch in two fundamental ways. First, the status of consumption typically
does not confirm or establish the culturally defined and traditional roles within the
society, and second, the consumption is demonstrated by what the individual consumes,
not by what they can give away.
3. Tradition and social learning. An important function of potlatch was the continuation of
tradition and social identification. Potlatches are celebrated with the demonstration of
symbolic objects and regalia. Songs, dances, and dramas are played out, all in prescribed
manners. The participants are reconnected to their own history and traditions. As Black
Elk, an indigenous person from a non-potlatch culture explained, it is from understanding
that power comes, the power is in understanding and participating in the meaning of the
ceremony (Neihardt 1995). As demonstrated by the Makah and much of contemporary
ceremonies, this may be the primary function of a modern potlatch. While conspicuous
consumption in formal affairs may serve symbolic functions, that is not their primary
purpose. Indeed, modern traditional ceremonies can be recognized and performed without
any display of wealth, and there is little effort in these affairs to instruct the participants
about culture and tradition.
4. The nature of property. As mentioned previously, for guests to reciprocate gifts received
in a potlatch, it was not necessarily thought of as an exchange of wealth, but as a method
of retaining those things that should never be exchanged. The honor and position of an
ancestor that would be legitimized in a potlatch was more important than a blanket, or a
thousand blankets.

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Research Need

Although potlatch appears to be a form of conspicuous consumption, the differences are
significant enough to conclude that there is little connection between the two. Nevertheless, a
considerable amount of information can be obtained by a cross-cultural comparison of modern
consumption patterns with the traditional potlatch. As pointed out by Bracken (1997), the
relationship between potlatch and European modes of exchange are not static but always in the
process of being specified by current models. Typically these have fallen into two camps;
potlatches have been seen as an extravagant waste, one subversive of capitalist commerce, or as
a ritual carrying out the meaning of some Western function (Harkin 1999). Neither of these is
very useful in understanding cultural differences and their implications for a postmodern market.
Study of potlatch has a number of benefits, both for understanding societys role in, and
the long-term implications of, marketing theory and societys preoccupation with consumption.
Such studies would have two specific benefits.
1. It would add to the understanding of the universality of indigenous cultures, and what
we can learn from them, especially in a world environment that is becoming more
culturally uniform. At the same time, it may add in a small measure to the
reestablishment of the unique cultural heritage of the Pacific Northwest indigenous
peoples.
2. This writer is unaware of any study which has sought to examine potlatch with a
combination of current marketing interests in conspicuous consumption combined
with ritual, customer satisfaction, and the gift-giving literature. For example, is
conspicuous consumption primarily for external or internal satisfaction? While both
could be present, which is the primary motivation? While current theories of
consumption could be interpreted as a people using their wealth for hedonistic
purposes, if the pattern is found to more closely align to potlatch, consumption would
need to be looked at as primarily a means of gaining and maintaining power and
status. In other words, a very expensive wedding could be seen as something that
pleases a family and their friends and makes them happy, a demonstration of power
and influence, or as the price one must pay to have ones family position and power
formally recognized by the appropriate mavens of society. If all of these are present,
what then are the factors that would predict distinctions?
These and the answers to other questions would benefit from more extensive cross-
cultural comparisons that could be facilitated by a better understanding of potlatch in light of
recent advancements in consumer knowledge.

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Relati onshi p i n a Fai r Tr ade Mar ket: How to
Cr eate and Manage Value
Mantiaba Coulibaly
Abstract
In this paper we analyze the way to create and manage value in a relationship between a
banana company and its partners in a fair trade market.
In the fair trade market a successful business requires some attention for and
collaboration from employees, customers, suppliers, communities, and shareholders. Also, some
degree of commitment is required from multiple partners to carry on in business and a greater
commitment to achieve new levels of performance (Giovannucci and Koekoek, 2003;
Henderson, 2008).
Our paper examines fair trade bananas and presents the case of Agrofair Company which
trades in bananas worldwide using the brand name ok. These bananas carry the label of Max
Havelaar, the Netherlands member of Fairtrade Labelling Organizations International (Acronym:
FLO). The label is the worlds first International Fairtrade Certification Mark.
We use previous research on strategic management (Porter, 1985, Barnay 1991; Barnay
and Barney and Hansen, 1994), value creation in relationships (Ricardo, 1821; Smith, 1937;
Kothandaraman and Wilson, 2001), and moral conception of the firm to study value creation in a
fair trade market. We focus on previous works during four years on fair trade bananas (Coulibaly
and Sauve, 2010; Coulibaly, 2008) to analyze the way to create and manage value in a
relationship between a banana company Agrofair and its partners. We elucidate the way to create
value and we identify the potential sources of conflicts in the transactions. In a fair trade market
we show how partners actions are conducted to help each actor even though they intend to make
a profit. In this context, the fair trade market represents one of the markets which allow value
creation by respecting the principle of fair relationships.

Keys words: Value, relationships, fair trade market
Introduction
A successful business requires some attention and collaboration from employees,
customers, suppliers, the communities, and shareholders. Some degree of commitment is
required from multiple partners to carry on in business and greater commitment to achieve new
levels of performance. This degree of commitment appears in the fair trade market based on fair
relationships between actors in developing countries (producers) and developed countries
(distributors, consumers, etc.). One relationship is focused on an active desire to alleviate
anothers suffering.
Furthermore, for a business to reach higher levels of performance, and at times merely
survive, diverse partners have to collaborate about transactions with the firm. They have to
participate in these transactions. All partners must save the world, the economic model, to
mobilize the energies of many who are either unwilling or simply are unable to donate resources
to the betterment of others.
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This paper illustrates these ideas with the fair trade movement. In particular, it examines
fair trade bananas and presents the case of Agrofair which trades in bananas worldwide using the
brand name ok. These bananas carry the label of Max Havelaar, the Netherlands member of
Fairtrade Labelling Organizations International (Acronym: FLO). This label is the worlds first
International Fairtrade Certification Mark.
We use previous research on strategic management (Porter, 1985, Barnay 1991; Barnay
and Barney and Hansen, 1994), value creation in relationships (Ricardo, 1821; Smith, 1937;
Kothandaraman and Wilson, 2001), and moral conception of the firm to study value creation in a
fair trade market. We focus on previous works during four years on fair trade bananas
(Coulibaly, 2008, Coulibaly and Sauve, 2009) to analyze the way to create and manage value in
a relationship between a bananas company Agrofair and its partners. First we elucidate the way
to create value (I). In the second part, we identify the potential sources of dubious transactions
(II). Finally we discuss moral analysis.
A way to create value?
Value creation is connected to the activities and to the mission of the organizations which
exchange within the relationship. In a fair trade market, we present activities and mission of the
organizations studying the fair trade bananas.

Activities
In a fair trade market consumption of fair trade bananas is raised (appendices 1). So
companies exchange with other organizations to develop a product combining their brand with a
fair trade brand (appendices 2). The Fairtrade brand is at the heart of the fair trade bananas and
in the relationship between organizations and consumers.
Fair trade brand
A fair trade brand guarantees social conditions: the direct purchase by consumers, a
minimum price, and the long term relationships between producers and buyers and the respect of
human rights (minimum social security, refusal of child labor, etc.). Environmental criteria are
added to social criteria: decrease in the use of pesticides and artificial fertilizers, waste recycling,
prevention of water pollution.
A brand represents one of the main resources in this market. For example in the sector of
fair trade bananas Fairtrade60 represents a brand which conveys a fair trade concept and its
image is recognized by consumers and distributors in the world:
Some distributors accept only to sell their products when they are labeled Max Havelaar.
It is the same reaction for some partners who say that if bananas or fruits are not labeled Max
Havelaar we cannot sell them as Fairtrade (Interview with GD, AgroFair France, June 2007).
So to deliver a product to the client, owners of the brand (banana brand and fair trade brand)
exchange with external partners to realize the transaction. In the following part, we develop this
relationship in a fair trade market.

Relationship in a fair trade market
In a relationship, all of the organizations investigate ways to create value. Value is
defined as relationships of a firms market offering and price weighed by the consumer against

60
Since 2008, a fair trade association Max Havelaar and its partners decide to use Fairtrade as a label and to
represent the association.
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its competitors market offering and price (Kothandaraman and Wilson, 2001: 380). Each
organization uses their own resources and reinforces these resources combining with their
partners resources. Indeed, according to the resource dependence theory (Pfeffer & Salancik
1978) critical resources of the organizations depend on external partners. So organizations rely
on their external stakeholders (Berman and al. 2006: 5-6) and they cooperate to create value such
in network relationships (Hkansson and Snehota, 1995).
In a fair trade market, we distinguish two types of partners: direct and indirect partners.
Direct partners who are producers, distributors, certification and control organizations (FLO and
FLO certified
61
), and consumers, exchange about the product and the fair trade concept (for
example a fair trade banana). Indirect partners help direct partners to improve life conditions in
developing countries and to regulate the relationship: government, voluntaries, etc. In a
relationship each partner plays a key role. So, for fair trade bananas, a fruit company Agrofair is
connected to a fair trade association Max Havelaar which receives a government subsidy (public
subsidy), a private subsidy (charities organizations) and others sources of funding 60 % of the
profit of Max Havelaar provide by subsidy (Interview with JD, Max Havelaar, 2007).
Max Havelaar helps the organizations of the producers: we have received a lot help
around the world to realize our project, for example from FIDA: International funds for
development (Interview with ZLK, Sitraka, May, 2008). We note that the revenues of the fair
trade association Max Havelaar derives from royalties paid by organizations which
commercialize fair trade products, about 2000 products (Interview with SG, Max Havelaar
France, January 2009). These funds are transmitted to the control organization (FLO) to reach
fair trade goals and to help producers in developing countries. The financial resources of the
banana company Agrofair result from the selling of the fair bananas and some subsidies.
Moreover in the market, the different departments of the organization exchange
information concerning production and communication strategy: in Agrofair, we have many
departments, one department takes care of the producers, doing whatever they have to do with
the production, another department is logistic, sales is another department : marketing, of
course there are other departments. Marketing works mainly directly with the marketing
department of Max Havelaar. We do things together, like the fair trade week; (...) the day
before yesterday we had a common meeting with Max Havelaar from other countries, so its a
strong relationship (Interview with KDK, AgroFair Netherlands, October, 2007).
Also, the fair trade association Max Havelaar organizes annual meetings with all of the
partners to promote the fair trade products: Meeting with license owners (about 190 companies)
representing companies which commercialize fair trade products (Interview with SG, Max
Havelaar France, January. 2009). During the meeting, they discuss communication strategy as
well as contracts between partners in develop and developing countries.
To develop partners relationships and attract consumers, the fair trade association Max
Havelaar prepares each year a fifteen day long conference in some countries such as France, the
United Kingdom, Canada, (Fifteen of the fair trade) to communicate and promote the fair trade
concept (Interview with SG, Max Havelaar France, January, 2009. In this way, partners in fair
trade markets focus on some key resources: brand image (quality of bananas, food safety) and
communication strategy on a fair trade concept: respect of producers, environment. We notice
that resources are critical to manage organizations (Barney and Hansen, 1994) and to reach their
objectives, organization needs financial and technical resources (Porter, 1985) and all the
members commit themselves to maximize profit. This is one way of value creation.

61
FLO (Fair trade Labelling Organizations) makes the control, FLO cert delivers certification.
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Now we will analyze how value is created in the relationship (what leads to create
value?).
Mission in a market
The mission is defined as concrete actions and plans of the organization to achieve their
main objectives, it can be considered as a firms intentions (Ndofor and Levitas, 2004: 691). Two
things define the mission of the company: client and product or service (Macdonald and Pichette,
1995).
Previous research, show that an organization engages in a relationship with other
organizations for different reasons: to exploit market opportunities, to face competition, to share
common interests with other organizations, to improve its activities or profit (Porter, 1985;
Prahalad and Hamel, 1990), to help others, to serve society (Weber, 1947), etc. Based on
previous works, we note that business organizations bring about interactions between labor,
capital (relation with partners), client (sold product or service) and natural resources (Smith,
1937). So when the client has agreed to pay a high price, capital reaches a high value. Also this
negotiated price is distributed among labor, capital and land. In an inter organizational
relationship the objectives of partners centre on the same mission. How is this mission explained
in a fair trade market?
A fair trade is a regulated market in order to reduce disparities between North and South:
Fair trade is a trading partnership, based on dialogue, transparency and respect, that seeks
greater equity in international trade. It contributes to sustainable development by offering better
trading conditions to, and securing the rights of, marginalized producers and workers especially
in the South. Fair trade organizations, backed by consumers, are engaged actively in supporting
producers, awareness raising and in campaigning for changes in the rules and practice of
conventional international trade (FINE
62
, 2001). So the fair trade represents: an alternative
approach to conventional trade that aims to improve the livelihoods and well-being of small
producers by improving their market access, strengthening their organizations, paying them a fair
price, and providing continuity in trading relationships (Giovannucci and Koekoek, 2003: 38).
In this context, organizations aim to allow the production of fair trade products in
developing countries and to sell this product in developed countries. This consists in balancing
the business of fair products between actors in the North and in the South, to resolve difficulties
related to the production and the marketing of the products and to protect the environment.
In the case of the fair trade bananas, bananas are bought to producers by distributors and
consumers. Bananas respect fair trade regulations so the fair trade banana is a differentiated
product. The main goal of the organizations is to put together their tangible and intangible assets
to create superior value for the customer.
So, in a relationship between a fruit company Agrofair and its partners in a fair trade
market, Agrofair not only delivers its traditional bananas but also fair trade bananas. The
company exchange, buys bananas directly to producers in developing countries or with ripeners

62
FINE is an informal association of the four main Fair trade networks: F (Fair trade Labelling Organizations:
FLO), I (International Fair Trade Association represented now by World Fair Trade Organization: WFTO), N
(Network of European Worldshops: NEWS) and E (European Fair Trade Association). It was created in 1998.

- 133 -

in developed countries and sells these bananas to the final consumers via some supermarkets,
groceries, etc. Agrofair commercializes fair trade bananas using its brand name Ok with a fair
trade brand name Fairtrade.
Organizations in this market sometimes share common objectives: sometimes we have a
common interest in the marketing, we can create promotions together, sometimes AgroFair
supplyies retailers. It was important that we had a direct connection with the retailers
(Interview with KDK, Agrofair Netherlands, 2008). The interest is not only to buy and to resell,
the interest is to have a common project, to accept the requirements that the customers can
have (Interview with AB, Az Mditerrane, mai 2008).
To achieve the mission, standards and norms are instituted by partners in the relationship.
Certification rules, contracts, licenses, norms (ISO: International Organization for
Standardization), and cooperation allow them to apply standards.
The system of labeling in a fair trade market represents a set of contracts (contracts and
standards) between three types of actors: producers in developing countries, control organization
(FLO) and partners in developed countries (buyers, ripeners, distributors, consumers). Standards
rely on specific requirements: health and safety of the workers when they are exposed to
particular dangers. The calculation of the guaranteed minimum price is fixed respecting
environmental rules (Max Havelaar France, 2008).
Also, there is a license holder contract in which a fair trade association authorizes a
company to commercialize its product with a brand (or label) Fairtrade. It against part, the
company paid royalties to the association related to a control organization (FLO). Also, FLO
realizes the control, give certification to producers which respect roles. Then, FLO controls and
gives certification to the producers who respect the rules: A firm qualifies to have the Fairtrade
Labeling Organizations International (FLO) gives its product the fair trade label when:
respecting standards, no firm can qualify if it uses forced labour (Henderson, 2008: 62). But
when a contract is not respected by producers, it is possible to suspend or do a decertification.
Then ripeners are controlled by FLO inspectors according to a volume (bought and sold).
So to apply standards, a fair trade association Max Havelaar collaborates with producers
to determine a minimum price of purchase for each raw material. A fair trade association also
checks that the minimum price covers the production cost while considering environmental
protection. It is also necessary that the minimum price covers the elementary needs of the
producers such as food, hygiene, education, health, etc. (Max Havelaar France, 2008).
In addition, there are negotiations between producers and buyers to finance producers
activities. So, sometimes producers can ask buyers to advance up to 60 % of the price of their
future harvest. This advance financing allows the producers to avoid having recourse to money
lenders to finance their activities (Max Havelaar France, 2008).
A control organization FLO cooperates with all of the partners to validate standards. For
certification, FLO cert makes sure that producers received remuneration (wages), that products
include a guaranteed minimum price and that the development subsidies which should help
producers to improve their living conditions is paid (FINE). So to carry out their checks, FLO
inspectors visit cooperatives and plantations each year to make a report which is transmitted to
the certification committee (representatives of the producers, of the importers and of the national
associations). Afterwards FLO verifies the activities of the importers, exporters and transformers
to make sure certified products are present throughout the chain.
After explaining the way to create value in a relationship and the role of the mission to
reach value, now we will focus on the characteristic of the value created.
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Organizational value
Value creation in a relationship originates from human nature for an engagement (Weber,
1947), to satisfy an ambition in life, to win, to contribute in an organization (through power) and
to reach an organizational goal (Pfeffer and Salancik, 1978). So to give a sense to one life and to
help others, members of an organization direct its action in some way and work with other
organizations. In this context, a set of rules sometimes represents the means to access power
(Weber, 1947) and relationships among partners and their mission allows us to identify the way
to create value. The value of the organization depends on transaction between different services,
people (human resources, sales, etc.) and it is linked to human nature, rules in society.
In a fair trade market value is related to a key concept sharing equal profit between
producers and all of the partners (FINE). According to Giovannucci and Koekoek (2003: 32-
33), a fair trade market gets additional profits from the producers, advantages such as high prices
and access to a new market. So a Fair trade concept allows us to improve natural resources and
direct access to markets, increasing rural labor and reducing financial technical risks for the
producers.
In the fair trade market, value relies on the key concept to realize equal benefit for
producers and all of the partners. So value is represented by:
Security for clients : price and quality of fair trade bananas which respect fair trade
conditions;
Increase of the profit (for organizations);
Veracity (culture and distribution of bananas are in accordance with fair trade market);
Respect standards and norms in a fair trade market.
In this market, costs will be less high by reducing middle men in the chain, by buying
bananas directly from producers selling to final consumers a product which respects
environmental rules. Also, if the client is ready to pay, there is a valuation and finally money for
the company. That way value can help organizations to reach their mission.
In the first part of our work, we showed that relationships in a fair trade market are a
source of value creation; however some limits can occur. In what follows, we will discuss these
limits and the way to resolve them.

Potential sources of limits in the relationship
We distinguish general kinds of factors impinging on relationships such as irritants
(Macdonald Pichette, 1995). Irritants provoke and motivate inappropriate behavior. Others
elements (individuals, organizations or customary behavior in an entire industry) resist effective
participation in a relationship. Limits in relationships rely on irritants and activities among
partners in the fair trade market. First, we characterize limits and then we identify potential
solutions.
Irritants
Irritants represent elements that incite people to carry out actions against the
organizational mission. Most often they are related to job description and defective policies.
Job description
Within an organization a typical defect in job description that can motivate unethical
behavior is when the scope of responsibilities does not correspond to the real power. So the
capacity to exploit resources and to reach objectives is limited and the incumbent is not always
able to deliver the goods, although it may be evaluated by the degree to which they are delivered.
- 135 -

Something similar happens in the relationships around an Agrofair Company in a fair
trade market. To subscribe to (or to join) a fair trade market all organizations must adapt their
proper conditions to a fair trade concept; collaborate with all of the services of each organization,
to follow a control organization rules. Also, these organizations must exploit their resources in
new conditions: adapt marketing strategy, common communication around the concept, new
regulations, no pesticides, and no pollution.
For example, a fair trade banana company Agrofair employees must adapt to new
conditions in all departments in each country where Agrofair is implanted (appendices 3). There
are a lot of responsibilities; it is necessary to manage marketing strategy and communication
with all of the partners in a market (producers, distributors, consumers and their old partners).
So irritants can appear with the lack of correspondence between responsibilities and
power during the exploitation of resources by employees.
Defective policies
When policies are established within an organization but opposite to organizational
values, deficiencies emerge. Another limitation can come from the company being unable to
reach its objectives because there are some constraints (environmental constraints, governmental
constraints, time, and unrealistic goes). Some problems (which hinder objectives) concern
obstacles, when the organization decides to make a change: to change the set up the departments,
to impose sanctions when results are not better, high bonuses.
In a fair trade market defective policies are linked to: policy, environmental norms and
fair trade regulations:
Complexity of contracts: to respect numerous standards and social and environmental
constraints.
Rigid application across many differing products: the same contracts (standards) in a fair
trade market for all of the products (coffee, tea, fruits, etc.). However each sector of the
products is specific.
Poor comprehension and application of the standards: it can be difficult for producers in
developing countries to apply really environmental norms related to the lack of training,
problems of adapting restrictions to their situation. Furthermore, some distributors refuse
to sell fair trade bananas without packaging, nevertheless this situation not respecting
environmental rules.
Very numerous contracts in the fair trade market: lead to execution and negotiation costs.
Partners spend time reading and finding agreements about contracts.
Focusing on fair trade bananas; we identify some limits which appear during transactions:
Climatic conditions: problems of producing bananas.
Differences in the price of bananas in supermarkets, public restaurants, etc.
Failure to respect norms regarding the quantity and the quality of chemicals products.
All partners take some decisions to cope with these irritants.
How partners can work against these limits
To reduce (or resolve) these irritants partners must negotiate a program based on training,
control, political decisions. This consists in changing company policies to face irritants: to
reinforce policies for training, to set the foundations of a coded conduct for transactions, to
control employees trough the human resources department, executives. In a fair trade market, the
different actions rely on marketing strategy and standards.
- 136 -

Common marketing strategies
All of the partners (the fair trade association Max Havelaar, the banana company
Agrofair, the producers, the distributors and the control organization FLO) adopt a common
communication strategy to promote fair trade products: communication on TV, radio, academic
conferences, governmental conferences.
Organizations in developed countries aim to increase their actions in developing
countries (living conditions of the producers) and to convince consumers to buy fair trade
products: make a special marketing event which facilitates action towards developing countries,
give trust to the consumers: correct information on the product, show on the product the various
components of the price of fair trade bananas (Interview with JM, Max Havelaar France,
October, 2007).
The future objective of the fair trade association Max Havelaar is to mention on the
products (bananas) information which evokes the Fairtrade concept: The minimum price
guaranteed for the fair trade product, the price perceived by the producers covering their
spending, the bonus of the fair trade which allows social financing, environmental and technical
projects. (Interview with JM, Max Havelaar France, October, 2007).
In general, a fair trade association aims to work with all of the partners to satisfy
consumers: Max Havelaar aims to work in synergy with all industrialists who are the users of
fair trade because it estimates that the final consumer does not always know what the
minimum price paid to the producer corresponds to. Also, this ignorance of the consumer
originates from the lack of explanation in the display of the price by the industrialist (Interview
with JM, Max Havelaar France, October. 2007).
All of these actions are realized because there are informal relations among partners
based on trust: we have no direct agreement, in speaking terms we have meetings together and
of course if we see a chance to start with Carrefour for instance and Max Havelaar has already
with Carrefour, then its good if we sit together and discuss, because its also beneficial
(Interview with KDK, AgroFair Netherlands, October 2007).

Reinforcement of the standards and contracts
To reinforce current standards and contracts, partners must review some rules and norms;
reduce constraints, and adapt regulations and standards to diverse products. Then, the price of the
fair trade product is adapted for all of the distributors.
These last years, there have been many exchanges in the fair trade market to integrate
producers in the process of decision-making (increase the numbers of decision-makers among
producers); to adapt standards to the environmental norms: The producers through their
continental networks (members of FLO) are consulted, it is not absolutely sufficient, they must
become an essential part of the system, they must not only be consulted but manage a part of the
operations. That means tomorrow, it is necessary to have employees for the South and by the
South.part of the work, the information about the market, etc. Not everything can be managed
by Westerners in the North who are based in Germany, in France, in the United States, it must
be balanced" (Exchange with CA, FLO, in May, 2008).
The partners in the relationship aim also to create a link between producers and
consumers: It is also a question of succeeding in moving closer producers and consumers: "
What seems to us essential in the future, what is the main stake, is not simply guarantees, but the
connection between producers and consumers, we must propose new tools for producers and
consumers, so that the consumers understand who producers are, where they are going, what
- 137 -

their plans are, what their ambitions are, what their desires are; as for the producers, it is
necessary to understand who the consumers are, what they want, what are trends, what we want
to see, to listen to or not; and what can both do, to have simple and direct relations. We are
going to open six months of discussions with stakeholders around these new bases and we have
our extraordinary general assembly in December which will validate the reform of the
architecture of the system (Exchange with CA, FLO, in May, on 2008).
In addition, partners plan to increase actions with the European Commission even if these
actions are difficult to realize: I think that it is important for fair trade organizations to go to the
European commission, make sure that it considers more within authorities such as WTO (World
Trade Organization), exactly the subject of fair trade. But the European Union is ready to put up
a fight with the WTO (World Trade Organization. I do not know if it is ready to (Interview
with PL, FAO, May 2008).
Finally, the reinforcement of legitimacy is perceived as the road to success in building
relationships in a fair trade market: Our legitimacy will be in big sectors and we must
demonstrate that it is possible, that we can resolve the challenges and the risks identified in
Santiago, fair trade can represent a big part of the significant world trade, not 1 %, but it can
represent 10, 15, 20 % of the world trade for a sector of coffee, cocoa, banana without
negotiating on our fundamental principles, and we think that it is in this way that virtuous
outcome with all the actors who lobby the international authorities (CA, FLO May 2008).
Conclusion
Some organizations aim to make a profit selling fair trade products to consumers. These
organizations decide to respect environmental rules in the world because this is perceived as a
good action. Their passion is to change the vision of their organization and the conditions of
poverty (of many producers in developing countries). So their actions are conducted for a
compassionate reason even though they intend to make a profit. Indeed these organizations must
make a profit respecting a Fairtrade concept share equal profit. This concept implies some
constraints: environmental rules and norms are based on restrictive conditions (standards and
contracts), collaboration between different organizations in the world (developed countries and
developing countries). The relationships create some limits on the fair trade market which are
barriers to creating value for each partner. Reinforcing and adapting to environmental conditions
and consumers demand that (using new marketing strategy, new standards), all the partners in the
fair trade market take some actions to reduce these limits, to pursue their mission and create
greater value.

- 138 -

Appendices

Appendices 1: Activities in a fair trade market (the case of bananas)
Total sales volumes (kg 000)

Source: Agrofair Annual Report (2006-2007)

- 139 -

FOB value paid and Fairtrade premium (US dollars, 000)

Source: Agrofair Annual Report (2006-2007)
Volumes of marked products (in ton)
Products 2002 2003 2004 2005
Coffee 15 779 19 872 24 222 32 747
Tea 1 226 1 512 1 965 2 411
Bananas 36 641 51 336 80 640 101 586
Cocoa and chocalat 1 656 2 643 4 201 5 041
Sugar 650 1 164 1 960 3 065
Honey 1 038 1 164 1 240 1 431
Juis of fruits 1 387 1 533 4 543 7 806
Rice 392 545 1 384 1 676
Source: Max Havelaar

- 140 -

Appendices 2: A banana brand ok in a fair trade market

Appendices 3: Distribution of the Agrofairs partners and products in the world

Source: Agrofair
- 141 -

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Interviewees

GD, Manager of the company AgroFair France.
JD, Sales services of the association Max Havelaar France
ZLK, Technical adviser to the producers organization, Madagascar
SG, Manager of the food markets, Max Havelaar France
KDK, Sales Director, AgroFair Nethertlands
AB, Manager (quality service) of the ripeners organization Az Mditerrane

- 142 -

The Fai r Ser vi ces Law After Ski lli ng: I ts Futur e
and What Ever y Busi ness Executi ve (and
Busi ness Pr ofessor ) Should Know
Dwight E. Denman

Introduction
On June 24, 2010, the United States Supreme Court ruled on the case, Jeffrey K. Skilling
v. United States.
63
In their ruling, the court held that conviction under the Honest Services Fraud
statute would be limited only to cases in which there was a showing of a bribe or a kickback. By
doing this, the court narrowed the application of the law. Observers believe that the Courts
narrowing will take a powerful tool away from government prosecutors in convicting corporate
executives. However, others believe that the vagueness of the law and some other unresolved
questions may not narrow its use as much as some would wish.
This paper will look at the background of the Honest Services Fraud statute, its
application against individuals in the private sector prior to Skilling, and the problems that it
caused for those being prosecuted under the law. Next, the paper will give a brief overview of
the Skilling case. After that, the paper will analyze more closely the Supreme Courts ruling. It
will also address some of the issues that remain unresolved. Finally, this paper will discuss
whether or not other countries have statutes similar to the honest-services fraud statute.
Background of the Honest Services Fraud Statute
The Honest Services Fraud statute, 18 U.S.C. 1346, was created by Congress during the
1980s. It is related to the Federal Mail Fraud Statute, 1341
64
, which was originally passed in
1872, and its wire fraud counterpart which is similar in wording (1343), and passed in 1952.
Prosecutors have used 1341 and 1343 to combat a multitude of criminal schemes, from
consumer frauds, stock frauds, land frauds, bank frauds, insurance frauds, and commodity frauds,
but even blackmail, counterfeiting, election fraud and bribery.
65
Mail fraud continues to be
the true love of federal prosecutors, a broad, self-defining statute that can be used to get crooks

63
130 S. Ct. 2896; 177 L. Ed. 619; 2010 U.S LEXIS 5259; Fed. Sec. L. Rep. (CCH) P95,808; 22 Fla. L. Weekly
Fed. S 550.
64
The wording of 1341 is as follows:
Whoever, having devised or intending to devise and scheme or artifice to defraud, or by obtaining money or
property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan,
exchange, alter, give away, distribute, supply, or furnish or procure for unlawful use any counterfeit or spurious
coin, obligation, security, or other article, or anything represented to be or intimated or held out to be such
counterfeit or spurious article, for the purpose of executing such scheme or artifice or attempting so to do, places in
any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the
Postal Service, or takes or receives there from, any such matter or thing, or knowingly causes to be delivered by mail
according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is
addressed, any such matter or thing, shall be fined not more than $1,000 or imprisoned not more than 5 year, or
both.

65
Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duq. L. Rev. 771, note 31 at 772.
- 143 -

whose behavior falls between the cracks of other statutes.
66
This catch-all [mail fraud] statute
may be the most important tool for apprehending the new breed of crime- white collar crime.
67

Recent congressional action has broadened the scope of mail fraud to include mailings via
private carriers,
68
broadened wire fraud to include telemarketing fraud
69
, and increased the
maximum sentence for both mail and wire fraud from five years to twenty years.
70

These statutes worked well for a variety of crimes where the victim suffered a monetary
loss as a result of the perpetrators fraud. Prosecutors attempted to broaden the statutes to
include frauds that did not include a monetary loss to the victims. Take, for example, a public
official who accepts a bribe or a kickback from a company in order to receive favorable
treatment in the awarding of a contract to the lowest bidders. In such case, the victims are the
public officials constituents and they are not suffering any sort of monetary loss since the
contracts are still going to the lowest bidder. Prosecutors argued that the loss to the constituents
was their intangible right to the public officials honest services.

The Honest Services Theory
This theory first came to light as a result of the disjunctive wording of the statute.
Prosecutors argued that the term scheme or artifice to defraud was separate and independent of
the scheme of for obtaining money or property. Therefore, prosecutors argued, a scheme or
artifice to defraud was not limited to schemes involving money or property, but also included
the victims intangible right to honest services.
Courts accepted this theory. In Shushan v. United States, 117 F.2d 110 (1941), the Fifth
Circuit reviewed the mail-fraud prosecution of a public official. Shushan allegedly accepted
bribes from parties who stood to benefit by receiving favorable action by the city. The court
stated that It is not true that because the [city] was to make and did make a saving by the
operations there could not have been an intent to defraud.
71

The Fifth Circuits opinion in Shushan formulated the origins for the development of an
honest-services doctrine. Over time, courts in all circuits began to accept this honest services
theory, not only in the prosecution public officials, but also in the private sector. In United States
v. Proctor & Gamble Co.
72
, perhaps the earliest application of the honest services theory to a
private-sector case, the court held:
When one tampers with [the employer-employee] relationship for the purpose of
causing the employee to breach his duty [to his employer] he in effect is defrauding the employer
of a lawful right. The actual deception that is practiced is in the continued representation of the
employee to the employer that he is honest and loyal to the employers interests.
73

66
Peter W. Low & Andrew L. Hoffman, Federal Criminal Law 161 (1997).
67
Brian C. Behrens, Note and Comment, 18 U.S.C. 1341 and 1346: Deciphering the Confusing Letters of the Mail
Fraud Statute, 13 St. Louis U. Pub. L. Rev. 489, at 526 (1993).
68
Section 1341, which originally applied only to United States Postal Service mailings, was amended in 1994 to
include commercial interstate carriers, such as FedEx and UPS. See SCAMS Act of 1994, Pub. L. No. 103-322,
250006, 108 Stat. 1796, 2087 (1994) codified at 18 U.S.C. 2326 (2000).
69
Telemarketing Fraud Prevention Act of 1998, Pub. L. No. 105-184, 112 Stat. 520 (1998) Codified at 15 U.S.C.
6101-6108 (2000).
70
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745, 800 (2002).
71
Id, at 119.
72
47 F. Supp. 676 (Mass. 1942).
73
Id. at 678.
- 144 -

Over time, [a]n increasing number of courts recognized that a recreant employee
public or private- c[ould] be prosecuted under [the mail-fraud statute] if he breache[d] his
allegiance to his employer by accepting bribes or kickbacks in the course of employment.
74

The McNally Case: Rejection of the Honest Services Theory
The Supreme Court brought the honest services doctrine in mail and wire fraud cases to a
halt in McNally v. United States
75
. In McNally, a state officer (along with his co-defendants) was
convicted under the honest services mail fraud theory for selecting an insurance agent to
represent the state of Kentucky in which he was to receive a share of the agents commissions by
receiving a kickback. The government did not claim that the citizens of the state suffered
because they had to pay higher premiums or that the insurance coverage was somehow
substandard. Instead, the government alleged that the kickback scheme defraud[ed] the citizens
and government of Kentucky of their right to have the Commonwealths affairs conducted
honestly.
76
The United States Court of Appeals for the Sixth Circuit upheld the lower courts
decision.
In overturning the lower courts decisions, the Supreme Court held that the scheme did
not qualify as mail fraud, stating that the mail fraud statute clearly protects property rights, but
does not refer to the intangible rights of the citizenry to good government.
77
In reviewing
Congress intent in passing the mail and wire fraud statutes, they found insufficient evidence to
indicate that they intended to depart from the traditional concept of fraud, which required a
deprivation of money or property by the victim.
78
The court also took the occasion to send a
message to Congress, stating If Congress desires to go further, it must speak more clearly.
79

Congress Passage of 1346
Congress acted quickly to the overturning of the honest services doctrine by the Supreme
Court by passing 1346 in 1988. The wording is amazingly short, existing of only 28 words. It
states, for the purposes of this chapter [mail and wire fraud], the term scheme and artifice to
defraud includes a scheme or artifice to deprive another of the intangible right of honest
services.
The Prosecution of Corporate Executives and Other Private-Sector Employees Under
1346
1346 has allowed the government prosecutors to be aggressive in prosecuting those in
private sector, especially corporate officers. It has been used to not only prosecute corporate
executives, but it has been used to prosecute lower-level employees. Because of its vagueness, it
was a prosecutors trump card when the normal fraud statutes did not fit the situation. One
commentator estimates that at least 113 corporate officers, directors, and other senior corporate
officers since 2000 have been charged with violating 1346.
80
Also convicted of honest services

74
United States v. McNieve, 536 F.2d 1245, 1249 (CA8 1976).
75
483 U.S. 350 (1987).
76
Id. at 353.
77
Id. at 356.
78
See Ibid, (The sparse legislative history indicates that the original impetus of the mail fraud statute was to
protect the people from schemes to deprive them of their money or property.)
79
Ibid.
80
Lisa L. Casey, Twenty-Eight Words: Enforcing Corporate Fiduciary Duties Through Criminal Prosecution of
Honest Services Fraud, 35 Del. J. Corp. L. 1, 42.
- 145 -

fraud were many professionals who advised top management, such as attorneys and investment
bankers.
81

Many commentators and defense lawyers have criticized the statute because of it
vagueness and have called for courts to find it unconstitutional. There is no reliable legislative
history to guide the courts as to the meaning of this language, and Congress has never amended
the statute.
82
Taken to its literal extreme, it could be used to convict a broad spectrum of
otherwise unethical behavior. One court stated the literal terms [of 1346] suggest that
dishonesty by an employee, standing alone, is a crime.
83
With the passage of 1346, the
question became how broadly the statute should be read. Should 1346 be read narrowly to deal
only with an intangible right to honest services, or should the statute be read more broadly as to
Congress intent to give greater latitude to the mailing or transmission element of a mail of
wire fraud scheme?
84

Courts attempted to limited the scope of 1346 by creating standards under which a
private employee would be convicted for honest services fraud. Circuit courts have restricted
convictions to those where there was some sort of special relationship in which the defendant
owes some sort or duty to the victim. In employer-employee relationships, the courts look to see
if the employee owed a fiduciary duty to the employer.
85
The problem, though, is that 1346
doesnt mention anything about the requirement of a fiduciary duty.
Some courts have indicated that not every breach of a fiduciary duty rises to the level of a
violation of 1346.
86
The problem, then, is determining which fiduciary breaches qualify as a
violation of 1346, and which ones dont. There is no consensus among the courts on this issue.
Multiple methodologies have lad to irregular, and even conflicting interpretations. This problem,
of course, is not unique to 1346, or even statutory construction generally. In this context,
however, with the liberty of fiduciaries at stake, the courts inconsistent approaches raise acute
concerns. A defendants freedom should not depend on the vagaries of geography or a
potentially idiosyncratic application of prosecutorial discretion.
87

United States v. Rybicki
88
, was considered the leading opinion on honest-services fraud
prior to Skilling. The Second Circuit found that honest-services fraud cases fall into two groups-
cases involving bribes or kickbacks and cases involving self-dealing. The court found that in
cases involving a bribery or kickback, the bribery or kickback itself is sufficient to prove an
honest-services violation. In self-dealing cases, however, the defendants behavior must cause,
or be capable of causing, some detriment to the employer. The court stated:
The phrase scheme or artifice [to defraud] by depriving another of the intangible right
of honest services, in the private sector context, means a scheme or artifice to use the mails or
wires to enable an officer or employee of a private entity (or a person in a relationship that gives

81
Id. at 43.
82
Ibid p. 50.
83
United States v. Frost, 125 F. 3d 346, 368 (6
th
Cir. 1997).
84
James Lockhart, Validity, Construction, and Application of 18 U.S.C.A. 1346, Providing that, for Purposes of
Some Federal Criminal Statutes, Term Scheme or Artifice to Defraud Includes Scheme or Artifice to Deprive
Another of Intangible Right to Honest Services, 172 A.L.R. Fed. 109, 17 (originally published in 2001, last accessed
Mar. 21, 2009).
85
See United States v. Caldwell, 302 F.3d 399, 409 (5
th
Cir. 2002).
86
See United States v. Carpenter, 791 F.2d 1024, 1035 (2d Cir. 1986) affd, 484 U.S. 19 (1987).
87
See Casey, supra note 18, at 52.
88
The case was originally heard by a panel in United States v. Rybicki (Rybicki I), 287 F.3d 257 (2d Cir. 2002) ,
later heard en banc in United States v. Rybicki (Rybicki II), 354 F.3d 124 (2d Cir. 2003) (en banc).
- 146 -

rise to a duty of loyalty comparable to that owed by employees to employers) purporting the act
for and in the interests of his or her employer (or of the other person to whom the duty of loyalty
is owed) secretly to act in his or her or the defendants own interests instead, accompanied by a
material misrepresentation made or omission of information disclosed to the employer or other
person.
89

The Rybicki case was unique in that it showed that the Defendant did not necessarily have
to be the one who had the fiduciary duty with the injured employer. The Defendants in Rybicki
were attorneys who paid insurance adjusters for an insurance company to process the claims of
Defendants clients faster than others. The Defendants in that case had no fiduciary duty to the
injured employer- it was the insurance adjusters who had the fiduciary duty. Therefore, honest-
services fraud applies when someone (not necessarily the Defendant) owes a fiduciary duty to
the injured employer.
Commentators have questioned the fiduciary duty requirement, and have questioned
what law a court applies in determining if a fiduciary duty exists. Fiduciary duties are normally
determined by applying the applicable state law. Had the court in Rybicki created a Federal
fiduciary standard? Courts have ruled that a violation of state law fiduciary duties is not
required.
90

The Fifth Circuit in United States v. Brown
91
, muddied the waters even further. In Brown,
the defendants were four former Merrill Lynch investment bankers who, along with Enron
employees, arranged for Merrill Lynch to purchase power barges in order to inflate Enrons
earnings statements. Further, evidence showed that Enron agreed to purchase the barges back
from Merrill Lynch if they could not find a third-party buyer within six months of the transaction
between Enron and Merrill Lynch. In essence, the government alleged that the sale to Merrill
Lynch was not a true sale, and thus should have been disclosed by Enron in their financial
statements.
The government, though it had no evidence of bribery, kickbacks, or self-dealing, argued
that the Enron executives who approved the transaction breached their fiduciary duties by failing
to disclose that the sale was not a true sale. The court disagreed, concerned that using the
governments theory would mak[e] every knowing fiduciary breach a federal crime. Instead, the
court chose to limit the honest-services law when it ruled that 1346 is not violated where an
employer intentionally aligns the interests of the employee with a specified corporate goal, where
the employee perceives his pursuit of that goal as mutually benefiting him and his employer, and
where the employees conduct is consistent with that perception of mutual interest.
92

The landscape that existed at the time of the Supreme Courts review of the Skilling case
was that of muddied, sometimes incongruous decisions that varied from circuit to circuit. Many
unanswered questions remained, and practitioners and commentators hoped that the Supreme
Court would offer some guidance so that decisions between circuits would be more consistent.
Perhaps, some hoped, they would rule that 1346 was unconstitutionally vague.
The Skilling Case

89
Id. at 146-47 (alteration in original).
90
See United States v. Weyrauch, 548 F.3d 1237, 1245 (9
th
Cir. 2008), cert. granted, 129 S. Ct. 2863
(J une 29, 2009) (No. 08-1196).
91
459 F.3d 509 (5
th
Cir. 2006).
92
Id. at 522.
- 147 -

Jeffrey Skilling was the former CEO of Enron Corporation, an energy company
headquartered in Houston. Enron was a high-flying company in the 1990s. They were
aggressive, innovative and supposedly very profitable. They were consistently considered a
favorite of Wall Street. It all came crashing down in 2001, when Enron ran out of cash and was
forced to file bankruptcy. Many investors, employees and retirees lost their life savings as a
result of the Enron bankruptcy.
The outrage caused by the Enron meltdown, along with other bankruptcies such as
WorldCom, led to numerous hearings on Capitol Hill. Members of Congress demanded action by
authorities at the Justice Department, and they soon responded with numerous indictments
against several corporate executives at Enron, including Skilling.
Skillings trial in Houston lasted four months. The Houston jury found him guilty of
nineteen counts, including honest services fraud. He was found not guilty of nine insider-trading
counts. Skilling appealed to the Fifth Circuit Court of Appeals; they affirmed the district courts
decision. Consequently, Skilling appealed to the United States Supreme Court, which granted
certiorari.
In his appeal to the Supreme Court, Skilling argued, among other things, that the honest
service fraud statute was unconstitutionally vague. He also argued that his actions did not
constitute honest-services fraud. The court affirmed in part and reversed in part.

The Constitutionality of 1346
The Supreme Court first looked at Skillings argument that 1346 was unconstitutionally
vague. There was not much analysis in their ruling. In ruling that 1346 was not
unconstitutionally vague, the court discussed the need to construe, not condemn, Congress
enactments. They also noted that the various Courts of Appeals, though divided as to how they
interpret 1346, had never thrown the statute out due to the statue being irremediably vague.
93

Skillings Claim that His Actions Did Not Constitute Honest-Services Fraud
Noting that the pre-McNally cases were not models of clarity, the Supreme Court pointed
out that the honest services cases preceding McNally were dominantly and consistently applied
to bribery and kickback schemes. Therefore, the court reasoned, Congress must have intended
1346 to reach at least bribes and kickbacks when they passed it. The prosecution had never
alleged that Skilling had received a bribe or a kickback. Based upon this, the court held that
1346 criminalizes only the bribe-and-kickback core of pre-McNally cases.
94
Therefore,
Skillings conviction for honest-services fraud was overturned.

Questions Remaining from the Skilling Case
Several questions remain unresolved from the Skilling case:
1. Fiduciary Duty- Must the Defendant in an private-services honest-services case
owe a fiduciary duty to their employer, and if so, where does this fiduciary duty standard come
from? Does it come from state law, or is there a built-in federal standard in 1346?
2. What constitutes a Bribe or Kickback?
At least on skeptic indicates that the government will inevitably try to expand the
boundaries of what constitutes a bribe or kickback. Timothy OToole, in an article written before
the Supreme Courts decision, theorizes that prosecutors would inevitably try to expand beyond

93
Skilling at 2928.
94
Id at 2931.
- 148 -

those discreet offenses and into bribery-esque conduct, which consists of conduct that is like
bribery but doesnt satisfy any definitions of bribery. The expansion is inevitable because
without the bribery-esque conduct, there could be no conceivable basis for the honest-services
law. Bribery and kickbacks are already clearly forbidden under a host of federal, state, and local
laws. If that is the only focus of the honest-services statute, it is completely superfluous.
95

OToole points to an ongoing case involving lobbyist Kevin Ring as an example of where
prosecutors are looking for bribery-esque conduct to prosecute defendants under 1346. Ring
was a lobbyist who is being prosecuted for doing what lobbyists do- trying to influence
legislation. Ring filed a motion to dismiss his case in light of the Supreme Courts ruling
limiting 1346. The District Court for the District of Columbia denied his motion. The Ring
case should give some indication of how courts will interpret Skilling, and how far the
prosecutors will try and push the boundaries..
3. What will happen to those Defendants who pled guilty to honest-services fraud
rather than go to trial? Will those prosecuted under the honest services fraud statute who chose
to plead guilty rather than have their case tried be allowed a review of their case? When they
pled guilty, they waived their rights to appeal their case. Will they be allowed a chance to have
their sentences reviewed and possibly have their sentences reduced? The authors guess is that
by pleading, they lost their chance for any sort of review of their case. If that is the case, that
seems unfair, because the ones who usually plead rather than take their case to trial are the
lower-level employees who cannot afford the crushing expense ot taking their case to trial.

A Comparative Law Analysis of the Honest-Services Fraud Statute
A database search of other countries, including all of the European Union countries,
Malaysia, Australia and New Zealand, does not indicate that these countries have anything that
specifically parallels the honest-services fraud statute. These countries have do fraud statutes;
whether or not their statutes are as broad as those here in the United States is debatable.
A review of Canadian fraud statutes indicates that they have several statutes dealing with
fraud- for instance, Canada has a fraud statute that deals with bribery of government officials, a
securities fraud statute, and many others. However, none of them deal with the term honest
services. Therefore, it is somewhat hard to compare the honest-services fraud statute to fraud
statutes in other countries.
Conclusion
The Supreme Courts ruling in the Skilling case is expected to limit the government
prosecutors utilization of the honest-services fraud statute against private-sector employees.
There remain some unanswered questions as to what extent courts will limit its application
should government prosecutors wish to push the envelope. The Ring case may give further
direction as to how far prosecutors will attempt to apply the law, and to what extent courts will
limit the honest-services fraud prosecutions. A search of the fraud statutes of several other
countries indicates that the honest-services fraud statute is unique to the United States.

95
Timothy P. OToole, The Honest-Services Surplus: Why Theres No Need (or Place) for a Federal Law
Prohibiting Criminal-esque Conduct in the Nature of Bribes and Kickbacks, 63 Vand. L. Rev. 49, 50-51.
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I nter nati onali zi ng The Busi ness School
Cur r i culum:
One Uni ver si tys Exper i ence

Rubee Li Fuller
Rifat Gorener
Tanweer Hasan
Ralph Haug
Thomas Head
Mark Holtzblatt
Gordon Patzer
Abstract
Roosevelt University, faced with the need to internationalize its business curricula,
established a task force to develop recommendations. This case study summarizes the groups
thoughts and recommendations. Of central importance is the discussion regarding what exactly
does internationalizing mean? Each university faces its own unique parameters so not all the
recommendations might be relevant to all institutions, but the process described should prove
helpful.
Introduction
In the last decade business schools world-wide have discovered what their students
employers have known for well over 30 years commerce is a global construct. What does this
mean? Organization theory tells us that a businesss task environment involves nine sectors:
competitors, customers, financial resources, human resources, political/regulatory, sociocultural,
suppliers, and economics (Daft, 2010). Even small organizations realize that most, if not all, of
their sectors exist at the multinational level. Business plans, goals, procedures, and the decisions
that go into making them, must be developed with a full understanding of the uniqueness and
large diversity of national economic, legal, and cultural systems that exist.
Ultimately the fundamental purpose of any business school is to prepare students to be
effective operators in the business environment. Obviously this means that the students must be
globally proficient. As business schools have become aware of this dimension to their
responsibility they have reacted by internationalizing their curricula. This requires each
institution to struggle with two fundamental questions: 1) What, exactly, is internationalization?;
and 2) What practices should be adopted to internationalize? This paper presents the case of one
urban, private, U.S. University who addressed these two questions.
Introductory Observations
Internationalization is not an option for Roosevelt Universitys Walter E. Heller
College of Business Administration. Aside from its students employers (and future employers),
pressures have been brought to bear from the university as evidenced by one of its strategic
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initiatives: Develop and expand study abroad opportunities for RU students who will become
competitive with their peers around the world and emerge as leaders of global enterprises and
organizations. (Office of International Programs).
Possibly more important are the realities imposed by the two business school
accreditation bodies (Roosevelt University is accredited by the ACBSP and is applying for
AACSB accreditation):
The AACSB requires its members to prepare students with the personal competencies
needed to work in an environment of global economic forces and significant
differences in cultural values (AACSB, 2007, p. 1). These personal competencies
include cultural self-awareness, cultural consciousness, and multicultural leadership
(Cant, 2004)
The ACBSP also clearly believes that globalization is of central importance, as it
classifies global business environment as one of the core curriculum components,
equal in importance as accounting, marketing, economics, and business strategy, and
required knowledge for all business students.
Clearly, the business academy recognizes the overwhelming importance for todays
business student to take on an internationalized frame of reference. This can be seen in the
importance both of the principal accrediting associations place upon the globalization of
curricula. Equally clearly, the faculty of Roosevelt Universitys Walter E. Heller College of
Business Administration agrees with this internationalization imperative when it recently
approved its new mission statement identifying three driving foci for its academic programs:
Roosevelt Universitys Walter E. Heller College of Business Administration
provides a diverse population of students the best opportunity to develop critical skills
necessary for success. This education emphasizes professional integrity, sustainable
business practices, and global engagement. Roosevelt University Catalog
The college, enacting this new mission statement, created a task force and charged it to
examine internationalization and make a series of recommendations to the colleges faculty
regarding how to fulfill its commitment to producing internationalized students. What follows is
a summary of what the task force discovered, followed by a list of recommendations spread out
over a three-year implementation schedule.
What Is Internationalization?
Before one can establish exactly what program elements should be introduced in order to
internationalize, or globalize, business students it seems advantageous to first define the
construct. It is quite interesting that it appears the term is one that everyone seems to understand,
but no clear definition exists in the literature. One source 96 states it is the process of
integrating international and multicultural perspectives and experiences into the learning,
discovery and engagement mission of higher education. The American Council on Education
defines internationalization as institutional efforts to integrate an international, global, and/or
intercultural dimension into the teaching, research, or service functions of an institution.
(A.C.E.) Clearly these two sources establish direction for the faculty, but what of the students?
Perhaps the closest approximation comes from the Danish Ministry of Education (2005) which
suggests that internationalization is the process of developing an individuals insight into and

96
From A call to leadership: The presidential role in internationalizing the university
http://www.eric.ed.gov/ERICDDocs/data/ericdocs2sqi/content_storage_01/0000019b/80/1b/a0/71.pdf
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capacity to understand the cultural complexity of everyday life and to communicate in a
prejudice-free manner with people from other cultures (approximate translation).
It also appears a generally accepted rule that successful internationalization of the
students requires more active learning techniques than traditional classroom activities. Business
educators cannot simply teach that cultural differences matter. They must equip students to
understand how cultural differences work and thus how to turn cultural competence into a
competitive advantage (Egan & Bendrick, 2008, p. 387). Henry Mintzberg pontificates upon
the subject: To broaden people beyond geographic borders means not only to teach about
globalization, but also to provide a truly balanced international experience (Mintzberg &
Gosling, 2002, p. 66).
Perhaps the best way to operationally define internationalizing would be to look at the
requisite skills and competencies any educational program should focus upon. There are at least
two different, but not conflicting, attempts at establishing these requirements. The first comes
from a global research team. Ang (et al, 2007; as described in Egan & Bendrick, 2008, p. 391)
and his colleagues identified four different components of global understanding:
Metacognitive intelligence. The ability to acquire cultural knowledge, recognize
cultural assumptions, understand cultural norms, and perceive others cultural
preferences before and during interactions.
Cognitive intelligence. Knowledge of economic, legal, values, and social systems in
different cultures and subcultures.
Motivational intelligence. The desire to learn about and function in situations
involving cultural differences, based on intrinsic interest and confidence in ones
ability to deal with them.
Behavioral intelligence. The ability to exhibit situational appropriate verbal and
nonverbal actions, including words, tone, gestures and facial expressions, when
interacting with people from different cultures.
The second approach grows out of an extensive review of expatriate training. Yamazaki
and Kayes (2004) concluded that there are 9 essential competencies an internationalization
program should revolve around:
Building relationships: ability to gain access and maintain relationships with members
of a host culture
Valuing people of different cultures: empathy for differences; sensitivity to diversity
Listening and observation: knows cultural history and reasons for certain cultural
actions and customs
Coping with ambiguity: recognizes and interprets implicit behavior, especially
nonverbal cues
Translating complex information: knowledge of local language, symbols or other
forms of verbal language and written language
Taking action and initiative: understands intended and potentially unintended
consequences of actions
Managing others: ability to manage details of a job including maintaining cohesion in
a group
Adaptability and flexibility: views change from multiple perspectives
Managing stress: understands own and others mood, emotions, and personality
We suggest that these two sets, as they relate to executing the various functional and
strategic business operations, serve as the basic driving force for our globalization programs.
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Why todays business leaders need internationalization

Internationalization of the curricula will require a sustained significant effort by the
colleges faculty and administrations, as well as significant commitments on the part of the
university administration and student support services. To obtain, and maintain, these efforts it
is wise to establish exactly why todays business students must develop a global perspective.
Title VI of the Higher Education Act clearly establishes the U.S. governments position on
internationalization with regards to business education:
(a) The Congress finds that (1) the future economic welfare of the United
States will depend substantially on increasing international skills in the business
community and creating an awareness among the American public of the
internationalization of our economy; (2) concerted efforts are necessary to engage
business schools, language and area study programs, public and private sector
organizations, and United States business in a mutually productive relationship
which benefits the Nations future economic interest; (3) few linkages presently
exist between the manpower and information needs of United States business and
the international education, language training and research capacities of
institutions of higher education I the United States, and public and private
organizations; and (4) organizations such as world trade councils, world trade
clubs, chambers of commerce and State departments of commerce are not
adequately used to link universities and business for joint venture exploration and
program development.
Todays business environment is such that virtually all businesses encounter international
interactions, and that these occur at a fairly low level in the organizational hierarchy. Businesses
are finding that they require a fair degree of global awareness among even their entry level
employees. However, a recent European study reported that one of the least inter-culturally
competent social groups are business students (Blasco, 2009).
It is not just from inter organizational relations that require internationalized employees,
but intra organizational operations as well. For example, conflict between employees based
upon cultural differences is ever increasing and becoming a serious threat to both domestic and
global firms (Egan & Bendrick, 2008). It has also been found that foreign acquisitions often fail,
not for financial or operational issues, but rather because the acquiring organizations
management systems are not compatible with the host nations culture (Egan & Bendrick, 2008).
Todays managers no longer work solely in their own home culture, but must work across
cultures. This work takes on many forms, such as: 1) encountering employees, customers, and/or
vendors from different cultures, 2) trips to overseas customers or suppliers, 3) short visits to
international divisions, and 4) long-term expatriate assignments (Ymazaki & Kayes, 2004).
Developing a global corporate mindset and a group of global managers as its main flag bearers
has become a key prerequisite for successfully competing and growing in worldwide markets
(Paul, 2002, p. 5).

How Should Roosevelt University Approach Internationalization?

As with the term itself, much of the literature doesnt really provide guidance with how
one should internationalize ones students. The American Council on Education (ACE)
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defines international education as learning opportunities that are designed to help students
understand other cultures and nations; communicate across borders; and acquire an
understanding of the cultural, social, and political systems of other countries and regions, and the
global forces that are shaping the world.
Cant (2004), identified three ways which business schools have sought to internationalize
their business curricula:
International business degrees/majors. Combines traditional business courses with
language and area studies, and in-depth observation (this method is preferred in
Europe (Blasco, 2009)
Specialized stand-alone international business courses.
Infusion. International dimensions are integrated into the traditional business courses
(this method is preferred in the U.S. (Blasco, 2009)
For purely political and budgetary reasons, most business schools start to internationalize
their curricula by simply creating separate international courses in order to avoid having to retool
domestic oriented faculty (Egan & Bendick, 2008).
One needs to avoid stereotype-ridden take-away lessons. Take for example someone
taught that Scandinavians are uncomfortable with bargaining. A manager who had been taught
such material could hardly be blamed if he blunders into a sales presentation to Ikea intending to
hold firm on prices because Scandinavians are culturally programmed to avoid the confrontation
involved in hard bargaining. When he encounters the actual Ikea buyer a Greek raised in
Canada, trained in the Harvard negotiating program, with 20 years experience as a buyer in
China this former student will soon rue his mis-education (Egan & Bendick, 2008, p. 389).
This illustrates the critical need to teach students to become a culturally complex individual so
that they can operate in a culturally complex situation.
Cant (2004, p. 180), reports While it is important to ensure international business
students develop technical business skills and knowledge, if this is achieved without students
gaining an understanding of the impact of culture then they will not be prepared for the realities
of global commerce. Typical international courses are generally recognized as a good base for
internationalization, but not sufficient at providing the students with the skills needed to be
competent global managers (Praetzel, 1999). Mintzberg and Gosling (2002, p. 65) state
Although managers cannot be created in a classroom, practicing managers can profoundly
improve their capabilities there. The research around expatriate training clearly establishes that
internationalization efforts should fall under the general category of experiential learning
(Yamazaki & Kayes, 2004). Recent studies have clearly established that cultural awareness is
most effectively learned through direct, experiential exposure to intercultural situations that
engage the students both affectively and cognitively (Jones, 2003). Mintzberg and Gosling
(2002) believe it is essential that to be internationalized, students truly need to live cross-cultural
experiences as authentically as possible. These experiences are best delivered not by an
international faculty, but by multidomestic ones, each rooted in its own culture (p. 66).
An examination of the graduate students at the Copenhagen Business School (a truly
multicultural student body) found that even a strong emphasis on culture taught within the
framework of a highly integrated, interdisciplinary international business program, with a student
population that ought in theory to be particularly receptive to cultural matters, is not enough in
itself to guarantee that students engage with culture seriously during their studies. I recommend
strengthening conceptual integration with (activities) that explicitly address business
activities from a cultural perspective to avoid a situation where they opt for cultural short-cuts in
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their assignments in the form of overly general, values-based descriptive approaches to culture
(Blasco, 2009, p. 174).
Blasco (2009) calls for avoiding the cafeteria approach for internationalization where
one provides (pedagogically) a bit of this and a bit of that in the hope that something will be
useful (p. 176). The schools program should be purposeful and systematic, and under the
direction of a single international business studies department. It is critical to keep this in mind,
as often times we in academia face such requirements (like internationalization) by a process
similar to brainstorming throwing disconnected programs and ideas into the mix hoping that
something will work. There is no question that to truly accomplish internationalization one must
use multiple activities, however it is equally certain that these efforts must be coordinated and
compatible. With this in mind, some of the specific activities that have gained attention in the
literature include:
Clearly, immersion in different and challenging cross-cultural situations is the best
method for teaching (Mintzberg & Gosling, 2002). Mintzberg has designed a masters
degree where the students take courses in several different nations, from professors
native to those countries.
Action Learning is another strong possibility for internationalization (Yamazaki &
Kayes, 2004). Action learning involves teams of individuals working on creating
solutions to organizational problems, in this case in cross-cultural settings. This is
exactly what our British partnerships involves.
The globalization strategies of business schools have focused on developing high-
tech links with non-U.S. business schools, overseas study tours, foreign language
requirements, faculty and student exchange programs, and international course
material. Other progress includes recruiting higher percentages of foreign students
(Friga, Bettis & Sullivan, 2003, p. 237).

Comparison University Practices

In the firm belief of not wanting to reinvent the wheel and to provide greater insights
into the industry practices for internationalization several institutions were studied. These
institutions represent both the AACSB and ACBSP. The institutions selected because they were
either competitors for Roosevelt University, while others are schools noted for excellent
international programs. The purpose was to identify the practices that both the business colleges
and the universities implemented.
Northern Illinois University:
1. University Wide
a. The NIU Study Abroad Office sponsors travel experiences to 75 different
countries lasting from 10 days to one year.
b. There is an International Education Week each year in the fall, consisting of
events, lectures, and informational sessions regarding travel experiences.
c. Undergraduate Certificate Programs are offered in Asian-American studies,
Latino/Latin American Studies, International Studies, International Business
Studies (all liberal arts courses), International Politics Studies, International
Development Studies
2. College of Business
a. Faculty exchange program with Slobomir P University in Serbia
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b. China, Spain, and France study abroad programs
c. Undergraduate International Business Seminar (elective) focuses on countries
and businesses in the European Union. Combines both cultural experiences and
the business perspectives of 6 to 8 firms.
d. Study Abroad Scholarships
e. Undergraduate students must take one of the following courses as a part of their
general education: Anthropology, World Geography, Geography of Economic
Activities, World History since 1500, World Religions, Foreign & Comparative
Politics, Sociology, Women Across Cultures
f. MBA offers a European Business Seminar similar to the undergraduate class
g. Graduate short-term study abroad courses in Southeast Asia, China & Korea
h. Most functional areas have graduate level international courses
i. The Professional MBA a cohort based one year program requires students to
participate in a 9 day international experience

DePaul University
1. College Of Business
a. One of their learning objectives is to ensure their students understand business
within a global context.
b. Undergraduate students must complete at least three courses with a global
focus. This is typically met through the completion of courses taken to satisfy the
general education requirements.
c. There appears to be at least recurring class (in Marketing) where students are
taken to a foreign country. This has included at least France and India.
d. The graduate (MBA) capstone course is Strategic Analysis For Competing
Globally. It appears to be a typical strategic management class, but specifically
includes international commerce.
e. There is a short term, eight to ten day, international seminar that all graduate
students are encouraged to participate in.
f. The college offers lock-step MBA programs in Bahrain and Taiwan. They
have also offered such programs in Eastern Europe and China.
g. The College has established the Driehaus Center For International Business to
coordinate its various international programs for both its students and faculty.
h. There are international student exchange opportunities for both undergraduate
and graduate students including: South Africa, Japan, Singapore, Austria,
England, Finland, France, Germany, Greece, Italy, Poland, Sweden, Argentina,
Chile, and Peru.

Governors State University
1. University Wide
a. The Universitys International Services Office oversees the study abroad
programs, which include semester long, short term tour trips, and internships.
b. The university provides some financial aid to assist students with these study
abroad programs.
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a. The college is actively attempting to develop exchange relationships with
several European colleges and universities.
b. The College has an International Business and Global Trade Research Institute,
which is an academic and research unit that assists the business community as
well as maintaining a worldwide comprehensive data base.
c. The B.A. Business Administration degree and the B.A. Business & Applied
Science degree do not have an international class as a part of the business core.
d. The BABA does have an International Business Concentration which requires:
International Accounting, Intercultural Communication, International Trade and
Commercial Policy, International Financial Management, International Business
Strategy and Technology Management, International Marketing Strategies, as
well as 12 credit hours in a foreign language. An internship (either a domestic or
international) with an international business is strongly encouraged.
e. The MBA degree does require Organizational Behavior in the Global Context
as a core course.
f. The MBA does have an International Business concentration

St. Xavier University
1. University Wide
a. Center for International Education the department that provides study abroad
experiences in over 15 countries.
b. Wide variety of short-term (one to two week) international study trips open to
both graduate and undergraduate students.
c. The university offers various forms of financial aid to assist students with short-
term travel study programs. These include various named scholarships from
Rotary International, Gilman, and Morgan Stanley.
d. The university also provides opportunities for students to take part in service
oriented international projects. These trips are subsidized by the university in
order to make them more affordable for the students.
e. The university also permits students to participate in study abroad programs
offered by outside universities and other agencies. These can be used for
academic credit if they are preapproved.
f. The university offers an International Studies Major, that includes world
history, world geography, world politics, global money and power, four semesters
of foreign language, a disciplinary specialization (anthropology, history, political
science, sociology), and four additional courses with international content.
2. College of Business
a. Faculty led study abroad program in China during the week of spring break is a
for-credit graduate college credit class. Class includes guest speakers, readings,
and site visitations.
b. Undergraduate business core course: International business
c. Undergraduate BSBA International Business concentration consisting of
International Finance, Global Logistics and Supply Chain Management,
International Economics, and International Marketing
d. Finance BSBA concentration requires International Finance
e. MBA core does not include an international course.
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f. MBA Finance concentration requires International Finance

Indiana University
1. University Wide
a. International Office sponsors various clubs like Japanese Conversation Club,
Korean Christian fellowship, Chinese Conversation Club and the like.
b. The university sponsors an International Education week.
c. The Office of Overseas Study facilitates study abroad program (currently, for
about 2000 students) to a large number of foreign countries. This office also puts
in $100,000 for scholarship to ensure that the programs remain affordable.
d. The Center For The Study of Global Change is located within the Office of the
Vice President for International Affairs. This center facilitates analysis and
innovative thinking about global issues and provides support for innovations for
teaching, learning and research in global studies.
e. The Center for International Education and Development Assistance (i)
coordinates short-term teaching and training assignments for faculty,
administrators, and graduate students with partner institutions supported by
external grants and contracts, (ii) provides visa and payment information for
faculty members and departments that wish to host international guests and
scholars, etc.
a. Hosts Center for International Business Education and Research (CIBER). This
center helps faculty weave a global perspective into their classroom teachings,
helps with professional development (hosts international Luncheon Series, which
brings international government and business leaders to Indiana to speak with
local business people); and fund student programs in various countries.
b. At the graduate level, CIBER invite students to participate in the Kelly
International Perspective field study course, which aims to give students general
knowledge about a particular country as well as specific knowledge about a
business issue within that country. The course culminates in a ten day research
trip to the country.
c. CIBER provides travel awards to MBA students to support their participation in
approved study-abroad programs.
d. The college, through CIBER, provides assistance to doctoral students via
research awards.
e. At the undergraduate level CIBER offers an Emerging Economics Courses and
Study Tours in the spring semester. The course is structured to combine
classroom and in-country experiences in a variety of countries.
f. CIBER funds 10 scholarships a year to undergraduate students participating in
the Emerging Economics Course and Study Tour.
g. The college sponsors five teams of undergraduate students to participate in a
web-based Marketplace Global Competition with teams from around the world.
h. The college provides a variety of funding opportunities for faculty members
Faculty Research Grants (5 a year), Annual Travel and Research Award (1 a
year), and some money to develop a Global Citizenship Course.
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i. The college provides support for a variety of professional development
activities Pedagogy in Business Conference, CIBER Case Collection,
International Teaching Opportunities, etc.
j. The college provides support for the Foreign Language Tutoring Program
(French, Spanish, German, Italian, Chinese, Japanese, Russian, Arabic, and
others.
k. The College has a Center for Global Sales Leadership which infuses the
curriculum with contemporary issues relevant to international sales.

Roosevelt University Parameters
While looking to other universities for direction provides guidance, it must berecognized
that each university has its own unique dimensions which create relevant parameters for the
design of its own internationalization programs. For Roosevelt University these include
During the Fall 2009 semester, university wide, Roosevelt had enrolled 124 new
international students (42 undergraduate and 82 graduate), making a total of 335
international students on campus (roughly 5% of the student body). The single
program with the greatest number of international graduate students is the MBA, with
51. The M.S. Accounting program is ranked 8
th
with 11 international students. At the
undergraduate level, the College of Business hosts 4 of the top 10 programs with
international students (Finance = 11, Management = 8, Marketing = 7, Accounting =
6). These international students are, by definition, acquiring what it takes to become
internationalized, as they are exposing themselves to a foreign nation (in this case,
the U.S.). However they could also provide a potential asset that could be exploited
for use by the other students.
There are significant numbers of foreign-born U.S. permanent residents and
naturalized citizens that are enrolled at Roosevelt University. There is no way to
accurately establish the exact numbers, as the university does not collect such data.
Many of these students have significant life and work experiences in their home
nations as well as the United States. Once again, these individuals have already been
exposed to internationalization. They could also prove to be of major assistance in
meeting our goal of providing their fellow students with a global perspective.
The university does have solid experiences with offering travel abroad programs. In
the Fall 2008 semester (university wide) there were 18 Roosevelt University students
who took part in a semester abroad, or a faculty led experience. The Spring, 2009
semester had 57 students (this included the Nottingham Consultancy trip with 13
students) taking part in such experiences. The Summer, 2009 semester number was
19, and Fall, 2009, had 10 students. The countries included (with number of
students): Austria (1), Greece (7), Guatemala (20), Italy (2), Mexico (1), Poland (1),
Spain (3), United Kingdom(31), Belize (6), Germany (1), Ghana (1), France (5),
China (16), Thailand (1), Finland (1), Costa Rica (2), South Africa (1), Cypress (1),
Tanzania (1)
One major difficulty in developing any program for Roosevelts college of business is
that there is actually four different student populations. First, like most business
schools, there are significant numbers of students at both the undergraduate and
graduate levels. However, at both levels there are also two different groups of
students. The first group consists of those students who cannot realistically afford any
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financial burden beyond that of their regular courses (making international travel
impossible). The second group is made up of those who can afford some type of
international travel based experience. This means (assuming experiential learning is
to be a major aspect of the program) there needs to be a variety of methods to
accomplish the same purpose. It is absolutely essential that some of these methods
must be offered at no additional expense (beyond tuition and textbooks) to the
students.
There is a fairly large student body at both levels (between 800 and 900 students
each). There are also both day and night students, as well as both part-time and full-
time students. Clearly whatever programs that are established, there is the need to
offer multiple opportunities throughout the year.
Some universities create non course credit graduation requirements that would force
students to jump through a variety of hurdles unrelated to course work in order to
become internationalized. While not necessarily impossible at Roosevelt, such
requirements would be extremely difficult to wind through the various bureaucratic
steps for approval. Such recommendations would also likely encounter a great deal
of resistance from students, university administrators, and non business faculty
members. In addition, for basic practical student financial reasons, any required
activities will have to be credit bearing so that students can use financial aid and
tuition reimbursement programs to help defray the costs.
Chicago itself offers enormous possibilities for Roosevelt to exploit. These include a
large percentage of non U.S. born workers, a large number of U.S. businesses
(headquarters and regional offices) that have significant FDI. In addition the city is
home to a very large number of foreign owned businesses.
A significant percentage of the colleges current faculty, both full and part-time,
already possess significant work-related international experiences (research, teaching,
and consulting) that provide a very solid base on which to build any programs.
Currently the university has established reciprocal student exchange programs with
universities in Australia, China, England, Finland, Germany, Mexico, Poland, and
South Africa.
Roosevelt University has also signed Memorandum of Understandings for
cooperation with institutions in Brazil, China, Poland, Russia, South Africa, Taiwan,
The Netherlands, and Turkey. These agreements permit the relevant academic units
in both institutions to start conversations with each other in order to develop specific
programs for practices such as faculty exchange, research collaboration, and student
exchanges.

What WEHCBA Currently Has In Place

The next step in the process involved an audit of current practices that address
international issues. First involved identifying the current international courses the college
offers. These are:
Undergraduate: (note all BSBA students must take at least one international business
course)
International Accounting
International Financial Analysis
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Survey of International Business (Management)
International Marketing Strategies
Graduate:
International Accounting
Global Accounting: IASB & IFR
International Financial Analysis
Global Issues In Information Systems
International Business Environmental Analysis
International Management & Leadership
International Consultancy
Global Business Simulation
International Marketing Analysis
The review then identified other program elements the college was involved in. These included:
A Spring semester international study course to Turkey.
The PRME Initiative
The graduate consultancy class with Kent University, Canterbury, United Kingdom.
Some of the students will also attend classes at Kent.
Faculty/student exchange agreement with Krakow Poland Business School.
Investigating the possibility of an exchange program with Copenhagen Business
School
Investigating the possibility of an exchange program with Brazilian University
The facultys background was then examined. This involved an on-line survey to
discover the relevant global experiences possessed by the current faculty (full and part-time).
38.5% of the respondents indicated recent international travel for purposes of
research, training, teaching, or conference presentations
42.9% of the respondents indicated immediate future plans of international travel for
purposes of research, training, teaching, or conference presentations.
65% report their international work-related experiences have contributed to their
teaching, research, and professional advancement.
What percentage of the faculty would like to contribute to international education on
campus through the following methods:

Item Extremely
Interested
Somewhat Interested Little or No
Interest
Develop ways to share ideas on international programs with the
university community
15.4% 53.8% 30.8%
Advise international students 15.4% 76.9% 7.7%
Develop means to encourage international student life & community
outreach
23.1% 30.8% 46.2%
Promote place for international education in my academic
department/program
53.8% 15.4% 30.8%
Explore funding for international projects 30.8% 30.8% 38.5%
Develop and teach courses in international studies 50.0% 35.7% 14.3%
Develop and expand international internships and exchange programs
for faculty
35.7% 42.9% 21.4%
Develop or expand exchange programs for students 28.6% 42.9% 28.6%

Specefic Recommendations

What follows are the committees list of recommendations for internationalizing the
colleges curricula. It would be virtually impossible to adopt all of them in a short period of
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time. Therefore the committee suggests that they be phased in over a three-year time period. It is
not the intention that those items placed later in the time-line are any less, or more important,
than their earlier counterparts. Rather, the placement was made based upon necessary pre-
development time, practical considerations, and/or simply the sequential nature of some of the
suggestions.
Overall the committee proposed that the college adopt a multiple method approach to
internationalize its students. This would involve a highly coordinated set of activities, requiring
both traditional classroom and first-hand experiential based techniques to accomplish its
objective. The program should be put under the direction of a director who will be charged with
maintaining the programs quality and relevance. This designated individual will oversee the
academic and student extracurricular activities.
Some colleges have chosen to focus upon one or two specific geographic locations for
their international activities. The committee believes that this strategy would place significant
limitations upon the faculty and students. Given the wealth of resources, and the ease of travel to
and from Chicago, it is also believed that this single focus practice is not necessary. Providing
both students and faculty with the most diverse set of activities would also be most attractive to
both groups. Finally, there is always a danger involved when one puts all of ones eggs into one
basket. The change of a university official, a single terrorist act changing the State
Departments visa granting practices, and simply factors such as exchange rate fluctuations could
all create barriers that would completely disrupt our entire set of curricula.

1. Year One

A. There are two functional areas, human resources and real estate, that currently have no
area specific international/global courses, or equivalent international experience. The
faculty in these 2 areas should be strongly encouraged to develop such courses.
B. Two experiential type undergraduate courses should be developed. One would involve
a faculty led travel experience to another country. The other would consist of an
executive colloquium involving speakers from a variety of backgrounds and an in depth
research activity.
C. A previous graduate colloquium course that had been moth balled be resurrected and
retooled to focus on international issues using guest speakers with significant first-hand
global experiences.
D. Instructors of all core courses be strongly encouraged to include some type of global
perspective into their class.
E. A major opportunity can be found in the fact that student and faculty exchange
agreements with foreign universities are much more common in Europe than in the
United States (Blasco, 2009). Chicago presents a highly attractive possibility for
European students and faculty. Roosevelt has seen this with its past arrangements with
English and French schools. Therefore we can assume there are a number of non U.S.
schools willing to consider partnerships with Roosevelt. We should actively seek out
these schools and prudently enter into faculty and student exchange relationships.
F. The college should develop close relationships with the various Chicago international
associations, the Rotary Club, SCID, trade clubs, the Executive Club, and consulates in
order to identify speakers for the colloquium, possible research opportunities, and
invitations for students to various events.
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G. The college should pursue, as a high priority, a significant endowment that would
create need based scholarships for supporting students and faculty with international
travel experiences.
H. There should be incentives provided to the faculty to support their participation.

2. Year Two

I. The International Director/Coordinator position be formally created and filled in some
manner.
J. All core courses, both undergraduate and graduate, contain a global perspective of
some type. Ideally this perspective should be integrated throughout the course, but when
this is not practical at a minimum having an in-class unit devoted to global issues. The
international director will be required to conduct regular reports on how this requirement
is being implemented.
K. Undergraduate students will be required to complete, as a part of their general
education requirements, an international component. This would consist of taking at least
two courses that are based on global perspectives outside of the U.S. material. These
courses could include topics such as history, literature, political systems, arts and culture,
foreign languages, humanities, as well as the natural and behavioral sciences.
L.. The college will encourage the formation of a Global Business Club for both graduate
and undergraduate students who are interested in international/global business. This
could possibly involve an International Business Fraternity. An active faculty advisor
should be identified to support the student club.
M. The College should develop a Center For Global Business that would facilitate the
colleges internationalization efforts as well as provide a forum for faculty and students
interested in international activities to meet, distribute information, facilitate
communications, and possibly host both academic and practitioner conferences. This
could provide an excellent naming opportunity to establish an endowment.

3. Year Three

N. All graduate business students to take one international/global course as a part of their
degree program. MBA students should be required to take two: one functional area
course and one experiential course. The experiential course would be in place of the
open elective. If a student has significant international work experience the advisor may
approve substitutions.
O. The college should develop an International Business week featuring speakers
capped with a major event for the Chicago business community.
P. The college should develop an advisory board made up of relevant individuals in the
local business community. This board should provide guidance to the Director and the
Dean in the form of ideas, events, and financial support.

Conclusion

It is a certainty that all business schools must concern themselves with internationalizing
their curricula. Exactly what this means, and what practices should be utilized is uncertain.
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What is presented here is one vision, for one university, based upon its unique situation. Some
of these suggestions may be appropriate for other universities, and some may not. However, the
process utilized here, a cross functional task force carefully examining the external and internal
environments before making the recommendations should prove effective for all.

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References

AACSB (2007) Eligibility procedures and accreditation standards for business accreditation. Tampa, FL:
Association to Advance Collegiate Schools of Business International.
A.C.E. International Mapping Survey, http://www.acenet.edu/AM/Template.cfm?Section=Search.
Ang, S., Dyne, L., Koh, C., Ng, K., Templer, K., Tay, C. & Chandrasekar, N. (2007). Cultural Intelligence: Its
Measurement And Effects On Cultural Judgment And Decision Making, Cultural Adaptation, And
Task Performance. Singapore: Nanyang Technological University.
Blasco, M. (2009) Cultural pragmatists? Student perspectives on learning culture at a business school.
Academy of Management Learning & Education, 8, pp. 174-187.
Cant, A. (2004) Internationalizing the business curriculum: Developing intercultural Competence. The
Journal of American Academy of Business, pp. 177-182.
Daft, R. (2010) Organization Theory and Design, 10 ed., Mason, Ohio: Southwestern Publishing.
Danish Ministry of Education (2005) Danmark og Globaliseringen. Albertslund: Schultz Information.
Egan, M. & Bendrick, M. (2008) Combining multicultural management and diversity into one course on
cultural competence, Academy Of Management Learning & Education, 7, 387-393.
Friga, P., Bettis, R. & Sullivan, R. (2003) Changes in graduate management education and new business
school strategies for the 21
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century. 2, pp. 233-249.
Jones, W. (2003) Over the wall: Experiences with multicultural literacy. Journal of Marketing Education, 25,
pp. 231-240.
Mintzberg, H. & Gosling, J. (2002) Educating managers beyond borders. Academy of Management Learning
and Education , 1, pp. 64-76.
Paul, H. (2002) Creating a global mindset, in F. Maidment (ed) Annual Editions: International Business, 11
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ed., Guilford, CT: McGraw-Hill.
Praetzel, G. (1999) Pedagogical recommendations for internationalizing the undergraduate business
curriculum. IAER, 5, pp. 137-146.
Yamazaki, Y. & Kayes, D. (2004) An experiential approach to cross-cultural learning: A Review and
integration of competencies for successful expatriate adaptation. Academy of Management Learning &
Education, 3, pp. 362-379.

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AACSB/ ACBSP/ I ACBE: The Race to Cr eate an I SO
for Collegi ate Busi ness Educati on or Ci r cli ng the
Wagons?
Irene T. Houle
Abstract
This paper examines the accreditation of collegiate business schools and programs.
There are differences between countries as to whether colleges and universities are accredited by
the government or by private groups. There are also differences in whether or not particular
fields have specialized accreditation. For 70 years the only specialized accreditation for business
schools was through AACSB. In 1988 the ACBSP was formed and in 1998 IACBE joined the
party. Today 58% of business programs in the USA have accreditation through one of these
three programs. A much smaller percentage of programs outside the USA have one of these
accreditations. What does this mean for those schools without accreditation? How does this
affect faculty, students, and administrators? In particular what does this mean for programs
outside of the USA? EFMD began offering accreditation for business schools/programs in 1997.
There are stark differences between American (USA) collegiate business programs and faculty
scholarship and European, will there be more convergence going forward as schools strive for
accreditation or will the accreditation standards adjust to allow for the differences?
Introduction
There has been increasing attention to and discussion about accountability and standards
as that pertains to many areas of personal life, commerce, government, and education. In the
world of commerce this has been particularly evident in the global embrace of ISO standards and
the proliferation of activities for which ISO standards have been created. The educational arena
has remained a more decentralized world with individual countries working in virtual isolation
with their unique educational systems. It is within post-secondary education (as it is called in the
USA), colleges and universities, that there has been the most obvious movement toward creation
of standards that could be applied to schools in many countries rather than just one.
This paper will focus specifically on standards that apply to management education (also
known as business studies and including the fields of accounting, management, marketing,
operations, finance, organizational communication, international business, and management
information systems) at the college/university97 level. This specific focus is the result of
several factors. First, in the USA there are increasing numbers of students choosing to major in
business disciplines and nearly 1/3 of all bachelor degrees awarded in the U.S. are awarded to
business students (AACSB). Whatever is done that covers study in the business disciplines will
have an impact on an entire school due to the relative size of this discipline. Second, there is a
long and well documented history of accreditation and standards as they apply to schools
offering degrees in business studies, not only in the USA but in many other industrialized

97
Throughout the paper the terms college level, university level, postsecondary, and higher education will be used
interchangeably to reference education that goes beyond the elementary and secondary levels as understood in the
United States.
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countries as well, and more recently many developing countries have schools that are seeking,
and gaining, accreditation for their business studies schools and programs. Third, there are ISO
standards for management and specifically for management systems in educational
organizations. Fourth, I believe it would be impossible for any single paper to cover all of the
accreditations and standards applicable to universities and to all the specific programs/disciplines
within universities.
Higher Education Accreditation in the USA
The United States does not have a centralized authority that exerts control over
postsecondary educational institutions in the country. The U.S. government does have a
Department of Education and the head of this department is The Secretary of Education which is
a cabinet level position. Education has existed within a cabinet level position only since 1953
when it was part of the new cabinet position of Health, Education and Welfare, and then
achieving stand alone cabinet status in 1979 when the cabinet position of Secretary of Education
was established. Meanwhile postsecondary educational institutions have been engaging in
accreditation activities using the peer review process since the latter part of the 19th century.
This peer review process of accreditation, specifically designed to be non-governmental
and to forestall government intervention, remains the basis for virtually all accreditation of
postsecondary educational institutions. Thus the USDOE is limited to recognizing accrediting
agencies that have applied for recognition as follows:
The U.S. Secretary of Education is required by statute to publish a list of
nationally recognized accrediting agencies that the Secretary determines to be
reliable authorities as to the quality of education or training provided by the
institutions of higher education and the higher education programs they
accredit. The Secretary only evaluates accrediting agencies that apply for
recognition, and certain criteria for recognition that are unrelated to the
quality of accrediting activities limit the scope of the Secretary's recognition
activities. (USDOE, 2010)
The USDOE recognizes accreditation agencies for the accreditation of postsecondary
educational institutions only, and only for accrediting activities within the United States.
Schools from outside the U.S. that are accredited by a recognized accrediting agency are not
included in the USDOE Database of Accredited Postsecondary Institutions and Programs and the
procedures used by the accrediting agency in evaluating the school have not been reviewed by
the USDOE (USDOE, 2010).
There are seven regional accrediting organizations that collectively cover all 50 states and
these seven organizations accredit the majority of postsecondary educational institutions and
virtually all of the public colleges and universities and most of the private institutions as well.
Because the criteria for USDOE recognition of an accrediting agency is so narrow, as
acknowledged by the USDOE, many accrediting agencies first require that an institution be
accredited by a regional accrediting agency as a condition of applying for accreditation from
their agency. This ensures that the agencys accredited schools will be listed in the USDOE
database since the regional accrediting organizations are all USDOE recognized. The regional
agencies provide accreditation for institutions as a whole and not for specific disciplines or
programs, nor does the accreditation of the institution as a whole guarantee the quality of any
program within the institution. Thus many postsecondary institutions pursue specific
accreditation for programs for which it is required such as many health care related fields and
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legal studies programs as well as for programs that are competitive in nature either in initial entry
or in which bachelor degree graduates are competing for spots in graduate programs.
Accreditation of Collegiate Business Schools and Programs in the USA
The USDOE does not recognize any of the accrediting agencies providing specific
accreditation for schools of business within a university or college or business programs within
postsecondary educational institutions. U.S. institutions that desire accreditation for their
business schools or programs look primarily to three U.S. based accrediting agencies, and more
recently some schools have pursued accreditation through the European Foundation for
Management Development (EFMD).
Association to Advance Collegiate Schools of Business International (AACSB) is the
oldest, best known, and still most prestigious (Cochran, 2007; Roller, Andrews, and Bovee,
2003) of the three business program accrediting agencies in the U.S. Started in 1917 by 17 elite
institutions AACSB was the sole U.S. accrediting agency of business schools until 1988. Many
schools joined AACSB as members but historically only a small fraction applied for and
achieved accreditation. In 1988 AACSB had 260 accredited members, representing
approximately 10% of the nearly 2400 institutions that had business programs (Cochran, 2007).
These accredited schools tended to be large and research oriented (Roller, et.al., 2003). During
this 70 year period the standards for accreditation were universal and placed a heavy emphasis
on faculty research. Over the last 30 years AACSB has introduced a separate accreditation for
accounting and revised their standards twice. First in the early 90s to accommodate smaller and
more teaching intensive institutions mission-linked standards were introduced, and again in 2004
a change adding the PQ (Professionally Qualified) designation that would apply to faculty who
did not have doctoral degrees in a business discipline but did have qualifications as a
professional in their field. By 1996 AACSB had 326 accredited members and 551 in 2007
(Francisco, Noland, and Sinclair, 2008) and as of January, 2010 there were 579 accredited
members of which 469 (81%) are U.S. schools and 110 (19%) are schools outside the U.S.
(AACSB, 2010). The 469 accredited U.S. schools represents 29% of the U.S. schools offering
business degrees at any level (AACSB, 2010).
In 1988 the Association of Collegiate Business Schools and Programs (ACBSP) was
founded, in large part as a reaction to both the real and perceived inflexibility and research
oriented bias of the AACSB accreditation standards. ACBSP was believed to provide an avenue
for smaller and more teaching intensive institutions to received accreditation for their business
programs (Cochran, 2007; Roller, et.al., 2003). ACBSP is the only U.S. business school
accrediting agency to give accreditation to 2 year programs (Associates degrees) and the
institutions granting only 2 year degrees constitute 50% or more of ACBSP accredited
institutions (Roller, et.al., 2003). Approximately 320 U.S. business school programs have
ACBSP accreditation which is 19% of the U.S. schools offering business degrees at any level
(AACSB estimates there are 1,621 postsecondary schools in the U.S. that offer degrees in
business). 59 schools outside of the U.S. have ACBSP accreditation. In June of 2010 ACBSP
changed its name to Accreditation Council for Business Schools and Programs (ACBSP, 2010).
International Assembly of Collegiate Business Education (IACBE) is the third U.S. based
accrediting agency and was founded in 1998. While ACBSP addressed the issues of institutional
size and teaching orientation in designing their accreditation standards their standards were still
based heavily on those of AACSB and seemed still too rigid and prescriptive. IACBE focuses
on rigorous outcomes assessment and continuous improvement process (Roller, et.al. 2003,
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page 198). As of September, 2010 IACBE has 162 accredited institutions with 140 in the U.S.
and 22 in 13 other countries (IACBE, 2010). The 162 U.S. schools represent about 10% of all
schools. (See Table 1 below)
Table 1
AGENCY # accredited schools # schools outside U.S. # schools inside U.S. % accredited of all U.S.
schools
AACSB 579 110 469 29%
ACBSP 379 59 320 19%
IACBE 162 22 140 10%
EFMD 128 125 3 <.1%
Much has been written about the impact of attaining accreditation; increased faculty
salaries (Levernier and Miles, 1992), the changing nature of and evaluation of business school
faculty work (Ehie and Karathanos, 1994; Henningger, 1998; Srinivasan, Kemelgor, and
Johnson, 2000), and of course the effects of AACSBs modified standards (Jantzen, 2000;
Yunker 2000; Francisco, et.al. 2008). Such discussions, while important, are beyond the scope
of this paper.
However this paper is concerned with the increasing number of institutions seeking
accreditation. Currently 58% of all U.S. postsecondary institutions offering business degrees are
accredited by one of the three agencies.
Higher Education Accreditation outside the USA
It is well beyond the scope of this paper to do a country by country listing and
description of methods of accrediting institutions of higher education. I have chosen to focus on
Europe for two reasons. First, the two countries with the largest number of institutions seeking
accreditation for their business programs via the U.S. agencies are France and the United
Kingdom, with Germany, and Switzerland also in the top tier. Second, European nations have
been meeting regularly since 1999 and working towards establishing uniform guidelines against
which national standards can be benchmarked.
In what has become known as the Bologna Process (enic-naric.net) the European Higher
Education Area (EHEA) was established and the European Qualifications Framework for
lifelong learning was developed. These standards are outcome based rather than input dependent
and there are eight levels covering the skills that should be present upon finishing compulsory
education through the highest levels of academic, professional, and vocational education and
training (Europa, 2006). The use of the word Framework by the Working Group that
developed the qualifications signals that this an umbrella under which many sets of national
standards can continue to operate yet there will be a common understanding of all the standards
that allows compatibility with and transferability within the different national systems of
postsecondary education (Overarching Framework for Qualifications in the EHEA, 2005).
Universities and colleges in Great Britain are autonomous and the public relies on the
Quality Assurance Agency for Higher Education (QAA) to establish standards and conduct peer
reviews of institutions. The QAA is a private, independent agency supported by the membership
fees of the colleges and universities. QAA is a member of the European Association for Quality
Assurance in Higher Education (ENQA) which was established as part of the Bologna Process
(An Introduction to QAA, 2009). In France it is Evaluation Agency for Research and Higher
Education (aeres) that is the private agency responsible for evaluating French postsecondary
schools, and aeres is a member of ENQA (aeres, 2010).
Germany has created the zur Akkreditierung von Studiengngen in Deutschland
(Foundation for the Accreditation of Study Programmes in Germany). This Foundation, a
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member of ENQA, accredits the accrediting agencies (Foundation for the Accreditation of Study
Programmes in Germany, 2010). Switzerland has the Center for Accreditation and Quality
Assurance of the Swiss Universities (OAQ), which like its counterparts already listed is a
member of ENQA (OAQ, 2010).
Canada is worth mentioning because it has the third highest number of institutions
seeking accreditation for business programs through the three U.S. agencies and because its own
accreditation system for postsecondary education is very similar to that of the U.S. The primary
responsibility lies with the provinces and territories because there is no national ministry of
education (Canadian Information Center for International Credentials, 2009). There is no
national accreditation nor formal national recognition of accrediting agencies, however there are
professional associations of accrediting agencies such as the Association of Accrediting
Agencies of Canada (AAAC, 2010).
Accreditation of Collegiate Business Schools and Programs outside the USA
France is the number one country in pursuing accreditation for its schools through U.S.
agencies, 50 French schools are accredited through AACSB, 4 through IACBE, and 6 through
ACBSP. Similarly Switzerland has 13 schools accredited by AACSB, 7 by ACBSP, and 7 by
IACBE. Great Britain has 41 schools accredited by AACSB but only 2 by ACBSP and none by
IACBE. Canada and Australia have the same pattern as Great Britain with 34 and 24 schools
respectively accredited by AACSB but none by IACBE, Canada has 15 accredited by ACBSP
and Australia none. Germany has 15 schools accredited by AACSB and none by either of the
other two. (AACSB, 2010; ACBSP, 2010; IACBE, 2010). (See Table 2 below.)
Table 2
COUNTRY/AGENCY AACSB ACBSP IACBE EFMD
France 50 6 4 17
Great Britain 41 2 0 22
Canada 34 15 0 9
Australia 24 0 0 11
Switzerland 13 7 7 4
Germany 15 0 0 3
At the time this paper is being written, June through September of 2010, there appears to
be only one significantly large agency outside of the U.S.A. providing accreditation specifically
for business schools and programs. That agency is the European Foundation for Management
Development (EFMD). Founded in the 1970s EFMD differs markedly from the three US
accrediting agencies in that it provides significantly more services to a more varied base of
customers. Their current model of accreditation, known as EQUIS (European Quality
Improvement System), was introduced in 1997 and today 128 schools in 35 different countries
have attained this accreditation. Only three schools from the US are on this list: Babson
College, Bentley University, and Michael G. Foster School of Business at University of
Washington (EFMD, 2010).
EQUIS is further differentiated, according to EFMD, by its focus on the
internationalization of the institutions it accredits and by the use of corporate connections as a
criteria for accreditation. EFMD requires a large percentage of the student body to be from
countries other than that in which the school is located, and likewise the faculty needs to be
diverse as regards their country of origin. A minimum of 25 faculty, referred to as core faculty,
are required to be full time and unique to the program/school and training or experience. This
accreditation is not for small schools. The requirement for corporate connections ties to their
interest in applied knowledge and their corporate consulting. (EFMD, 2010) An even more
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specialized accreditation, EPAS (EFMD Programme accreditation System) is offered to those
schools or programs whose entire mission and scope is International Business, only 35 schools
have attained this EPAS accreditation (EFMD:EPAS, 2010).
It did become apparent that many schools in developing countries were pursuing ISO
certification, and not a few schools in the U.S. as well.
ISO and standards for Management and Management Systems in Education
ISO is the International Organization for Standards, known always as ISO. 163 countries
are members of ISO, one member per country, and each member represents the national
standards institute of his or her country. Founded in 1947 ISO originally helped each member
country develop standards for that particular country. Over time the request for international
standards began to grow until the 1960s when it became a roar as international trade was
increasing exponentially. Countries needed standards that would apply across borders so that
machinery manufactured in France could be maintained and repaired in Sweden without needing
tools and parts from France. In addition such standards would cut down on trade barriers based
on differing standards and in 1979 the Agreement on Technical Barriers to Trade (aka GATT
Standards Code) was adopted. Today there are over 18,000 published International Standards on
everything from farm equipment to baby strollers and surgical scalpels. (ISO, 2010)
Among the most widely recognized of the ISO standards are the ones for good
management practice. ISO uses a family name system of identifying standards and the
management standards are the 9000 family so that such standards appear in print as ISO
9000:2008 or ISO 9001:2004. ISO management standards focus on the systems and processes of
management versus specific tasks, this is to allow their applicability to virtually any
organization. However ISO has taken the step of creating industry or sector specific standards
for some industries and education is one such sector. IWA 2:2007 Quality Management
Systemsguidelines for the application of ISO 9001:2000 in education is the standard. These
standards are applicable to all levels of education, ISO does not have specific standards for
postsecondary educational institutions. Several institutions, most noticeably from countries in
Africa, have sought and achieved ISO certification for their institutional management. As is
noted in virtually all articles written about ISO 9000 achieving ISO 9000 certification does not
guarantee the quality of your product or service, but it does signal that you have the processes
and procedures in place with the intention of striving for quality.
A corollary standard is the 14000 series which is for environmental management. Many
institutions around the globe, including several in the USA have achieved ISO 14000
certification for their environmental management systems. As with ISO 9000 this is not about
the outcomes but the policies and procedures put into place, in this case to achieve minimum
harmful effect on the environment.
Implications for Faculty, Administrators, and Students
One of the primary concerns for business school faculty has to do with employability and
standards for tenure and promotion. At one time it was required that accredited business schools
hire only faculty with degrees from accredited schools. At this time virtually all U.S. institutions
offering doctorates in business EXCEPT for for-profit and/or distance programs such University
of Phoenix and Argosy. If accreditation becomes a de facto standard and all schools will hire
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only faculty with degrees from accredited institutions what happens to the for-profits? And what
happens to those faculty who have already earned their degrees through these programs?
This is further complicated when hiring faculty from different countries is involved. Will
U.S. institutions accept faculty with degrees from institutions accredited by a European
accrediting agency? And conversely would European institutions begin to prefer faculty from
European accredited schools rather than American accredited schools? This could dampen even
visiting positions and faculty exchanges.
Administrators have to worry about not only the faculty aspects of accreditation but the
institutional requirements. Many schools have been accredited for years and have invested
significant time and money into the initial process and the yearly reviews and periodic renewals.
Any significant change in the accreditation landscape could have huge cost implications for an
institution needing to change agencies and create even more pressure on those schools not yet
accredited. With 58% of U.S. business schools/programs accredited through one of the three
U.S. accrediting agencies it seems likely that this number will continue to increase at a rapid rate.
Will more European schools feel the need to seek U.S. agency accreditation or will this instead
push them away from the U.S. agencies and encourage formation of a competitive agency?
Would schools eventually need dual accreditation if they wish to have foreign faculty and
foreign students?
Students also face a conundrum. What happens to transfer students or even students who
wish to study abroad for a semester or two? Will their credits easily be accepted when the
institutions involved are each accredited by a different agency? How will this affect financial
aid? For U.S. students enrolling at any institution with regional accreditation is sufficient to
apply for government financial aid, could this requirement change to require programmatic
accreditation?
Suggestions for Further Inquiry and Discussion
The majority of the discussion in the United States about business program accreditation
has focused on the tension between smaller, teaching intensive institutions and the larger,
research oriented institutions that until 1988 were the only schools with specialized accreditation.
Much of this discussion has revolved around the prestige that accreditation is believed to bestow,
whether or not this prestige is diluted as more schools gain accreditation, the effect of
accreditation on faculty, and other topics that remain of interest primarily to the institutional
participants. To date no research has been done to determine if students enrolled in accredited
business programs have better outcomes than students at non-accredited institutions.
While some papers have explored the attitudes and beliefs of administrators at U.S.
institutions regarding accreditation (Ehie et. al. 1994; Srinivasan et.al. 2000; Roller et. al. 2003)
no parallel work has been done involving the administrators of institutions outside the U.S. Of
particular interest would be the reasons these schools chose to pursue accreditation through the
U.S. accrediting agencies and how they perceive the emerging EFMD accreditation and the
European Qualifications Framework. Are European institutions interested in dropping their U.S.
agency accreditation in favor of a European standard?
Is anyone interested in trying to create a standard that would be similar to an ISO
standard, or in creating an agency similar to ISO that would create universal standards for post-
secondary institutions? What would such an agency look like? What might the standards be?
Certainly on the face of it one can more easily imagine setting a universal standard for the size of
lug nuts on passenger vehicles than a universal standard for a core curriculum or credit hours.
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- 174 -

Cor por ate Gover nance and Stock Retur ns i n
I stanbul Stock Exchange
Basak Turan Icke
Mehmet Akif Icke
Yusuf Ayturk
Abstract
This paper analyses whether good corporate governance leads to higher common stock
returns in ISE. We investigate the case of Turkish firms using an investment strategy that holds
only the firms listed in Extended ISE Corporate Governance Index (CGI) over the period August
2005 July 2010. In our research, because we do not have a detailed corporate governance
ratings database, we use ISE Corporate Governance Index as a portfolio consisting of well-
governed firms. We find that Extended ISE CGI (the portfolio of well-governed firms) under
performs ISE All Index (benchmark portfolio). This result mainly can be explained by the higher
valuation of Extended ISE CGI firms. In order to adjust for market risk, developed by Black,
Jensen and Scholes in 1972 and having been used widely in literature, market model time
regression analysis is conducted. Moreover, normal distribution, homoscedasticity and
nonexistence of autocorrelation assumptions for residuals and stationarity assumption of time
series are tested to use time series regression analysis. We also find that risk-adjusted return of
Extended ISE CGI portfolio represented by the regression constant alpha is negative and it is
statistically insignificant at the 5 per cent level over the period August 2005 August 2010. This
result shows that an investor who prefers an investment strategy that holds only the firms listed
in ISE Corporate Governance Index (CGI) over the period August 2005 July 2010 cannot earn
abnormal returns. This is consistent with efficient capital markets. More research is needed
before we can conclude that corporate governance ratings are irrelevance for portfolio selection.

Keywords: Corporate Governance, Istanbul Stock Exchange Corporate Governance Index,
Market Model.

Introduction
After corporate scandals such as Enron and WorldCom in the United States (the US), and
Marconi, Parmalat, and Royal Ahold in European Union (EU) countries corporate governance
has received a lot of attention in the financial community. According to the OECD definition,
corporate governance is the relationship between corporate managers, directors and the providers
of equity, people and institutions who save and invest their capital to earn a return. Corporate
governance ensures that stakeholders have sufficient, reliable, timely, comprehensible, cost-
effective and detail information to follow the companys stock return and operating performance.
Good corporate governance implications have some advantages both for companies and
countries. Good corporate governance is the key to the integrity of corporations, financial
institutions and markets, and central to the health of our economies and their stability. In addition
to that, companies practicing good corporate governance principles, have lower cost of capital
because of sufficient information disclosure, they have better financial capabilities and liquidity,
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and also the probability of the exclusion from the capital markets is lower for the companies
implementing good corporate governance.
The concept and implementation of corporate governance is relatively new in Turkey.
Capital Markets Board of Turkey (CMB) published CMB Principles of Corporate Governance in
2003 based on Organization for Economic Cooperation and Development (OECD) Principles of
Corporate Governance. In addition to the principles, Istanbul Stock Exchange (ISE) started to
calculate ISE Corporate Governance Index (CGI) in 2007. ISE CGI aims to measure the price
and return performances of ISE-listed companies with a corporate rating of minimum 6 over 10.
Recently some empirical evidence points to the relationship between corporate
governance and stock returns. In their pioneering work, Gompers et al. (2003) demonstrate that
an investment strategy that bought the firms in the lowest decile of the index (strongest
shareholder rights) and sold the firms in the highest decile of the index (weakest shareholder
rights) would have earned abnormal returns of 8.5 per cent per year during the sample period.
Other empirical research, Drobetz et al. (2004), has also found that trading strategies from sorts
on governance index values generate abnormal returns. These findings are not consistent with
efficient capital markets. On the other hand, Bauer et al. (2004), Core et al. (2006) and Aman,
Nguyen (2008), demonstrate that risk-adjusted returns are insignificant across governance-based
portfolios.
This paper analyses whether good corporate governance leads to higher common stock
returns in ISE. We investigate the case of Turkish firms using an investment strategy that holds
only the firms listed in Extended ISE Corporate Governance Index (CGI) over the period August
2005 July 2010. We also analyze whether the firms listed in Extended ISE CGI can gain higher
equity returns (abnormal returns) after adjusting for the market model. This paper can be
summarized as follows. In section I, we explain the corporate governance concept and its
applications in Istanbul Stock Exchange. In section II, we review the literature studying the
relationship between the corporate governance and stock returns. In section III, we construct our
data set and explain our research methodology. In section IV, we conduct our analysis and the
results of the research are stated. We use Extended ISE CGI as a high governance-based
portfolio and analyze the performance of this index with market model by conducting time series
regression analysis. After adjusting for market risk factor, we demonstrate whether abnormal
return become significant for high governance-based portfolio in ISE over the period August
2005 July 2010. In section V, conclusions of our research are drawn and the implications of the
results for investors are discussed.
A Brief Overview of Corporate Governance
In the accounting and finance literature, particularly in the US, an agency theory
perspective is commonly used to explain the concept of corporate governance. (Kalbers, 2009,
193) According to Shleifer and Vishny, corporate governance deals with the ways in which
suppliers of finance to corporations assure themselves of getting a return on their investment.
(Shleifer and Vishny, 1997, p.737)
A broader definition would be to define corporate governance as a set of mechanisms
through which firms operate when ownership is separated from management. Corporate
Governance (CG) is the system by which companies are directed and controlled. (Claessens,
2006, p.4)
In practice there are four principles of good corporate governance, which are:
Transparency, accountability, responsibility and fairness. CG principles are important for a firm
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but the real issue is concerned with what corporate governance actually is. CG is concerned with
creating a balance between the economic and social goals of a company including such aspects
as the efficient use of resources, accountability in the use of its power, and the behavior of the
corporation in its social environment. (Aras and Crowther, 2009)
Corporate governance has been on the agenda for a long time around the World.
Increasing research interest has occurred not only in the US where the subject is well established
as a significant focus of business research, but also there is growing interest across Europe and
developing countries. Turkey is no exception with a growing interest in corporate governance
from academics, business circles, policymakers and regulators and with recent government
initiatives to improve corporate accountability and control in the financial sector. (Ararat and
Ugur, 2003, p.71)
Good corporate governance leads to better company performance, higher profitability and
efficiency. In other words, good CG is largely correlated with better operating performance and
market valuation of companies. The aim of CG principles is to increase both shareholder value
and satisfaction of other stakeholders. Achievement of this aim is largely linked with the
development of capital markets in which the CG principles are understood by both investors and
shareholders. (Arsoy, Crowther, 2008) 2007 World Bank Report identifies points for
implementation of corporate governance in extensively differing regimes, and political,
economic and social environments. The major elements of corporate governance are defined as
competitive markets, financial discipline and well-regulated and liquid securities markets.
(World Bank Corporate Governance Report, 2007)
Corporate governance is concerned with the relationships among a business
management, its board of directors, its shareholders and lenders, and its other stakeholders. Good
CG follows principles that can vary significantly among countries, and are currently the subject
of various initiatives designed to achieve agreement on an acceptable framework of basic
standards in which a central role is attributed to the OECDs Principles of Corporate
Governance. Implementation of good corporate governance requires satisfactory performance on
the part of several different parties from both the private and public sectors. (Cornford, 2006,
p.26-27)
Corporate governance has recently received more attention because of lots of scandals
and crises. Recent corporate scandals in the US and elsewhere (Enron, Arthur Andersen,
Worldcom, Tyco International in the US; Parmalat and Cirio in Italy; Daiwoo Group in Korea;
Allied Irish Bank, US/Ireland, Nortel in Canada etc.) have led to a wide-ranging re-examination
of standards for corporate governance with repercussions that extend also to financial
regulation.(Cornford, 2006, p.19) Corporate scandals have forced politicians, financial
authorities, and supranational organizations to search for more effective governance practices.
Governance practices reflect, in fact, differences in culture, traditional financing options,
corporate ownership patterns, and legal origin. (Zattoni and Cuomo, 2008)
Turkish Corporate Governance Features
Due to the current efforts of Turkey trying to become a member of EU, the recent global
scandals of large corporations in the most developed markets of the world, the competition of
emerging markets to attract global foreign direct investment, corporate governance is the hot
topic in Turkey. Corporate governance models can vary according to the system of corporate
ownership and management control mechanisms prevailing in a country. In Turkey, a market-
oriented corporate governance and control system cannot be said to exist, since the flotation
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ratios of listed companies and share dispersion levels are low. (Okutan, 2007) According to
Ararat and Ugur, Turkeys investment environment is quite slimy for the investors. Low
liquidity, high volatility, high cost of capital and limited new capital formation are the
characteristics of the Turkish capital market. Shortcomings in the legal and regulatory
framework contribute substantially to the risks of investing in equity markets in Turkey. (Ararat
and Ugur, 2003)
Turkey has developed its own corporate governance code in 2003. Turkey still needs to
have good corporate governance practices in order to attract and retain the capital it needs for
investment and economic growth. Hence, Turkey has adopted many regulations, especially for
the listed companies majority of which are controlled by a single family as the controlling
shareholder. (Altintas et al. 2007)
There are two types of corporate governance model namely Anglo-Saxon Model (such as
United Kingdom and the United States) and Continental European Model. In the Anglo-Saxon
Model, the objective of the corporation is maximization of shareholder value. On the other hand,
in the Continental European Model shareholder value has secondary importance. Their approach
is labeled as the stakeholder model of CG. There have been some differences and similarities
between Turkish CG Model and Anglo-Saxon and/or Continental European Model. The Turkish
CG Model is that a hybrid case whereby ISE firms display important similarities and differences
with both systems. (Tuzcu and Fikirkoca, 2005)
In Turkish finance literature corporate governance has become an increasingly important
issue. Numerous scholars are working on CG structure. Here are some examples of work on this
issue. Altintas et al. focus on monitoring information related to corporate social responsibility of
Turkish listed companies in ISE-30 Index between 2003 and 2005. The researchs framework is
composed of three categories; corporate governance, environmental policy, and social policy.
The results disclose that the majority of the companies in ISE-30 Index positively commit
themselves to adhering to the Corporate Governance Principles. (Altintas et al. 2007)
According to Yurtoglu, overwhelming majority of Turkish publicly listed companies are
ultimately owned and controlled by families who organize a large number of companies under a
pyramidal ownership structure or through a complicated web of inter-corporate equity linkages.
(Yurtoglu, 2003, p.16)
A corporate governance issue, emerging from the Turkish system, seems to be
weaknesses in minority shareholder rights, although new measures are being taken, including the
adoption of new corporate governance rules of best practice. (Demirag and Solomon, 2003, p.4)
As La Porta et. al. reports, in many countries, expropriation of minority shareholders and
creditors by the controlling shareholders is extensive. (La Porta et al, 2000, p.27) Turkey is
among those countries. Procedures for minority shareholders to voice their views are extremely
limited and, as with many countries around the world, lessening the divide between majority and
minority shareholder rights is an essential step towards improving corporate governance
standards. Furthermore, such improvements in minority shareholder rights are required in order
to prevent expropriation of minority shareholder wealth by majority shareholders through abuse
of power and concentration. Indeed, better protection of minority shareholders has been found to
be significantly associated with higher corporate valuation (La Porta et al. 2002, p.1147).
Kahyaoglu and Bozkus investigate the relationship between stock return asymmetries, i.e.
stock market return volatility and corporate governance by using the data of selected companies
listed on Istanbul Stock Exchange (ISE) and they test the hypothesis whether there is a
correlation between the quality of corporate governance, concentration of ownership and the
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positive skewness of ISE listed company returns. The authors find that there is a relation between
stock market return volatility and the quality of corporate governance both at the firm level and
market level in Istanbul Stock Exchange. (Kahyaoglu and Bozkus, 2010)
Durukan et al. examine the data on the nonfinancial firms listed in Istanbul Stock
Exchange (ISE) during the period 1993-2003. In this study the authors use three different
measures of earnings in the analysis. Earnings before tax come out to be the major measure. The
authors findings show that Turkish corporate governance system is not ineffective, but this
evidence on its own cannot be interpreted as it being effective. The CEOs in Turkey are
evaluated based on the accounting based measures mainly the pretax income figure which may
be the reflection of a corporate governance system. (Durukan et.al, 2006)
Bektas and Kaymak examine the relation among performance, board attributes, and
ownership issues in Turkish banks, they regress return on assets (ROA) on the independent
variables. They find that there is a significant linear relationship between board composition and
performance. This variable has a negative and statistically significant value at the 2%
significance level. In other words, there are dominant shareholders who appoint small boards. To
be successful, a bank may appoint a majority of insiders to establish better informal contacts with
the environments or may choose a board made up of outsiders to better adapt to the formal
governance system. On the other hand, the authors results suggest that concentrated ownership
is generally not preferred, and their finding supports the use of concentrated ownership, as it
reduces the negative implications of tenure on bank performance. (Bektas and Kaymak, 2009)
The Empirical Literature View
The empirical literature related with corporate governance can be structured along three
lines. These are the research on the relationship between stock returns and corporate governance,
the empirical research on the association between firm value and corporate governance and the
research examining the impact of corporate governance on firm performance. However, in this
paper, the research area is only limited by the relationship between stock returns and corporate
governance. Other two research areas are not within the scope of this paper.
Gompers et al. in their pioneering research use the incidence of 24 governance rules and
construct their governance index for 1.500 large firms during the 1990s. They also construct two
main portfolios according the governance index, these are the dictatorship portfolio including
firms in the highest decile of the index and the democracy portfolio including firms in the lowest
decile of the index. Democracy portfolio have the lowest management power or the strongest
shareholder rights, while dictatorship portfolio have the highest management power or the
weakest shareholder rights. Subsequently, they examine the performance of an investment
strategy that is purchasing shares in democracy portfolio and short selling shares in dictatorship
portfolio. This long-short investment strategy earns an average annual return of about 8.5 per
cent after adjusting portfolio returns for risk factors with Carhart (1997) model. (Gompers et al.
2003)
Drobetz et al. examine the impact of corporate governance on stock returns over the
period 1998 2002 in Germany. They construct a broad corporate governance rating (CGR) for
German public firms. They use the Fama-French three factor model for risk factors and conduct
time series regression analysis. As a result of this study, an investment strategy that is buying
high-CGR firms and short selling low-CGR firms earns abnormal returns of around 12 per cent
on annual basis during the sample period. (Drobetz et al. 2004)
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Bauer et al. analyze whether good governance leads to higher equity returns in Europe.
They use Deminor Corporate Governance Ratings for companies included in the FTSE Eurotop
300 and follow the approach of Gompers et al. (2003). They examine the performance of an
investment strategy that is purchasing shares in good governance portfolio and short selling
shares in bad governance portfolio. They analyze both the United Kingdom sample and
European Monetary Union sample and employ Carhart (1997) four-factor model for risk factors.
As a result of the study, the performance differential between the good governance and the bad
governance portfolios is found as 6.83 per cent annually. The regression constants (alpha values)
are consistently positive, though they are statistically insignificant at the 5 per cent level. This
shows that good governance does not lead to higher equity returns in UK and Europe. (Bauer et
al. 2004)
Cremers and Nair investigate how internal governance mechanisms (shareholder
activism) interact with external governance mechanisms (market for corporate control). The
proxies for internal governance used are the percentage of share ownership by public pension
funds and the percentage of share ownership by the largest blockholder. They find that a
portfolio that buys firms with high takeover vulnerability and high public pension fund
(blockholder) ownership and shorts firms with low takeover vulnerability and high public
pension fund (blockholder) ownership generates an annualized abnormal return of 10 to 15 per
cent on which proxy is used for internal governance. On the other hand, they find that a portfolio
that buys firms with high takeover vulnerability and low public pension fund (blockholder)
ownership and shorts firms with low takeover vulnerability and low public pension fund
(blockholder) ownership does not generate any statistically significant abnormal return. (Cremers
and Nair, 2005)
Aman and Nguyen investigate the case of Japanese firms using their own governance
index. They use the index to form five portfolios and analyze monthly returns of the portfolios
over the period 2000 2005. They find that risk-adjusted returns are insignificant across all five
governance-based portfolios. This result shows that there is no relationship between stock returns
and corporate governance in Japan. (Aman and Nguyen, 2008)
Johnson et al. reexamine Gompers, Ishii, and Metricks (2003) findings of significant
long-term abnormal returns for firms sorted on governance index values. They show that the
industry distributions of Democracy firms and Dictatorship firms differ statistically and
economically from each other, and from the population of firms. Using one thousand biased
random samples of hedge portfolios with governance-neutral nonevent firms (non-Dictators
minus non-Democracies), they find that adjusting firms returns by their respective Fama and
French (1997) 48-industry median returns overrejects the null hypothesis of zero abnormal
returns. In contrast, tests based on three-digit SIC industry-adjusted returns are well specified.
An approach that adjusts returns based on industry and characteristics size, book-to-market, and
momentum is also well specified. Using either of the well-specified methods, they find
statistically zero long term abnormal returns for event-firm hedge portfolios (long Democracies,
short Dictatorships). (Johnson et al. 2009)
Cremers and Ferrell examine the association between corporate governance and abnormal
stock returns for the 1978 2007 time period. They construct a corporate governance database
consisting of a large sample of firms starting in 1978. For the thirty years period they find
strongly statistically significant abnormal returns using the Carhart (1997) four factor model
associated with going long good governance corporate firms and shorting those with poor
governance. They use both value-weighted and equally-weighted portfolios and the result is not
- 180 -

different. They document that there is a statistically significant relationship between good
corporate governance and positive abnormal stock returns. However, it is stated that this
relationship has been weakening especially over the period 1990 2007 and this is the result of
market efficiency. (Cremers and Ferrell, 2009)
Comparing of findings of these studies, it can be summarized that there is no such a
certain relationship between good corporate governance and positive abnormal stock returns. The
relationship between corporate governance and stock returns can be changed as the sample,
country or risk factor model differs. Although there are lots of researches on corporate
governance on ISE, there is no empirical research on which the relationship between good
corporate governance and positive abnormal stock returns in Turkey is examined. This study
aims to fill this gap.
Data Description
There is no detailed corporate governance ratings database for all the firms listed in
Istanbul Stock Exchange. Because of this reason, we cannot construct two main portfolios (a
portfolio consisting of well-governed firms and a portfolio consisting of poorly governed firms)
based on a corporate governance ratings database. However, there is an Istanbul Stock Exchange
Corporate Governance Index (ISE CGI) in which companies applying Corporate Governance
Principles are included. ISE CGI aims to measure the price and return performances of ISE-listed
companies with a corporate governance rating of minimum 6 over 10. The corporate governance
rating is determined by the rating institutions incorporated by Capital Market Board in its list of
rating agencies as a result of their assessment of the company's compliance with the corporate
governance principles as a whole. Calculation of the Corporate Governance Index started on
31.08.2007 after the Exchange was notified of 5 companies with Corporate Governance Rating
of minimum 6 over 10. For companies included in ISE Corporate Governance Index, there is an
also less annual listing/registration fee advantage.
In our research, we use ISE Corporate Governance Index as a portfolio consisting of
well-governed firms. However the main drawback is that the ISE CGI started at the end of
August of 2007 and the time period over September of 2007 to July of 2010 is very limited. In
order to overcome this drawback, following Bauer et al. (2004) method we extend our analysis
backwards, assuming that corporate governance ratings are constant for a limited number of
months only for the first 5 companies which are included in ISE CGI at the starting of the index.
We construct a portfolio consisting of these 5 companies as a well-governed portfolio and then
we measure the performance of this portfolio over the period August of 2005 to August 2007.
After that, we combine extended portfolio and ISE CGI monthly returns. By doing so, we have a
dataset covering 60 months to measure the performance of a new well-governed portfolio that is
named as Extended ISE CGI. This approach seems reasonable. On the other hand, we use ISE
All Index as a benchmark portfolio while comparing the performance of Extended ISE CGI. ISE
All Index is comprised of the stocks traded on National Market except investment trusts. The
financial data employed in the analysis is obtained from Istanbul Stock Exchange Database.
Empirical Analysis and Results
To analyze the relationship between stock returns and good corporate governance, we
measure the performance of value-weighted corporate governance portfolio (Extended ISE CGI)
consisting of well-governed firms listed in ISE CGI. We also analyze whether there is any
- 181 -

difference between Extended ISE CGI and ISE All Index in terms of their stock returns. Monthly
returns of Extended ISE CGI and ISE All Index are value-weighted. Calculations of monthly
returns of extended portfolio consisting of the first 5 companies which are included in ISE CGI
at the starting of the index depend on the principle that portfolio is value-weighted and the
weights are updated at the end of each month using the firms end of month market values.
Monthly ISE CGI and ISE All Index returns and monthly stock returns of the extended portfolio
are sourced from Istanbul Stock Exchange Database.
We adjust the monthly returns of Extended ISE CGI portfolio according to the Market
Model. Market Model was developed by Black, Jensen and Scholes (1972) and has been using
widely both in literature and practice for performance measurement. The time series regression
with the market model is
r
i, t
r
f, t
=
i
+ b
i
(r
m, t
r
f, t
) +
i,t

|r
m, t
r
f, t
] is the markets excess return over the risk-free rate. We calculate the market returns
r
m, t
as the monthly returns of ISE All Index, because this index includes almost all stocks and it
can be accepted as market portfolio. The risk-free rate r
f, t
is the rate on the shortest maturity
treasury bills. The difference |r
m, t
r
f, t
] measures the return on a zero-investment portfolio
financed at the risk-free rate and fully invested in the market portfolio. |r
i, t
r
f, t
] is Extended
ISE CGI portfolios excess return over the risk-free rate. The intercept term
i
is supposed to
capture the abnormal return unexplained by exposure to market risk factor. The slope b
i
is the
only systematic risk factor beta coefficient.
i,t
stands for residuals.
Normal distribution, nonexistence of autocorrelation and heteroscedasticity assumptions for
residuals and stationarity assumption of time series must be tested to use time series regression
analysis.

Table 1: Jarque Bera Normality Test Results

- 182 -

Table 2: White Heteroscedasticity Test Results
F-statistic 0.350451 Prob. F (2,57) 0.7059
Obs*R-squared 0.728830 Prob. Chi-Square (2) 0.6946
Scaled explained SS 1.121327 Prob. Chi-Square (2) 0.5708
Dependent Variable: RESID^2
Method: Least Squares
Sample: 2005M08 2010M07
Included observations: 60
Variable Coefficient Std. Error t-Statistic Prob.
C 0.001872 0.000557 3.361507 0.0014
ISE_ALL_INDEX 0.004118 0.004942 0.833264 0.4082
ISE_ALL_INDEX^2 0.000582 0.036954 0.015755 0.9875
R-squared 0.012147 Mean dependent var 0.001901
Adjusted R-squared -0.022514 S.D. dependent var 0.003480
S.E. of regression 0.003518 Akaike info criterion -8.412859
Sum squared resid 0.000706 Schwarz criterion -8.308142
Log likelihood 255.3858 Hannan-Quinn criter. -8.371899
F-statistic 0.350451 Durbin-Watson stat 1.514152
Prob(F-statistic) 0.705877

Table 3: Augmented Dickey Fuller Test Results
Null Hypothesis: Portfolio has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=10)
Augmented Dickey Fuller test statistic
Portfolio t Statistic Probability
*

ISE CGI -6,381727 0,0000
ISE All Index -7.041044 0,0000
Test critical values: 1% Level
5% Level
10% Level
-4.121303
-3.487845
-3.172314
*MacKinnon (1996) one-sided p-values.
Normal distribution is tested with Jarque Bera Test for residuals as stated on Table 1.
With 0,2754 Jarque Bera and 0,8714 probability values, residuals are normally distributed.
Durbin Watson d statistic is used for detecting serial correlation. Critical Durbin Watson d
Statistics at significance points of d
L
and d
U
at 5% level of significance are 1,549 and 1,616,
respectively. Time series regression result, with 1,9085 Durbin Watson statistics, shows that
there is no serial correlation or autocorrelation among residuals.
Homoscedasticity is tested with the White Heteroskedasticity Test as stated on Table 2.
As a result of White Heteroskedasticity Test, Observation multiplied with R
2
value is found as
0,728830 and probability value is found as 0,6946. According to the test results,
homoscedasticity assumption cannot be rejected. Lastly, stationarity assumption of time series is
tested with Augmented Dickey Fuller Test as stated on Table 3. Test results show that both
Extended ISE CGI and ISE All Indexs excess returns time series do not have a unit root.
After basic assumptions of time series regression analysis are tested, we conduct time series
regression analysis on Extended ISE CGIs excess returns (dependent variable) and ISE All
Indexs excess returns (independent variable) as stated on Table 4.

Table 4: Descriptive Statistics and Performance Attribution Regression Results
Panel A: Descriptive Statistics of the Monthly Returns (September 2007 August 2010)
Portfolio Mean Standard Deviation Minimum Maximum
ISE CGI 1,58 % 0,0962 -18,24 % 20,92 %
ISE All Index 1,84 % 0,0923 -22,44 % 22,12 %
Panel B: Descriptive Statistics of the Monthly Excess Returns (September 2007 August
2010)
Portfolio Mean Standard Deviation Minimum Maximum
ISE CGI 0,32 % 0,0974 -20,02 % 19,75 %
ISE All Index 0,59 % 0,0933 -24,22 % 20,95 %
- 183 -

Panel C: Performance Attribution Regression for ISE CGI Portfolio (September 2007
August 2010)
Dependent Variable: ISE CGI
Method: Least Squares
Included observations: 60
Variable Coefficient Std. Error t-Statistic Prob.
b
ISE CGI
0.945356
*
0.058029 16.29103 0.0000
ISE CGI
-0.002358
*
0.005380 -0.438235 0.6628
R
2
0.820654 Mean dependent var 0.003201
Adjusted R
2
0.817562 S.D. dependent var 0.097370
S.E. of regression 0.041589 Akaike info criterion -3.489179
Sum squared resid 0.100321 Schwarz criterion -3.419368
Log likelihood 106.6754 Hannan-Quinn criter. -3.461872
F-statistic 265.3977 Durbin-Watson stat 1.908516
Prob(F-statistic) 0.000000
*
Statistical Significance at the 5% level.

We find that Extended ISE CGI portfolio generates lower monthly absolute and excess
returns than ISE All Index portfolio over the period August 2005 July 2010. The graph
indicates that the absolute cumulative returns of Extended ISE CGI are lower than ISE All Index
returns at the end of sample period.

Figure 1. Cumulative raw returns: Extended ISE CGI and ISE All Index from August 2005
July 2010: This figure shows the development of the value of Extended ISE CGI and ISE All
Index from August 2005 July 2010 assuming 1 Turkish Lira is invested in the portfolios in
August 2005.

Mainly, we conduct time series regression analysis and find that risk-adjusted return
(abnormal return) of Extended ISE CGI portfolio represented by the regression constant
ISE CGI

is negative and it is statistically insignificant at the 5 per cent level over the period August 2005
July 2010.
Conclusion and Implications
Good corporate governance is the key to the integrity of corporations, financial
institutions and markets, and central to the health of our economies and their stability. The
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- 184 -

concept and implementation of corporate governance is relatively new in Turkey. Good
corporate governance is widely associated with better performance and well-governed
corporations generally have higher stock return performance. However, sometimes stock prices
cannot fully reflect cross-sectional differences in governance. Excess returns can only result
from exposure to identified risk factors. When investors recognize the better firm performance
and lower risk level of well-governed firms, the market values of the well-governed firms
increase and the opportunity for additional returns disappears.
In this paper, we analyze whether good corporate governance leads to higher common
stock returns in ISE. We investigate the case of Turkish firms using an investment strategy that
holds only the firms listed in ISE Corporate Governance Index over the period August 2005
July 2010. We find that risk-adjusted return (abnormal return) of Extended ISE CGI portfolio is
statistically insignificant over the period August 2005 July 2010. An investment strategy that
holds only the firms listed in Extended ISE CGI during the period August 2005 July 2010 do
not earned abnormal returns.
The results of this study can be explained by lower risk level of well-governed firms,
well-governed firms with high governance ratings generate lower stock returns because of their
lower risk level. This result is also consistent with market efficiency, and screening based on
publicly available information about corporate governance cannot be expected to earn excess
returns. Only the expectation of rating changes and new declarations not currently reflected in
stock prices can generate abnormal returns. Main limitation of our study is the fact since we do
not have a corporate governance ratings database for all the firms listed in ISE, and we cannot
construct two main portfolios (a portfolio consisting of well-governed firms and a portfolio
consisting of poorly governed firms) based on a corporate governance ratings database. In the
future, a study including all the firms in ISE should be done by constructing a comprehensive
corporate governance ratings database for all the firms listed in ISE.

- 185 -

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- 187 -

Twi n Themes of Dr. Theodore W. Schultz:
Relevance for 21
st
Centur y I nter nati onal
Agr i cultur al and Busi ness Development
Larry Janssen
Abstract
This paper explores the contributions of Dr. Theodore Schultz path breaking research in
economics and its continuing relevance for 21
st
century global agriculture and business. Dr.
Schultz, a native of South Dakota and graduate of South Dakota State College, received the
Nobel Prize in Economics (in 1979) for his lifetime of economic research on the inter-related
themes:
Contribution of agricultural modernization to economic growth, and
Investing in people (human capital) is the main source of economic growth in a
modern economy.
Schultz initially studied economic issues involved in the transformation of U.S.
agriculture and later broadened his studies to examining the processes of agricultural
modernization around the world. His key insight was investing in human capital of farm people
was essential for achieving agricultural modernization. This insight was quickly expanded to the
more general idea that widespread human capital formation is essential to economic development
and modernization in all nations. Key applications of these ideas are discussed for their
relevance to contemporary international agriculture, education, and business.
Introduction
This paper is about the twin themes developed by Schultz that led to his receiving the
Nobel Prize in Economics. These themes are:
Agricultural modernization is a major contributor to economic growth, and
Investing in people (human capital) is the main source of economic growth in a
modern economy.
Some major implications of each theme are discussed for their relevance to past and
contemporary international agriculture, education, and business. The paper begins with
discussion of background influences on his work followed by discussion of each theme and
finally key relationships of each theme to past and contemporary international agriculture,
education, and business.
During the past and current academic year, South Dakota State University (SDSU) is
celebrating the life and works of 1979 Nobel Laureate in Economics and SDSU alumnus,
Theodore W. Schultz (b. 1902 d. 1998). The signature event is the Schultz Symposium held on
the SDSU campus in early October. Panel discussions, lecture series, and classroom studies are
held throughout the year and involve many faculty and students. The content of this paper is
substantially influenced by the authors participation in many of these events. Also, this paper is
an expansion of an earlier outreach article written by the author about Schultz. (Janssen, April
2010, 4 pp).
- 188 -

Some Background Influences on Schultzs Work
T.W. Schultz, the oldest of eight children was born in 1902 and raised on a family farm
near Badger, South Dakota. His farm work experiences, rural schooling, completing aggie
school and later a bachelors degree (in 1928) at South Dakota State College were formative
factors influencing his professional interests in agriculture and in economics.
Completion of a Masters (also in 1928) and PhD (1930) from the University of
Wisconsin set the stage for his brilliant career as a teacher, researcher, and administrator at Iowa
State University (1930 1943) and the University of Chicago (1943 1972). He continued his
professional writings until the early 1990s.
Schultzs tool kit included a brilliant, inquisitive, and disciplined mind. He was a keen
observer of human behavior especially real world behavior of rural people while abroad
(Schultz, biographical note, 1979). His writings and speeches often include his perceptions of
human behavior and use of economic theory and economic history to explain observed behavior.
His research and professional writings challenged a lot of dogma (especially in development
economics) and insisted on examining the proper use of economic theory. He also insisted on
empirical studies to test propositions. His research writings often included policy and
management applications.
Schultz lived during the era of incredible transformation of U.S. production agriculture
and its enormous influences on increasing food supplies, rural urban migration, changes in
rural and urban life, and many other factors related to national economic growth.
Schultz initially studied economic issues involved in the organization and transformation
of U.S. agriculture (Schultz, 1945 and 1953) and later broadened his studies to examining the
processes of agricultural modernization around the world (Schultz, 1964). His key insight was
investing in human capital of farm people was essential for achieving agricultural modernization.
This insight was quickly expanded to the more general idea that widespread human capital
formation is essential to economic development and modernization in all nations.
According to Huffman (2009), Schultzs interest in developing human capital theory was
stimulated by his post-World War II visits to Germany and Japan and their nearly miraculous
speed of recovery from wartime devastation to modern industrial nations. He attributed their
quick recovery to a healthy and highly educated population that was able to make productive use
of new investment and infrastructure.
Schultz is widely recognized as an agenda setter for research and teaching programs in
agricultural and applied economics (Ruttan, 1981). His research program attracted many top
graduate students who later became influential in universities, government, and international
agencies. His research program and professional writings continue to impact the fields of
agricultural policy, rural poverty, international agriculture and rural development, and the
economics of education (AJAE, April 2010). His professional writings and speeches often
emphasize his agrarian roots and his high regard for the potential of ordinary people.
Agricultural Modernization and Economic Growth
Schultz began his 1979 Nobel lecture entitled Economics of Being Poor with the
following quote: Most of the people in the world are poor, so if we know the economics of
being poor we would know much of the economics that really matters. Most of the worlds poor
people earn their living from agriculture, so if we knew the economics of agriculture we would
know much of the economics of being poor (Schultz, 1993, reprinted on page 1).
- 189 -

Traditional agriculture is characterized by subsistence, labor intensive, reliance on human
or animal power, low levels of mechanization, minimal use of commercial inputs, and low output
per person. Even today, most farmers in developing nations are engaged in traditional
agriculture, although a majority of global agricultural production is from modern commercial
farming systems. From a global perspective, 85% of the worlds 450 million farmers operate less
than two hectares, 14% operate from 2 100 hectares, and less than one percent operated farms
exceeding 100 hectares (Von Braun, 2005, pp. 5)
Schultz characterized most farmers engaged in traditional agriculture as poor but
efficient. In other words, farm households make good allocation decisions with the meager
resources and traditional technologies available, but are poor due to lack of sufficient resources.
He firmly rejected the notion that small farmers were poor due to cultural characteristics and
stated that these farmers needed new knowledge and skills to adopt new technologies, but also
to cope with changing economic environments.. (AJAE, April 2010, pp.454).
Schultz arrived at his poor but efficient hypotheses from his earlier work on the
problems of U.S. agriculture and from observations of farmers made in trips to less developed
nations. As stated by Barret et.al. Schulz had long been convinced that the problem of poverty
in American agriculture stemmed from the intersection of rapid technical change, the industrial
organization of the (agricultural) sector, and its dependence on an unstable macro-economy to
determine its output prices. In Schultzs view, new technology was the essential
driver of higher farm incomes, but only in the context of new investments in human capital on
the farm (AJAE, April 2010, pp. 454)
Schultz was optimistic that global agriculture has the potential capacity to produce more
food for the worlds growing population and can greatly improve the income and welfare of poor
people in both rural and urban areas. However, substantial investment in modern capital inputs
and in human capital is required to achieve these beneficial results.
Since agriculture is the main livelihood in most developing nations, transforming
traditional agriculture to a modern commercial enterprise is an essential ingredient of long-term
economic growth and development. Agricultural modernization requires considerable investment
in: (1) new scientific and technical knowledge which requires both public and private sector
funding of agricultural research, (2) industrial capacity to produce new inputs and the institutions
(market or governmental) to make the inputs accessible to farm households, and (3) education of
farm people to increase their capacity to invest and make management decisions for proper use
of new technology. (Schultz, 1964).
Schultz recognized that modernizing agriculture creates a lot of uncertainty and requires
making rapid adjustments on the farm and throughout the agricultural - food sector. In his view,
entrepreneurial talent is required to constructively handle rapid change. He advocated further
education and training to enhance entrepreneurial talent and also provide the specialized skills
needed in our ever changing economic environment.
Agricultural Modernization: Applications to International Agriculture and Business
Schultz strongly held that most farmers, regardless of operation size, were technically
efficient within the labor, capital, technology, and environmental constraints that they faced.
Providing new technology (broadly conceived) and education / training to properly use it were
the major ways to improve their livelihood within agriculture. This viewpoint is consistent with
the philosophy and approaches used in the agricultural Green Revolution.
- 190 -

The Green Revolution (GR) started in the 1950s in Mexico and Philippines and by the
early 1970s was becoming widely adopted especially in South Asian nations. The Green
Revolution concentrated on yield improvements for major cereals such as wheat, rice, and maize
and could be adopted by farmers with small, medium, or large acreages as large machinery was
not required. The GR was a package deal of using (1) modern inputs consisting of improved
seed varieties (high yield varieties), fertilizer, and pesticides and appropriate (2) public policies
related to agricultural and rural development. These public policies included: (1) investments in
agricultural research and development, (2) rural roads / transportation, (3) agricultural credit, (4)
irrigation development (as needed), (5) input supply systems from agribusiness and government,
and (6) price stabilization mechanisms (Hazell, 2009).
The Green Revolution was much more than a technology fix, because it emphasized
farmer education about adopting and properly using the new technology. It also led to rapid
expansion of agricultural credit and input delivery systems and major expansion of processing,
storage, trade, and marketing capacities. It required substantial government involvement along
with developing a private agribusiness sector (Hazell, 2009).
GR as a package deal of technology, farmer education, agribusiness, and government
policy is a substantial real-world application of Schultzs ideas of agricultural transformation and
modernization. However, some of the governmental policies contained within the actual
implementation of GR, such as continued use of input subsidies and extensive continuing
subsidies for irrigation development, were probably not consistent with his ideas on the role of
government in agriculture. Schultz advocated a role for government funding in agriculture / rural
development sectors with strong public goods components such as agricultural research, rural
education, and primary health care and policies related to improve macroeconomic stability.

Schultz was an early contributor to policy discussions on the organization of global
agricultural research and to estimating rates of return to this activity. In his 1981 Symposium
speech on Agricultural Productivity in Low Income Countries at SDSU, Schultz generally
praised the investment activities and contributions of agricultural research toward improving
food supplies and quality of the natural resource bases. He strongly suggested that organized
agricultural research needed to increasingly orient their program to the requirements of
agriculture in low-income nations, to conduct organized nutrition research and household
research in low-income countries, and provide high quality graduate training for students from
low-income nations (Shultz, 1981, pp. 9 - 10). Schultz was a strong proponent of the
institutional setting and agricultural research accomplishments applicable to low-income nations
from the network of international agricultural research institutes (CGIAR).
However, his greatest contribution may have been encouraging some of his high-caliber
Ph.D. students including Drs. Ruttan, Evenson, Peterson, and Griliches to conduct economic
investigations of interrelations between agricultural research, technical change, and productivity
issues that led to major advancements in our knowledge base and to changes in the organization
and conduct of agricultural research.
Throughout his career, Schultz was concerned about distorted economic incentives in
agriculture, caused by overvaluing agricultural production (high price supports and trade
barriers) especially in developed nations and deliberately undervaluing agricultural production in
many low-income nations. The consequences of undervalued agricultural production activities
were especially severe as it greatly reduced farmer incentives to increase food production in
nations that needed it most (Schultz, 1978, Economics and Politics of Agriculture in
- 191 -

Distortions of Agricultural Incentives). The agribusiness sector, private firms and non-
government cooperatives, would develop the most when public policies facilitated widespread
rural and urban economic development and provided appropriate institutions and incentives for
traditional farmers to increase their production and improve their livelihoods.
Of course, agribusiness development is a major component of modernizing agriculture
and is a major beneficiary of any successful transformation of traditional agriculture and of
changes in food demand composition stemming from rising incomes, urbanization, and sweeping
technological changes occurring at the food consumer level. In particular, the seed, fertilizer,
pesticide, irrigation equipment, farm machinery, and farm / rural credit segments of agribusiness
expand with modernization of the farm sector, while consumers largely benefit from home
refrigeration and transformation of purchasing some of their food from supermarkets.
Schultzs recipe for transforming traditional agriculture provided the mechanism for
many farmers to improve their household income from agricultural production related activities.
However, expanding human capital of farm household members through rural elementary and
secondary education and farm extension outreach programs also created greater opportunity for
many to migrate to urban areas for non-farm employment.
The greatest rural-to-urban migration in the United States occurred from the end of
World War II to the late 1960s while rapid rural (mostly farmers) to urban migration has been
occurring for the past 30 40 years in the developing world. Many of the push and pull
factors associated with this type of migration are consistent with Schultzs ideas of modernizing
agriculture. On balance, farmers adopting new technology would increase their output and early
to mid-stage adopters would often find it beneficial to expand their holdings. Thus many current
farmers (especially late adopters) would be pushed out of agriculture and into other pursuits.
At the same time, the rural brain drain would be accelerated by the pull factors of urban
employment growth and greater range of opportunities for those developing skill sets
transferable to non-farm employment and increasing their human capital. (AJAE, 2010, Irwin et.
al).
Investment in Human Capital
Schultzs studies on processes explaining agricultural modernization and economic
change led to his conclusion that investment in human capital (education, health, and training) is
the major long-term factor explaining modern economic growth and development. To achieve
and maintain a modern economy, continuous investment in human capital must occur alongside
investments in other forms of capital and technology.
Investment in human capital is directly influenced by its major attributes. Paraphrasing
Schultz in his 1981 SDSU address: Investing in People some major attributes of human capital
are: (1) You cannot sell or give away your own stock of human capital; (2) It goes with you
wherever you go. Unlike many other forms of capital, it cannot be confiscated by government;
(3) The duration of the value of your own human capital occurs within your lifetime; (4) You
must invest your resources and time to acquire it. Human capital is not free; it is an investment.
(5) It is more efficient to invest in your human capital while young as there is a longer time to
benefit from it, and (6) Not all forms of human capital turn out to be worthwhile investments. It
matters whether you choose wisely or not.
Schultzs research on human capital led to rethinking basic ideas in many disciplines and
resulted in a much more inclusive concept of what is referred to as capital. For example, some
sociology research expanded the concept of capital to a multiple capitals framework that
- 192 -

includes evaluation of interactions between natural capital, financial capital, built (infrastructure)
capital, human capital (individual abilities), social capital of human groups and communities,
cultural capital, and political capital (Flora and Flora, 2007). Economists tend to emphasize
contributions of human, physical, and natural resource concepts of capital and would consider
some of the other forms of capital as institutions that can be changed over time by adding to
our knowledge base.
Schultz believed that there are many diverse types of capital, with each form subject to
rates of return analysis. The major categories of human capital are investments in: (1) health
related services, (2) formal education, (3) on-the job training, are (4) informal / outreach
education. Thus human capital (specifically education, health care, and training) investments can
be examined in an economic financial framework as are many other capital investments.
Schultz was instrumental in developing and applying concepts of social and private rates
of return by level of formal education primary, secondary, and post-secondary. Rates of return
analysis includes assessment of: (a) direct costs of education tuition, fees, books & materials,
and public subsidies, (b) costs of foregone earnings by the student (and family), and (c) benefits
of higher earnings and well-being over the remaining life time of the student. (Schultz, 1963).
This analytical framework led to a wealth of empirical studies on rates of return to formal
education in many nations.
Based on numerous studies involving international comparisons of patterns of rates of
return to formal education as summarized by Psacharopoulos (1994), T. Paul Schultz (1988) and
OECD (1998), the following generalized findings occur:

a) Rates of return to education are highest at the elementary education level, where
basic literacy skills are taught, followed by returns to secondary education and higher
education.
b) Private and social rates of return are similar for primary and secondary schooling, but
private rates of return are much higher than social rates of return for university
education. The individual payoff to their investment in higher education is closely
related to the extent of availability of professional careers (such as engineering,
medicine, pharmacy, scientist, public administration etc.) that strictly require higher
education degrees and related skill sets.
c) Rates of return to general education are generally higher than rates of return to
vocational education. The main reason is the transferability of people into different
types of employment is often greater with a general education. The ability to change
job types, careers, and employers has become nearly essential in a dynamic modern
economic system.
d) Rates of return to education are generally higher in low-income nations than in high-
income nations, due to relatively few people able to acquire more formal education
beyond primary schooling.
e) Rates of return to education are generally higher for females than males, largely due
to cultural norms that have often limited female enrollment in schools.
f) Rates of return for private investment university education in many developed nations
is relatively close to, but slightly higher than, rates of return to productive
investments in the business sector. This finding indicates that individuals as a whole
are making good allocation decisions in terms of investing in their own education.
- 193 -

Huffmans (2009) summary of human capital investment literature reported that
annualized rates of return to education in the United States were: (1) extremely high (>25%) for
pre-school programs for disadvantaged children and for obtaining an elementary education
diploma, (2) high (10 24%) for completion of a high school diploma or four year college (BA /
BS) degree, or an advanced degree (Masters, PhD, MD etc), and medium to low (0 to 9%) for
only completing some high school or some college.
It is important to recall that most of the rate of return literature measures benefit /costs
in terms of direct financial costs of acquiring more education, opportunity costs based on
alternative employment, and financial returns over time from employment. Non-financial and
consumptive benefits of education are not included in these calculations. It is likely that these
benefits also increase with rising household income levels.
Schultz also emphasized investment in health care services as essential to developing
human capital. The stock of health capital is partly inherited and partly acquired, is subject to
depreciation over time especially later in life. Health care investments include child care,
nutrition, clothing, housing, medical services, and the use of ones own time. The flow of
services that health care renders consists of healthy time or sickness-free time which are
inputs to work, consumption, and leisure activities (Schultz, 1981, Economics of Being Poor,
pp. 13). From a global development perspective, the substantial decrease in infant mortality
rates and increase in adult life-span provides many economic benefits to humanity. These
benefits include: (1) greater amount of time in the work force (lower dependency ratio), (2)
greater labor productivity from fewer sickness days, and (3) greater incentives to obtain more
education as there is a longer time period to benefit from it.

Schultz was a consistent advocate of investing in human capital of both men and women
and that human capital investment decisions made by women may differ from those made by
males, especially concerning household production and consumption activities and the allocation
of time in raising children. His suggestions of combining major insights of human capital theory,
allocation of time in both the household and in the work force, and economics of information
search has led to a more robust treatment of household decision making and allocation of time
and economic activity at different stages in the family life cycle.
Schultz also predicted in a 1972 paper on Womens New Economic Demands that
investing in human capital of women would greatly increase the economic value of womens
time and have major repercussions on many institutions in society. These repercussions include
changes in household decision making, in the desired number of children, in their demand for
child care, health care and proper nutrition, in marriage customs, and in changing demands by
employees in the work force (Reprinted in Schultz, 1993).
In other words investing in human capital of both men and women is directly associated
with modern economic growth. Such investments not only lead to a rise in per capita income and
in household income, but also entail major changes in social, political, and economic institutions
of society.
Relation of Human Capital Investments to Economic Growth
Economic growth, as explained by Schultz, stems from peoples search for higher rates of
return to their own investment which leads to so many changes in human behavior, including
selection of employment, business, and consumption activities and, frequently, migration to
other locations. These changes are so pervasive in developed nations that their predominant
- 194 -

economic activity has shifted from agriculture to manufacturing to post-industrial employment
and output and predominant location of population and economic activity has shifted from rural
to urban / metropolitan areas. It also often leads to major changes of the roles of men, women,
and children in society.
Furthermore, according to Schultz, human capital is a rising proportion of all capital and
a rising percent of national income in all modern economies. In the United States and other
developed nations, the value of human services (wages, salaries, and proprietors income) has
increased from 55% to 75% of total economic return during the 20
th
century. These results occur
from long term changes in supply and demand favoring higher skilled human services.
The rising economic value of human time, on a global basis, has several key implications.
First, there is an increased demand for educational services at all levels primary, secondary,
and post-secondary as more formal education is often viewed as a key to higher earnings in the
modern economy. Second, the income distribution of a more educated labor force is (usually)
less unequal than the income distribution from ownership of physical capital. Third, greater
rewards for entrepreneurial behavior are more likely to occur for a larger proportion of
households. Fourth, as value of time for women increases fertility rates tend to decline resulting
in lower population growth rates. Greater investments per child are then made in proper
nutrition, health care, and education (Schultz, 1981, Economics of the Value of Human Time)
Schultz mainly viewed education as a human capital investment and as a direct
contributor to economic growth through the ability of educated persons to achieve higher
earnings. Van den Bergs (2001) review of key relationships between education, human capital,
and economic growth suggests that education influences economic growth through several
different pathways. First, if education is viewed as human capital it is subject to diminishing
returns and capable of causing only short-run and medium-run economic growth (pp. 405).
However, if education investments are closely tied to technology investments then long-term
permanent economic growth can occur due to positive externalities and providing highly
skilled human capital for increasing research and development (R & D). Van den Berg
considered the impacts of general education on spreading ideas and knowledge on increasing the
ability of people to adapt existing technology to their circumstances and needs in low-income
countries. Overall, these alternate concepts on the role of education in economic development are
consistent in their projected results.
Schultz was also concerned about wealth and income distribution effects of economic and
public policy changes. He was especially concerned about the extent of rural poverty and the
roles that education, research, improved nutrition, health care, and selected anti-poverty
programs could accomplish in reducing extreme poverty. However, Schultz generally viewed the
rise of national income from increased human capital investment (both education and health
care), relative to property based income, as the greatest long-term factor leading to improved
income distribution in nations.
Schultz was a proponent that greater investment in human capital will lead to more
rewards (both monetary and non-monetary) for entrepreneurial behavior in all major economic
sectors: agriculture, industry, services (both private and public sector), and households. In other
words, greater education and good health promotes our ability to cope with and adapt to
constantly changing conditions. All kinds of social groups (churches, non-profit organizations,
businesses, local governments, and state / federal governments) as well as individual households
can engage in productive entrepreneurial activities that enhance human welfare. However, in
many cases these institutions are also viewed as stumbling blocks to needed changes. Schultz
- 195 -

would likely examine the potential for creating the needed incentives for organizations to make
necessary changes.
Schultzs writings clearly indicate his disdain for the neo-Malthusian approach of
imposing strict limitations on global resource use and population controls. His writings suggest
that the rising economic value of humans, especially women, will greatly reduce fertility and
over time the growth in global population. The demand for increased quality attributes of
people in households, communities, and even at the global level will strengthen as economic
development proceeds. The human spirit combined with widespread education will advance the
search for and adoption of newer technologies that will reduce our dependence on the most
limiting natural resources. He has considerable confidence in the power of knowledge and
further wise investments in human capital as the mechanism for continually finding appropriate
solutions to our most pressing long-term global problems.
Investing in Human Capital: Further Applications for International Business and
Education
Many implications of further investing in human capital have already been discussed.
However, some additional applications for international business and education are offered
below as food for thought.
First, there is an essential need for basic education and literacy for all men, women, and
children on a global scale. Continued expansion, development, and upgrading of global markets
for products and services will increasingly require this minimum level. This statement is based
on the role of formal education in fostering modern (not necessarily Western) attitudes and
growing need for more sophisticated evaluation of consumer (and producer) of goods and
services prior to purchase.
Second, greater investment in formal education in lower income nations should have high
payoffs, but needs to be tailored to the economic development stage of the nation. In most cases,
this means greater emphasis on primary and secondary education for boys and girls and, in many
cases, for adult men and women. It also implies developing widespread education opportunities
in both rural and urban areas. The example of South Korea of shifting national education policy
(such as enforced minimum grade levels) to slightly lead changes in economic and employment
structure may be useful. Otherwise, migration of higher skilled persons (brain drain) to other
nations is further encouraged.
Third, investments in basic education, nutrition, and primary health care often reinforce
each other. Anti-poverty programs such as PROGRESA in Mexico and BOLSA in Brazil have
worked reasonably well because they have been targeted to the rural (and later urban) poor,
provide incentives to children of poor families to remain in school and not go into the labor
force, and provide improved nutrition and health care, especially for women and children. These
kind of anti-poverty programs require continuing investment in and upgrading of education
services as more children remain in school. They require the cooperation and many skills
provided by the business sector for efficient program administration and for discouraging the
overuse of child labor. Long-term these programs create growing markets for the business
sectors as labor productivity is enhanced and more families break out of a vicious poverty cycle.
Fourth, Schultz strongly favored institutional arrangements that facilitated discovery,
diffusion, and application of new knowledge, in general, and useful knowledge in particular. In
the modern economy, this means developing organizational arrangements such as universities,
research centers, and private-public consortiums that can quickly transfer new knowledge and
- 196 -

discoveries to the classroom and to the business sector. It also means strengthening international
research centers for agriculture, nutrition, health care and other essential quasi-public goods.
Again, he would likely remind us to carefully examine the incentive structures for conducting
and funding those activities that are so critical to long-term global economic growth and welfare.
Fifth, growing standardization of higher education is occurring within and between
nation-states, especially in the European Union. This process can further facilitate student and
faculty transfers between nations and has important implications for global hiring by
international business firms, foundations, and other international institutions. In particular, this
process should lower search costs and provide a larger pool of qualified applicants.
Finally, investing in human capital can be greatly facilitated by government policies and
programs, by educational institutions, and by the for-profit business and non-profit organization
sectors. However, it is the final responsibility of the individual and family to make the necessary
allocation decisions (especially time commitment) to invest in their own human capital. Schultz
would certainly argue that society was best served by informed decision making by individuals
and families. Therefore, providing proper incentives for further human capital investments, as
opposed to rigid mandates, is the appropriate long-term policy approach.
Concluding Remarks
This essay is intended to provide the reader with some of the major ideas that Schultz
contributed to the applied economics literature that led to his receipt of the Nobel Prize in
Economics in 1979. More important, many of his ideas and his research results continue to
influence thinking and practice in U.S. and global agriculture, business, education and
government circles today! The requirements needed for continued investment in human capital
and for continued modernization of agriculture, especially in low-income and middle-income
nations, will remain a challenging agenda for many decades.

- 197 -

References

This paper is greatly expanded from an outreach article prepared by the author:
Janssen, Larry. 2010. Twin Themes of Theodore W. Schultz SDSU Economics
Commentator No. 516 , April 16 (4 pages).
References used in preparing this paper were:
American Journal of Agricultural Economics: Special Issue Commemorating the Centennial of
the AAEA. Vol. 92, No. 2, April 2010. Articles used were:
Barrett, Christoper B., Michael R. Carter, and C. Peter Timmer. A Century-Long Perspective on
Agricultural Devleopment. pp. 445 468.
Irwin, Elena G., Andrew M. Isserman, Maureen Kilkenny, and Mark D. Partridge. A Century
of Research on Rural Development and Regional Issues. pp. 522 553.
Flora, Cornelia and Jan Flora. 2007. Rural Communities: Legacy and Change. 3
rd
Edition.
Westview Press.
Hazell, Peter. 2009. Transforming Agriculture: The Green Revolution in Asia in Millions Fed:
Proven Successes in Agricultural Development. International Food Policy Research
Institute. pp. 25 32.
Huffman, Wallace E. 2009. Investing in People for the 21
st
Century. T.W. Schultz Lecture,
South Dakota State University. Oct. 6.
Psacharopoulos,George. 1994 Returns to investment in education: a global update in World
Development (22): p. 1325 1343.
Selected presentations from a Symposium with Theodore W. Schultz: a Centennial Event at
South Dakota State University. Sept. 21-22, 1981. Includes presentations / papers by
T.W. Schultz on Investing in People and Agricultural Productivity in Low Income
Countries and by Dr. Vernon Ruttan on Theodore W. Schultz: An Agenda Setter.
Schultz, T. Paul. 1988. Education Investments and Returns. In Chenery and Srinivasin, ed.
Handbook of Development Economics. Amsterdam: North Holland.
Organization for Economic Cooperation and Development. 1998. Human Capital Investment:
An International Comparison. Paris: OECD.
Schultz, T.W.1945. Agriculture in an Unstable Economy. New York: McGraw-Hill.
_______. 1953. Economic Organization of Agriculture. New York: McGraw-Hill.
_______. 1963. The Economic Value of Education. New York: Columbia Univ. Press.
_______. 1964. Transforming Traditional Agriculture. New Haven: Yale Univ. Press.
_______. 1968. Economic Growth and Agriculture. New York: McGraw-Hill.
_______. 1970. Investment in Human Capital: The Role of Education and Research. New York:
Free Press.
_______. 1981. Investing in People: the economics of population quality. Berkeley, CA.
University of California Press.
_______. 1993 The Economics of Being Poor. Cambridge, Mass. Blackwell Press. Schultz, T.W.
1978. On Economics and Politics of Agriculture in Distortions of Agricultural
Incentives. Indiana University Press. pp. 3 23.
Schultz, T.W. 1979. A Biographical Note Prepared for Nobel Foundation.
Van den Berg, Hendrik. 2001. Economic Growth and Development. New York: McGraw-Hill.
pp. 371 405.
Von Braun, Joachim. 2005. The World Food Situation: an Overview IFPRI paper prepared for
CGIAR annual meeting, Marrakech, Morocco, Dec. 6.
- 198 -

I mpact of Si ngle Stock Futures on the Volati li ty of
Under lyi ng I ndi an Stocks
Thadavillil Jithendranathan
Rakesh Gupta
Abstract:
This study aims to test the influence of the introduction of derivative asset on the
volatility of the underlying asset. Study uses introduction of single stock futures listed on the
National Stock Exchange of India to test the influence on the volatility of the underlying stock
returns. Indian market in unique in its nature as single stock futures form a substantial proportion
of the derivative market as against other markets around the world where index futures are more
common and single stock futures form a marginal proportion of the derivative trading.
Results support the hypothesis that introduction of single stock futures reduce the
volatility of the returns of the underlying stock. Results of the study are robust as we use
sophisticated models to test volatility and further in test of the influence of introduction of the
futures contract on the volatility of the underlying stock returns.
Introduction
The main theme of this paper is to address the issue of identifying the role, if any of
derivatives in influencing the volatility of emerging stock markets? In the recent years equity
index based derivative securities have been introduced by emerging markets and there are some
studies that look into the impact of these derivatives on the volatilities of the underlying stocks
98
.
The index futures are based on a basket of individual stocks, it is difficult to interpret the results
of these studies at an individual stock level as the change in the volatility of the underlying index
returns may be because of the change in the volatilities of the constituent assets of the index and
not because of the introduction of the derivative. This study uses the Single Stock Futures (SSFs)
where the underlying asset is a single stock to study the impact of these contracts on the
volatility of the underlying stock.
Introduction of a derivative contract can reduce the volatility of the underlying asset by
allowing the speed at which new information is incorporated into the underlying asset price
99
.
The volatility-reducing effect of SSFs should also be greatest in markets where there are little or
no short-sales. Bris, Goetzmann and Zhu (2007) find that majority of the emerging markets do
not allow short-sales or the short-sales are severely restricted. When short-selling is limited or
outright banned the markets are denied an opportunity to capitalize negative information into
prices, quickly and in a cost effective way. The absence of substitutes like derivatives results in
failure to quickly and adequately incorporate information thereby increasing volatility. Investors
are generally risk averse and when considering emerging markets investors make their decisions

98
Kan (1997), Pok and Poshakwale (2004), Ryoo and Smith (2004), Zhong, Darrat and Otero (2004), Drimbetas,
Sariannidis, and Porfiris (2007), Kasman and Kasman (2008)
99
In the context of equity markets in India, in its recommendations LC Gupta committee argued that by introduction
of derivative instruments speculative transactions that took place in the spot market will transfer to the derivative
market thus reducing the volatility of the spot market. Moreover, derivative instruments also provide a cost effective
way of rebalancing portfolios thus transferring trading from spot to derivative markets.
- 199 -

with greater caution. Higher volatility in the stock markets can discourage foreign investors in
investing into emerging markets. Therefore the study of the effects of derivatives like SSFs on
the volatility of asset prices in emerging markets is important. Emerging markets are believed to
exhibit higher volatility
100
in their asset prices and the influence of derivatives in these markets
on volatility can have major implications on the investments decisions of the foreign investors.
This study is different from the earlier studies as it is based on use single stock futures
and not index futures (the discussion on how index futures can cause bias in results is placed on
page xx) to test if that can influence the volatility of the underlying asset returns. This study also
considers models with restrictions of symmetry and without this restriction as well. Finally, we
make an out-of-sample comparison by using a set of data for the assets that had no derivative
available during the study period
101
.
When it comes to using equity derivatives as a vehicle to incorporate information the
general perception as expressed by Fratzscher (2006) is that equity derivatives have usually
reduced volatility and strengthened liquidity in equity markets, enhanced returns to institutional
investors such as mutual or pension funds, and reduced the cost of equity listings for firms.
Therefore, when short selling is restricted or illegal then a possible alternative could be the use of
derivatives. However, while the primary motive for derivatives usage is to reduce volatility the
research appears to be mixed. Previous studies tend to be of two categories; theoretical and
empirical.
Several studies such as Baldauf and Samoni (1991), Antoninon and Foster (1992), Pinceli
and Kaoutnous (1997), Galloway and Miller (1997), Dennis and Sim (1999), and Rahmen (2001)
generally confirmed the assertion that speculative traders in futures markets stabilize or even
reduce spot market volatility. These theoretical explanations are similar to Harris (1989) in that
an increase in well informed speculative traders decreases spot volatility. In comparison,
relatively few papers suggest that speculation, sometimes referred to as excess speculation, in
futures leads to destabilization in spot markets, e.g. Lee and Ohk (1992) and Antonu and Holmes
(1995).
There is a long history of studies on the effect of derivatives on the commodity markets
such as Kaldor (1939), Stein (1961), Peck (1976), Turnovsky (1983), Kawai (1983) and Weller
and Yano (1987). Likewise, there have also been many studies of the effects of derivatives on the
pricing and volatility of financial assets. Among these studies are Froewiss (1978), and
Figlewski (1981) all of which were on GNMA securities. Studies done on T-bills include
Simpson and Ireland (1985). A study on T-Bonds was done by Bortz (1984). And in the area of
derivative effects on S&P 500 index volatility, studies include Edwards (1988) and Harris
(1989). One empirical paper that happened to be on SSFs effects on stock volatility was Dennis
and Sim (1999) that dealt with stocks on the Sydney Exchange.
India is a unique market to study the effect of introduction of derivatives on the
underlying assets. The SSF contracts have become popular in the Indian market and the trading
volume on these contracts as a percentage of total derivatives volume is much higher when
compared with other major markets in the world. The volume of SSFs on NSE accounts for
approximately 50% of the derivatives trade. Uniqueness of the Indian derivatives market

100
Some researchers, e.g. ?? have argued that flow of portfolio investments into emerging markets increase volatility
of the emerging stock markets. However a review paper by Gupta and Basu (2007) find that empirical evidence does
not support this.
101
Derivative contracts were introduced in the Indian market progressively as such it was possible to identify stocks
in the market, within the same industry group that had no derivative contract traded during the period of study.
- 200 -

provides a good test case as any change found in the volatility of the underlying asset is more
likely to be an influence of the introduction of the derivative stock and not because of other
factors. Furthermore, law in India specifically provides derivatives to be used for hedging
purposes only and to that effect most derivative traders in India describe themselves as hedgers
(Sarkar, 2006).
Studies of the influence of futures contracts on the spot market have been numerous; e.g.
Thenmozhi (2002), Gupta (2002), Raju and Karnde (2003) find decline in volatility after the
introduction of the derivatives and Shengagaram (2003) find no change in spot market volatility
after the introduction of the derivative contracts. The studies thus far on tests of influence of the
derivatives on the spot market volatility are based on the underlying index and not the individual
stocks. The test of change of volatility of the index with the introduction of the derivative
products may not be optimal for several reasons. Firstly, the index represents the diversified
portfolio of the market, so the introduction of the derivative on the index may not influence the
volatility of the index significantly as we are looking at the diversified portfolio of stocks.
Secondly, the derivatives (single stock futures) on individual stocks are introduced at different
times in the market place; as such it gives an opportunity to see if the change in volatility of the
underlying is because of the introduction of the futures contract of because of other market
factors. Lastly, we look at the data for two years prior to the introduction of the futures contract
and two years after the introduction of the futures contract.
Derivatives markets in India have existed since 1875. Bombay Cotton Trade
Association started futures trading in 1875 and by the 1900s was a major futures market in the
world. In 1952 Indian government banned cash settlements and the trading derivatives moved to
informal market. Following recommendations of the Kabra Committee appointed in 1993, the
Forwards Contracts (Regulation) Act of 1952 was amended and derivative trading in
commodities were allowed in early 2000
102
.
Currently the law recognizes derivatives as securities and as such can be traded but only
if the derivatives are traded on exchanges. Index futures were introduced for trading at NSE in
June 2000, followed by index options in June 2001, options and futures on individual securities
in July 2001. From the beginning, volumes of derivatives on stock indexes and individual stocks
have grown rapidly especially single stock futures.
The rest of the paper is organized as follows. Section 2 describes the empirical
methodology, Section 3 details the data, Section 4 analyzes the results and Section 5 concludes
this paper.
Empirical Methodology
Introduction of SSFs can have an effect on the trading volume of the underlying stock by
shifting some of the trading activity away from the spot market. This shift may also be an
indication of high level of speculative activity in the futures market, where the cost of transaction
is lower compared to the spot market. The effect of introduction of SSF on the trading volume of
the underlying stock is tested using the following regression equation.
t it
D t v + + + =
2 1 1
(1)

102
Prior to the introduction of the formal derivatives contract in the Indian market, there was a form of futures
trading referred to as badla which allowed carrying forward of a buy/sale contract to a next settlement period on
payment of carry forward charges thus creating a semi-derivative product that allowed short-sales.
- 201 -

where
t
v is the log of trading volume in the NSE market, t is the time trend and D is a dummy
variable with a value of 0 when there is no futures contract and 1 for those days when there is
futures trading. A study by Chae (2005) shows that the distribution of daily volume is non-
normal, with high skewness and kurtosis and hence ordinary least squared method cannot be
used on the level of volume. To alleviate this problem in this study we use a log function of the
volume as suggested by Ajinkya and Jain (1989).
Following Antoniou and Holmes (1995)
103
, the conditional mean and conditional
volatility of all stocks are estimated as follows:
t Mt it
R a a R + + =
1 0
(2)
D h h
t t t
+ + + =
1 1
2
1 1 0
(3)
where R
it
is the return of the i
th
stock, R
Mt
is the return of the market and D is a dummy variable
that has a value of 0 for the pre-futures period and 1 for the post-futures period. If the dummy
variable is significant, then it can be assumed that the introduction of the futures contract has a
significant effect on the volatility of the underlying asset.
The unconditional variance of the stock return can be calculated as ) 1 /(
1 1 0
. An
increase in the unconditional variance would suggest that greater information is transmitted to
the market as a result of the futures trading.
The log likelihood function to maximize in GARCH setup is given by:
I = -
1
2
log(2n) -
1
2
log (o
t
2
)
1
t=1
- (y
t
- p - y
t-1
)
2
o
t
2 1
t=1
(4) the computer
maximizes the function and generates parameter values that maximizes the log likelihood
function and will also construct their standard errors.
Conditional mean and conditional volatility of the stock returns after the introduction of
futures contract is given by the following GARCH (1,1) model.
t Mt it
R a a R + + =
1 0
(5)
1 1
2
1 1 0
+ + =
t t t
h h (6)
where R
it
th
stock, R
Mt
is the return of the market, and h
t
is the
volatility. This model is used to estimate the conditional volatility after the introduction of the
futures contract for the full sample period.
Conditional mean and conditional volatility of the stock returns after the introduction of
futures contract is estimated as per the following model. In this case we also include ratio of
volume of stock trading and trading of futures contracts.
t Mt it
R a a R + + =
1 0
(7)

t t t t
TR h h
2 1 1
2
1 1 0
+ + + =

(8)
where R
it
th
stock, R
Mt
is the return of the market, h
t
is the volatility, and TR
t

is the ratio of futures volume/stock volume at time t.
Stocks are shown to exhibit asymmetries in returns and to address this issue we also
estimate a model that allows for asymmetries in asset returns
104
. Equation (8) can be rewritten
with an asymmetric term.

103
Pok and Poshakwale (2004) also use similar methodology for their study of the Malaysian market.
104
Studies in the Indian context that analyse the impact of derivatives contract are based on index futures (e.g.
Shenbagaraman, 2003; Bandivadekar and Ghosh, 2003; Rao, 2007; Sarangi and Patnaik, 2007). There are only two
studies that look at the impact of single stock futures derivative on the underlying (Nath, 2003 and Vipul, 2006).
However these studies assume symmetry in the response of volatility to information. Our study differentiates itself
- 202 -

t Mt it
R a a R + + =
1 0
(9)
2
1 1 3 2 1 1
2
1 1 0
+ + + + =
t t t t t t
S TR h h (10)
where R
it
th
stock, R
Mt
t
is the volatility, TR
t

is the ratio of futures volume/stock volume at time t, and S
t-1
is a binary variable with a value of
1 if
t-1
is negative and zero otherwise.
Research has also argued that the ratio of futures volume to the open interest may have
some information content. Increase in volume relative to open interest may suggest speculative
trading (??). We also include this ratio to determine if the trading in futures market is
information driven or it is speculative. Following model is estimated including all variables
t Mt it
R a a R + + =
1 0
(11)
2
1 1 4 3 2 1 1
2
1 1 0
+ + + + + =
t t t t t t t
S OP TR h h (12)
where R
it
th
stock, R
Mt
t
t

is the ratio of futures volume/stock volume at time t, OP
t
is the ratio of futures volume/open
interest, and S
t-1
is a binary variable with a value of 1 if
t-1
Data
This study covers 28 SSFs that are traded in the NSE market and their underlying
stocks that are traded NSE market. The effects of the introduction of the SSF on the underlying
stock volatility is studied by comparing the volatility of the stock two years prior to and two
years after the introduction of the SSF. This resulted in a sample of 28 stocks
105
covering
different periods as the futures on the stocks were introduced at different times. The details of
these SSFs are given in table 1 with the industry classification and to control sample
106
. The
daily price and volume of the SSFs and underlying stocks are obtained from NSE. Table 2
details the growth trends in the ratio of futures trading volume to stock trading volume. Results
indicate that the trading in the futures market has grown at a much faster pace than that of the
volume in the spot market. This may indicate that some of the trading activity could have
transferred from the spot market to the derivative market.
Results
The effect of introduction of stock futures on the volatility of the underlying stock is
studied in this study by estimating GARCH volatility of the underlying asset. Study estimates the
volatility of the asset for the period two years preceding the introduction of the futures contract
and after the introduction of the futures contract. A dummy variable is introduced that takes a
value of zero for the period prior to introduction of the futures contract and 1 after the
introduction of the introduction. If the coefficients of the dummy variable are statistically

from former studies as it is based on the single stock futures. And also considers models with symmetry and
asymmetry to address the weaknesses that may arise by assuming symmetrical response to information.
Furthermore, we also consider a control sample.
105
Gazprom SSFs were also introduced in 2001, but since there was not enough data on the underlying stock prior to
that it was not included in the study. Another SSF that is not included in this study is the SSF of United Energy
Systems which was broken into several separate firms in 2008.
106
Control sample is a stock that did not have a futures contract introduced during the period of study and belong to
same industry group and have similar characteristics.
- 203 -

significant it is inferred that the introduction of the futures contract has influenced the volatility
of the underlying asset.
Results in table 4 convincingly support the hypothesis that the introduction of the futures
contract reduces the volatility of the underlying stock by providing a means of low cost
transactions for incorporating the news impact in the asset prices.

Table 1 Details of Stocks analyzed

Name of the Company Ticker symbol
of underlying
stock
Date of SSF
introduction
Industry Classification Company with no
futures contract
ACC Cements ACC November 9, 2001 Cement & Cement Products India Cements
ABB ABB April 20, 2005 Electrical Equipment Havells
BHEL ? ? Electrical Equipment Crompton Greaves
BPCL BPC November 9, 2001 Refineries Zuari Agro
Cipla Ltd CIP November 9, 2001 Pharmaceuticals Glaxo
Gail GAI September 26, 2003 Gas Suppetro
Grasim GRA November 9, 2001 Cement & Cement Products GNFC
HDFC HDF November 9, 2001 Finance Housing LIC Housing
HDFC Bank HDB August 29, 2003 Banks J & K Bank
Hindalco Aluminium Tube Investment
Hindustan Lever HIL November 9, 2001 Diversified Voltas
ICICI Bank Banks Kotak Bank
Infosys Technologies INF November 9, 2001 Computers - Software INFOTCENT
ITC Ltd ITC November 9, 2001 Cigarettes Godfrey Philipps
Mahindra & Mahindra MAM November 9, 2001 Automobiles 4 wheels Ashoka Leyland
National Aluminium NAT January 31, 2003 Aluminium Jindal Steel
ONGC Oil Exploration/Production Chennai Petro
Ranbaxy Ltd RAN November 9, 2001 Pharmaceuticals Zhandu Pharma
Reliance Capital Finance SRTRANFIN
Reliance Ltd REL November 9, 2001 Refineries Essar Oil
SAIL SAI September 15, 2006 Steel & Steel Products GUJNRECOKE
SBI Bank SBI November 9, 2001 Banks Corporation Bank
Siemens Electrical Equipment Laxmi Machines
Sun Pharma SUN April 20, 2005 Pharmaceuticals Elder
Pharmaceuticals
Tata Motors Automobiles 4 Wheel Escorts
Tata Power TAP November 9, 2001 Power CESC
Tata Steel Steel & Steel Products Mahendra Seamless
Wipro Ltd WIP January 31, 2003 Computer Software ROLTA

Table 2 Growth trends in the ratio of futures trading volume to stock trading volume
In this table the growth trends in the ratio of futures trading volume to stock trading volume is estimated using the following regression:
t t
t t v + + + =
2
2 1

Where
t
v is the ratio of the Indian rupee trading volume of the futures and stocks, and t is the time trend.
Firm
(t-stat)
1

(t-stat)
2
x100
(t-stat)
R
2

(F-stat)
Mean of
dependent
variable
(std. dev)
- 204 -

ABB 2.1492
(13.8233)
*
0.0048
(6.9329)
*

-0.0006
(9.2791)
*

0.1296
(76.8002)
*

2.4888
(1.7698)
ACC 0.1497
(1.6594)
***

0.0077
(34.9066)
*

-0.0003
(34.0724)
*

0.3927
(609.832)
*

2.8412
(1.6732)
BHEL 0.4881
(5.2998)
*

0.0047
(21.1783)
*

-0.0002
(21.1783)
*

0.2010
(237.849)
*

1.9988
(1.4890)
BPCL 1.0946
(6.9426)
*

0.0018
(4.7731)
*

-0.0001
(4.0749)
*

0.0133
(13.7861)
*

1.8751
(2.2943)
CIPLA -0.4742
(5.9061)
*

0.0053
(27.0005)
*

-0.0002
(23.3760)
*

0.3109
(425.873)
*

1.7351
(1.3980)
GAIL 1.0588
(9.2015)
*

0.0067
(18.0805)
*

-0.0005
(20.2437)
*

0.2394
(223.440)
*

2.3922
(1.6516)
GRASIM 0.7234
(5.6493)
*

0.0039
(12.4436)
*

-0.0001
(11.0823)
*

0.0818
(84.9030)
*

2.2881
(1.9313)
HDFC -0.1961
(6.1608)
*

0.0019
(25.3206)
*

-0.0001
(20.5497)
*

0.3212
(446.634)
*

0.6904
(0.5585)
HDFCBANK 0.6617
(10.4915)
*

0.0019
(9.3761)
*

-0.0001
(7.6504)
*

0.0764
(60.2991)
*

1.3082
(0.8272)

HINDALCO -0.8213
(7.8998)
*

0.0061
(24.1994)
*

-0.0002
(18.2276)
*

0.3507
(509.691)
*

2.1644
(1.8647)
HINDUNILVR -0.2264
(2.9631)
*

0.0048
(25.6848)
*

-0.0002
(22.5794)
*

0.2825
(371.873)
*

1.7345
(1.3038)
ICICIBANK 0.2033
(1.8849)
*

0.0087
(27.7476)
*

-0.0005
(28.9878)
*

0.3475
(420.973)
*

2.4550
(1.7657)
INFOSYSTCH 0.4431
(11.6076)
*

0.0015
(16.1500)
*

-0.0001
(10.8049)
*

0.2515
(317.445)
*

1.2519
(0.6376)
ITC 0.1860
(3.9077)
*

0.0025
(22.0708)
*

-0.0001
(18.2830)
*

0.2530
(319.902)
*

1.3154
(0.7961)
M&M 2.2915
(19.5161)
*

0.0032
(11.3682)
*

-0.0002
(15.3911)
*

0.1876
(218.488)
*

2.6808
(1.8829)
NATIONALUM -0.0129
(0.0516)
0.0096
(13.1867)
*

-0.0004
(10.4840)
*

0.1394
(128.743)
*

3.6988
(3.5683)
ONGC 1.1352
(16.6475)
*

0.0020
(10.3075)
*

-0.0001
(9.2978)
*

0.0661
(56.8566)
*

1.8135
(0.9332)
RANBAXY 0.5310
(6.2951)
*

0.0030
(14.5916)
*

-0.0001
(11.7350)
*

0.1384
(152.341)
*

1.8981
(1.3134)
RELCAPITAL 1.1719
(8.6574)
*

0.0150
(24.4799)
*

-0.0016
(28.0932)
*

0.4709
(454.039)
*

3.1582
(1.9764)
RELIANCE 0.0876
(1.5994)
0.0041
(31.0184)
*

-0.0001
(25.0465)
*

0.4191
(680.306)
*

1.9655
(1.0381)
SAIL 2.0776
(20.6144)
*

0.0039
(5.5869)
*

-0.0007
(7.4192)
*

0.1241
(47.9934)
*

2.2640
(0.9222)
SBIN 0.0639
(0.6798)
0.0062
(27.1776)
*

-0.0002
(22.7404)
*

0.3332
(471.664)
*

2.7787
(1.6644)
SIEMENS 1.2138
(9.0669)
*

0.0086
(14.3416)
*

-0.0009
(16.5771)
*

0.2389
(160.839)
*

2.3410
(1.6297)
SUNPHARMA 1.2946
(6.9062)
*

0.0074
(8.7226)
*

-0.0008
(10.6590)
*

0.1303
(77.2875)
*

2.0934
(2.1348)
TATAMOTORS 2.3380
(21.6655)
*

0.0032
(12.3271)
*

-0.0002
(15.1516)
*

0.1435
(158.777)
*

2.9732
(1.6853)
TATAPOWER 1.2084
(11.3323)
*

0.0046
(17.7824)
*

-0.0002
(19.5507)
*

0.1756
(201.671)
*

2.4805
(1.6975)
TATASTEEL 0.3579
(3.5735)
*

0.0064
(26.0854)
*

-0.0002
(22.8010)
*

0.2916
(388.567)
*

2.9877
(1.7198)
WIPRO 0.4539
(5.9415)
*

0.0040
(18.0134)
*

-0.0002
(14.8639)
*

0.2138
(215.479)
*

1.9394
(1.1393)

*
Significant @1%,
**
Significant @5%,
***
Significant @10%

Table 3 Effect of futures introduction on underlying stock trading
volume
Name of the Company Coefficient T-value
ACC Cements -0.00010 -2.288*
ABB -0.00005 -2.795*
BPCL -0.00100 -6.373*
- 205 -

Cipla Ltd -0.00009 -1.779***
Dabur Ltd 0.00144 8.829*
Dr Reddy -0.00153 -10.774*
Gail
Glaxo Ltd -0.00002 -0.679
Grasim -0.00021 -3.698*
Gujarat Ambuja Cements -0.00043 -5.713*
HCL Technologies -0.00008 -2.676*
HDFC 0.00028 3.649*
HDFC Bank 0.00023 5.354*
Hero Honda -0.00443 -15.507*
Hindustan Lever
Hindustan Petroleum 0.00000 0.0211
Infosys Technologies -0.00147 -7.254*
IPCL -0.00002 -1.182
ITC Ltd -0.00018 -2.723*
L & T Ltd -0.00013 -2.544*
Mahindra & Mahindra -0.00001 -1.394
MTNL -0.00008 -4.461*
National Aluminium -0.00009 -2.330*
Oriental bank -0.00010 -2.319**
Punjab National Bank -0.00008 -10.506*
Ranbaxy Ltd -0.00005 -135.751*
Reliance Ltd 0.00000 2.673*
SAIL -0.00009 1.306
Satyam Computers -0.00084 -1.720*
SBI Bank 0.00000 -1027.034*
Sun Pharma -0.00005 -203.156*
Tata Power -0.00041 -17.756*
VSNL -0.00475 -15.693*
Wipro Ltd -0.00045 -3.921*

Table 4 Effect of Futures Contract on Stock Volatility
Conditional mean and conditional volatility of each of the stocks in this study are estimated using the following GARCH(1,1) model:
t Mt it
R a a R + + =
1 0

D h h
t t t
+ + + =
1 1
2
1 1 0

where R
it
th
stock, R
Mt
t
is the volatility and D is a dummy variable that has a value of 0 for the
pre-futures period and 1 for the post-futures period.
Firm a
0
(t-stat)
a
1

(t-stat)
0

(t-stat)
1

(t-stat)
1

(t-stat)
100
(t-stat)
ABB 0.0011
(2.0479)**
0.6592
(16.116) *
0.0001
(3.1697) *
0.1516
(3.7745) *
0.5559
(4.7824) *
-0.0041
(-2.3852) **
Havells 0.0021 0.7619 0.0000 0.0961 0.7931 0.0013
- 206 -

(2.6176)* (14.7845)* (2.9335)* (3.8585)* (15.3670)* (1.1833)
ACC 0.0001
0.2016
1.0300
20.8334*
0.0000
2.5862*
0.07504
3.7835*
0.8721
27.2760*
-0.0031
-2.3671*
India Cements -0.0013
(-1.6032)***
1.0589
(16.5112)*
0.0000
(2.7897)*
0.0801
(3.9621)*
0.8601
(23.8228)*
-0.0043
(-2.4555)*
BHEL 0.8910
(1.3559)
0.8910
(15.7433)*
0.0001
(1.1567)
0.0687
(1.8381)***
0.8074
(5.6818)*
-0.0093
(-1.1621)
Crompton Greaves 0.0003
(0.3528)
0.8983
(13.4189)*
0.0003
(3.6283)*
0.1933
(3.8901)*
0.4893
(4.2747)*
0.0036
(0.8283)
BPCL -0.0003
(0.4373)
0.8688
(15.1380)*
0.0007
(6.7512)*
0.9699
(9.2670)*
0.0345
(0.8877)
-0.0392
(-4.1248)*
Zuari Agro -0.0003
(-0.3139)
0.7224
(10.0942)*
0.0001
(3.0990)*
0.0931
(4.5842)*
0.8334
(24.7934)*
-0.0036
(-1.7928)***
CIPLA -0.0003
(-0.5896)
0.5202
(11.5481)*
0.0000
(1.9906)**
0.0632
(3.4719)*
0.8902
(25.8177)*
-0.0018
(-1.5965)
Glaxo 0.0000
(0.1030)
0.4993
(12.6384)*
0.0001
(4.1219)*
0.2387
(4.9482)*
0.4761
(5.5226)*
-0.0067
(-2.9192)*
GAIL 0.0008
(1.6527)***
0.9660
(17.5716)*
0.0000
(3.1910)*
0.1402
(5.0532)*
0.7989
(21.7217)*
0.0000
(0.1447)
SUPPETRO -0.0001
(-0.1204)
1.0216
(15.1035)*
0.0000
(2.4977)*
0.1390
(4.7372)*
0.8415
(30.0949)*
-0.0005
(-0.4206)
GRASIM 0.0008
(1.4501)
0.6953
(13.3099)*
0.0002
(3.3902)*
0.1815
(3.2019)*
0.6065
(6.3267)*
-0.0145
(-3.1215)*
GNFC 0.0011
(1.4676)
0.8191
(12.7304)*
0.0000
(3.2690)*
0.0532
(4.8378)*
0.9290
(67.6229)*
-0.0012
(-2.3572)*
HDFC 0.0009
(1.6348)
0.2851
(6.6758)*
0.0001
(3.0076)*
0.2481
(4.3993)*
0.6115
(7.0673)*
-0.0080
(-2.6614)*
LICHSGFIN 0.0011
(2.0064)**
0.5397
(14.1727)*
0.0000
(3.6164)*
0.0993
(5.1331)*
0.8545
(34.5727)*
0.0029
(3.4823)*
HDFCBANK -0.0002
(-0.4952)
0.6917
(12.6520)*
0.0000
(2.3599)**
0.1942
(3.2292)*
0.4589
(2.7665)*
-0.0012
(0.8383)
J&KBANK 0.0009
(1.2758)
0.8592
(13.6363)*
0.0000
(2.2141)**
0.1283
(3.9788)*
0.8045
(14.7149)*
0.0005
(0.5732)
HINDALCO 0.0003
(0.5366)
0.4355
(10.3081)*
0.0000
(3.2315)*
0.1348
(3.4777)*
0.7141
(9.2957)*
-0.0054
(-3.1039)*
TUBEINVEST .0002
(0.3137)
0.3859
(6.7560)*
0.0000
(2.1478)**
0.0689
(5.3539)*
0.9200
(77.9010)*
-0.0001
(-0.2697)
HINDUNILVR -0.0006
(-1.2381)
0.8412
(21.7723)*
0.0000
(1.9191)**
0.0840
(3.6858)*
0.8335
(14.5555)*
-0.0028
(-1.7994)***
VOLTAS 0.0011
(1.4780)
0.6044
(10.5558)*
0.0000
(2.3440)*
0.0749
(5.0145)*
0.9015
(48.4724)*
-0.0008
(-1.2772)
ICICIBANK 0.0003
(0.5506)
0.8522
(17.8209)*
0.0000
(2.9821)*
0.1635
(4.7620)*
0.7218
(11.7812)*
-0.0035
(-2.0996)**
KTKBANK -0.0005
(-0.6813)
0.8596
(13.4747)*
0.0001
(4.4085)*
0.2916
(5.3700)*
0.6477
(15.6696)*
-0.0006
(-0.2582)
INFOSYSTCH -0.0030
(-3.8492)*
1.8349
(32.5307)*
0.0003
(4.8748)*
0.7909
(7.4710)*
0.2107
(3.0145)*
-0.0082
(-1.3352)
INFOTCENT -0.0023
(-1.6301)***
1.8143
(17.5616)*
0.0009
(11.0103)*
-0.0048
(-5.7066)*
0.6180
(29.1611)*
-0.0052
(0.5956)
ITC -0.0002
(-0.5212)
0.6573
(15.8083)*
0.0000
(1.5475)
0.1439
(1.8919)***
0.7401
(5.2058)*
-0.0054
(-1.5356)
GODFRYPHLP -0.0006
(-0.7884)
0.4023
(6.3243)*
0.0007
(3.5291)*
0.1332
(3.5409)*
0.2194
(1.1518)
-0.0445
(-3.4096)*
M&M 0.0004
(0.6588)
1.1438
(19.5505)*
0.0000
(1.5753)
0.0552
(2.5834)*
0.9232
(28.3882)*
-0.0012
(-1.4800)
ASHOKLEY 0.0010
(1.1351)
0.8054
(12.2267)*
0.0000
(1.9801)*
0.0591
(3.2588)*
0.9067
(29.8024)*
-0.0019
(-1.7054)***
NATIONALUM 0.0012
(1.4601)
-0.0296
(-0.5340)
0.0001
(2.9704)*
0.2347
(4.4058)*
0.6753
(9.6041)*
-0.0068
(-2.3048)**
JINDALSTEL 0.0022
(2.3369)*
-0.0375
(-0.6994)
0.0000
(3.7496)*
0.1630
(5.4641)*
0.7663
(21.7273)*
-0.0003
(-0.2156)
ONGC 0.0000
(0.6457)
0.8324
(17.5871)*
0.0000
(3.2085)*
0.1803
(4.8204)*
0.7794
(19.8269)*
-0.0024
(-2.4384)***
CHENNPETRO 0.0000
(0.0945)
0.8925
(14.3236)*
0.0001
(5.1220)*
0.2143
(4.4970)*
0.4973
(6.4116)*
0.0212
(4.1405)*
RANBAXY 0.0007
(1.1417)
0.7396
(15.9168)*
0.0001
(3.1905)*
0.1063
(3.3891)*
0.7284
(11.1856)*
-0.0063
(-2.8420)*
ZANDUPHARM -0.0009 0.4447 0.0001 0.2557 0.5312 -0.0051
- 207 -

(-1.7115)*** (9.4745)* (3.7211)* (5.4329)* (6.5932)* (-2.1695)**
RELCAPITAL 0.0002
(0.3111)
1.3175
(25.8604)*
0.0000
(5.2453)*
0.0830
(4.7185)*
0.8394
(82.4974)*
0.0006
(1.6617)***
SRTRANFIN 0.0010
(1.2718)
0.5745
(10.5013)*
0.0000
(4.1175)*
0.1856
(5.5923)*
0.7196
(17.0587)*
0.0005
(0.3229)
RELIANCE 0.0004
(0.8343)
1.0266
(28.3588)*
0.0000
(3.5636)*
0.1967
(5.6230)*
0.6539
(11.1482)*
-0.0018
(-1.9112)***
ESSAROIL -0.0020
(-1.8128)***
0.7877
(9.7974)*
0.0010
(7.6452)*
0.2631
(5.2576)*
0.0707
(0.9386)
0.0085
(0.7814)
SAIL 0.0001
(-0.1540)
1.3670
(30.0645)*
0.0002
(1.3687)
0.1496
(2.4667)*
0.4384
(1.3079)
0.0031
(1.1630)
GUJNRECOKE -0.0060
(-7.9552)*
1.1233
(19.8644)*
0.0006
(5.6851)*
3.0168
(8.2180)*
0.0000
(0.1086)
0.0048
(0.3759)
SBIN 0.0000
(1.6223)
0.8534
(22.3600)*
0.0000
(2.1937)**
0.0592
(3.4086)*
0.9108
(32.8151)*
-0.0006
(-1.8453)***
CORPBANK 0.0004
(0.6802)
0.7571
(13.3905)*
0.0000
(3.3508)*
0.1551
(5.3268)*
0.7617
(17.0289)*
-0.0036
(-2.4765)*
SIEMENS 0.0015
(2.5991)*
0.8372
(16.5532)*
0.0001
(4.0450)*
0.1566
(3.9611)*
0.5256
(5.5912)*
0.0000
(0.0432)
LAXMIMACH 0.0024
(3.7492)*
0.4624
(8.9011)*
0.0001
(3.1587)*
0.1642
(3.8215)*
0.30983
(1.7482)***
0.0112
(2.7847)**
SUNPHARMA 0.0012
(2.4927)*
0.5771
(15.5653)*
0.0002
(3.9943)*
0.2329
(4.4571)*
0.3064
(2.1476)**
-0.0143
(-3.7047)*
ELDERPHARM 0.0007
(0.8983)
0.8748
(13.9559)*
0.0000
(2.0364)*
0.0957
(3.0966)*
0.8646
(19.2778)*
-0.0156
(-1.4833)
TATAMOTORS 0.0011
(1.5306)
1.1137
(19.8263)*
0.0000
(2.2011)**
0.0354
(2.6641)*
0.9429
(45.2697)*
-0.0019
(-2.2189)**
ESCORTS -0.0007
(-0.8974)
1.0036
(16.3706)*
0.0000
(2.1431)**
0.0623
(3.7439)*
3.7439
(39.5727)*
-0.0010
(-1.3390)
TATAPOWER 0.0000
(1.3497)
0.9188
(19.4458)*
0.0000
(3.0062)*
0.0361
(3.5631)*
0.9363
(59.0491)*
-0.0021
(-2.9861)*
CESC -0.0004
(-0.4442)
0.7695
(11.1543)*
0.0004
(3.9285)*
0.1066
(3.1954)*
0.4123
(3.1366)*
0.0382
(3.0825)*
TATASTEEL 0.0012
(2.0971)**
1.0177
(20.8608)*
0.0000
(2.4591)*
0.1141
(3.6520)*
0.8128
(15.1061)*
-0.0026
(-2.2216)**
MAHSEAMLES 0.0005
(0.8683)
0.2082
(3.9363)*
0.0000
(1.4913)
0.1630
(6.2656)*
0.8340
(32.7949)*
0.0029
(0.4048)
WIPRO -0.0006
(-0.9034)
1.4917
(23.4729)*
0.0001
(3.1303)*
0.1399
(4.6230)*
0.7440
(13.5528)*
-0.0064
(-2.6317)*
ROLTA -0.0008
(-0.7952)
-0.0828
(-1.220)
0.0003
(4.6069)*
0.2131
(4.9905)*
0.6107
(10.1589)*
-0.0206
(-3.4902)*

*
Significant @1%,
**
Significant @5%,
***
Significant @10%
Shaded rows show the results for the control sample (control sample is the company from same industry group that has no futures contract during
the period of study).

Table 5 Conditional Volatility of the Stock Returns after the Introduction of Futures Contracts
t Mt it
R a a R + + =
1 0

1 1
2
1 1 0
+ + =
t t t
h h
where R
it
th
stock, R
Mt
t
is the volatility.
Firm a
0
(t-stat)
a
1

(t-stat)
0

(t-stat)
1

(t-stat)

1

(t-stat)
1
+
1

ABB 0.00034
(0.5510)
0.83865
(23.8825)
*
0.00002
(2.5680)
**

0.11444
(4.0553)
*

0.82220
(18.4107)
*

ACC 0.00028
(0.7284)
0.84926
(29.4895)
*

0.00001
(3.1056)
*

0.07631
(5.3710)
*

0.89639
(45.0403)
*

BHEL 0.00098
(2.3840)
**

1.02809
(34.6561)
*

0.00003
(3.3017)
*

0.10060
(4.8133)
*

0.79975
(17.7379)
*

BPCL -0.00005
(0.0984)
0.71961
(19.5291)
*

0.00003
(2.6495)
*

0.08756
(3.9126)
*

0.86767
(24.2826)
*

CIPLA -0.00008
(0.2046)
0.59887
(20.8520)
*

0.00010
(5.5630)
*

0.15193
(5.3534)
*

0.54505
(7.9435)
*

GAIL 0.00134
(2.5461)
**

0.74844
(25.6625)
*

0.00016
(4.4029)
*

0.60970
(7.5816)
*

0.33830
(4.4114)
*

GRASIM 0.00055 0.80438 0.00001 0.04648 0.93702
- 208 -

(1.2868) (30.6806)
*
(2.4412)
**
(4.8012)
*
(62.5897)
*

HDFC 0.00069
(1.5911)
0.81371
(24.8545)
*

0.00002
(2.3497)
**

0.08725
(4.2220)
*

0.87181
(0.8718)

HDFCBANK 0.00035
(0.6334)
0.90636
(35.9360)
*

0.00008
(3.2731)
*

0.16172
(4.3111)
*

0.60832
(6.4317)
*

HINDALCO -0.00045
(1.0535)
0.89680
(27.3907)
*

0.00002
(3.6632)
*

0.11060
(6.4831)
*

0.85300
(35.3961)
*

HINDUNILVR -0.00051
(1.3324)
0.63631
(24.7270)
*

0.00004
(3.5839)
*

0.12830
(5.2797)
*

0.73557
(13.4871)
*

ICICIBANK 0.00001
(0.0224)
1.14503
(35.4624)
*

0.00000
(1.7402)
***

0.04022
(3.4207)
*

0.94981
(57.2975)
*

INFOSYSTCH 0.00023
(0.5961)
0.85295
(32.1266)
*

0.00000
(1.4512)
0.03443
(2.8556)
*

0.96136
(66.8259)
*

ITC 0.00029
(0.7283)
0.65893
(25.8142)
*

0.00002
(3.6184)
*

0.08203
(4.4344)
*

0.84394
(25.1666)
*

0.92597

M&M 0.00066
(1.3121)
0.98754
(33.8828)
*

0.00001
(2.5767)
*

0.06721
(4.9492)
*

0.90895
(44.5890)
*

0.97616

NATIONALUM -0.00011
(0.2009)
1.02515
(27.5978)
*

0.00002
(3.4805)
*

0.10105
(5.9605)
*

0.87423
(40.3721)
*

0.97528

ONGC -0.00029
(0.8020)
0.99630
(41.1080)
*

0.00000
(1.8327)
***

0.04800
(5.3857)
*

0.94710
(84.1969)
*

0.99510

RANBAXY 0.00007
(0.1471)
0.61987
(23.3649)
*

0.00000
(1.0735)
0.02636
(4.8056)
*

0.97335
(157.108)
*

0.99971

RELCAPITAL 0.00016
(0.2014)
1.76145
(50.1822)
*

0.00008
(1.3380)
0.21115
(2.4994)
**

0.70887
(4.8969)
*

0.92001

RELIANCE 0.00035
(1.2506)
1.06694
(60.8853)
*

0.00002
(3.0035)
*

0.11859
(4.6426)
*

0.79799
(16.5280)
*

0.91658

SAIL 0.00138
(1.3604)
1.38857
(28.1236)
*

0.00003
(1.3231)
0.04975
(2.1540)
* *

0.90794
(17.8745)
*

0.95768

SBIN 0.00039
(0.9438)
1.05894
(39.5793)
*

0.00001
(2.7199)
*

0.04803
(4.4637)
*

0.92393
(49.5667)
*

0.97196

SIEMENS 0.00051
(0.7344)
0.98181
(24.1265)
*

0.00016
(4.1879)
*

0.37611
(4.6677)
*

0.45419
(5.3513)
*

0.83030

SUNPHARMA 0.00020
(0.3574)
0.53617
(14.2001)
*

0.00003
(1.9157)
***

0.22445
(3.2254)
*

0.73323
(8.5074)
*

0.95767

TATAMOTORS -0.00018
(0.4519)
1.09956
(39.6307)
*

0.00000
(1.2924)
0.03525
(4.7048)
*

0.96204
(100.387)
*

0.99729

TATAPOWER 0.00024
(0.5953)
0.98381
(38.5082)
*

0.00002
(3.8431)
*

0.13480
(6.4940)
*

0.81590
(29.2022)
*

0.95070

TATASTEEL 0.00016
(0.3904)
1.24185
(41.7442)
*

0.00000
(1.7225)
*

0.04329
(3.8392)
*

0.95122
(67.9958)
*

0.99451

WIPRO -0.00052
(1.2493)
1.07752
(37.5047)
*

0.00001
(2.2404)
**

0.11046
(4.5705)
*

0.86496
(26.5077)
*

0.97542

*
Significant @1%,
**
Significant @5%,
***
Significant @10%

Table 6 Symmetrical Model of Conditional Volatility of the Stock Returns after the Introduction of Futures Contracts with
Stock/Futures Volume Ratio
t Mt it
R a a R + + =
1 0

t t t t
TR h h
2 1 1
2
1 1 0
+ + + =

where R
it
th
stock, R
Mt
t
is the volatility, and TR
t
is the ratio of futures volume/stock volume at time
t.
Firm a
0
(t-stat)
a
1

(t-stat)
0

(t-stat)
1

(t-stat)

1

(t-stat)
2
x100
(t-stat)
1
+
1

ABB 0.00032
(0.5312)
0.83838
(24.7926)
*

0.00002
(2.2222)
**

0.11719
(4.0931)
*

0.82018
(18.8325)
*

0.00004
(0.2353)

ACC 0.00026
(0.6594)
0.84700
(30.5299)
*

0.00002
(2.7811)
*

0.08120
(5.6151)
*

0.88210
(37.6841)
*

-0.00016
(1.7193)
***

BHEL 0.00101
(2.4595)
* *

1.02754
(37.6375)
*

0.00004
(3.2393)
*

0.10358
(5.0030)
*

0.77870
(14.9384)
*

-0.00033
(2.3040)
* *

BPCL -0.00005
(0.1026)
0.71970
(19.5798)
*

0.00004
(2.4790)
**

0.09140
(4.1031)
*

0.86090
(23.9464)
*

-0.00023
(0.7895)

CIPLA -0.00013
(0.3053)
0.59310
(21.2418)
*

0.00008
(4.3927)
*

0.13890
(4.8081)
*

0.58100
(8.6829)
*

0.00084
(1.8185)
***

GAIL 0.00099 0.77680 0.00024 0.51980 0.30580 -0.00146
- 209 -

(2.0035)
**
(24.1850)
*
(3.1582)
*
(4.9596)
*
(1.9378)
***
(6.4284)
*

GRASIM 0.00053
(1.4167)
0.80670
(33.7288)
*

0.00001
(2.6634)
*

0.04970
(4.1202)
*

0.93020
(51.4428)
*

-0.00014
(2.1133)
**

HDFC 0.00066
(1.4662)
0.81690
(25.1470)
*

0.00002
(2.2498)
**

0.09040
(4.3059)
*

0.86450
(24.0550)
*

-0.00045
(0.9208)

HDFCBANK 0.00043
(0.9350)
0.90400
(35.7680)
*

0.00015
(6.8222)
*

0.16800
(4.9450)
*

0.52190
(6.6561)
*

-0.00291
(9.3952)
*

HINDALCO -0.00046
(1.0705)
0.89430
(26.6346)
*

0.00002
(3.2366)
*

0.10820
(5.9491)
*

0.85430
(35.5081)
*

0.00011
(0.9191)

HINDUNILVR -0.00052
(1.1413)
0.63610
(26.1343)
*

0.00004
(3.2113)
*

0.12800
(5.3430)
*

0.73680
(13.4095)
*

0.00009
(0.3566)

ICICIBANK -0.00008
(0.1421)
1.15038
(34.4874)
*

0.00002
(1.5059)
0.05056
(2.6773)
*

0.91329
(22.6311)
*

-0.00027
(1.3882)

INFOSYSTCH 0.00022
(0.5782)
0.85950
(30.8738)
*

0.00001
(1.4415)
0.04410
(3.3767)
*

0.94620
(52.9277)
*

-0.00021
(1.0803)
0.99030

ITC 0.00025
(0.6940)
0.65459
(24.7700)
*

0.00001
(1.9785)
**

0.07444
(3.8699)
*

0.86747
(27.1340)
*

0.00033
(1.6644)
***

0.94191

M&M 0.00068
(1.6509)
0.98840
(37.9902)
*

0.00001
(2.5554)
**

0.06800
(5.0771)
*

0.90540
(44.9942)
*

-0.00007
(1.0166)
0.97340

NATIONALUM -0.00005
(0.0850)
1.02370
(28.0710)
*

0.00001
(1.1534)
0.09426
(5.2139)
*

0.88351
(39.2473)
*

0.00027
(2.6010)
*

0.97776

ONGC -0.00025
(0.6744)
0.99150
(43.9194)
*

0.00000
(1.2204)
0.03150
(3.4875)
*

0.96690
(98.9800)
*

0.00018
(2.0266)
**

0.99840

RANBAXY 0.00005
(0.1169)
0.62290
(23.1757)
*

0.00000
(1.2879)
0.02400
(5.0433)
*

0.97610
(181.371)
*

0.00010
(2.3666)
**

1.00010

RELCAPITAL -0.00002
(0.0223)
1.74695
(49.8956)
*

0.00023
(2.3395)
**

0.30694
(3.8077)
*

0.49170
(3.2875)
*

-0.00158
(1.8040)
***

0.79864

RELIANCE 0.00037
(1.3351)
1.06333
(61.6847)
*

0.00003
(3.4398)
*

0.12987
(5.0168)
*

0.75460
(14.3276)
*

-0.00040
(2.6621)
*

0.88447

SAIL 0.00133
(1.3428)
1.38984
(28.4516)
*

0.00007
(1.2168)
0.06076
(2.0716)
**

0.85774
(10.1773)
*

-0.00085
(0.8449)
0.91850

SBIN 0.00039
(1.0753)
1.05781
(40.5608)
*

0.00001
(1.9783)
**

0.04631
(4.2798)
*

0.92762
(50.0388)
*

0.00004
(0.9000)
0.97393

SIEMENS 0.00042
(0.6342)
0.98230
(25.0846)
*

0.00027
(4.7059)
*

0.30110
(3.6850)
*

0.43010
(4.2534)
*

-0.00270
(5.3384)
*

0.73120

SUNPHARMA 0.00016
(0.2992)
0.52780
(16.3148)
*

0.00005
(3.3003)
*

0.23300
(4.3743)
*

0.70460
(11.1060)
*

-0.00043
(3.5103)
*

0.93760

TATAMOTORS -0.00018
(0.4544)
1.09942
(39.9434)
*

0.00000
(0.2894)
0.03475
(4.4875)
*

0.96332
(98.0623)
*

-0.00018
(0.4679)
0.99807

TATAPOWER 0.00025
(0.5980)
0.97980
(32.3465)
*

0.00004
(3.2779)
*

0.14220
(6.6303)
*

0.79480
(25.8310)
*

-0.00032
(1.7139)
***

0.93700

TATASTEEL 0.00020
(0.4840)
1.24339
(43.4459)
*

0.00000
(0.3650)
0.03530
(2.9948)
*

0.96140
(81.5649)
*

0.00008
(2.1537)
**

0.99670

WIPRO -0.00050
(1.2060)
1.07515
(37.5098)
*

0.00002
(2.2470)
**

0.12226
(5.1315)
*

0.83885
(22.6848)
*

-0.00043
(1.6308)
0.96112

*
Significant @1%,
**
Significant @5%,
***
Significant @10%

Table 7 Asymmetrical Model of Conditional Volatility of the Stock Returns after the Introduction of Futures Contracts with
Stock/Futures Volume Ratio
t Mt it
R a a R + + =
1 0

2
1 1 3 2 1 1
2
1 1 0
+ + + + =
t t t t t t
S TR h h

where R
it
th
stock, R
Mt
t
t
t, and S
t-1
t-1
Firm a
0
(t-stat)
a
1

(t-stat)
0

(t-stat)
1

(t-stat)

1

(t-stat)
2
x100
(t-stat)
3

(t-stat)
1
+
1

ABB 0.00032
(0.5498)
0.84010
(23.6788)
*
0.00003
(1.8677)
***

0.12080
(4.1025)
*

0.81380
(17.7020)
*

0.00002
(0.1486)
-0.01880
(0.4707)

ACC 0.00025
(0.6531)
0.84670
(30.3462)
*

0.00002
(1.7492)
***

0.08070
(5.1673)
*

0.88270
(35.7596)
*

-0.00015
(1.2683)
0.00547
(0.1841)

BHEL 0.00101
(2.1727)
**

1.02742
(33.7424)
*

0.00004
(2.6387)
**

0.10324
(4.5432)
*

0.77934
(14.9612)
*

-0.00033
(2.1178)
**

0.00204
(0.0500)

BPCL 0.00007
(0.1365)
0.71380
(20.8786)
*

0.00007
(2.8795)
*

0.10620
(4.1316)
*

0.8345
(18.6469)
*

-0.00025
(0.7491)
-0.07240
(2.7363)
*

CIPLA -0.00014 0.5989 0.00014 0.16280 0.47730 0.00076 -0.14390
- 210 -

(0.3445) (28.1037)
*
(3.8903)
*
(4.9392)
*
(5.7761)
*
(1.3086) (2.2454)
**

GAIL 0.00023
(0.4190)
0.84210
(24.1941)
*

0.00031
(7.8408)
*

0.43620
(4.8749)
*

0.01690
(0.3956)
-0.00145
(8.2779)
*

0.37410
(4.9421)
*

GRASIM 0.00049
(1.2775)
0.81000
(40.5937)
*

0.00000
(0.8518)
0.04390
(4.4289)
*

0.93960
(61.2774)
*

-0.00010
(1.6978)
***

0.02500
(1.5175)

HDFC 0.00062
(1.3287)
0.81760
(25.0239)
*

0.00002
(1.6921)
***

0.08920
(4.3812)
*

0.86670
(24.0356)
*

-0.00042
(0.8396)
0.01170
(0.4950)

HDFCBANK 0.00046
(1.0606)
0.90500
(35.1630)
*

0.00016
(4.5837)
*

0.17510
(4.5459)
*

0.53240
(5.2686)
*

-0.00295
(4.2175)
*

-0.11030
(1.9650)
**

HINDALCO -0.00046
(1.1219)
0.89560
(27.2208)
*

0.00001
(1.5154)
0.10770
(5.9347)
*

0.85380
(35.3535)
*

0.00012
(1.0830)
0.02600
(1.1173)

HINDUNILVR -0.00052
(1.3550)
0.63600
(24.8497)
*

0.00004
(2.7103)
*

0.12790
(4.9932)
*

0.73690
(13.1806)
*

0.00009
(0.3537)
0.00077
(0.0188)

ICICIBANK -0.00011
(0.2234)
1.14856
(32.4049)
0.00001
(3.0641)
*

0.03964
(4.8627)
*

0.93759
(96.7858)
*

-0.00015
(2.2175)
**

0.02687
(1.3837)

INFOSYSTCH -0.00004
(0.1194)
0.83996
(34.3874)
*

-0.00001
(25.2722)
*

-0.00155
(2698.50)
*

1.00092
(5486.31)
*

-0.00000
(220.732)
*

0.05572
(23.2093)
*

0.99937
ITC 0.00021
(0.5618)
0.65379
(24.9412)
*

0.00001
(1.2432)

0.07770
(4.1190)
*

0.85775
(24.0821)
*

0.00031
(1.3808)
0.03949
(1.2423)
0.93545

M&M 0.00069
(1.6681)
***

0.98880
(35.2277)
*

0.00002
(2.2371)
**

0.06920
(4.8296)
*

0.90370
(42.9936)
*

-0.00009
(1.1226)
-0.01500
(0.8104)
0.97290

NATIONALUM 0.00008
(0.1571)
1.01723
(26.4708)
*

0.00002
(2.1080)
**

0.09038
(5.0296)
*

0.89669
(42.2113)
*

0.00025
(2.7448)
*

-0.04310
(2.2538)
**

0.98707

ONGC -0.00019
(0.4486)
0.98880
(39.8330)
*

0.00000
(0.4137)
0.02590
(2.8728)
*

0.97390
(96.8882)
*

0.00020
(2.6401)
*

-0.01700
(0.8574)
0.99980

RANBAXY 0.00002
(0.0357)
0.62260
(22.3854)
*

0.00000
(1.6804)
***

0.02430
(4.5953)
*

0.97500
(156.461)
*

0.00010
(2.2096)
**

0.00998
(1.1914)
0.99930

RELCAPITAL -0.00008
(0.1086)
1.75322
(48.5861)
*

0.00018
(2.0708)
**

0.30250
(4.0242)
*

0.50560
(3.7249)
*

-0.00138
(1.7997)
***

0.10960
(1.8545)
***

0.80810

RELIANCE 0.00031
(1.1032)
1.06372
(61.7045)
*

0.00002
(2.4888)
**

0.12644
(4.8535)
*

0.77009
(15.1446)
*

-0.00032
(2.2115)
*

0.05403
(1.8419)
***

0.89653

SAIL 0.00118
(1.1610)
1.38904
(30.2854)
*

0.00002
(0.3670)
0.04461
(1.6128)
0.90937
(12.3030)
*

-0.00019
(0.2271)
0.04174
(0.8442)
0.95398

SBIN 0.00021
(0.5185)
1.07319
(31.3358)
*

0.00011
(9.0160)
*

0.13111
(4.8465)
*

0.53690
(11.5978)
*

-0.00098
(20.2887)
*

0.09150
(2.1533)
**

0.66801

SIEMENS 0.00039
(0.5556)
0.98290
(22.6823)
*

0.00026
(4.1898)
*

0.29600
(3.8636)
*

0.43580
(4.6634)
*

-0.00264
(5.3933)
*

0.03070
(0.5170)
*

0.73180

SUNPHARMA 0.00018
(0.3309)
0.52890
(15.2278)
*

0.00005
(3.2174)
*

0.23000
(4.0841)
*

0.70800
(11.1336)
*

-0.00043
(4.1290)
*

-0.00665
(0.1464)
0.93800

TATAMOTORS -0.00025
(0.5402)
1.10005
(36.5090)
*

-0.00001
(1.5724)
0.03267
(4.2224)
*

0.96726
(99.2990)
*

0.00005
(1.2387)
0.02565
(1.8043)
***

0.99993

TATAPOWER 0.00029
(0.7744)
0.98080
(32.7176)
*

0.00004
(3.2321)
*

0.14230
(6.2314)
*

0.79530
(24.6519)
*

-0.00035
(1.7814)
***

-0.02260
(0.8891)
0.93760

TATASTEEL 0.00019
(0.4452)
1.24330
(38.2986)
*

0.00000
(0.4003)

0.03578
(3.0239)
*

0.96077
(64.8514)
*

0.00008
(1.8266)
***

0.00318
(0.2359)
0.99655

WIPRO -0.00084
(1.8183)
***

1.06673
(35.7447)
*

0.00001
(1.0364)
0.11608
(4.9614)
*

0.83435
(22.3692)
*

-0.00047
(1.8059)
***

0.09429
(2.9055)
*

0.95042

*
Significant @1%,
**
Significant @5%,
***
Significant @10%

Table 8 Asymmetrical Model of Conditional Volatility of the Stock Returns after the Introduction of Futures Contracts with Stock/Futures
Volume Ratio and Ratio of Futures Volume/Open Interest

t Mt it
R a a R + + =
1 0

2
1 1 4 3 2 1 1
2
1 1 0
+ + + + + =
t t t t t t t
S OP TR h h
where R
it
th
stock, R
Mt
t
t
t, OP
t
is the ratio of futures volume/open interest, and S
t-1
t-1

Firm a
0
(t-stat)
a
1

(t-stat)
0

(t-stat)
1

(t-stat)

1

(t-stat)
2
x100
(t-stat)
3
x100
(t-stat)
4

(t-stat)
1
+
1

ABB -0.00111
(1.8944)
***
0.82741
(42.4772)
*

0.00021
(5.0261)
*

0.11208
(3.1835)
*

-0.05473
(0.7262)
-0.01446
(11.5443)
*

0.03016
(9.0503)
*

0.01424
(0.2639)
0.05735

ACC 0.00007
(0.1854)
0.77630
(50.6171)
*

0.00018
(8.5317)
*

0.09330
(5.1486)
*

-0.08980
(2.1329)
**

-0.01113
(15.3623)
*

0.02602
(24.1976)
*

0.05700
(1.7135)
***

0.00350

BHEL -0.00050 1.00313 0.00000 0.10468 0.06011 -0.00454 0.03523 0.09507 0.16479
- 211 -

(1.3879) (56.1378)
*
(0.1324) (3.9948)
*
(1.6809)
***
(8.4143)
*
(17.2809)
*
(3.0042)
*

BPCL -0.00172
(3.5738)
*

0.67470
(36.4712)
*

0.00021
(7.0513)
*

0.11876
(5.6319)
*

-0.05179
(1.5151)
-0.01154
(6.6418)
*

0.06196
(16.7013)
*

-0.10344
(3.0614)
*

0.06696

CIPLA 0.00003
(0.0828)
0.53270
(36.1098)
-0.00002
(3.7336)
0.04040
(1.8220)
0.05310
(3.0741)
-0.00051
(1.2631)
0.05224
(31.3879)
0.09450
(2.9791)
0.09350

GAIL -0.00043
(0.8636)
0.84564
(38.1581)
*

0.00021
(5.8202)
*

0.27096
(6.6834)
*

0.03561
(0.6544)
-0.01588
(11.8936)
*

0.03989
(10.3614)
*

0.13687
(3.4068)
*

0.30658

GRASIM -0.00053
(1.4788)
0.77660
(52.3796)
*

0.00010
(6.3705)
*

0.15060
(6.3792)
*

0.04650
(1.0901)
-0.00852
(10.6951)
*

0.04357
(13.3264)
*

0.06160
(1.7313)
***

0.19710

HDFC -0.00106
(1.6871)
0.34960
(58.2739)
*

0.00019
(9.5021)
*

0.39460
(6.7544)
*

-0.19530
(0.4879)
0.00600
(0.8544)
0.02521
(0.3413)
0.01010
(0.0333)
0.19930

HDFCBAN
K
0.00041
(0.9454)
0.92197
(51.6425)
*

0.00009
(3.7266)
*

0.14620
(6.4732)
*

-0.18986
(5.5275)
*

-0.00480
(3.3663)
*

0.05025
(11.6614)
*

0.10075
(2.1569)
**

-0.04365

HINDALCO -0.00070
(4.1525)
*

3.07435
(44.3376)
*

0.00013
(5.5001)
*

0.22140
(10.1432)
*

-0.25455
(0.0704)
-0.00203
(28.4562)
*

-0.00517
(0.0233)
0.09855
(5.5412)
*

-0.03315

HINDUNIL
VR
-0.00180
(5.1170)
*

0.50890
(40.4686)
*

0.00000
(0.1736)
0.12220
(6.7869)
*

-0.15000
(3.8413)
*

0.00102
(2.3006)
**

0.05485
(19.6205)
*

0.14250
(4.3149)
*

-0.02780

ICICIBANK -0.00170
(3.4835)
*

1.13192
(51.0926)
*

0.00009
(3.3132)
*

0.06269
(2.6658)
*

0.08264
(1.3301)
-0.00824
(5.8220)
*

0.04376
(11.2613)
*

0.08335
(2.2187)
**

0.14534

INFOSYST
CH
0.00009
(0.2047)
0.74850
(44.0398)
*

0.00014
(11.8591)
*

0.15270
(5.9685)
*

-0.12550
(7.4296)
*

-0.00844
(10.6172)
*

0.02005
(11.3873)
*

0.10780
(2.7560)
*

0.02720

ITC -0.00097
(2.9816)
*

0.63400
(43.6786)
*

0.00001
(0.5944)
0.07804
(4.4396)
*

-0.15397
(3.0655)
*

-0.00226
(2.1815)
**

0.04597
(17.2678)
*

0.04327
(1.3942)
-0.07593

M&M 0.00005
(0.1230)
0.98180
(60.9588)
*

0.00011
(6.6276)
*

0.22290
(8.1352)
*

0.44680
(10.0735)
*

-0.00661
(11.4338)
*

0.00770
(8.3373)
*

0.00895
(0.3255)
0.66970

NATIONAL
UM
-0.00005
(0.1029)
1.00059
(38.3446)
*

-0.00002
(2.4653)
**

0.10820
(8.3554)
*

0.86021
(55.5004)
*

0.00182
(5.6426)
*

0.00551
(4.7809)
*

-0.00811
(0.4803)
0.96841

ONGC -0.00003
(0.0708)
0.93562
(55.0724)
*

0.00014
(6.0213)
*

0.03192
(2.9224)
*

-0.27565
(4.7733)
*

-0.01064
(9.0626)
*

0.04241
(17.7738)
*

0.09754
(2.7619)
*

-0.24373

RANBAXY -0.00170
(4.8815)
*

0.63170
(38.6995)
*

-0.00003
(2.6381)
*

0.22570
(8.9246)
*

-0.03190
(2.0070)
**

0.00022
(0.2899)
0.05950
(23.1200)
*

0.01810
(1.0220)
0.19380

RELCAPIT
AL
-0.00008
(0.0965)
1.43649
(42.4706)
*

0.00040
(4.3504)
*

0.13330
(4.7611)
*

-0.21838
(7.5429)
*

-0.01941
(6.0065)
*

0.03383
(9.1478)
*

0.08892
(1.8118)
***

-0.08508

RELIANCE -0.00036
(1.2036)
1.12799
(85.8958)
*

0.00006
(4.4137)
*

0.04116
(3.0597)
*

-0.28893
(3.8355)
*

-0.00135
(1.8820)
***

0.01792
(18.0251)
*

-0.10207
(2.4582)
**

-0.24777

SAIL -0.00024
(0.2454)
1.17800
(28.9895)
*

0.00022
(2.6471)
*

0.08177
(1.9941)
**

0.28838
(42.4914)
*

-0.01973
(3.5677)
*

0.03289
(6.2991)
*

-0.00702
(0.0878)
0.37015

SBIN -0.00084
(2.5861)
*

1.06975
(70.4664)
*

0.00021
(8.0058)
*

0.02827
(3.9137)
*

-0.44670
(6.8579)
*

-0.00825
(5.7739)
*

0.02272
(23.9081)
*

0.04278
(0.9854)
-0.41843

SIEMENS -0.00135
(2.2862)
**

0.94202
(34.9878)
*

0.00002
(0.6883)
0.12267
(3.0720)
*

0.14025
(2.9763)
*

-0.01239
(10.0784)
*

0.05750
(15.0058)
*

0.17086
(5.1687)
*

0.26292

SUNPHAR
MA
-0.00019
(0.3984)
0.51750
(24.2715)
*

0.00008
(4.0671)
*

0.29630
(6.2551)
*

0.27170
(4.6106)
*

-0.00734
(9.7822)
*

0.03794
(9.3252)
*

0.04200
(1.0187)
0.56800

TATAMOT
ORS
-0.00035
(0.8640)
1.12985
(66.8979)
*

0.00010
(6.2581)
*

0.13499
(6.9071)
*

0.72288
(24.8218)
*

-0.00591
(6.8574)
*

0.00144
(3.2482)
*

0.00570
(0.2020)
0.85787

TATAPOW
ER
-0.00061
(1.5359)
0.92120
(51.7089)
*

0.00010
(6.0399)
*

0.23260
(6.8747)
*

0.20280
(3.7975)
*

-0.00839
(11.5145)
*

0.02386
(15.9906)
*

0.05270
(2.3349)
**

0.43540

TATASTEE
L
-0.00096
(2.2670)
**

1.09938
(51.6370)
*

0.00006
(2.4567)
**

0.14086
(5.8595)
*

0.21239
(6.9015)
*

-0.00639
(5.1805)
*

0.02716
(13.8857)
*

0.07048
(2.1274)
**

0.35324

WIPRO -0.00085
(1.9774)
**

1.05904
(53.2671)
*

0.00002
(1.5914)
0.13300
(7.4898)
*

0.79091
(30.9133)
*

-0.00194
(2.9983)
*

0.00037
(0.6982)
0.10515
(3.4117)
*

0.92390

*
Significant @1%,
**
Significant @5%,
***
Significant @10%

- 212 -

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- 214 -

Pr oduct and Busi ness I nnovati on
of the Double Heli x Model:
I ts Appli cati on i n Automobi le I ndustr y

Ki-Chan Kim
V.G. Girish

In this globalized world, successful organization thrives with the continuous evolution
and adaptation to the situation. No business succeeds with continuous success, until and unless if
it does not evolve according to the situation. This paper tries to analyze the integration of
dynamic and organization capability. This study also tries to analyze the capabilities of
successful businesses and performance in production and marketing based on business
architecture. These days, the challenges faced by organizations are, how to transform themselves
from growing concerns to have sustainable growth potential rather than targeting, how to
maximize their profit and turnover. We see business as an organism and pinpointed some of the
ways to prepare it self, how to survive in long term rather than obsessed with maximizing short-
term interest. In order for a business to survive, it requires a process of evolution within the
business and adaption toward the environment that surrounds it. We proposed a business model
and an empirical analysis of Korea-Japan automobile industries was also carried out to test the
proposed conceptual model. On the basis of the outcome of the study, we suggested some
implications for the consistent success in automobile industry.

Key Words: Organization, Evolution, Adaptation, Organizational Capability, Dynamic
Capability, Business Architecture, Automobile Industry, Korea, Japan

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Exami nati on of Cultur al Or i entati on on
Gender Gap: Some I mpli cati ons on Wor kplace
Regulati on
Diane May
Hamid Yeganeh
Introduction
By considering the implications of cultural values, policy makers and business leaders
may adopt effective strategies to promote gender equalities at the societal and organizational
levels. As we start the second decade of 21
st
century, gender-based inequality continues to be a
major preoccupation around the globe. Men and women are treated unequally in politics,
business, organization, and education. We recognize that culture may have important
implications for gender gap in many areas. Understanding the relationship between culture and
gender gap can have important applications in formulating policy in social disciplines such as
political science, management and organizational studies, education, international law, and
human resource management. In turn, many of the policy considerations form the basis of, and
may have, practical implications in workplace regulation. This paper will present a proposal for
investigating the effects of cultural values on gender-based inequality and identify some
implications for workplace regulation. First, the paper will define workplace regulation and give
some examples of gender-based regulations. Second, the paper will address the
conceptionalization of culture and gender gap. Third, the paper will present a proposed
hypotheses for empirical analysis for determining the effects of culture on gender gap. Finally,
the paper will investigate culture and the gender gap in the workplace.
Workplace Regulation
Workplace regulation encompasses a broad spectrum of local, national, and international
laws. In the United States workplace regulation occurs in many areas such as private contract
law, common law privacy torts, state agency laws, and state and federal laws encompassing
unions and labor laws, employee protections such as equal employment opportunity and
discrimination laws, and safety, health and welfare. Many of these state and federal laws and
regulations protect and promote gender equality. A far-reaching example is Title VII of the Civil
Rights Act of 1964. Title prohibits discrimination based on gender in the workplace as has been
expanded to protect against sexual harassment. Despite all the regulations in place, gender
inequality still remains. For example, in the U.S. women still earn only $.77 for every $1.00
earned by men. (U.S. Department of Commerce, Economics and Statistics Administration,
August 2007). When it comes to leadership, the percentage of women in management,
professional and related occupations is 50.6%, but the percentage of female Fortune 500 CEOs is
2.4%.
Internationally, the movement to abolish gender discrimination in the workplace is
relatively new. Beginning in the 1900's women's legal status began to change and regulations
with world-wide effect prohibiting discrimination began to appear. The International Labor
Organization (ILO), an agency of the United Nations, was at the forefront. The ILO has as its
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primary goal the improvement of working conditions, living standards and fair and equitable
treatment of workers in all countries. For example, the ILO espoused equal pay for equal work
of equal value as early as 1919 in its official founding documents. The ILOs Equal
Remuneration Convention 100, in 1951, expressly addresses women and states: "Each Member
shall...ensure the application to all workers of the principle of equal remuneration for men and
women workers for work of equal value. ILO Convention 100, is one of the most widely
ratified ILO conventions, with 164 countries signing on to date, the United States is the notable
exceptions in signing." The United States, however, has its own law, the federal Equal Pay Act
of 1963, which provides the same protection. Regional employment laws also exist and affect
gender. For example, the European Social Charter protects workers including pregnant women.
Despite acceptance of laws affirming gender workplace equality, setbacks continue to occur
(Schaffer 2009). In 2003 a Japanese District Court found that different, lower pay for women
was acceptable. A 2003 study in the Ukraine found widespread employment discrimination in
job applicants asking for male applicants only and in others, only attractive females need apply.
In Latin America, a women needs 15 years of education to make the same amount of money as a
man with 11 years of education. Wages for equal work were the most equal in the Northern
European nations, but there women still earned 12% less than men.
Additional areas where gender disparities arise in the workplace include:
Women are often placed on a separate, and less promising, career tracks.
Women tend to be funneled into supporting, staff function areas-personnel/human
resources, communications, public relations and customer relations.
Women are considered a riskier employee for leadership positions under a
motherhood stereotype that she may be taking time off for child raising, and could not
be considered an effective front-line executive.
Fewer women are asked to take on risky positions that are often career enhancing
such as being asked to fill expatriate positions, especially those areas that are
considered non-women friendly countries.
In some countries, a womans marital status is an important consideration during the
hiring process.
Many corporate cultures are male-designed and driven thereby representing an
influential factor in womens advancement in business.
As noted, workplace regulation touches on a multitude of gender-based areas. While laws
and regulations generally promote gender equality, gender disparities in the workplace continue.
Even though laws are in place, cultural values in a country may also impact gender inequality in
the workplace. Culture and gender gap are conceptualized below and hypotheses are presented.
Culture and Schwartzs Value Types
Socio-economic development, modernity, historical/political legacies, and institutional
factors have been recognized as the most important factors affecting gender-based inequality
(Bolzendalh and Myers, 2004; Hardford, 2005; Norris and Inglehart, 2001; Inglehart and Norris
2003; Inglehart, Norris, and Welzel 2002; Inglehart and Welzel 2005). While all these factors
may explain some aspects of gender-based inequality, an important question is posed: Do
cultural values affect gender-based inequality? Since it is through culture that societies maintain
regularity and order, it would be plausible to suggest that cultural values might have important
implications for gender-based inequality. Some scholars have supported this idea (Inglehart and
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Norris 2003; Norris and Lovenduski 1995); nevertheless, at this writing, systematic empirical
evidence is rare.
Culture can be considered the accumulation of shared meanings, rituals, norms, and
traditions that distinguishes members of one society from another (Soloman, 1996; Hofstede,
1980). Krober and Kluckhohn (1952) suggested a very comprehensive definition as following:
culture consists of patterns, explicit and implicit of and for behavior acquired and transmitted
by symbols, constituting the distinctive achievements of human groups, including their
embodiment in artifacts; the essential core of culture consists of traditional ideas and especially
their attached values.
Bearing in mind the complexity of culture, a practical approach among researchers is to
identify several of its major dimensions and analyze them across borders. The cross-cultural
literature provides us with different conceptual models (e.g. House et al., 2004; Schwartz, 1992,
1994; Hofstede, 2001; Hampden-Turner and Trompenaars, 1994; Hall, 1977; Kluckhohn and
Strodtbeck, 1961). Among all cultural models, Schwartzs work represents a large-scale and
innovative study that improves upon previous research in many respects. Schwartz made a clear
distinction between individual and cultural levels of analysis and presented the results of each
level separately. Furthermore, Schwartzs questionnaire is not based on outcomes, but on
preferences for values that guide ones life. It is argued that by minimizing the effects of
situational factors, this approach is supposed to be more accurate.
Schwartz (2006; 1992; 1994) has described culture in three pairs of value types:
Conservatism/Autonomy, Hierarchy/Egalitarianism, and Mastery/Harmony. The Conservatism
value type is characterized by social order, respect for tradition, family security and wisdom.
Conservative cultures emphasize the status quo, propriety, and restraint of actions or inclinations
that might disrupt the solidarity or the traditional order (Schwartz, 1992; 1994). By contrast, the
Autonomy value type emphasizes the pursuit of individual desires. Another pair of value types is
Hierarchy/Egalitarianism (Schwartz, 2006; 1992; 1994). In Hierarchical societies, cultural
emphasis is on the legitimacy of an unequal distribution of power, roles and resources, authority
and wealth. In contrast, Egalitarianism corresponds to features such as equality, social justice,
freedom, responsibility, and honesty. Mastery/Harmony is the third pair of Schwartzs cultural
values. Mastery is characterized by active self-assertion, ambition, success, daring and
competence. By contrast, Harmony cultural value accepts the world as it is and emphasizes the
unity with nature (Schwartz, 1992; 1994). The three pairs of Schwartzs cultural dimensions are
described in Table-1
Table 1 : Schwartzs cultural dimensions and their descriptions
Dimension Description Dimension Description
1 Conservatism The person embedded in society. The
emphasis on maintenance of the
status quo, propriety, tradition, family
security
Autonomy
(Affective and
Intellectual)
Emphasis on the desirability of
individuals independently pursuing their
own ideas and intellectual directions.
Promoting pleasure, exciting, and varied
life
2 Hierarchy Emphasis on the legitimacy of an
unequal distribution of power, roles
and resources
Egalitarianism Emphasis on everyone's welfare
equality, social justice, freedom,
responsibility, and honesty
3 Mastery Emphasis on self-assertion, ambition,
success, daring and competence
Harmony Emphasis on avoiding self-assertion,
quality of life, harmony with
environment
Source: Schwartz (1994)
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Gender Gap Conceptualized

Gender is the most universal social organizing principle (Roopnarine and Mounts, 1987).
Gender roles create arrangements by which a society transforms biological sexuality into
products of human activity, and in which these transformed needs are satisfied (Reiter, 1975, p.
159). Gender functions are traditionally divided into distinct feminine and masculine gender
roles that may vary substantially from one society to another. The differences between gender
roles can be explained on the basis of different theoretical perspectives. According to Parsons
and Shillis (1951), the division of labor based upon sex has survived because it is beneficial for
society. Hence, the social stability is maintained because the male assumes the role of
breadwinner and the female accepts the role of raising children and managing relationships
within the family. In contrast, the proponents of the Conflict Theory (O'Neil et al., 1995)
maintain that such a division of labor has been maintained by those men in power and is not
necessarily beneficial to society. Recent trends suggest that the gender inequalities are obsolete
in modern times and should be changed (Sandstrom et al., 2006).
Distinct gender roles lead to major inequalities in a wide range of social, economical,
educational, political, social, conjugal, financial, and labor-related issues (Wirls, 1986).
Therefore, in any study dealing with gender-based inequalities it is important to take into
consideration the multi-dimensional character of this concept. The Global Gender Gap Index
(GGI), introduced by the World Economic Forum in 2006, can be considered a suitable measure
that captures national gender-based inequalities on economic, political, education and health-
based criteria (World Economic Forum Report, 2007). In other words, the Gender Gap Index
(GGI) examines the gap between men and women in four fundamental categories: I) economic
participation and opportunity, II) educational attainment, III) political empowerment and IV)
health and survival (World Economic Forum Report, 2007). Table 2 depicts these four criteria
and the 14 different indicators that form the Gender Gap Index (GGI).
Methodologically, the GGI is a practical measure as it is designed to assess gender-based
gaps in access to resources across the world rather than the actual/absolute levels of the available
resources. Moreover, this index uses outcome variables rather than input measures. This
approach is especially appropriate, as it does not rely on subjective, country-specific and culture-
bound constructs such as women emancipation. Another advantage of GGI is that it ranks
countries according to their proximity to gender equality rather than to womens empowerment.
In view of all these advantages, we consider that the GGI is an appropriate measure to evaluate
the gender-based inequalities around the world.

Table 2 : Gender Gap Index four dimensions and the corresponding indicators
Gender Gap Index Dimensions Indicators
I) Economic Participation and
Opportunity
Ratio: female labor force participation over male value
Wage equality between women and men for similar work
Ratio: estimated female earned income over male value
Ratio: female legislators, senior officials and managers over male value
Ratio: female professional and technical workers over male value
II) Educational Attainment Ratio: female literacy rate over male value
Ratio: female net primary level enrolment over male value
Ratio: female net secondary level enrolment over male value
Ratio: female gross tertiary level enrolment over male value
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III) Political Empowerment Ratio: females with seats in parliament over male value
Ratio: females at ministerial level over male value
Ratio: number of years of a female head of state (last 50 years) over male value
IV) Health and Survival Ratio: female healthy life expectancy over male value
Sex ratio at birth (converted to female-over-male ratio)
Source: The World Gender Gap Report, 2007

Hypotheses For Study

Conservatism/Autonomy
Conservatism value type is characterized by social order, respect for tradition, family
security and wisdom. In conservative societies the person is viewed as embedded in the group.
Thus, cultural emphasis is put on maintenance of the status quo, propriety, and restraint of
actions that might disrupt the solidarity or the traditional order. In that sense, Conservatism
corresponds to collectivistic and traditional societies as described respectively by Hofstede
(1980, 2001) and Inglehart (1997). Such collectivistic/traditional societies insist on distinct
gender roles, and emphasize the importance of parent/child ties and reject divorce,
homosexuality, abortion, euthanasia, and suicide (Inglehart and Baker 2000; Inglehart and
Welzel 2003; 2005). Thus, it seems plausible to associate Schwartzs Conservatism cultural
dimension with gender gap.
Intellectual Autonomy as described by Schwartz (1992) implies curiosity,
broadmindedness and creativity. In other words, those dominated by Intellectual Autonomy
seek actively to express and fulfill their intellectual preferences and feelings. Similarly,
Affective Autonomy is related to social behavior based on pursuit of pleasure, excitement and
varied life. Schwartzs Autonomy dimension corresponds to Hofstedes Individualism (1980,
2001) and Ingleharts Self-Expression (1997). In such societies, authority is less respected,
gender roles are less distinct, and divorce, homosexuality, abortion, euthanasia, and suicide are
tolerated (Hofstede, 1980, 2001; Inglehart 2000; Inglehart and Baker 2000; Inglehart and Welzel
2003; 2005). Therefore, it is plausible to associate Schwartzs Autonomy with gender-based
equality.
On the basis of above discussions, we put forward the following hypotheses for
investigation:
1. Conservatism is positively associated with gender gap
2. Autonomy is negatively associated with gender gap.

Hierarchy/Egalitarianism
In societies marked by Hierarchy, cultural emphasis is on the legitimacy of an unequal
distribution of power and wealth. The manifestations of Hierarchy dimension include more
concentration of authority, authoritarian decision-making, inequality of roles, and a strong sense
of class culture. Schwartzs Hierarchy dimension is very similar to Hofstedes Power
Distance (1980, 2001) and can be associated with traditional societies as described by Inglehart
et al. (2000). Hierarchical cultures are economically less developed, are less democratic, and
show the prevalence of traditional gender roles both in and outside family (Hofsetde, 1980).
Furthermore, the tolerance of divorce, homosexuality, abortion, euthanasia, and suicide is much
lower in hierarchical cultures (Hofstede, 1980, 2001; Inglehart 2000; Inglehart and Baker 2000;
Inglehart and Welzel 2003; 2005). Thus, it is argued that people in hierarchical cultures may
cherish gender gap.
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Schwartz (1992) maintains that Egalitarianism cultural value corresponds to features
such as equality, social justice, freedom, responsibility, and honesty. Egalitarian cultures are
economically more developed, tend to be democratic, and are pervaded by modern values such
as gender equality and tolerance of divorce, homosexuality, abortion, euthanasia, and suicide
(Hofstede, 1980, 2001; Inglehart 2000; Inglehart and Baker 2000; Inglehart and Welzel 2003;
2005). Therefore, it is plausible to suggest that egalitarian cultures do not show a tendency
toward gender gap.
investigation:
1. Hierarchy is positively associated with gender gap.
2. Egalitarianism is negatively associated with gender gap.

Mastery/Harmony
Mastery cultural value is characterized by active assertiveness, ambition, success, daring
and competence (Schwartz, 1992). It is associated with all testosterone-driven values such as
hard work, achievement, material reward, and functionality. As such, Schwartzs Mastery
corresponds to Masculinity cultural dimension as described by Hofstede (1980; 2001).
Therefore, it seems plausible to argue that Mastery cultural dimension leads to a masculine-
driven society and eventually to increasing levels of gender gap.
Harmony cultural orientation involves accepting the world as it is (Schwartz, 1992). In
societies marked by this cultural value, people should fit harmoniously into the natural and social
world and avoid conflict and self-assertion. In that sense, Harmony resembles Femininity
dimension as described by Hofstede (1980, 2001) and involves feminine and progesterone-driven
values that are opposed to assertiveness, ambition, and conflict. Therefore, it might be plausible
to argue that Harmony cultural dimension has a tendency toward the prevalence of feminine
values.
investigation:
1. Mastery is positively associated with gender gap.
2. Harmony is negatively associated with gender gap.
Economic Development Hypothesis
The connection between culture and economic development has been emphasized by
many scholars (e.g. Bell, 1973; Chirot, 1977; DiMaggio, 1994; Hein, 1992; Inglehart, 1997;
Hofstede, 1980, 2001; Schwartz, 1992, 1994; Inglehart and Welzel, 2005). Therefore, in
investigating the relationship between culture and gender gap we will control for some macro-
level indicators to remove the possibility of mediation (Hofstede, 1980). Gross Domestic Product
(GDP) per capita and Human Development Index (HDI) are two reliable macro-level variables
that are often used to measure the level of economic development. Accordingly, in this study we
will control for GDP per capita and HDI to assess the effects of cultural values on gender gap.
It has been suggested that economic development may adversely affect the gender gap
(Inglehart, Norris, and Welzel, 2002). The classical modernization perspective holds that
economic development brings about a more broad based distribution of educational and
occupational resources that ultimately leads to lower levels of gender gap (Kenworthy and
Malami 1999; Reynolds 1999; Rule 1994; Siaroff 2000; Welch and Studlar 1996; Wilensky
(2002).
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Thus, it is plausible to put forward the hypothesis that economic development is
negatively associated with gender gap.
Analysis
These hypotheses will be tested through empirical analysis. Formulas will be derived to
see if there are significant correlations of culture to gender gap. Based on the previous
discussions, we will define the Gender Gap Index (GGI) as the main dependent variable that is
likely to be affected by cultural dimensions (independent variables) and economic development
(control variable). As a data set, we propose using 53 countries for which both Schwartzs
cultural scores and Gender Gap data were available. Appendix A presents all 53 countries and
their respective data. We will utilize the 2005 release of Schwartzs data for 55 countries
surveyed during the years 1988-2004. The data for the Gender Gap were obtained from the
World Economic Forum (The Global Gender Gap, Report 2007). We will reverse the gender
equality scores provided by the Global Gender Gap Report (2007) in order to calculate the
Gender Gap Index. The GDP per capita data for all included countries (except Cyprus) were
obtained from the World Economic Forum report. The GDP per capita data in US dollars was
adjusted for purchasing power parity (PPP). The data for HDI were obtained from the United
Nations report 2000, 2001. The results of this study will indicate whether culture has an impact
on gender gap. The results will be limited that only three pairs of cultural values are implicated.
Culture and Implications for Workplace Regulation
Culture is becoming increasingly recognized as a factor having demonstrable effects in
the business world and on laws. For example, the role of culture has been examined in a
comparison of national accounting standards and has been cited as a reason for the differences.
Ding (2005) found that differences between national accounting standards and international
accounting standards are explained by cultural dimensions and legal origin and therefore play a
role in opposition in accounting harmonization efforts.
In a study more directly related to legal regimes, Licht, Goldschmidt, and Schwartz
(2003) investigated the cultural dimensions of corporate governance laws. They used the
cultural profiles derived both from Schwartz and from Hofstede and conducted an analysis of
cross-sectional samples of nations from around the world, drawing on data from two models of
cultural dimensions in cross-cultural psychology. Their results demonstrated that corporate
governance laws exhibit systematic cultural characteristics and that "cultural values partly
determine the types of legal regimes likely to be perceived and accepted as legitimate in a
nation." Their "findings lend support to the argument that there is culturally-induced path
dependence in corporate governance regimes" and that cultural values partly determine the types
of legal regimes likely to be perceived and accepted as legitimate in a nation" and "can serve as
guides for legislators and interest groups in their law-making activities." They reflect that by
quantitatively assessing the location of nations on cultural dimensions, this framework provides
yardsticks for measuring the suitability of transplanting legal mechanisms from one nation to
another."
The very meaning of work was related to the cultural norms of different societies in a
study by Schwartz (1999). In this study, Schwartz compared cultural data from 49 nations to
investigate cultural dimensions of the meaning of work. He found that egalitarianism and
intellectual autonomy values were important where societal norms defined work more as a
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entitlement and that conservatism and hierarchy values were important where societal norms
defined work more as an obligation. These attributes and values regarding the meaning of work
become incorporated into the foundation of workplace regulation. Understanding the cultural
dimensions of the meaning of work explain not only the basis for the regulation but also
compliance with the regulatory structure. Licht, Goldschmidt, Schwartz (2003) determined that
"countries cultural profiles alone explain almost half of the variance in the level of compliance
with the law."
If workplace regulations are in part, culturally-based and enforced, then it may follow
that the presence or absence of laws regarding gender equality, or the intentional ignorance of
them, may reflect that country's cultural values regarding gender. One way to determine
whether laws exist, or are effective, to promote gender equality in the workplace is to compare
the economic participation and opportunity and gender wage gap between countries and regions
of the world. While the GGI Report does not specifically review nation's laws toward gender
equality, it recognizes the differences in economic participation among countries, and states that
"to maximize competitiveness and development potential, each country should strive for gender
equality i.e., to give the same rights, responsibilities and opportunities as men." The Report also
states while the GGI provides a transparent and comprehensible framework, "future research will
be needed [in addressing the challenges and opportunities of gender gap] to develop a clearer
understanding of the policies that are successful and those that are not."
The data for the GGI included 130 countries representing over 90% of the world's
population. While gaps in health and education were reported to have decreased from years past,
the gender gap on economic participation remained wide at 62%. No country had achieved
gender equality. The four highest ranking countries (least gender gap) were the Nordic countries
of Norway, Finland, Sweden, and Iceland who had closed a little over 80% of their gender gap.
The lowest ranked country, Yemen, had closed only around 47% of its gender gap.
Norway had the narrowest gender gap of all nations and was ranked 6th in economic
participation. A 2004 change in a law on board compositions in Norwegian public companies
was observed as a major contributor to their enhanced status. Among regional averages in
economic participation, North America (the U.S. and Canada) scored the highest at about 76%,
with these regions following in order; Oceania, Western Europe, Eastern Europe, Sub-Saharan
Africa, Latin America and the Caribbean, and Asia. The Middle East and North Africa were last
in economic participation with about 40%. The Report confirmed that "in the countries where it
is relatively easy for women to work and to have children, female employment and fertility tend
to be higher." This statement gives support to the proposition that a nation's cultural norms and
its laws, play a part in whether women are welcomed in the workforce or not. A country that
makes it easy for women to work likely values higher autonomy, egalitarianism, and mastery.
Regarding gender differences in the labor force participation rates, Antecol (2000) found that a
plausible candidate for the differences was "cultural factors such as tastes regarding family
structure and womens role in market versus home work."
The gender pay gap may also be seen as an indicator of cultural norms and workplace
regulations. The International Trade Union Confederation's Global Gender Pay Gap Report
(2008) calculates the gender pay gap from publicly available data for 63 countries, including 33
European countries and 30 from the rest of the world. Interestingly, the report contains many
results that would support a number of cultural and legal conclusions, however, the gender pay
gap data is full of variables that may render many of the actual conclusions surprising. For
example, Finland is one of the top countries in the world for the least gender gap in the four areas
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looked at in GGI for gender gap, but its gender wage gap well exceeds the world's average wage
gap. The gender wage gap in Finland is explained by a highly segregated workforce.
Despite the variable factors with wages, the report provides wage gap statistics that may
reflect a country's cultural norms and workplace regulations. The report states that the general
trend in pay gap is that women in Europe, Oceania, and Latin America fare better than Asia and
Africa where female participation is generally low. However, in Africa, there is little data
available because the economies are informal. In Asia, there is a significantly wider pay gap in
transitional economies like Armenia and Georgia and much wider pay gap in Japan and Republic
of Korea where women have been underrepresented in the labor force market. These countries
are traditionally conservative and hierarchal and therefore the gender pay gap is not surprising.
The laws and enforcement of them may reflect the cultural norms. As noted, as late as 2003, a
Japanese District Court found that different, lower pay for women was acceptable.
In the United Sates the wage gap, at 22.5%, is lower than in Canada which is 27.5% but
still behind the world gender pay gap in the world. In the United States, the Equal Pay Act of
1963 requires men and women to be paid equal for equal work. However, efforts to pass
legislation requiring equal pay for comparable work have failed. In Europe, the pay gap is less at
14.5%. However, the gender pay gap in individual countries in Europe are surprisingly distinct.
The European Commission states that a "high pay gap is usually characteristic of a labor marker
that is highly segregated (eg. Cyprus (24%), Estonia (25%), Slovakia (22%), Finland (20%), or
in which a significant of women work part-time, eg. Germany (22%), the Netherlands (18%),
Austria (20%). In Europe, the law requires equal pay for work of equal value. Despite this law,
female -dominated roles are paid less for comparable roles, women are paid less where labor
markets are highly segregated, and women are paid less in male-dominated sectors such as
industry, business and the financial sector. In Europe, prejudices and stereotypes are seen as a
contributory factor in pay discrimination (Chicha 2006). In Australia and New Zealand, pay
gaps have been less due to the presence of labor unions and collective bargaining. In Australia
the pay gap is rising and is partly explained by a change in policy and the introduction of
"WorkChoices" the government workplace system which restricts trade union rights and reduced
the number of employees covered under collective agreement. Global Gender Pay Gap (2008).
In reflecting on the role of the ILO, the Global Gender Pay Gap report notes that the
Equal Pay Convention 100 of the ILO has had a positive impact on gender pay gap but the
precise impact is unclear because of wider policies in any society.
Other workplace laws can be influenced by culture. Gender workplace laws most often
present issues related to equal employment opportunity, discrimination in hiring or promotion,
and wages, but can also impact areas such as sexual harassment. For example, Luthar and
Luthar (2007) argue that "the degree to which a society focuses on the interest of the individual
versus the interest of the group has implications for the likelihood to sexually harass as well the
degree to which sexual harassment would be tolerated" and "that strategies for coping with
sexual harassment in the workplace may be subject to cultural influences." The individual focus
is related to intellectual autonomy, egalitarianism, and mastery.
Finally, Schwartz (1999) suggested that knowledge of cultural values can be used in the
workplace to predict and interpret risk-taking and innovation in work, supervisor behavior to
workers, decision-making styles referring to reliance on own judgment, consultation with
superiors or subordinates and looking at the extension of work life into other areas of life.
Further research in workplace regulations as a reflection of culture is needed such as whether
workplace laws are effective in eliminating cultural bias affecting gender equality.
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Conclusion
This paper reviewed culture, gender gap and workplace regulation and proposes a model
to investigate the effects of cultural values on gender equality. While many studies have focused
on some narrow aspects such as gender-based differences in labor, employment, remuneration,
political representation, education, and leadership, this proposed methodology relies on a
comprehensive conceptualization of gender gap. We defined gender gap, as all gender-based
inequalities with respect to four major criteria: economic participation and opportunity,
educational attainment, political empowerment, and health and survival. We defined culture as
meanings, rituals, norms, and traditions that distinguish members of one society from another
and we adopted Schwartz framework to measure cultural values. The relationship between
cultural dimensions and gender gap is of paramount importance, because socioeconomic
development, cultural values, and gender gap are closely intertwined to workplace regulation.
At the practical level, by considering the implications of cultural values, policy makers and
business leaders may adopt effective strategies, laws, and policies, to promote gender equalities
in the workplace.

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Appendix A

List of 53 countries and respective variables and data
Country Egalitarianism
Source:
Schwartz, 2005

Harmony
Source:
Schwartz, 2005

Conservatism
Source:
Schwartz, 2005
LNGDPcap
Source: Global
Gender Gap,
Report 2007
HDI
Source: United
Nations report
2000, 2001
GGI
Source: Global
Gender Gap,
Report 2007
1 Argentina 5.098 4.266 3.625 9.44967218 0.818333 0.302
2 Australia 4.921 4.129 3.847 10.2501223 0.916667 0.28
3 Austria 5.059 4.622 3.186 10.3083191 0.907667 0.294
4 Bolivia 4.834 4.26 4.214 7.8272409 0.695 0.343
5 Brazil 5.037 4.04 3.8 8.9193194 0.7345 0.336
6 Bulgaria 4.249 4.251 4.026 8.99168673 0.829 0.292
7 Canada 4.985 4.199 3.521 10.2986666 0.933 0.28
8 Chile 5.109 4.493 3.902 9.27799902 0.806333 0.352
9 China 4.312 3.762 3.738 8.70151275 0.635833 0.336
1 Cyprus 5.061 4.323 4.194 9.96175646 0.903 0.348
11 Czech 4.589 4.661 3.768 9.81312511 0.845 0.328
12 Denmark 5.147 4.32 3.289 10.3163916 0.911667 0.248
13 Egypt 4.827 4.2 4.692 8.25790419 0.708 0.419
14 Estonia 4.752 4.663 4.078 9.53024759 0.817 0.299
15 Finland 5.026 4.586 3.532 10.2613368 0.9085 0.196
16 France 5.183 4.495 3.097 10.2048136 0.914833 0.318
17 Georgia 4.742 4.094 4.245 8.00436556 0.754 0.334
18 Germany 5.14 4.706 3.183 10.1738963 0.902833 0.238
19 Ghana 4.854 3.433 4.3 7.6989362 0.553 0.327
20 Greece 4.979 4.683 3.469 9.94275634 0.887167 0.335
21 Hungary 4.507 4.384 3.727 9.67489166 0.825667 0.327
22 India 4.494 3.979 3.913 8.03008409 0.509333 0.406
23 Indonesia 4.325 3.992 4.503 8.13710339 0.625 0.345
24 Ireland 4.987 3.897 3.598 10.441617 0.893 0.254
25 Israel 4.857 3.352 3.823 10.0436842 0.868 0.304
26 Italy 5.376 4.905 3.611 10.1417561 0.895833 0.35
27 Japan 4.466 4.302 3.547 10.2334026 0.921 0.355
28 Jordan 4.47 3.704 4.354 8.50106381 0.773 0.38
29 Macedonia 4.475 4.14 4.048 8.76483421 0.8 0.303
30 Malaysia 4.497 3.681 4.332 9.17792048 0.745167 0.356
31 Mexico 4.774 4.576 3.792 9.16576133 0.786833 0.356
32 Namibia 4.599 3.561 4.02 8.81714962 0.657 0.299
33 Nepal 4.703 4.156 4.276 7.22911388 0.534 0.442
34 Netherlands 5.083 4.192 3.355 10.2777372 0.924167 0.262
35 New Zealand 5.027 4.193 3.471 10.0095578 0.898667 0.235
36 Norway 5.285 4.635 3.55 10.5145838 0.935 0.194
37 Peru 4.984 3.913 4.141 8.58914169 0.7224 0.338
38 Philippines 4.603 4.084 4.071 8.42748728 0.695333 0.237
39 Poland 4.546 4.235 4.051 9.41889806 0.83725 0.324
40 Portugal 5.388 4.57 3.513 9.80686651 0.836 0.304
41 Russia 4.641 4.254 4.043 9.17450592 0.798667 0.313
42 Singapore 4.691 3.979 4.213 10.1807404 0.8575 0.339
43 Slovakia 4.578 4.526 4.049 9.55534751 0.863 0.32
44 Slovenia 4.581 4.774 3.816 9.89419451 0.891 0.316
- 226 -

45 South Korea 4.471 3.562 3.784 9.8831828 0.922 0.359
46 Spain 5.203 4.636 3.363 10.0929088 0.8995 0.256
47 Sweden 4.96 4.54 3.234 10.2728418 0.9205 0.185
48 Switzerland 4.979 4.526 3.043 10.3641035 0.9235 0.308
49 Turkey 4.909 4.309 4.026 8.91998807 0.710333 0.423
50 UK 4.998 3.814 3.552 10.2945494 0.902333 0.256
51 USA 4.799 3.694 3.771 10.5258635 0.924167 0.3
52 Venezuela 4.734 4.026 3.943 8.68270763 0.7865 0.32
53 Zimbabwe 4.311 3.573 4.068 7.50273821 0.541 0.354

- 227 -

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- 229 -

Tax Revenue Var i ati on i n Di ffer ent Countr i es
Mitch McGhee
Tzu-Man Huang
Terry Crain

This study intends to examine the tax revenue structure in different countries and how the
revenues fluctuate with the economic condition. Tax revenues are often compared by the
percentage of Gross Domestic Product (GDP) across countries. However, the tax portfolios
might differ across countries. Such comparison is not rich in the literature review and might
provide some interesting insights into the variation of tax revenues across countries. As a result,
we plan to collect data about the tax structure in several countries and examine how various
sources of tax revenues are affected by macroeconomic factors. In this preliminary study, we
present the tax revenues as a percentage of GDP in different countries and how the tax revenue
growth rates fluctuate with the economic conditions.
Tax Revenues as a Percentage of GDP
Tax revenues provide important funding resources for most countries. Each country has
its own tax structure. When the economic condition changes different countries experience
various fluctuations in their tax revenues. However, it is difficult to compare total tax revenues
across countries because of the different economic sizes. As a result, instead of comparing the
total tax revenue figures, most data show the tax revenues as a percentage of GDP. We utilized
the data collected from the World Bank website (http://data.worldbank.org) and selected
countries with complete data available during the sample period from 2005 to 2008. The results
are presented in Table 1. The tax revenues as a percentage of GDP in 2005 and in 2008 are also
listed in Figure 1 for comparison. There are 24 countries in our sample. In 2008, Kuwait had the
lowest percentage of 0.90 percent, followed by Pakistans 9.8 percent. On the other hand, the
United Kingdom has the highest percentage of 28.6 percent of GDP as its tax revenues, followed
by Norways 28.10 percent. Most countries experienced minor growth in their percentages from
2005 to 2008, except for Iceland. Also, Brazil had the percentage of GDP as 3.3 percent in 2005
and it increased it to 16.4 percent in 2008. In fact, Brazil increased it tax revenues to 15.40
percent of GDP in 2006 and increased slightly after that. We suspect that there might be some
significant tax policy change in Brazil in 2006, which deserves further investigation. In our
sample 24 countries, the average tax as a percentage of GDP is 17.61 percent in 2008, compared
to 16.03 percent in 2005, which is a 9.86 percent increase. If Brazil is excluded, the average tax
as a percentage of GDP is 17.67 percent in 2008, compared to 16.59 percent in 2005.
Tax Revenue Growth Rates and Volatilities
In order to investigate the characteristics of tax revenues, we obtained the GDP data from
the World Bank and computed the tax revenue by multiplying the GDP and tax as a percentage
of GDP for each country. The growth rates of tax revenues from 2006 to 2008 are generated and
presented in Table 2, while the figures for 2006 and 2008 are also shown in Graph 2 for
comparison. Brazil has the growth rate of 476.10 percent in 2006. To avoid a scaling problem,
we excluded Brazil in Graph 2. In 2008, Iceland has the lowest tax growth rate of -26.62 percent,
- 230 -

while Romania has the highest growth rate 79.29 percent. Excluding Brazil, Chile has the biggest
percentage change in its tax growth rate from 2006 to 2008 in our sample countries. The average
tax growth rate is 13.31 percent in 2008 and 15.43 percent in 2006.
The volatility of the tax growth rates is evaluated by its standard deviation. The results
are shown in Figure 3. Brazil actually has the highest volatility of 260.94 percent in its tax
revenue growth rate from 2005 to 2008. However, again to avoid a scaling problem, we
excluded Brazil in Figure 3. Other than Brazil, Romania has the highest volatility in its tax
growth rate of 31.83 percent, followed by Icelands 23.25 percent. Thailand has the lowest
volatility of 0.99 percent, followed by Norways 1.16 percent and Pakistans 1.63 percent. The
United States has a volatility of 13.47 percent and ranked in the top ten in our sample countries
in terms of the tax growth rate volatility.
Tax Growth Rates versus GDP Growth Rates
Tax revenues could be affected by many factors. GDP is usually considered an economic
condition indicator. The relationship between the tax revenue growth and the GDP growth for
each country is examined. Tax revenue growth rates are highly correlated with GDP growth in
many countries, including the United States (0.9930), Chile (0.9912), Iceland (0.9902), Poland
(0.9838), United Kingdom (0.9789), India (0.9723), Thailand (0.9634), South Africa (0.9474),
Hungary (0.9457), Singapore (0.9393), Morocco (0.9162), Portugal (0.9134), with the
correlation coefficients shown in the parentheses. They all have a positive correlation value
higher than 90 percent. On the other hand, we also find some countries that have negative
correlation coefficients, including Pakistan (-0.9986) and Norway (-0.9915). The complete
information is shown in Figure 4.
These countries are divided into three groups based on 2008 tax revenue as a percentage
of GDP. If the percentage is less than 15 percent, it is considered in the low tax bracket in our
sample, and it includes eight countries. If the percentage is between 15 and 20, it is in the middle
bracket, which includes nine countries. If the percentage is higher than 20 percent, it is in the
high end of the tax revenues and includes seven countries in our sample. The details are shown
in Table 3. We computed the median of the correlation coefficients between the tax growth rate
and the GDP growth rate for these three tax brackets. We found that low tax countries actually
have a higher correlation between tax growth rate and GDP growth rate, when compared to
middle or high tax countries. We also included the volatility of tax growth rates for these
countries and the result suggests that low tax countries also have a higher volatility in their tax
growth rates. The medians of the standard deviations for tax growth rates are generated for low
tax, medium tax, and high tax countries, with the figures shown in Table 3.
Based on our findings, it seems that low tax countries seem to have more volatile tax
revenues. Their tax revenues also seem to be more correlated with GDP growth. However, we
need to further investigate the tax structure of each country to be able to explain how tax
revenues are affected by economic conditions.
Conclusion and Future Research
This is a preliminary study about the tax revenue variation in different countries. In the
preliminary examination, we selected sample countries based on the data available. The data are
generated from World Bank source. We examined 24 countries and how their tax revenues
changed from 2005 to 2008. The tax revenues are presented as percentages of GDP. By
- 231 -

obtaining GDP data, we present the tax growth rates and the volatility of the tax growth rates
during the sample period. The relationship between the tax revenue growth rate and the GDP
growth rate is also computed for our sample countries. In our preliminary findings, it seems that
low tax countries have higher volatility in their tax revenues, while the tax growth rates have a
higher correlation with the economic condition.
However, we will need to further investigate the tax structure for each country to be able
to identify more factors that influence tax revenues across countries. Such comparison is not rich
in the literature review and might provide some interesting insights into the variation of tax
revenues across countries. As a result, we plan to collect addition data from Revenues Statistics
of OECD member countries database about the tax portfolios in several countries and examine
how various sources of tax revenues are affected by macroeconomic factors.
Figure 1 Tax Revenues as a Percentage of GDP in 2005 and 2008

Data Source: World Bank (http://data.worldbank.org)

Figure 2 Tax Growth Rates in 2006 and 2008

Note: Brazil had the growth rate of 476.10 percent in 2006. To avoid a scaling problem, we excluded Brazil in this graph.

0.00%
5.00%
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- 232 -

Figure 3 The Standard Deviation of Tax Growth Rates (2006-2008)

Note: Brazil had a standard deviation of 260.94 percent for its tax growth rates. To avoid a scaling problem, we excluded Brazil in this graph.

Figure 4 The Correlation between Tax Growth Rates and GDP Growth Rates

Table 1 Tax Revenues as a Percentage of GDP from 2005 to 2008
Country 2005 2006 2007 2008
Kuwait 1.00 0.80 0.90 0.90
Pakistan 9.60 9.40 9.80 9.80
United States 11.40 12.10 12.20 10.30
Nepal 9.20 8.80 9.80 10.40
Spain 12.60 13.20 13.90 10.60
India 10.20 11.50 12.40 12.90
Philippines 13.00 14.30 14.00 14.10
Singapore 12.20 12.60 13.90 14.60
Egypt 14.10 15.80 15.40 15.40
Honduras 14.50 15.20 16.30 15.80
0.00%
5.00%
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30.00%
35.00%
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- 233 -

Brazil 3.30 15.40 16.30 16.40
Thailand 17.20 16.70 16.10 16.50
Ukraine 17.10 17.70 16.50 17.80
Romania 12.20 11.40 11.80 17.90
Poland 16.70 17.40 18.30 18.40
Portugal 16.70 17.40 18.30 18.40
Chile 18.70 20.60 21.50 19.80
Italy 21.20 22.70 23.10 22.60
Hungary 20.30 20.10 21.40 23.60
Iceland 28.10 28.10 27.50 24.60
Morocco 22.00 22.40 25.10 27.50
South Africa 27.30 28.70 29.00 27.70
Norway 28.90 29.70 29.10 28.10
United Kingdom 27.30 28.10 27.70 28.60
Data Source: World Bank (http://data.worldbank.org)

Table 2 Tax Growth Rates from 2006 to 2008 (in percentage)
Country 2006 2007 2008
Iceland 2.09 19.41 -26.62
Spain 14.23 22.87 -14.92
United States 12.60 5.63 -13.41
South Africa 11.59 11.25 -6.94
Chile 36.73 16.53 -4.77
United Kingdom 9.95 13.46 -1.52
India 27.32 38.70 2.47
Italy 12.24 15.47 6.56
Honduras 17.76 18.31 7.91
Portugal 9.56 20.45 9.62
Norway 14.58 13.03 12.31
Thailand 14.09 14.96 12.98
Singapore 18.85 32.33 14.47
Pakistan 13.91 17.10 14.90
Philippines 30.83 19.98 16.70
Brazil 476.10 29.58 18.87
Hungary 1.54 30.73 22.93
Egypt 34.29 18.32 24.38
Poland 7.88 42.16 24.79
Kuwait 0.56 27.10 29.01
Morocco 12.28 28.42 29.45
Nepal 6.76 26.19 30.19
Ukraine 29.48 23.46 36.34
Romania 15.86 42.87 79.29
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Table 3 Tax Revenue Growth Volatility and Correlation to GDP Growth
Country 2008 Corr SD
Kuwait Low Tax
Pakistan Tax < 15% GDP 0.568554 13.00%
United States (Median) (Median)
Nepal
Spain
India
Philippines
Singapore
Egypt Medium Tax
Honduras Tax 15-20% GDP 0.178000 8.07%
Brazil (Median) (Median)
Thailand
Ukraine
Romania
Poland
Portugal
Chile
Italy High Tax
Hungary Tax > 20% GDP 0.275000 9.63%
Iceland (Median) (Median)
Morocco
South Afraid
Norway
United Kingdom

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Obstacles on the Path to
Global Accounti ng Standar ds
Louella Moore
Abstract
This paper reviews the current status of the International Accounting Standards Boards
(IASB) mission to develop a single set of accounting standards. While the IASB can point to a
high number of countries which now allow International Financial Accounting Standards, those
countries appearing to adopt International Financial Accounting Standards (IFRSs) have often
done so by reserving the flexibility to opt out on selected issues. Further, little has been done to
resolve differences in Western and Islamic cultural approaches to financial reporting. In addition,
the recent global financial crisis has highlighted areas of the IASBs fair value accounting model
which are just as problematic as the prior historical cost or stewardship model. The paper
suggests that perhaps the greatest obstacle to developing a single set of global accounting
standards is that neither the IASB nor the accounting profession as a whole has really come to
grips with inherent financial measurement paradoxes which are deeply problematic from an
epistemological and philosophical standpoint.
Introduction
Many reasons can be sited to support the need for global accounting standards: 1) The
number of instances of cross-border financing and listings of stocks on multi-national exchanges
is significant; as of June 30, 2008 over 1000 non-US companies were listed in the US,
approximately $4.3B of foreign securities were held in the US, and more than $10 Trillion of US
securities were held by other countries) (IASPlus Statistical Database 2010), 2) Differences in
accounting standards can make it difficult to compare economic performance between
investments in different legal jurisdictions (Nicolaisen

2005), and 3) A lack of agreement on
accounting standards is widely assumed to impose costs and diminish market efficiency
(PricewaterhouseCoopers LLP2009). The International Accounting Standards Boards (IASB)
goal is to develop, in the public interest, a single set of high-quality global accounting
standards.
(IASB, Global, 2010)
To that end, the IASB has made significant strides in recent years by
adding more and more countries willing to require or allow International Financial Reporting
Standards (IFRS). Nevertheless, since India, the United States, and large portions of Africa, the
Middle East, and Oceana still have not fully converted to IFRSs, significant obstacles to a single
standard for world-wide financial reporting remain. The problem areas in achieving the IASBs
goal could be grouped into three main themes -- political, cultural, and epistemological issues in
measurement.
This paper will begin with an assessment of the current status of the International
Accounting Standards Boards (IASB) goals to achieve worldwide convergence of accounting
standards. The second section of the paper will highlight continuing political and cultural issues.
The third section will discuss the market value models paradox of counter-intuitive gains
following credit downgrades. While standard setting bodies in most IASB member countries
embrace the concept of a consistent and logical accounting framework, recent compromises
between the logic of fair market value and certain pragmatic problems when this model is
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applied to liabilities demonstrate the difficulty in sticking with a single paradigm of either fair
value or historical cost. The fourth section of the paper will focus on philosophical and
practical problems in the ontology and epistemology of accounting and the phenomenal world
which may explain some of the paradoxes and counter-intuitive effects in accounting.
A primary goal of the paper is to use a multi-disciplinary approach blending concepts
from philosophy, physics, and Eastern world views to explore the idea that some of the
inconsistencies in accounting may stem from unexamined uncertainties and interdependencies in
the underlying phenomena being measured. The intent of the paper is to add an additional layer
of understanding to the early warnings by such noted scholars as Gerhard Mueller

(1967) that
convergence to a single world standard for financial statements would not be easy, and in some
cases might not even be desirable. The paper concludes with some suggestions concerning
pragmatic management of the inherent paradoxes of accounting measurements.
An Assessment of Progress toward the IASB Goal
In 1966 US, Canadian and United Kingdom (UK) accounting standard setting bodies
began work to form a study group focused on the need for international accounting standards.
The International Accounting Standards Committee (IASC), predecessor organization to the
current International Accounting Standards Board (IASB), was formed in 1973 with sponsorship
from Australia, Canada, France, Germany, Japan, Mexico, Netherlands, UK/Ireland and the
United States (US). By 1998 the IASC membership had expanded to 140 accountancy bodies in
101 states. (Deloitte 2010, p. 15) Operating merely by moral persuasion with no power to impose
or police any standards in the global community, the IASC had limited political stature in its
early days.
Illustration 1
Key Events in International Accounting Standards Convergence
1973 IASC is formed with sponsorship of 9 countries
1988 IASC membership of 140 accountancy bodies in 101 countries
2000 IOSCO identifies required changes that must occur for IASC standards to be accepted
2001 Restructured IASC becomes IASB
2002 Norwalk agreement (IASB & FASB) concerning steps for standards convergence
2007 SEC stops requiring those using IFRS to do a reconciliation to US standards
2010 122 of 172 jurisdictions (71%) require or permit IFRS for some domestic companies

In 2000 the International Organization of Securities Commissions (IOSCO)
recommended that its members allow multinational issuers to use IASC standards in cross-border
offerings and listings subject to certain changes in the IASC. The IOSCO recommendation
served as the impetus for revising the governance structure and renaming of the IASC as the
International Accounting Standards Board in 2001. In 2002 the IASB and the United States
Financial Accounting Standards Board (FASB) issued a joint agreement on steps to be taken by
both parties to better converge the accounting standards of the FASB with those of the IASB.
The 2002 agreement, generally referred to as the Norwalk agreement, led to revisions in
numerous FASB and IASB standards making US and international practice more compatible if
not always perfectly aligned. In 2007 the US Securities Exchange Commission (SEC) stopped
requiring foreign registrants who used IFRS to prepare a reconciliation schedule to US standards.
(Deloitte 2010, 16-17) The FASB and IASB are continuing to work on standards revisions
aimed at increasing similarities in the respective standards. They had initially projected the
convergence project could be completed by mid-2011. (IASB, Convergence 2010) Later the
projected date was extended to 2014, but the FASB and US have still not settled on a firm date.
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The SEC chairman denies that the SEC is purposely dragging its feet (WEBCPA Staff 2010)
even though in public statements it suggests 2015 or 2016 as likely to be the earliest date for
required use by domestic US companies. (SEC 2010, p. 15) These key events are summarized in
Illustration 1.
As of June 2010, out of 172 jurisdictions which would have the power to determine their
own accounting standards, 122 permit or require IFRS for at least some domestic listed
companies. IFRS are NOT permitted in 31 jurisdictions; 19 countries have no stock exchange.
The 122 jurisdictions represent approximately 80% of the countries with an active stock
exchange. Out of the 122 which permit or require IFRSs, IFRS are required for all domestic
companies in 91 countries. This is roughly three quarters of those countries which allow IFRS at
all or 60% of the total countries. Still, audit reports may specifically indicate the financial
statements are in accordance with IFRS as adopted by the specified jurisdiction. (IAS Plus
2010, Use) Illustration 2 shows that the hold outs as of early 2010 include the United States,
most of the Middle East, India, much of Africa and parts of Oceana though India has expressed
intent to expedite acceptance of IFRS possibly by 2012. (Doval 2008, Haribhakti 2008, Asia
2010) While parts of Africa and Oceana are among the jurisdictions without their own stock
exchanges, non-adoption of IFRSs in the US, India, and the Middle East are primarily related to
political and cultural forces which bear additional discussion in the next section of the paper.
Similar to the distribution of adoptees, the IASB trustees currently include only one member
from South America, one from Africa, and none from the Middle East. (IASB, Geographical,
2010)

Illustration 2
Global Acceptance of IFRS Accounting Standards

Source: http://www.iasb.org/Use+around+the+world/Use+around+the+world.htm as of June 21, 2010. Blue indicates
acceptance, gray being considered, and white not permitted.
Political and Cultural Aspects of Global Accounting Standards
Through coordination and communication with worldwide accounting standards setting
bodies, the International Accounting Standards Board has come to be seen as an effective force
in achieving convergence in accounting standards among many of the worlds major political
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forces. However, there is a difference in convergence and having a single set of accounting
standards. Convergence means that the accounting standards become increasingly similar, but
with individual jurisdictions maintaining the right to autonomy on specific issues. For some
smaller countries without an existing accounting standard setting structure, acceptance of IFRS
statements provides a cost effective mechanism for entry into global markets. Other countries
that already had a strong standard setting process in place before the IASB was established are
reluctant to give up their autonomy. The fact that more than one fourth of the adopters
incorporate language saying the financial reports are in accordance with IFRS as adopted by the
specified jurisdiction is indicative that the IASB still does not have the same political or legal
status as domestic or regional accounting standards setters under the auspices of the national
government or regional authority such as the European Union (EU).
Establishment of national accounting standard setting bodies has often occurred as a
result of some major financial crisis. For example, the original Committee on Accounting
Procedures (CAP) in the US was formed in response to financial issues associated with the Great
Depression. Prior to the formation of the CAP, there were no uniform accounting standards in
the US. After standard setting bodies were authorized by the US SEC (Securities Exchange
Commission), primary financial statements in the US continued to be based on simple historical
cost/stewardship concepts until the mid-nineteen-seventies when the US began developing a
conceptual framework which would move them gradually toward more fair values on the
financial statements. US standards today allow value many financial investments at fair value
but with most tangible and intangible property valued at historical cost. The conceptual
framework of the IASB espouses a balance sheet oriented, fair value approach to accounting
which is very similar to the conceptual framework adopted by the FASB but with the IASB
being more accepting of fair value estimates for assets other than financial instruments.
With the worlds highest number of lawyers per capita for any country
(wiki.answers.com 2010), US practice tends to be driven by both laws and aversion to law suits.
For fear of litigation, the US auditing profession is reluctant to embrace subjective valuations if
they can avoid them (Pannese & DelFavero, 2010). On the other hand, the response to financial
crises by Congress, government agencies, and government sponsored accounting standard setting
bodies has always been to write more detailed rules and laws as quickly as possible in order to
show government responsiveness. It is perhaps not surprising that the US government would be
reluctant to delegate authority for responding to future political financial crises to an
international body over which they have limited control. The IASB has recently been seen to
carve out special exceptions for the EU even while protesting the practice (Rappeport 2007).
Similarly, IFRS in China are not only voluntary, but related party disclosures are considered too
burdensome for state owned businesses and are generally ignored. (Meyer 2009) In Canada,
companies listing in the US are allowed to use US generally accepted accounting procedures
(GAAP) rather than IFRS; Canadian not-for-profits and pension plans will not be required to
adopt IFRS. Countries that have not officially come under IFRS such as Australia, Hong Kong,
Korea, India, Malaysia, Pakistan, and Thailand have adopted some standards that are word-for-
word the same as IFRS but have allowed more time for transition compared to the IASB or have
omitted certain standards (Deloitte, 2010, pp. 31-32). Many countries seem intent on
maintaining the possibility of differing from the official IASB policy. Further, there is no strong
mechanism for assuring that even countries that have adopted word for word IFRS standards
really police their application. The fact that the majority of the worlds countries appear to be
adopters may not necessarily mean the standards are narrowly and consistently applied.
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A major obstacle to the IASBs mission to have a single worldwide standard for
accounting statements is in its inability to attract significant adoptions or even to engage in
meaningful dialogue with Islamic countries. The IASBs general conceptual framework could
be argued to have a distinctive Western or secular slant very similar in form to those existing in
the US and UK prior to formation of the IASB. The presence of China and Japan as adopters has
had little impact on the general conceptual approach taken by the IASB to standard setting. It
could be argued that since China and Japan are principal trading partners with Western countries,
they were willing to sign on to the existing arrangement in order to maintain harmony with
standards in their primary target markets. Or it may be simply that the diversity of religion in
Western, Chinese and Japanese cultures makes it easier to ignore cultural values with religious
bases.
Islamic financial markets are significant in volume.

One estimate in 2008 put the amount
of Islamic financial instruments at nearly $1 Trillion with a 15-20% annual rate of growth with
much of the trade in these instruments occurring in global rather than the domestic markets of
Islamic countries (Hanney 2008). It is not as though Islamic countries are disinterested in
financial accounting issues as is evidenced by the formation of the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) in Bahrain in 1990 and the Malaysian
Accounting Standards Board (MASB) in 2003. Still, the presence of multiple Islamic authorities
makes it challenging for the IASB to engage in convergence discussions with groups whose
cultural values place religious authority above that of secular professional accounting bodies.
Dialogue is difficult when two groups do not agree on basic assumptions about the hierarchies of
political power and cultural values. If convergence is really needed to provide quality
information for decision making, it seems amazing that many popular academic textbooks on
international accounting by Western publishers (Choi & Meek 2008, Radebaugh, Gray, & Black,
2006) completely ignore Islamic countries. This would seem to be a glaring lacuna.
Undoubtedly any movement toward convergence of Islamic and IASB rules if it should occur
will be difficult, but why is it not even being discussed by academic texts? Perhaps it is too
much to expect cooperation or compromise between Western dominated and Islamic standard
setters. Still, if rational decision making rather than politics were really the driving force behind
international accounting standards convergence, it would seem that academic accounting texts
should at least be addressing the differences in IFRS and Islamic accounting rules so that
reconciliations between the statements could be made.
The Western slant to the conceptual framework of the IASB almost guarantees countries
with significant numbers of Islamic citizens will never be able to adopt IFRS in anything like
their current form. In Islamic countries with strong overlap between church and state, financial
statements are generally expected to be prepared in a manner that shows deference to religious
principles. For example, under Islamic shariah law, businesses are expected to contribute a
certain percentage of income to charity. Showing the charitable donations as a separate line on
the financial statements would not require any reconciliation for comparability with Western
practice. On the other hand, a major religious and cultural issue in Islamic culture is the
prohibition on inappropriate fixed charges (riba), i.e., interest, on contracts with uncertain
outcomes. In Islamic culture, the ethical sensibilities are that the financial institution and the
investor should both share in uncertain returns rather than one party receiving a return while the
other bears all the risk. Illustration 3 shows some major forms of investments marketed as
shariah compliant as summarized in Moore and Steinbauer (2008).

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Illustration 3
Financial Instruments Commonly Marketed as Shariah Compliant
Investment Brief Description
1. Muharaba Trust or partnership financing for short term ventures.
2. Musharaka Participative financing for long term projects.
3. Ijara Lease financing structured as a rental. Title does not pass at the end.
4. Ijara Wa-Iktina Rent plus payments to a fund used to purchase the title at end of lease.
5. Istisna Pre-delivery financial lease for construction phase of long term projects.
6. Sukuk Tradeable bonds backed by tangible assets.
7. Takaful Mutual insurance with shariah compliant investments.

While more conservative Islamic individuals would simply rent a modest apartment until
they could afford to buy a house outright, long term financial instruments similar to mortgages
and bonds are currently being marketed which are structured to avoid conceptualizing the
products as containing prohibited forms of Islamic finance such as interest. An example of such
an instrument would be a contract whereby payments on a building or home are treated as rent
for a set number of years, after which time the title will go to the tenant. If the same transaction
occurs in Western cultures where there is no cultural stigma against interest, accounting
standards would generally consider the contract to be an in-substance purchase with the initial
value of the asset and liability to be computed through present value techniques utilizing an
assumed rate of interest. As the IASB and FASB move to adopt leasing standards which will
use present value techniques to capitalize leases that were formerly considered operating, or pure
rentals, (Leone 2010) there is clearly no consideration being given to the fact that this type of
standard will simply make it more difficult to provide any form of accounting convergence
between Islamic and non-Islamic jurisdictions.
Paradoxes in the Fair Value Model
Accounting standard setters generally aspire to have a logical, consistent framework to
guide them in setting accounting standards that will be logical and well accepted. Still, a hard
lesson for standard setters world-wide to admit is that no accounting frameworks devised to date,
whether based on historical cost or fair value, have been without what should have been
predictable weaknesses, flaws, and counter-intuitive results when applied to real life situations.
Numerous accounting academics have addressed the flaws and inconsistencies in both historical
cost and fair value models of accounting (Middleditch 1918, Sweeney 1927, Schmidt 1930,
Benston 2006, Kvifte 2008)

Still, it seems that the inherent weaknesses are only admitted and
addressed by accounting standard setters in the aftermath of some embarrassing financial crisis.
The recent crisis in world financial institutions has brought to light counter-intuitive results when
liabilities are forgiven or valued at revised interest rates.
In the aftermath of the US subprime mortgage crisis in 2007, a Financial Crisis Advisory
Group (FCAG) comprised of senior executives from global companies was formed to counsel
the FASB and IASB on the role of accounting standards in that meltdown. The groups role was
apparently not only to collect facts, but also to serve as a buffer between the FASB, IASB, and
regulatory bodies who were concerned that too rapid a shift toward fair market valuation may
have heightened the impact of the crisis.
.
Even though some US banks were particularly
concerned about being forced to take charges against earnings during what they believe to be a
period of market irrationality, the body concluded that IFRS fair market standards in fact did
not heighten the crisis because many banks outside the US were still using amortized historical
cost, so that recording of loss recognition was actually delayed. (Goldschmid & Hoogervorst
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2009) Still, the FCAG noted the following problems with the fair market approach: 1)
difficulties in valuing illiquid assets, 2) delayed recognition of losses, 3) off balance sheet
accounting, and 4) excessive complexity (Bloom & Schirm 2010, 37). The Group encouraged
the FASB and IASB to avoid a hasty response to the crisis and to step up efforts to address
financial instruments and off-balance sheet reporting in general and the treatment of counter-
intuitive gains from changes in credit risks in particular. Unfortunately, the FASB and IASB
were not able to agree on a common approach for addressing financial instrument issues. The
IASB chose to split measurement, impairment, and hedging issues into three different projects
focused primarily on financial assets. The FASB chose to address assets and liabilities in a
single project (Lamoreaux 2010).
The problem of counter-intuitive gains on downgraded securities is not new, having been
a fly in the ointment for years in the FASBs attempts to write and adhere to a consistent
accounting conceptual framework. When an entity is experiencing severe liquidity problems, the
market rate of interest for that firm will include a risk premium. Computing the fair value of the
liability at this higher interest rate will result in a lower liability value even though the
organization still is legally liable for the same nominally designated payments. Marking the
liability balance down with a debit, results in a credit that a pure mark to market system would
record as a gain even though it hardly seems logical that they are really gains or positive
benefits from a credit downgrade. The Financial Accounting Standards Board (FASB)
initially recognized this counter-intuitive effect when its 1975 Statement No. 4 called for labeling
gains and losses on early extinguishment of debt as extraordinary even though the transaction is
neither unusual nor infrequent, the usual criteria for being designated as extraordinary.
Schroeder & Clark (1998, 480) attribute this turnaround from prior guidance under Accounting
Principles Board (APB) Opinion No. 26 (1972) to such events as a $37.5 Million gain reported
as ordinary income on the 1973 United Brands financial statements after a swap of debentures
with differing interest rates. In the process of converging US standards with IFRSs, the FASB
again reversed itself in its 2002 Statement No. 145, indicating that such gains and losses on early
extinguishment of debt would not be labeled as extraordinary.
In the case of troubled debt restructurings, the 1977 FASB Statement No. 15 held that no
gain or loss on either the asset or liability side was to be recognized for differences in interest
rates unless the total to be collected is less than the carrying value. On the asset side, this
treatment was criticized as allowing lending institutions to put off recognizing deteriorating
receivable values. In 1993 FASB Statement No. 114 changed the rules on the asset side to require
a determination of the present value based on the restructured payments discounted at the
original discount rate. On the other hand, instruments on the liability side of the restructuring
were still valued using the FASB No. 15 rules. Though the treatment was not consistent between
the asset and liability side, failure to establish a mirror image treatment between the debtor and
the creditor avoided the counter intuitive prospect of rewarding companies that have
deteriorating credit positions with an increase in income. FASB Statement No. 159 (2007) now
allows the fair value option for many US liabilities so that companies may report even greater
amounts of intuitive gains at the new effective interest rate.
Both the US experience and the report from the Financial Crisis Advisory Group (FCAG)
suggest that a fully consistent framework with all items listed at fair value is idealistic but not
practical. The FCAG concluded that for conceptual and/or practical reasons, a simplified mixed
attribute model, rather than a full fair value-through-earnings model, is preferable. (Goldschmid
& Hoogervorst, 2009, 5) Following the FCAG advice, the IASB proposed that changes in fair
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value resulting from credit risk devaluations be reported in Other Comprehensive Income rather
than be a part of the main income measure. Still, it is not clear whether this will really solve the
problem. Much of the academic accounting research over the last three decades has been built
on models which assume that financial markets are reasonably efficient and can see through
differences in financial statement presentation. Showing the gains and losses on financial
instruments, but simply in a different category is not likely to change market reactions so it may
be primarily a symbolic gesture, but at least these counter-intuitive gains will not flow to
Retained Earnings for potential distribution as dividends. A deeper, more fundamental problem
was suggested in the FCAG report when they noted .. in some circumstances, differences in the
focus of accounting standard setters and prudential regulators as they pursue their missions may
create conflicts (for example, transparency may not always be the best way to prevent a run on
the bank). (Goldschmid & Hoogervorst, 2009, 6-7) [underlines added for emphasis, not in the
original source] This comment suggests an inherent dilemma in accounting measurement to be
discussed further in the next section.
Philosophical and Scientific Measurement Problems Related to Accounting
Accountants attempt to measure and present information on economic activities.
Accounting systems have evolved as pragmatic solutions to practical business information needs.
It has been primarily in the last century that the accounting has emerged as an organized
profession, interested in and capable of self-reflection about its goals and conceptual
underpinnings. While the IASB and most countries with a regulated accounting profession now
have written conceptual frameworks, these have evolved primarily within the last three decades
and have very much continued with a practical focus. The frameworks typically try to explain
that there are limitations to any set of financial statements, espouse decision usefulness as the
primary rationale behind having financial statements, and provide a very general framework with
definitions of the types of items one would expect to see in a set of financial statements. While
terms such as relevance, reliability, representational faithfulness, and timeliness are typically
sprinkled through the conceptual framework statements, they could be seen primarily to serve as
public relations fodder to demonstrate the legitimacy of the processes used by the standard
setting bodies in the setting of new standards. While this approach is not surprising, and may be
useful to an extent, the accounting profession and its conceptual frameworks are largely lacking
in the type of pure analytical foundation one finds in fields like science, philosophy, or
economics even though the field of economics has been used in recent years as a basis for
considerable academic research.
Many paradoxes and dilemmas in accounting measurement are known; for example,
Moores 2009 survey article noted at least eight major areas which prevent the presentation of a
simple, precise, and noncontroversial bottom line. Still, known problems such as the
incorrigibility of allocations (Thomas 1969, Devine 1985), the ability to manipulate local or
departmental income through transfer pricing schemes (Moving 2007), and counter-intuitive
market adjustments on the liability side (Brubaker 2008, Katz & Reason 2008) have not been
systematically addressed in a way that tries to understand 1) what is the underlying nature of
these paradoxes, and further, 2) are the paradoxes separate and distinct or are they somehow
related? To tentatively approach the problem, the remainder of this paper will consider how
philosophers and scientists might look at the measurement problems in accounting along with a
brief assessment of some of the problems in the use of economic theory as the sole foundation
for assessing the benefits of accounting information.
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Philosophers emphasize issues of epistemology and ontology. Epistemological questions
focus on such issues as 1) how do we know things, 2) how can we be certain that what we know
is correct and true, 3) what are the necessary and sufficient conditions for knowledge, and 4)
what are the limits to our knowledge. As providers of information, accountants might use these
types of questions to speculate on to the degree to which the information is convincingly true.
Standard setters use the term true and fair as if is a goal that has been well-thought out and
agreed upon by consensus, when in fact accountants may not all have the same idea as to what
true and fair entails. An epistemological approach would focus on what true and fair really
means and to what degree does accounting information really achieve this goal or what would be
the conditions under which we could come closest to a true rendering of knowledge about the
entity? Ontological questions focus on whether or not certain entities or abstractions truly exist
and the relationship between entities or abstractions. In accounting we are trying to measure
characteristics of economic phenomena. If the economic phenomena we are attempting to
measure do not exist as unique and independent entities in the way we normally surmise, our
measurements may be biased or skewed as well. Scientists also attempt to measure aspects of
the phenomenal world, thus they have some experiences with the practical limitations of
measuring physical phenomena that might have some relevance to the accountants task of
measuring economic data. While philosophers rarely concern themselves with accounting, they
have produced a vast body of literature on the nature of reality and have recently begun to
engage in cross disciplinary discussions with scientists about the problems of measuring real
world phenomena. As accountants are in the business of measuring certain aspects of economic
reality, philosophical insights on the nature of the phenomenal world around us may be a place
to begin to get a handle on the nature of underlying measurement problems experienced in the
day to day accounting world.
Philosophy and the Self
Some fields of philosophy focus considerable attention on the issue of self vs. other. The
concept of duality in philosophy refers to the assumption that the self is separate and distinct
from the rest of society. While we all think in some respect that our self is an objective entity
that can be weighed, measured, and photographed, philosophers suggest that our self is not as
separate from the rest of society as we might first assume. While Western culture values self-
determination and independence, philosophers who have carefully reflected on the issue of
self suggest that no self can be truly independent of its social environment. The genetics
received from our parents and their parents before them determine our maximum potential height
and weight. The genetics received from our parents in some way reflects how healthy the
historical environment allowed them to be. Our current situation impacts how much we have
available to eat and therefore also impacts our height and weight. Further, our self esteem is
impacted to a greater or lesser degree by the messages we receive from family, customers, our
competitors, and media such as advertising. Our attitude stemming from our current
assessment of messages from these others result in pessimism or optimism that not only
impacts in turn the attitudes of those around us, but even the prices bid for stocks and other
economic goods. Modern philosophers refer to this inherent interdependence between the self
and the rest of society as non-duality (Loy 1988). The concept has distinct implications for
accounting measurement because it suggests that market values for specific economic entities
cannot be purely objective measures that are entirely separate and distinct from the psychological
make-up of market participants.
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While much of Western philosophy tends to be secular in nature, many of the early views
of non-dualism were grounded in religious and ethnic traditions. The Hindu Upanishads dating at
least 1000 years BCE are credited with a non-dualistic Advaita-Vedanta view in which the
individual and the divine are seen as one substance. (Deutsch 1980) While many early Greek
philosophers concentrated on finding the best approaches for individual happiness, some like
Plotinus (205-207 CE) posited views of non-duality, seeing all phenomena as part of a unitary
fabric. Some Buddhist philosophers go so far as to say all selves are inherently empty because
of the intricate web of interdependence of causes and effects in the universe. From this concept
of emptiness, Buddhist schools conclude that the only true route to happiness is to stop grasping
at the individual self and begin thinking about benefiting society and the universe as a whole. A
unique twist to the Buddhist line of analysis is that even though they claim that at the ultimate
level there is no such thing as an absolute self, the conventional self is not entirely abandoned
as a unit of analysis. Individuals still are held to ethical standards and behavior that extend
beyond mere rules but point toward a goal of benefiting society as a whole.
The concept of society, or the whole, being more important than the individual has
implications far beyond religious practice. The idealistic underpinnings of socialist and
communist movements have been founded on similar themes. The failures of some socialist and
communist movements are not necessarily evidence of a flawed goal, but could simply indicate
that the movements were high-jacked by individual political interests. Further, capitalistic
societies like the US or Germany have considerable socialistic tendencies in terms of income
redistribution through tax procedures while communistic countries like China are becoming
increasingly entrepreneurial. The section below on economics will return again to the theme of
individual vs. societal emphasis and the problems in maintaining one approach over the other.
Scientific Measurement Issues
Secular and even multi-cultural societies with diverse religious groups are often drawn
toward scientific rather than religious explanations for phenomena. Classical Newtonian physics
once held out the promise that all phenomena might be reduced to deterministic, mathematical
formulas. Formulas were devised for calculating speed, thrust, weight, and other useful data.
But toward the end of the 19
th
and the beginning of the 20
th
century and continuing to the
present, scientists have been faced with situations in which phenomena can only be measured
probabilistically, with strange, paradoxical effects occurring such that objects may appear to be
particles or waves depending on the measurement device used. Further, Werner Heisenbergs
(1970) uncertainty principle suggests that it is impossible to know precisely both the position and
momentum of a quantum object. Similar to the philosophical perspectives on non-duality,
quantum physicists have had to revise the Newtonian assumption that anything physical can be
measured if one only has the right tools. Instead the field of quantum mechanics currently holds
that at the subatomic level discrete objects do not exist.
Two of the most challenging problems in accounting are the determination of entity
boundaries and the allocation of costs to subunits. The whole issue of off-balance sheet
financing stems in part from the difficulty in devising any rules that will perfectly discriminate
what is inside vs. outside the corporate veil. This inability to clearly draw a line between self
and other may reflect the non-duality, emptiness, or non-existence of corporate units. Further,
Thomas (1969) and Devines (1985) work demonstrating the impossibility of truly defensible
allocations of joint cost to subunits within an entity could be said to merely reflect the underlying
nature of phenomena in the economic realm. If the primary paradoxes and problems in
- 245 -

accounting measurement do in fact stem from the paradoxical nature of the underlying units
being measured, another intriguing issue concerns the inability to simultaneously measure
position and momentum. While the international accounting scene is attempting to leave behind
historical costs, more accurate measurement of current fair values still may not tell us anything
about the momentum or future direction of the firm. Accountants have generally assumed that
the past is the best predictor of the future, but some theories of economics and finance would
suggest that the future will be determined not by the past, but only by new information not yet
known. The connection between accounting, finance, and economics will be explored more in
the following section.
Problems with the Capital Markets Paradigm
Not being initially driven by theory, accounting really has no unique underlying research
base of its own. Accounting researchers commonly borrow from other fields such as finance,
economics, and the branch of human psychology sometimes referred to as human information
processing. The greatest research prestige tends to flow toward theories that can use high levels
of mathematical or analytic rigor coupled with the ability to test the theories using real world
phenomena. Capital markets research has been a dominant research paradigm in accounting
since the mid to late 1970s. Based on an assumption that capital markets are reasonably quick
and efficient at adjusting to a new price based on new information, financial databases have been
used to analyze the relationships between accounting and management changes and stock prices.
By using large volumes of data, capital markets research attempts to ferret out very minute
correlations between accounting changes and stock prices which are statistically significant, even
if they are not necessarily large enough to be meaningful for future planning purposes.
Critics of capital markets research suggest that the very tiny differences detected in
market prices under different scenarios are unstable from one research study to another. Some
have even questioned the logic of using an assumption of general market efficiency as a tool to
measure instances when the market is really not efficient. Even Arrows (1950) famous
impossibility theorem found that if market players have different ideas about what is important,
there is no reason to assume that the equilibrium price necessarily results in a common sense
solution for maximum social welfare. Equilibrium depends on utility functions which evolve
from psychological and social processes that are fickle and not well understood. Lehman (1992)
noted in particular that capital markets research treats stock prices as deterministic without
considering the effect of social power structures. The finance and economics literature is based
on an assumption of rational behavior, but the major corrections which occur after market
bubbles suggest that irrational behavior can also be at play. A major focus of the Financial Crisis
Advisory Groups was whether market behavior might have been exacerbated by accounting
numbers. Further, FCAGs candid remarks about transparency and runs on the bank suggest an
interdependency or non-duality between accounting numbers and market behavior. The
opposite effect can also occur. During the Great Depression, President Roosevelts call for a
bank holiday during which all banks were reported to have been audited over a four day
period, which of course was impossible, may have reset public sentiment enough to stop
debilitating bank runs. Further, government stimulus packages often aim to do the same thing in
terms of resetting public pessimism. The issues discussed above suggest that while market value
may seem simple to the public, the non-duality and potential psychological effects of accounting
numbers on market participants makes the accounting undertaking much more complex that it is
typically painted in the business or popular press.
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It is a truism that there would be no difference between historical cost and market value
numbers without fluctuating prices. Yet the accounting profession has never really come to
grips with the underlying problems related to fluctuating prices whether based on assumed
average indices or based on specific prices. Moore (2009) reviewed key literature on inflation
which suggests no satisfactory solution has been found for inflation accounting. In economic
theory, holders of monetary assets are hurt the most during times of inflation and gain the most
during deflation while holders of nonmonetary assets or liabilities generally maintain a constant
level of purchasing power. Yet the current fair market model espoused by the IASB does not
correspond with the economic model at all. No purchasing power gains or losses are reported at
all for cash balances. Companies that adjust stock investments or plant and equipment for
market changes will recognize gains during periods of increasing prices. Yet it is not at all
clear who has gained. First, many of these assets will not be sold at todays prices but held for
use in operations. Second, a gain in nominal prices today will simply result in higher
depreciation and/or replacement costs later. If the so-called gains are moved through the
income statement to retained earnings, recording these phantom gains could permit the depletion
company resources through dividends prior to replacement of the assets. Further, constantly
changing the return on investment ratios investment base for market value fluctuations
compounds the difficulty in separating out performance changes attributable to management
actions versus actions of the overall market.
Classical economics is based on the assumptions that market participants are rational,
they seek to maximize individual utility, and competition leads to production of goods at the
lowest overall price. Game theory has recently challenged classical economic assumptions by
showing that if parties can agree to work toward a common goal the outcome can be higher than
under pure competition. (Fernandez & Bierman 1998; Gintis 2000) Still, Pounders (1992) model
of the prisoners dilemma suggests that it can be very difficult to keep players focused on a
common goal without someone cheating the system for short term gain. Further, there are
numerous challenges in getting economic players with diverse values and cultural backgrounds
to agree on a set of long term positive goals worth pursuing if it means giving up some short
term gain. Getting standard setting bodies around the globe to agree on a list of major objectives
or goals without some holding out for the possibility of doing things their own way is equally
challenging.
Summary and Implications
There are many reasons that deriving a single set of international accounting standards is
proving to be very difficult. First, ethnically and politically diverse regions are reluctant to give
up perceived control over their accounting systems. Second, accounting is culturally imbedded;
to ignore cultural views on issues such as interest and imputed interest creates a divide that
precludes any compromise. Third, the view that there should be just one single way to do
accounting is likely a myth. Accounting researchers have clearly shown that there are pervasive
allocation problems inherent in accounting where a single defensible technique simply does not
and cannot exist. Fourth, accounting practitioners and academics alike fail to recognize and
discuss the inherent complexities surrounding any attempt to measure accounting phenomena
that are not static but are continually enmeshed in an interdependent web of measures which
influence and are influenced by market participants.
It is customary for research papers and standard setters alike to offer solutions. The
history of accounting standard setting is to offer two solutions (A or B), to choose one approach
- 247 -

such as A, then wait for problems to arise, and switch to B. Then when problems arise with B,
standard setters switch to solution A or A1 again as the public has probably forgotten the prior
iteration anyway. Neither academicians nor the audience for accounting standards are likely to
be pleased with a conclusion that says there is no perfect solution. Nevertheless, this paper
concludes that accounting has some intractable problems that pose an ontological limit on the
degree to which accounting can provide as precise and perfect a bottom line as the general public
would like it to be.
On the other hand, this does not mean that there is nothing we can do, so we should just
throw up our hands and forget it. Quite the contrary, this paper suggests that the conclusion that
accounting is intermeshed in the overall societal milieu actually opens up whole new
possibilities. While it is worthwhile to look for at least a rudimentary level of consistency in
accounting standards, minor differences can be handled by simply being more forthright in
admitting that differences exist, e.g., capitalization vs. non-capitalization of interest inherent in
long term leases or lease/purchase agreements, and focusing on providing rubrics for conversion
to alternative presentations. Further, admitting and discussing the problems and paradoxes of
fair value adjustments for liabilities and assets alike could be used to increase interest in and
public ownership of accounting issues. Last but not least, in concentrating on deriving consistent
financial accounting standards when the inherent nature of the phenomena we are measuring
may not be amenable to a perfectly consistent solution, the major accounting professional bodies
have done very little to promote greater corporate responsibility for quality working conditions,
environmental responsibility, or other issues for the overall societal benefit. There is a difference
in perfect accounting by the rules and accountability. Refocusing from operational accounting
rules and procedures to weightier concepts of corporate accountability to society would open up
completely different problems and opportunities both philosophically and pragmatically. The
major standard setting and professional bodies around the globe pay lip service to promoting the
public interest, yet they do not seem to have any robust strategies for promoting corporate
accountability for public benefit to society as a whole rather than the narrow benefit of investors
and creditors. As a starting point, if accounting professional bodies could simply come to
publicly admit the limitations of the rules based approach to accounting and that there is a
difference in accounting vs. accountability, it might open up greater dialogue between
accountants and a multiplicity of stakeholders about the impact of corporations on society. Over
time technology experts and operations management professionals have taken over much of what
was once the accountants role of providing information for strategic business decisions.
Recognizing the opportunities for expansion from providing required reports and audits to one of
reporting on corporate social accountability could open up new areas for expansion of the
accounting profession. Still, it is possible that the current social structure which ties the
mainstream accounting profession to corporations who pay the salaries of auditors and fund the
major accounting standard setting bodies may prevent the accounting profession from becoming
more forthcoming about the limitations of accounting and preclude any movement to expand our
role from rote following of rules to one of focusing on the broader role of accountability to
society. If that is so, then in the long run, the accounting profession may stand to find itself in an
ever narrowing box while still to be developed organizational structures take on the broader role
of reporting on the social accountability of corporate entities.

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Ener gy I ssues and Poli cy I nSwi tzer land
Frank Moseley
Andrew Bertsch,
James Ondracek,
Abstract
Globally known for Swiss cheese, precision watches and clocks, protective banking laws
and other amenities and attributes, Switzerland has gradually worked its way up the world
rankings in many diverse categories. In addition to other salient issues facing this small but
highly developed central European country are two main positions within the energy sector.
These two positions are to promote energy efficiency and encourage the use of renewable
energy. As part of the European power grid the energy policy of generating electricity will be
reviewed in this paper. This paper will also review the Swiss energy mix and relate it to its
carbon dioxide footprint per capita and per GDP. The impact on Switzerlands energy policy
of the liberalization of the European energy market will be included.
Introduction
Switzerland, geographically, is located in the middle of Europe and is a relative small but
highly developed country. As a small country and as part of the western European power grid,
Switzerland's energy policy is aligned with that of its neighbors. In the summer it is able to
export electricity, but in winter it generally has to import it. In 2005 for the first time Switzerland
imported more electricity than it exported (SwissWorld.org). The energy issues most important
to Switzerland issues that are aligned with its neighboring countries have two main
components. They are to promote energy efficiency and encourage the use of renewable energy.
As part of the European power grid the energy policy of generating electricity will be reviewed.
This paper will also review the Swiss energy mix and relate it to its carbon dioxide footprint
per capita and per GDP. The impact on Switzerlands energy policy in the liberalization of the
European energy market will be discussed as well.
Policies and Issues
The International Energy Agency (2009) state that a comparison of estimates of energy
production measured in joules (J) or British thermal units (BTUs) and world population growth
has shown that a major change has occurred between 1850 and 2000. The growth in world
energy production intensity per capita has provided a wide variation. Prosperous countries such
as Switzerland with per capita GDP above $30,000 have been able to reduce their energy
consumption per capita while less developed countries with lower per capita GDP also have
lower energy consumption per capita. For example, petroleum consumption in Switzerland is
currently at the same levels as 2005, so there has not been a major change in Swiss petroleum
consumption over the past four years (Switzerland Country Review, 2010). Switzerland's per
capita electricity consumption is slightly higher than that of its neighbors, though well below that
in Scandinavia, the US and Canada. However, it is worth remembering that in many countries a
significant proportion of the electricity used is consumed by large industrial plants, which
- 251 -

Switzerland does not have. If it were unable to import goods produced by such plants and had to
make them itself, its per capita consumption would likely be higher (SwissWorld.org).
Switzerland is several years ahead of the U.S. in addressing the need to reduce
greenhouse gas emissions. Swiss citizens currently use only half as much energy per capita as
U.S. citizens, due in part to Switzerlands mild climate and its greater population density, which
tends to lower the amount of energy used for transportation (Energy Design Update, 2007).
Switzerlands electricity is almost entirely carbon-neutral; nearly 60% of its electricity is
hydroelectric, with the balance provided by nuclear plants. On average, cars driven in
Switzerland are much smaller and more energy-efficient than those purchased in the US.
Additionally, Swiss citizens are diligent recyclers; out of 450 kilograms of household waste
generated per capita annually in Switzerland, 350 kilograms are recycled and 100 kilograms are
incinerated (Energy Design Update, 2007).
The global average per capita use of all forms of energy is 2,000 watts continuous.
Energy use ranges widely across the global as Africans and Bangladeshis consume an average of
less than 500 watts continuous per capita whereas Americans average 12,000 watts continuous
per capita. A public/private consortium called the 2,000-Watt Society has set the goal of
reducing Swiss energy consumption to 2,000 watts per capita by 2100 (Energy Design Update,
2007).

In addition to the previously stated petroleum consumption rate holding steady for the
last five years, petroleum production has decreased from 2006 to 2009. Switzerland is producing
less petroleum. On the other hand, Switzerland is consuming more natural gas today than in the
past five years. All of their natural gas is imported as they do not produce any domestically.
Switzerland has increased nuclear and hydroelectric production as well as focused on renewable
energy supplies since 2005 (Switzerland Country Review, 2010).
Measured in thousands of tons of oil equivalent, the International Energy Agency (2009)
states that Switzerland consumes over 25,718 (thousand tons of oil equivalent or ktoe) of energy.
Imported oil and refinery products make up 40% of the total, 10% imported natural gas, nuclear
power 28%, imported coal less than 1%, other renewable sources other than hydropower about
8% and hydropower 12%.
Switzerlands longest serving and important source of renewable energy has been
hydropower. The long term potential of Switzerlands new renewables such as solar, biomass,
wind and geothermal are sound but vary in their use for economic reasons. One of the goals of
Switzerlands energy policy is to increase the amount of electricity production from renewables
to 10% of the countrys present day electricity consumption, by 2030. Today about 56% of
Switzerlands electricity production comes from renewable sources with hydro as the largest
contributor accounting for 96% of all renewable energy sources.
The Economist Intelligence Unit (2007) reports that hydropower is the only domestic
energy source in Switzerland. Switzerland imports about 80% of total energy consumption,
mostly crude oil, heating oil, gas and electricity generated abroad. Domestic electricity
production is dominated by hydroelectric power stations, which provide almost 60% of the
demand. Five nuclear power stations provide close to 40% and the remainder is supplied by
conventional thermal stations. In a referendum in 1990, the Swiss voted for a ten-year
moratorium on the construction of nuclear power plants, but rejected a proposal to abandon
nuclear power altogether. This was confirmed by the clear rejection of two antinuclear initiatives
in May 2003. A new Nuclear Energy Law came into force in February 2005. The revised law
- 252 -

does not prohibit the construction of new nuclear power stations, although any decision on new
plants will be subject to a referendum. The government is currently working on an energy action
plan mapping out its goals for the energy sector, as the government forecasts supply shortfall
from 2018. New gas power plants are under discussion; nuclear energy remains a major point of
contention in Switzerland (Economist Intelligence Unit, 2007).
The Swiss Federal Office of Energy (2008) states Switzerlands per capita electricity
consumption is higher than that of its neighbors but below that of Scandinavia. Switzerland
obtains its electric power from a number of different sources. The SFOE (2008) also states, for
example, the Emosson dam and reservoir in Canton Valaia, a hydroelectric dam which generates
about 140MW of electrical power or about 900 million KW hours per year is a significant supply
source. New forms of renewable energy contribute about 6% towards Switzerlands production
of electricity.
In terms of the liberalization of the European energy market, in which Switzerland must
compete, liberalization is likely to bring down the prices of fossil fuels. The liberalization of
electricity and gas was in 2004 and the energy market was fully liberalized in 2007. This will
have a negative effect on the environment and it could undermine the CO2 emissions policy of
Switzerland. Their stated policy is to cut its carbon dioxide emissions by 2011 to 90% of its 1990
level (SwissWorld.org).

The SFOE (Swiss Federal Office of Energy, 2008) is working closely with the Swiss Gas
Industry to evaluate the impact of the liberalization of the EU gas markets and gas agreements in
Switzerland.
How does a countrys energy mix affect its CO2 emissions? For data and research
analysis the UN Statistics Division, the IMF, the IEA and the U.S. Energy Information Agency
have complied data on CO2 emissions per capita and per unit of GDP of various industrialized
and developing countries, this is compared with a countrys energy mix.
Francis M. Vanek and Louis D. Albright (2008) present an energy systems tool in their
text Energy Systems Engineering. This equation was developed by economist Yoichi Kaya and
known as the Kaya equation. It is a tool for disaggregating various factors that contribute to
overall emissions of CO2. It can be applied to an individual country or the world as a whole.
The equation incorporates population, level of economic activity, level of energy consumption,
and carbon intensity. The stated equation is:
CO2 (emissions) = (P) x (GDP/P) x (E/GDP) x (CO2/E)
For an individual country, P is the population of the country, GDP/P is Gross Domestic
Product per capita, E/GDP is energy intensity per unit of GDP, and CO2/E is the carbon
emissions per unit of energy. The latter three terms on the right side of the equation are
performance measures; the last two terms are metrics that need to be lowered to improve the
emissions going into the environment. It should be noted that the CO2 is the emissions emitted to
the atmosphere not CO2 sequestrated by a country. Policy makers should understand that a
country must carefully control and monitor all the measures to ensure that CO2 levels remain
constant or are reduced.
The International Energy Agency (2009) advises that an attractive combination for a
country to achieve would be low energy consumption and a low carbon energy mix. Switzerland
comes out the lowest of developed countries in terms of CO2 emissions intensity. Its CO2 per
capita measured in tons of CO2 per capita is 6.1, the U.S.A. is 20.4. Measurements of CO2 per
GDP measured as tons CO2 per $10,000 GDP, the Swiss is 1.1, the U.S.A. is 5.2. Four other
- 253 -

developed countries have emissions below 2 tons CO2 per $10,000 of GDP, Switzerland,
Sweden, Iceland and France. These countries have either high electricity generation from nuclear
sources or use hydropower sources.
Conclusions
As was stated earlier, Switzerland has the lowest CO
2
emissions per GDP of any
developed nation and the lowest per capita CO
2
emissions of the Western economies.
Switzerland accomplishes these statistics through its high percentage of electricity generation by
nuclear and hydropower sources. Coal is used in the country primarily in cement factories and
foundries.
Switzerland is cooperating with the IEA (International Energy Agency, 2009) to increase
their efforts to reduce emissions. Oil use is the cause of more than three quarters of Switzerlands
CO
2
emissions which indicates more effort needs to focus on transport and heating. According to
the SFOE (2008), Switzerland is considering taxing carbon based fuels. A tax of 12 Swiss Francs
($10.75) on heating oil and gas will be applied to every ton of CO
2
emitted. The IEA
recommends raising these taxes further. The IEA acts as energy policy advisor to Switzerland as
well as to 26 countries in an effort to insure reliable and clean energy. As a wealthy country
Switzerland has taken a leading role in pointing the way of using renewable energy and
improving energy efficiency.

- 254 -

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McGraw-Hill Publishing

- 255 -

Ener gy I ssues and Poli cy I nTur key
Frank Moseley
James Ondracek
Andrew Bertsch
Abstract
Turkey is geographically, politically, and officially part of Europe and Asia. Due to its
proximity to the Caspian Basin and the Middle East, Turkey lies in close proximity to over 70%
of the worlds proven oil and gas reserves. As a geographic bridge close to the energy source
countries and the European energy consumer markets, Turkey can play a significant role in
providing energy diversification of the various supply sources and routes to the consumer
markets. The issue of energy security through diversification of energy sources and routes is in
alignment with all of Europes desire. This paper will include an examination of Turkeys energy
mix and comment on how that may affect its carbon dioxide footprint per capita and per GDP.
Along with its extensive coastline and proximity to the African continent, Turkey is positioned to
be a major player in the global energy industry.
Introduction
Turkey lies in close proximity to over 70% of the worlds proven oil and gas reserves due
to its location to the Caspian Basin and the Middle East. As a geographic bridge close to the
energy-producing, energy-source countries, and the European energy consumer markets, Turkey
can play a role in providing energy diversification of the various supply sources and routes to the
consumer markets. The issue of energy security through diversification of energy sources and
routes is in alignment with Europe. This paper will also review Turkeys energy mix and
comment on how that may affect its carbon dioxide footprint per capita and per GDP. Turkey,
with a population of around 75 million people and a GDP of over $406 Billion (PPP GDP $506
Billion) is a key player in bridging energy access from the Middle East to Europe (UN Statistics
Division, 2007). The International Energy Agency (2007) reflects a comparison of estimates of
energy production measured in joules (J) or British thermal units (BTUs) and world population.
It has shown that growth has changed immensely since 1850 to 2000. However, the growth in
world energy production intensity per capita has provided a wide variation. Some developed
countries such as Switzerland with per capita GDP above $30,000 have been able to reduce their
energy consumption per capita while less developed countries, such as Turkey, with lower per
capita GDP, about $5,410, also have lower energy consumption per capita and therefore produce
less total metric tons of CO2 per capita.
Policies and Issues
The U.S. Library of Congress (2007) has Turkey well endowed with energy and mineral
resources. Turkeys mountainous terrain provides a variety of hydroelectric sites, however they
are distant from the population centers. Commercially exploitable deposits have been located but
the country is only partially surveyed. The speed of exploitation has been fairly slow. The
International Energy Agency (2007) has oil consumption at 35%; this accounted for the majority
- 256 -

of Turkish energy consumption by 2008. Natural gas followed with 29% of consumption, coal
comprised 25%, followed by hydroelectric and renewable consumption at 11%. Nuclear electric
energy consumed was zero in 2008, although 5,000MW of installed nuclear power capacity is to
be commissioned after 2012.
During the 1970s Turkey experienced a number of power blackouts including rotating
blackouts. Turkey had experienced a shortage of foreign exchange which had the effect of
limiting the amount of imported oil and fuel supplies. The Turkish administration in the 1980s
implemented a build, operate, and transfer scheme (BOT) under which foreign investors could
provide capital and technology and operate these plants for a number of years which provided
revenues that would ultimately payout. The plants would then be transferred to the government.
Although the second most important resource of energy is lignite, the resource has high amounts
of water and sulfur making it difficult to burn. Nevertheless, there are potential deposits of over
6.5 billion tons to provide fuel for electricity generation.
The state-owned oil company, Turkish Petroleum Corporation (TPAO), Shell, and Mobil
control most petroleum production. TPAO increased domestic oil exploration in the hope of
increasing output. Escalating conflicts with the Kurdish forces in southeastern Turkey has caused
some Western operators should as Mobil to cease operations at the 3,200 bpd Selmo field. The
International Energy Agency (2007) states the firm is the largest oil producer pumping more than
60,000 bpd which is relatively small by Mideast standards.
The International Energy Agency (2007) also states there are five refineries with a total
capacity of over 700,000 bpd meet the countrys need for petroleum products. Although most of
the refinery output is in government hands, the fifth refinery is jointly owned by Mobil, Shell,
BP and a Turkish company.
Turkey is a major player in the important role of providing transit of oil and gas supplies.
From Russia in the Caspian region through to the Middle East with transit to Western Europe
Russian and Caspian oil are shipped via tanker through the Bosporus Straits. Turkeys
Mediterranean port at Ceyhan allows Iraq and Azerbaijan oil to be shipped to Western Europe.
With a rapidly growing economy, Turkey has become one of the more dynamic energy markets
in the region. Turkey is expected to have a 6% to 8% growth rate in energy consumption for the
coming years. The IEA estimates the primary energy consumption of Turkey is to grow from 126
Million t.o.e. to 222 million t.o.e. in 2020. At present about 30% of the total energy demand is
met by domestic sources, while the rest is satisfied by a diverse portfolio of both type and orgin.
An important European Union (EU) policy that Turkey values are that it was declared a
candidate for accession to the EU in Helsinki Summit in 1999. The EU recognizes their current
reliance on Russia as a major energy source. Turkey is primed as the energy corridor in the
region for Middle Eastern sources (Tekin and Williams, 2009). The context of EURussian
energy relations results in the EU recognizing Turkeys potential value as a relatively secure and
independent route for importing non-Russian energy supplies. Specifically, the EU has signed an
intergovernmental accord supporting the Nabucco gas pipeline, which could transform Turkey
into a major conduit for up to 35 billion cubic meters (bcm) of various non-Russian gas supplies
to Europe (Tekin and Williams, 2009).
Turkey is well positioned as a major energy corridor to Europe due to its geographical
proximity to energy-rich states such as Russia, the Caspian Basin, and the Persian Gulf. This
position also complements Europes relatively favorable terms of access to North African
sources (Tekin and Williams, 2009).
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However, Turkey faces some difficult decisions of its own. For example, one could
argue that Turkeys ability to act independently in its role to act as an energy conduit is heavily
constrained by its own dependence on Russia for over three fifths of its own gas consumption as
reported by Tekin and Williams (2009). Currently, the BTC pipeline is projected to reach 1.5
million barrels per day. This pipeline connects Azerbaijans offshore oil territory to European
customers via Turkey (Tekin and Williams, 2009). In addition and beginning in 2007, the BTE
pipeline began to carry natural gas from Azerbaijan for shipment via Georgia to Turkey. Once in
Turkey, the natural gas could be linked to various nodes of the European gas grid (Tekin and
Williams, 2009).
Continuing with the discussion of pipelines and Turkeys role in facilitating a corridor to
Europe Tekin and Williams (2009) report that Greece and Turkey built a two-way pipeline
interconnection able to transport up to 12 bcm of natural gas to Europe primarily from the
Caspian region. Additionally, this line is expected to reach Italy and possibly even Albania,
Macedonia, and Bulgaria, which are all signatories to the Southeast European Energy
Community Treaty. In the past 30 years, Iraq has been a major exporter of crude oil via the
KirkukYumurtalik pipeline that terminates in Ceyhan, Turkey. Post-occupation sabotage in Iraq
had rendered the pipeline largely inoperable until late 2007 (Tekin and Williams, 2009).
Another major alternative source of European gas is Iran, which holds the worlds third
largest reserves. According to the European Union in 2005, Iranian gas has been estimated as
capable of meeting more than 10% of the EUs medium term needs. An underlying but nontrivial
concern are bilateral TurkishIranian disputes which cast an uncertain light on the viability of a
Turkish transport route of Iranian gas bound for Europe (Tekin and Williams, 2009).
The EU recognizes Turkeys potential value as source of secure transit of non-Russian
energy supplies. This increases Turkeys potential accession to the EU. An energy corridor
through Turkey seems to offer a feasible mode of connecting a greater diversity of suppliers to
Europe via secure and independent routes (Tekin and Williams, 2009).
Turkeys energy policy has made much progress in meeting these EU accords in order for
it to be admitted to the EU. Progress has been made in restructuring and liberalizing the
electricity and gas markets in pursuance of directives from the EU. An independent regulator,
The Energy Market Regulatory Authority (EMRA) has been established to be in charge of
regulation and supervision of electricity, gas, petroleum and LPG markets.
In regard to renewable energy sources, the law on the Utilization of Renewable Energy
Sources was adopted in 2005. Turkey believes in fully utilizing its domestic resources of coal
and lignite reserves. Hydro and other renewable resources such as wind and solar will also be
developed in the coming years.
How does a countrys energy mix affect its CO2 emissions? For data and research
analysis the UN Statistics Division (2007), the IMF, the IEA (2007), and the U.S. Energy
Information Agency have complied data on CO2 emissions per capita and per unit of GDP of
various industrialized and developing countries, this is compared with a countries energy mix.
Francis M. Vanek and Louis Albright present in their text Energy Systems Engineering
(2008), an energy systems tool developed by economist Yoichi Kaya and known as the Kaya
equation. This equation is a tool for disaggregating various factors that contribute to overall
emissions of CO2. It can be applied to an individual country or the world as a whole. The
equation incorporates population, level of economic activity, level of energy consumption, and
carbon intensity. The stated equation is:
CO2 (emissions) = (P) x (GDP/P) x (E/GDP) x (CO2/E)
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For an individual country, P is the population of the country, GDP/P is Gross Domestic
Product per capita, E/GDP is energy intensity per unit of GDP, and CO2/E is the carbon
emissions per unit of energy. The latter three terms on the right side of the equation are
performance measures; the last two terms are metrics that need to be lowered to improve the
emissions going into the environment. It should be noted that the CO2 is the emissions emitted to
the atmosphere not CO2 sequestrated by a country. Policy makers should understand that a
country must carefully control and monitor all the measures to ensure that CO2 levels remain
constant or are reduced.
Conclusions
The International Energy Agency (2007) advises an attractive combination for a country
to achieve would be low energy consumption and a low carbon energy mix. In an earlier paper
results found Switzerland comes out the lowest of developed countries in terms of CO2
emissions intensity. Its CO2 per capita measured in tons of CO2 per capita is 6.1, the U.S.A. is
20.4. Turkey had a measurement of 3.6 in 2006. Measurements of CO2 per GDP measured as
tons CO2 per $10,000 GDP, the Swiss measurement is at 1.1, the U.S.A. is at 5.2, and Turkey is
at 5.2. Although Turkey has made progress in addressing its energy problems some policy
makers believe energy efficiency and conservation needs more attention. Industry is the major
user of energy and growth in use is expected to increase if left unconstrained. The most energy
intensive industries are iron and steel, food processing, textiles, cement bricks and ceramics.
Policy makers believe a shift in relative prices to reflect long run costs could induce an industrial
restructuring that could take Turkeys energy endowment into account. Another area for policy
makers to review is the management of the use of energy in the rural economy.

- 259 -

References

UN Statistics Division (2007) retrieved from http://data.un.org/Search.aspx?q=turkey
International Energy Agency (2007) retrieved from http://search.atomz.com/search/?sp-q=turkey&sp-
a=sp10029401&sp-p=all&sp-f=ISO-8859-1
Tekin and Williams (2009) EURussian Relations and Turkeys Role as an Energy Corridor, EUROPE-ASIA
STUDIES, Vol. 61, No. 2, March 2009, 337356
U.S. Library of Congress (2007) retrieved from
http://www.loc.gov/fedsearch/metasearch/?cclquery=turkey#query=(turkey)&filter=pz:id=lcweb|amm
em|catalog|ppoc|thomas
Vanek, F. & Albright (2008) Energy Systems Engineering, Evaluations and Implementation, McGraw-Hill
Publishing

- 260 -

A Compar ati ve Study of Lear ni ng Styles of
Busi ness Students i n The Uni ted States and the
Domi ni can Republi c
Bijayananda Naik
Deb Tech
Miguelina Franco
Abstract
The Index of Learning Styles (ILS) instrument based on the Felder-Silverman Learning
Style Model was used to compare distribution of learning styles of business students in the
United States and the Dominican Republic. Results show that majority of business students have
a balanced learning style in each of the four learning styles dimensions examined. Difference in
learning style preference between United States and Dominican Republic was statistically
significant only for the sensing-intuitive and active-reflective dimensions of the Felder-
Silverman model. The knowledge of statistically significant difference in learning styles of the
U.S. and non-U.S. students may help American faculty pay attention to special needs of
international students attending universities in the U.S.
Introduction
Research in the field of educational psychology indicates that individual learning style
affects educational achievements of a student in addition to factors such as intellectual ability
and aptitudes (Loo, 2002a). Different researchers have defined learning style in slightly different
ways. According to Loo (2002a), learning style refers to the consistent way in which a learner
responds to or interacts with stimuli in the learning context. Felder (1996) claims that students
have different learning styles which he defines as characteristic strengths and preferences in the
ways they take in and process information. Campbell (1991) cites Gregorc (1979) who defines
learning style as the distinctive behaviors which serve as indicators of how a person learns from
and adapts to his environment.
A number of articles have reported studies related to distribution of learning styles of
students in accounting and business education. Loo (2002a) discusses the results of studies by
Kolb (1984), Baldwin and Reckers (1984), Baker et al. (1986), Brown and Burke (1987),
Reading-Brown and Hayden (1989), and Holley and Jenkins (1993). These results indicate
varying proportion of students falling under different learning styles. Loo (2002b) performs a
meta-analytic examination of eight studies involving business majors and concludes that Kolbs
(1984) learning styles are not equally distributed. A study of the learning styles of business
students by Biberman and Buchanan (1982) indicated that predominant learning styles were
different for different business disciplines. Loo (2002a) studied the difference in learning style
distribution between hard and soft business majors and between male and female business
students. He found an equal distribution of learning styles for the soft majors but not for the hard
majors. He did not find any significant difference in distribution with respect to gender.
However, a study by Keri (2002) of college students found that predominant learning styles of
male and female students were different. A study of business majors by Wynd and Bozman
- 261 -

(1996) indicated that the learning styles of students with higher GPA differed from those of
students with lower GPA. The implication of differing learning styles is that different students
may prefer and use different learning methods that match their learning styles.
Just as students may prefer learning methods that match their learning styles, teachers
seem to prefer teaching styles that match their own learning styles. This possibility implies that
teachers tend to teach the way they themselves learn the material (Campbell, 1991). If
predominant learning styles of students in a class differ markedly from the learning style of the
teacher, a serious mismatch may occur between the teaching method used by the teacher and the
preferred learning methods of the majority of the students. Charkins et al. (1985) suggest that
the greater the mismatch between teaching style and learning style, the lower is the achievement
of students in a course. Felder (1993) argues that if the teaching style in a course matches
learning styles of students, it helps them to retain information longer, to apply material learned
more effectively, and to foster a positive post-course attitude. Teachers who are aware of the
distribution of the learning styles of their students can orient their primary teaching methods to
the students with the modal learning styles (Bell, 1998) and diversify their teaching methods to
meet the needs of other students.
Although knowledge about the distribution of learning styles of students may help
teachers fine-tune their teaching methods, sufficient information about the learning styles of
business students seems to be lacking. Perceiving a need for such information, Naik (2009)
studied the learning styles of undergraduate business students at the Beacom School of Business,
University of South Dakota using the Index of Learning Styles (ILS) instrument (Felder, 1996)
based on the Felder-Silverman Learning Style Model (Felder and Silverman, 1988) and
presented the results at the 16
th
Annual South Dakota International Business Conference in
October 2009. The results showed that majority of the business students who took part in the
study preferred sensing, visual, active, and sequential learning styles. An examination of the
gender difference in learning styles indicated that gender difference was statistically significant
only in the visual-verbal dimension. Attendees at the presentation asked whether there was any
difference in the learning styles of the U.S. students and international students. This paper
presents the preliminary results of a research to answer the question. The objective of the current
research presented in this paper is to investigate whether the learning style distributions of
business students in the U.S. are significantly different from that of business students in a
developing country such as Dominican Republic. If significant differences in the learning styles
of U.S. and non-U.S. students are observed, American faculty may consider enhancing their
teaching styles to meet the needs of international students studying in the U.S.
A brief description of the model used for determining the learning styles of business students
is described next followed by the methodology used in this research. The results of the analysis
of data are then presented and discussed. Finally, a conclusions section wraps up the paper.
Felder-Silverman Learning Style Model
A number of learning style models has been devised by researchers to identify individual
learning styles of people. Felder (1996) briefly describes the essential elements of four of these
learning style models, viz., the Myers-Briggs Type Indicator, Kolbs Learning Style Model,
Herrmann Brain Dominance Instrument, and Felder-Silverman Learning Style Model. Felder
and Silverman (1988) synthesized the results of a number of studies to develop their model
which they claim to be particularly relevant to science education. Felder-Silverman Learning
Style Model classifies students into five dichotomous categories: sensing learners or intuitive
- 262 -

learners, visual learners or verbal learners, inductive learners or deductive learners, active
learners or reflective learners, sequential learners or global learners.
Felder (1996) with Barbara Solomon has developed an Index of Learning Styles (ILS)
instrument that classifies students on four of the five dimensions of Felder-Silverman Model (it
excludes the inductive-deductive dimension). The ILS can be administered either by a printed
copy of the survey questionnaire or on-line on the Web (Felder and Soloman, 1998). The
characteristics of the four dimensions of the ILS are briefly explained next.
Sensing learners prefer learning facts and solving problems by well-established methods.
They dislike complexities and surprises such as being tested on material not explicitly covered in
the class. They understand material better with real-world examples and applications. They also
like brain storming with group-mates. Intuitive learners, on the other hand, are comfortable with
abstract ideas, mathematical formulations, and innovative methods of problem solving. They
dislike memorization and routine calculations. In the extreme cases, sensing learners may rely
too much on memorization without understanding, and intuitive learners may not pay attention to
details and be careless in calculations.
Visual learners like pictures, diagrams, flow charts, photographs, videos, and
demonstrations. They like color-coding, highlighting, and drawing boxes, circles, and lines to
show connections. Verbal learners, on the other hand, are comfortable with written or spoken
explanations and like to outline material in their own words. They like to discuss material in
groups, and explaining and listening to each other.
Active learners prefer hands-on activities, group discussions and group problem-solving.
They dislike simply sitting in the class and taking notes. Reflective learners tend to think about a
concept or problem quietly first. They like to study and solve problems alone, take notes and
summarize material. In the extreme cases, active learners can jump into activities prematurely
without thinking while reflective learners may never get anything done.
Sequential learners first understand the connection between parts in sequential steps to
understand the whole. On the other hand, global learners gain an overall understanding first by
absorbing material at random and then see the significance of the parts to the whole. Sequential
learners dislike teachers who jump around topics and skip steps. They learn new topics better
when related to that already learned. Global learners can solve complex problems faster but may
not be able to explain how they did it. In the extreme cases, sequential learners may know a lot
about specific aspects of a topic but have difficulty in relating them to different aspects or
different topics. Extreme cases of global learners may not have any clue of what is going on
until the light bulb of the big picture turns on.
Although the dimensions of the Felder-Silverman model used in the ILS have been
presented as dichotomous categories, Felder (1993) emphasizes that these dimensions should be
treated as continua and not as either/or categories. He argues that a students preference could be
represented on a scale of weak, moderate or strong in one side of a dimension. He also points
out that learning style preferences for a particular student may vary with subject and learning
environment, and can change over time. The objective of this research is to investigate whether
the differences in the learning environment in different countries lead to significant differences
in learning styles of business students. A brief description of the methodology used in this
research is presented in the following section.
Research Methodology
- 263 -

For this research, a sample of 297 undergraduate business students of the Beacom School
of Business, The University of South Dakota, Vermillion, South Dakota previously reported by
Naik (2009) was used. In addition, a limited sample of 39 business students of Universidad
Iberoamericana, Santo Domingo, Dominican Republic was used. The Index of Learning Style
(ILS) instrument (Felder and Soloman, 1998) based on Felder-Silverman Learning Style Model
was selected since it was previously used by Naik (2009). The survey instrument administered
was made anonymous and voluntary.
The ILS was administered to the students in the form of a printed questionnaire. The ILS
has 44 questions and takes about 10 minutes to complete. The responses to the learning style
questions were then entered on-line using the Web for each respondent. The responses for a
particular student were processed on-line and the result of the analysis was displayed as a report
for each respondent. Thus 297 printed reports corresponding to 297 students from the U. S. and
39 printed reports corresponding to 39 students from Dominican Republic formed the basis of
the data analysis and results presented next.
Data Analysis and Results
The analysis report for a student obtained from on-line processing of survey responses
consists of scores on a scale of 1 to 11 (odd numbers only) for one of the dichotomy of each of
the four ILS dimensions. A score of 1 to 3 in either dichotomy of a dimension indicates a
learning style preference that is fairly balanced in that dimension. A score of 5 to 7 indicates a
moderate preference in the associated dichotomy of the concerned dimension. A score of 9 to 11
indicates a strong preference. Thus, there are five possible categories in each of the four
dimensions to which a student can belong. For example, in the visual-verbal dimension, these
five categories are strong visual, moderate visual, balanced visual-verbal, moderate verbal, and
strong verbal. As an example, assume that the analysis report for a hypothetical student contains
the following scores: 3 reflective, 5 sensing, 7 visual, and 9 global. Thus, the hypothetical
student belongs to the following categories: balanced active-reflective category in the active-
reflective dimension, moderate sensing category in the sensing-intuitive dimension, moderate
visual category in the visual-verbal dimension, and strong global category in the sequential-
global dimension.
The analysis reports for the 297 students from the U.S. and 39 students from the
Dominican Republic were analyzed and the percentage of students belonging to each of the five
categories in each of the four dimensions for each country were calculated. Table 1 shows the
percentages of students belonging to the five categories of sensing-intuitive dimension for each
country. The corresponding results for the visual-verbal, active-reflective, and sequential-global
dimensions are shown in Tables 2, 3, and 4 respectively.

Table 1: Row Percentages for the Sensing-Intuitive Dimension
Strong
Sensing
Moderate
Sensing
Balanced
SEN-INT
Moderate
Intuitive
Strong
Intuitive
U.S. 19.19 41.08 32.66 5.72 1.35
Dominican
Republic
12.82 17.95 58.97 7.69 2.56
Table 2: Row Percentages for the Visual-Verbal Dimension
Strong
Visual
Moderate
Visual
Balanced
VIS-VRB
Moderate
Verbal
Strong
Verbal
U.S. 30.98 29.63 34.01 5.05 0.34
Dominican
Republic
25.64 23.08 46.15 2.56 2.56
- 264 -

Table 3: Row Percentages for the Active-Reflective Dimension
Strong
Active
Moderate
Active
Balanced
ACT-REF
Moderate
Reflective
Strong
Reflective
U.S. 4.71 20.54 63.30 9.76 1.68
Dominican
Republic
15.38 30.77 48.72 2.56 2.56
Table 4: Row Percentages for the Sequential-Global Dimension
Strong
Sequential
Moderate
Sequential
Balanced
SEQ-GLB
Moderate
Global
Strong
Global
U.S. 5.39 30.30 54.55 8.75 1.01
Dominican
Republic
2.56 28.21 56.41 10.26 2.56

The results presented in Tables 1 through 4 are also presented as bar charts in Figures 1
through 4 to allow visual comprehension of the differences in the distribution of learning styles
of business students between the U. S. and the Dominican Republic. Figure 1 shows significant
country related difference in learning style distribution along the sensing-intuitive dimension.
Country related difference seems to be the least along the sequential-global dimension as shown
in Figure 4. Some country related differences are noticeable in the other two dimensions as
shown in Figures 2 and 3.
Although the bar charts show some country related differences in the learning style
distributions, it is not clear whether these differences are statistically significant. A chi-square
test of independence was performed for each of the four learning style dimensions to see if
county played a role in determining learning style preferences. The null and alternative
hypotheses are stated as follows:
H
0
: The learning style preferences are independent of country
H
a
: The learning style preferences are not independent of country

Figure 1: Comparison along Sensing-Intuitive Dimension

Figure 2: Comparison along Visual-Verbal Dimension
0
10
20
30
40
50
60
70
P
e
r
c
e
n
t
a
g
e
SensingIntuitive
U.S.
DominicanRepublic
- 265 -

With five categories of preferences in each learning style variable and two categories in
the country variable, the degree of freedom is 4. Assuming a significance level 0.05, the critical
value of the chi-square test statistic to reject the null hypothesis is 9.48773 (taken from the
chi-square table).

Figure 3: Comparison along Active-Reflective Dimension

Figure 4: Comparison along Sequential-Global Dimension
0
5
10
15
20
25
30
35
40
45
50
P
e
r
c
e
n
t
VisualVerbal
U.S.
DominicanRepublic
0
10
20
30
40
50
60
70
P
e
r
c
e
n
t
ActiveReflective
U.S.
DominicanRepublic
- 266 -

The chi-square test statistic values and p-values calculated for the four learning style
dimensions are shown in Table 5. It can be seen from Table 5 that the null hypothesis is rejected
for the sensing-intuitive and the active-reflective dimensions of the learning style distribution
since the corresponding values of the chi-square statistics are greater than the critical value. The
null hypothesis is not rejected and the alternative hypothesis is accepted for the visual-verbal and
the sequential-global dimensions since the chi-square statistics are less than the critical value.
Thus, the data analysis seems to suggest that country of the students has an influence on the
distribution of learning styles only along the sensing-intuitive and active-reflective dimensions.
However, the statistical inference drawn here should be considered with caution because of the
small size of the sample from the Dominican Republic.

Table 5: Chi-Square Test Statistic Values and p-values
Dimension Chi-Square Test Statistic p-Value
Sensing - Intuitive 12.81319 0.01223
Visual - Verbal 5.59311 0.23167
Active - Reflective 11.59641 0.02062
Sequential - Global 1.40183 0.84388
Discussion
Since the data analysis suggests statistically significant differences in learning style
distributions between the U.S. and the Dominican Republic along the sensing-intuitive and
active-reflective dimensions, it is worthwhile to examine figures 1 and 3 to understand the nature
of the differences. Figure 1 shows relatively greater proportion of strongly and moderately
sensing students in the U.S. Figure 3 shows greater proportion of strongly and moderately active
students in the Dominican Republic. It is beyond the scope of this research to investigate the
cultural and educational environmental factors that may be contributing to the observed
differences in learning styles between the U.S. and the Dominican Republic. The preliminary
research presented here simply suggests that statistically significant differences may be observed
0
10
20
30
40
50
60
P
e
r
c
e
n
t
SequentialGlobal
U.S.
DominicanRepublic
- 267 -

in the learning styles of business students between a developed and a developing country.
Further empirical research needs to be carried out with more data from different countries to
obtain better insight into this issue. The findings of such research can benefit faculty in the U.S.
higher education in meeting the needs of international students.
Prior research indicates that individual learning styles of students significantly influence
the effectiveness of classroom teaching. Mismatch between the teaching style of the instructor
and the learning styles of the majority of students can lead to poor performance in and negative
attitude toward a course. Knowledge of the distribution of the learning styles of students in the
class can help the instructor customize his or her teaching methods to match the modal learning
styles of the students in the class. If significant differences in learning styles of international
students studying in the U.S. are observed, instructors in the U.S. can benefit from an
understanding of the nature of these differences and can meet the needs of the international
students better.
In this research the authors used the Index of Learning Styles (ILS) instrument to survey
297 undergraduate business students in the U.S. and 29 undergraduate business students in the
Dominican Republic. The analysis of the data shows that statistically significant differences in
the learning styles of students of the two countries exist along two of the four dimensions of the
Felder-Siverman Learning Style Model. However, investigation of the reasons why such
differences should exist is beyond the scope of this research and can be carried out separately.
Since the sample size from the Dominican Republic used in this preliminary research is
small, it is suggested that this research be repeated with more data from the Dominican Republic.
In addition, it is recommended that this research be conducted with data from other developing
countries to draw any definite conclusion as regards to the nature of the differences in learning
styles of students from developing and developed countries.

- 268 -

References
Baker, R. E., Simon, J. R., and Bazeli, F. P. (1986). An assessment of the Learning Style Preferences of
Accounting Majors. Issues in Accounting Education, Spring, pp. 1-12.
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- 269 -

The Greenspan/ Taylor Debate: The Esti mated
I mpor tance of Savi ng and Money i n I nter est Rate
Movements

Hillar Neumann
John Meyer

Although there is ample political contribution about the specific remedies for the
excesses and abuses leading to the global financial crisis and subsequent recession, this paper
will examine the theoretical debate about the role of monetary policy and the historically low
interest rates that have both preceded and followed the crisis in the U.S. The debate concerns
whether lengthy periods of low interest rates lead to risky lending behavior and other associated
undesirable practices culminating in real estate bubbles or other forms of financial peril.
Alan Greenspan in an opinion piece in the Wall Street Journal (W.S.J) argues that
harmful low interest rates are not due to the Federal Reserves excessive monetary expansion but
rather to the global savings glut: According to Greenspan, the global savings glut is the source
of declining long term rates. Greenspan argues that the interest rates that matter are long term
mortgage rates rather than the short term federal funds rates that are the target of monetary
policy. Greenspan eloquently supports the argument that it was the global decline in long term
rates rather than short term rates that caused the housing bubble. In his words, The decline in
the long term interest rates across a wide spectrum of countries statistically explains, and is most
likely the major cause of, real estate capitalization rates that declined and converged across the
globe, resulting in the global house price bubble.
On the other hand, John B. Taylor, in an earlier W.S.J. opinion piece and in his book
Getting off Track, provides both theoretical and empirical evidence that in fact the cause was the
expansionary monetary policy of the Federal Reserves F.OM.C. He argues it was the mis-
application of the generally accepted Taylor Rule which caused the bubble in real estate prices
and brought on the financial crisis. The Taylor Rule is supported in many quarters and as
Greenspan noted, has taken the aura of conventional wisdom.
John Taylors argument has been supported by Judy Shelton in a number of W.S.J.
opinion pieces and Richard Posner in his W.S.J. opinion piece and his book, A Failure of
Capitalism. Ronald Mckinnon in a W.S.J. article and in his book Exchange Rates Under the East
Asian Dollar Standard, has also contributed to the argument that the Federal Reserve is to blame.
In this paper we explore the relative merits of the two arguments. We will both
theoretically and empirically investigate whether it is the global excess savings glut or the U.S.
Federal Reserves expansionary monetary policy that is the culprit. We will empirically
investigate the issue using descriptive statistics and regression analysis to test the relative
importance of the competing sources of the financial crisis. The statistical analysis will draw on
data from the Federal Reserve System, the Bureau of Economic Analysis, and the World Bank
Development Indicators.
We do not intend to support either the global savings glut or expansionary monetary
policy arguments, but rather we empirically investigate the relative magnitudes of each of the
hypothesized sources. We will end the paper with further study proposals we believe will
contribute to the debate about avoiding future financial crisis.
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Pr oduct Launch i n a Decli ni ng Envi r onment:
The Blu-r ay Di sc Oppor tuni ti es and Str uggle
Klaus Oestreicher
Nigel Walton
Michael Newnham
Abstract
Increasingly ICT-based virtual products are challenging physical products and markets.
Obsolescence has become a real effect for an augmented number of established industries due to
the facilitation of access, consumption, and permanent, immediate availability, which
dematerialised products provide. Once again, Schumpeters Wind of Creative Destruction
intensifies organisations permanent struggle for survival (1950). This paper presents long-term
research in the optical disc industry, which has presented the optical disc format of Blu-ray as its
latest innovation. It is an example of how an established industry launches a new product for
finding new opportunities, but fights desperately against market resistance. The degree of
innovation, the Blu-ray represents, may not be sufficient in the overarching battle of the physical
place versus the virtual space (Kotler et al. 2002, Lam. 2004, Lamont et al. 1993, Scardigli et al.
1988).
As the US market research institute In-Stat highlights, the optical disc market has
declined for the 10
th
year in sequence (Kaufhold. 2010, IFPI. 2010). Sufficient evidence is
available that the replication industry of optical discs may be confronted with an endgame
scenario. The market climate may already be too hostile to support this industrys desire for a
renewal of consumers acceptance of the physical product, here the Blu-ray disc, and to create
new market opportunities in the struggle against the industrys potential obsolescence (Harrigan
et al. 1983).
Despite strong efforts of promotion and powerful market approaches, the Blu-ray disc
could not find inroads to markets yet making this format sustainably successful. Evidence is that
after a short period of time, Blu-ray discs available manufacturing capacities outperform
consumers demand by >30%, consumer and replication prices fall sharply and many of the
Home Entertainments content providers have little or no use for this format being a commodity
and based on mass production (dvd-intelligence. 2010a, Kaufhold. 2010, Killer-Korff. 2010).
Therefore, as research among the replication industry indicates, it presently seems more
as though the Blu-ray format may not fulfil this industrys needs and, with reference to
Abernathy et al.s research, may not lead to the renewal of industrial dynamics in a declining
marketplace (1983, 1984). Further explanation for reasons can be found in the theories of
innovation based on Utterbacks, Christensens and Christensen et al.s studies of disruptive and
discontinuous innovation (1996, 2003, 2003, 2004).
Following the paper presented at the Sixteenth Annual South Dakota International
Business Conference, this paper presents research about the Blu-ray formats market problems.
The introduction of the Transilience Organisation Innovation Map provided a conceptual
approach for the initial explanation of the underlying reasons (Oestreicher. 2009). Research
among European replication firms since concludes for Blu-ray that innovation in technology
alone is not sufficient, when innovations second stream of market linkages is involved
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(Abernathy et al. 1983, 1984). The paper presents explanations, why the Blu-ray disc may not be
sufficiently strong to support the replication industry in overcoming the odds impacting their
strategic opportunities in a declining and eventually disruptive environment (Lamont et al. 1993,
Yoo. 1992).
The research methods applied are grounded theory and case study (Goulding. 2002,
Charmaz. 2009, Eisenhardt. 1989, Davies. 2006).
The overall intention of this long-term research is to contribute to a theory, which may
also be relevant for other industries, like the publishing industry, whose struggle against
dematerialisation of content is presently starting (Picard. 2003).

Key Words: Radical vs. marginal innovation, Ideal Final Result, endgame strategies, theories of
innovation, Blu-ray
Introduction
The case of the Home Entertainment Industry is of particular interest, since being one of
the early showdowns between physical place and virtual space. An established industry, which
controlled markets, repertoire, distribution and artists for 100 years in a closed set of institutional
mechanisms going as far as pre-defining what consumers can see, hear and purchase is now
radically challenged (Kusek et al. 2006, Anderson. 2007). The special interest of this case is
threefold: 1), an established industry fights against obsolescence with means of marginal
improvements against the radical forces of architectural innovation; 2), a similar situation has hit
other industries, e.g. recently photography (with discontinuous outcome for analogue
photography), before; 3), other industries may follow the paradigm rather soon, making these
studies some type of a precedent case (Christensen et al. 2004, Anderson 2007, Kusek et al.
2006, Oestreicher. 2009).
The decision to develop a DVD, which could store significantly more data, arose from
the growing availability of High Definition programmes being broadcast on television. At the
time there was no way of recording these programmes, and Toshiba and Sony began a race to
develop the technology that would allow an order of magnitude increase in data storage. Sabbagh
reported that Sony has spent well over US$3 billion to establish and secure Blu-ray as the high
definition DVD standard in the marketplace, while the assumption about Toshibas real loss
exceeds one billion US$ by far (2008). Two years after Sonys supporters were winning the
battle against the Toshiba-lead HD DVD for the industry standard to be the HD format of choice
the race for the new dominant design of high definition discs the proliferation of high-speed
Internet access and the increasing availability of download services means that Blu-ray is now
facing challenges that VHS and DVD never experienced when they were at the same stage of
their lifecycles (Johnson et al. 2008a, Utterback. 1996).
It is the purpose of this paper to analyse the sustainability of Blu-rays competitive
position in the face of ICT-based virtual products, which are finding equal permanent
improvement as, e.g., You Tubes high(er) definition clips show already. The paper will start by
analysing the competitive environment and recent technological developments and the
implications for product and industry life cycles (Porter. 1987). It will then explore the strategic
options available and whether reinvention or end game strategies are the likely outcomes (Kim et
al. 2005, Harrigan et al. 1983).
The High Definition Case
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The Competitive Environment
Blu-rays success in winning a hard fought battle for the industry standard for the HD
format should have signalled the beginning of a new era of growth and appropriation in the
optical disc industry in 2008 (Grant. 2008). However, five years earlier, in 2003, Apple
introduced the iPod with the iTunes store, revolutionizing portable entertainment, creating a new
market and transforming the company.
According to Johnson et al. (2008a): `Apple did something far smarter than take a good
technology and wrap it in a snazzy design. It took a good technology and wrapped it in a great
business model. Apples true innovation was to make downloading digital music easy and
convenient. To do that, the company built a groundbreaking business model that combined
hardware, software and service.` Johnson et al. also stated that: `Business model innovations
have reshaped entire industries and redistributed billions of dollars of value` (2008a). Research
in the United States also provides evidence reinforcing these trends, which have now extended to
video as well as audio content: Nissen highlights that (2009):
Web-to-TV is happening. The under 35 adult population has already adopted it. Over
40% of young adult households view Internet video on the TV at least once per
month.
Service providers and TV networks view online video as largely additive to pay-TV
services.
Consumers prefer on-demand video consumption, streaming content, and the web
user experience.
Once Web-to-TV video becomes simple and convenient, mass consumer adoption
will follow quite rapidly.

However, In-Stats research revealed even more worrying data relating to the broad range
of devices being used to download content via the web. These were summarised by Nissen as
follows (2009):
Web-to-TV video content will use many devices and delivery mechanisms [concept
of convergent technologies].
Within 5 years, the number of US broadband households viewing Web-to-TV content
will triple, growing from 8 million to 24 million.
By 2013 nearly 6 million US broadband households will operate digital media
adapters/Blu-ray devices in conjunction with online video streaming services.
In 2013 4.2 million US broadband households will use gaming consoles to access
online video streaming services. 10.7 million consoles will be used as Web-to-TV
mediation devices.
In 5 years, there will be 7.4 million US broadband households that use media centre
PCs for streaming Web-to-TV content.
By 2013 there will be 3.6 million US broadband households operating web-enabled
HDTVs and 7.4 million HHs using web-enabled STBs/services.
The number of Web-to-TV devices used in conjunction with streaming services will
increase from 1.7M in 2008 to 22M by 2013.
Total devices used for downloading Internet video content will grow from 8 million
to 20 million over the forecast period.

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Although Blu-ray media players have IP/network connectivity the proliferation of media
devices with downloadable capabilities is very worrying for the industry. This is reinforced by
the RIAA figures for music shipments (2009). It needs to be highlighted that these trends are
apparent for other areas of the world, too.
In 2009 digital formats comprised a record 41 percent of total music shipments in the
United States. This is an increase from 34 percent in 2008 and 25 percent in 2007. The total
digital music market reached $3.1 billion for 2009. Digital downloads continued double-digit
growth in the past year reaching $2.0 billion, 19 percent growth over the 2008 total of $1.7
billion. Digital album growth continued to grow faster than single tracks and on a dollar basis
comprised 38 percent of the download market. Overall shipments of recorded music in the
United States fell 12 percent to $7.7 billion. Growth in digital formats only partially offset a
decline of 21 percent in physical formats. The decline in CD shipments accounted for virtually
all the decline on the physical side. Music videos remained flat year-over-year (RIAA. 2009).

Perception and Industry Paradigm
The unique forces impacting upon the industry have raised a number of questions
regarding the perceptions and industry paradigm shared by incumbent players in the Blu-ray
marketplace. For example, how are the leading companies positioned to deal with the challenges
ahead and what are their likely strategies? In 2009 and 2010, research undertaken among
participants of the replication industry revealed a number of disturbing factors:
A number of replication plants of physical sales have been offered for sale since their
shareholders do not believe in the industry's future, which includes even major
players.
A good number of replication plants went out of business. Technicolor, the industrys
# 1 player, was protected by chapter 11 and could regain its independence of
activities only, since Warner Bros. decided to assign its manufacturing and physical
distribution to them, leaving prior manufacturer and distributor Cinram, industrys #
2, in a situation of highest uncertainty, since there seems to be no replacement for this
loss of business (dvd-intelligence. 2010b, Baress. 2010).
Based on primary research (unpublished yet), other incumbents, like Media Plant,
Sweden, DocData, The Netherlands, kdg-mediatech, Austria or Marcon and CDA,
Germany, have started to turn away from the industry (Oestreicher. 2010).
Warner Bros, EMI and a number of other industry participants have divested early,
selling their replication factories, closed single plants or shut down manufacturing
lines to reduce overcapacities and to reduce expected losses.
The quantity-forecast on Blu-ray sales is poor considering that one replication line
should be able to manufacture around 25k discs per day by full load. And, available
capacities are far higher than market demand.
A number of industry CEOs stated in personal interviews (conducted in spring 2010)
that the industry's lifespan as a mass producer would not extend beyond another 3-5
years and that the Blu-ray disc will be the last physical format as mass product,
despite the development of the holographic disc.
The further market developments will have to prove these statements, but it is suggested
that a negative tendency, which is permanently underpinned by decreasing sales volumes, is
apparent. Further attention deserves that stated timeframes are cohering with Nissens study
(2010).
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Strategic drift would appear to
have occurred due to a rapid change in
the technological and competitive
environment and the failure of the
industry incumbents to respond with the
development of new business models
and strategies (Johnson. 2002). If this is
the case, the question as to how far
along the strategic drift model the
industry has progressed is very
important. E.g., is Blu-ray at Phase 1: incremental change, Phase 2: Flux or Phase 3/4:
transformational change or demise (see Figure).
In hyper-competitive Schumpeterian markets, where ICT-Based virtual products
challenge physical products, any competitive advantage gained is transitory (DAveni. 1994). In
the case of Blu-ray Phase 2 and Phase 3/4 of the strategic drift model could be imminent if action
is not taken quickly. Based on the research findings above and recent music industry figures,
endgame strategies for what could a declining industry may not be overly premature (Harrigan et
al. 1983).
According to Harrigan et al. declining
industries can be viewed as opportunities for
endgame strategies (1983). Depending on how
attractive an industry in decline is and on whether
the business has competitive strengths in the
remaining attractive market niches or segments,
the four possible endgame strategies shown in the left graphic are recommended.

Endgame Strategies Model
According to the ongoing primary research among industry incumbents, some would
appear to be already pursuing both Quick Sale and Harvest strategies. For example, based on
confidential information, EDC, like a number of others, may have chosen to respond to the
unfavourable environment by seeking a quick sale in order to realize the greatest possible value
from the permanently weakening competitive position of physical products. Other companies in
the market would appear to be contemplating the pursuit of Harvesting strategies by returning
value through the maximization of cash returns with little further investment. This is based on
the assumption that the industry has only 3 to 5 years left before entering terminal decline.
Both the Quick Sale and Harvesting strategies are exit routes from an industry whereas
Harrigans remaining two strategies, Leadership and Niche, involve continued participation. A
Leadership strategy will involve the achievement of market power in the remaining segments of
the industry and controlling the process of decline in the businesses favour (which requires
some form of investment). The expectation is that as other competitors leave the industry so the
profitability of the remaining firms improves.
Niche strategies depend on the existence of defensible market segments. In an endgame,
the strategy requires a business to pull out of the broad market and concentrate on niches where
it has relative strengths or where customer demand is likely to persist longer (or at higher levels)
than in the rest of the industry.

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However, Harrigan et al.s Leadership and Niche strategies are difficult to implement due
to the unique environmental factors impacting upon the industry (1983). E.g., the threats facing
Blu-ray are from substitute ICT-based virtual products and new entrants to the industry.
Moreover, Porters Five Forces framework is very difficult to apply to the Blu-ray scenario
because the industry and market boundaries have become irrelevant due to the advent of new
technologies such as downloadable content via the Internet (Porter. 1998). Competitors are
therefore entering Blu-rays competitive domain from adjacent industries.
According to Kim et al.,
Divestment (Quick Sale) and Harvesting
strategies are based on a structuralist
and environmental determinist view of
industry (2005). This is what the authors
referred to as red ocean strategies.
However, if Blu-ray is to engineer an S-
style growth curve to avoid moving into
an industry decline phase (left-hand figure)
then a reconstructionist view or blue ocean strategy is required. This raises the question of how
we actually define the industry and which industry must a leadership strategy be established in
(and is that feasible) and/or which niche segments are now available due to the redrawing of the
market boundaries. A simple answer would be that optical discs based on the Blu-ray standard
are a market segment, habitat, within the overall entertainment industry and a number of niche
segments can be exploited within this market dependent upon the positioning strategies of
individual firms (Cassia et al. 2006).
In terms of adopting a leadership strategy and achieving market power in the Blu-ray
sector using a blue ocean approach, leading market players need to promote the benefits of the
Blu-ray brand to a much wider audience (Kim et al. 2005). Too few potential consumers are
aware of the full range of actual and augmented features that Blu-ray can offer including its
streaming/downloadable capabilities, 3D and UHD potential. Continued investment in the
technology is also essential to ensure that it can match the benefits of broadband and broadcast
technologies. Research by In-Stat revealed that consumers who used the Internet to obtain
content could be broken down into three distinct segments consisting of (2009):
1) Power users (9%) who perform a wide variety of activities and applications on the
Internet on a frequent basis. Social networking, Internet TV, downloading movies,
etc.
2) Social Users (44%) who perform a limited set of activities and applications on the
Internet on a frequent basis. Primarily social networking and short online videos.
3) Passive Users (47%) who perform very few Internet activities and applications, on a
frequent basis. Primarily email, news, and web searches.
Power users may not be the wealthiest consumers but they influence the future buying
behaviour of social users (who represent 66% of future US broadband households). Power users
also access content on multiple screens (TV, PC, mobile);
they are under 30, male and multi-taskers and they
represent the largest social networks.
It is therefore critical that Blu-ray companies
access and influence this target segment and build brand
equity (right-hand graphic). For example, consumers
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have to recognize something about themselves in the Blu-ray brand that they dont see
elsewhere. The brand must have enough power so that consumers covet it and want to be a part
of it, even if its no longer the most convenient. Blu-ray and others in the high definition sector
have so far only had to sell the category the technology and the content in order to grow but
as the market matures this is not enough. Blu-ray needs to uncover the meanings and belief
systems of its target audience and align its brand with them. A brand that says something about
who the consumers are when they use the Blu-ray brand will ensure long-term success because
then Blu-ray will have permission from target audiences to explore even more territories. For
example, Apple customers are those who treasure simplicity and feel a little ahead of the curve.
They think different, as the Apple tagline says. Blu-ray will need to talk about itself and what
it provides by peeling back the three layers of the product benefits onion and understanding
what is inside in terms of the wants and needs of the consumer. What are they really getting
(Dibb et al. 2006)? What does the technology provide other than simple content i.e. excitement, a
new experience, being in control or enjoying the fine things of life?
Power users not only influence other buyers of content but also play an important role in
defining both current and future user needs. In order to overcome the problems of strategic drift
(mentioned earlier), power-users should therefore be allowed to determine Blu-rays future
business model possibly based on a redefinition of the meaning of content ownership. By doing
this a blue ocean strategy using a `value pioneering` instead of a `technology pioneering`
approach could be adopted [i.e. reinvention through the introduction of a new set of rules] (Kim
et al. 2005). For example, research by In-Stat revealed that power users had four primary
requirements from audio and video content (Nissen. 2009):
1) Being able to make back-up copies.
2) Being able to use content on multiple devices.
3) Being able to re-use content.
4) Being able to be interactive with content i.e. sharing with family and friends
(uploading and down-loading via social network sites).
Blu-ray media players are strongly positioned to meet these needs particularly due to the
ability to record and store content for re-use and redistribution. However, this challenges the
existing paradigm as to what constitutes legal ownership and the rights of the owner to share the
content. P2P file sharing and piracy are also a serious problem and all recent tactics to prevent
this occurring have failed.
A leadership position could therefore be taken by the industry in pioneering the
introduction of a digital rights information management system. This would require the co-
operation of other stakeholders. Blu-ray content owners should seek to provide an end-to-end
solution for managing, marketing, purchase and distribution of digital audio and video content.
For example, a Blu-ray customer would be granted digital ownership rights when downloading
content, which could be tiered based on differing levels of use. Complete rights would include all
four requirements listed above, namely: rights to download, rights to stream content; rights to
produce back-up copies of content (including optical discs); rights to transfer content to other
registered devices; rights to re-use the content and to distribute it to other users. Using an a la
carte menu system, consumers could pick and choose the level of rights they wish to purchase
based on differential prices. Pricing should also be set at competitive and affordable levels.
This approach would produce many benefits. First, it would help to monetise lost
revenues suffered by the entertainment industry due to piracy. Second, it would increase
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integration between different technologies and platforms and thirdly it would lock customers and
content providers into longer term relationships.
It would build increased brand loyalty and help to remove competition by creating co-
operative technological relationships with erstwhile rivals. This is what Brandenberger et al.
referred to as a Co-opetition Strategy combining competition and cooperation through a system
of digital rights information management (1997).
Blu-ray DVD Decline An Inevitable Surprise?
With regard to the aforesaid, a decisive question has to be answered: In deciding to
develop a high quality DVD system, did the industry set about solving the wrong problem? The
further question is then, whether Blu-ray will be a next generation of a failed product? There are
a number of very strong clues to suggest that the decline in the Blu-ray market is an inevitable
surprise. These clues come already from using a series of simple innovation analysis techniques
that can be used to help to define the right problem, and identify technology trends nevertheless
effectively.

The Ideal Final Result (IFR)
Altshuller postulated that products and
services tend towards ideality over time. He
defined ideality as the provision of all of the
required benefits and none of the costs or harm
(1996). Domb contributes that in terms of the
value equation, the Ideal Final Result has all the
benefits that the customer requires, and none of
the harm caused by the original system (1998,
1997). A useful modern analogous phrase
coined by Rodin is Free, Perfect and Now, which is complemented by Kellys thesis and
argumentation of follow the free (1999, 1997).
The idea of pausing to consider what would be the perfect outcome for the consumer is
an important one for a number of reasons:
1) The consumer will always abandon an existing solution in favour of a more ideal solution
(for him/her).
2) It forces a consideration of what functions (jobs-to-be-done as described by
Christensen et al., outcomes as described by Ullwick) need to be delivered. It also
forces a consideration of what other means of delivering the function might exist (2004,
2005).
3) A consideration of the Ideal Final Result can be the basis of the introduction of a
disruptive innovation.
4) The pace of technological change facilitates an ideal outcome increasingly often.
When thinking about where a disruptive innovation may come from, it is helpful to imagine what
would be the ideal final result for the consumer (not the manufacturer, wholesaler or retailer). An
ideal result for a film lover may be the opportunity to have any conceivable film available on
demand, on any medium, with perfect quality and free of charge.
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On the right is one example of how the Ideal Final Result may be described for the DVD
industry. It needs to be noticed
that the discs, the players, and
the business models all make
their own developmental steps
towards ideality. This
describes the concept of
habitat, the Blu-ray is a
dependent format in a system
of interlinked technologies,
which are developed by
incumbents of different sectors
of the Home Entertainment
Industry, and, by consideration of the complete industry, do not necessarily follow the same
organisational interests (Cassia et al. 2006). It is important to think about how the Ideal Final
Result could be delivered to the customer. When this is done, it is suggested to be concluded by a
company that:
1) The IFR can be delivered by certain developments of its own technology.
2) The IFR could be delivered by certain additions from outside to its own technology.
3) The IFR can be delivered by technology that it does not have.
4) The IFR cannot be delivered by any means that currently exists.
These are strategic considerations for a company, which can have an enormous impact on
the future health of a company. IFR analysis highlights the potential for disruptive innovation to
occur.
High Definition DVD and Blu-ray are certainly steps towards a more ideal solution for
the customer. But when one focuses on the Ideal Final Result of, say, any conceivable film, in
perfect quality, on any medium, and free of charge, it becomes apparent that Blu-ray falls far
short of this ideal, and the industry needs to look to alternative technologies that could meet the
need. As the above graphic shows, ways of distribution are involved simultaneously, which leads
towards a major institutional dilemma. All resources, processes and values of the content owners
are directed towards and focused on physical distribution. As the resources, process and values
theory (RPV) tends to hold, innovative ways of organising products and services are embraced,
when RPV favour the existing organisational structures and are difficult to master, when these
are on stake (Christensen et al. 2004). The close collaboration between content owners,
manufacturers of discs and players, etc. all of their RPV are mainly based on the distribution of
physical products seek for strategies and products, which do not foster such innovation being
against the status quo (established RPV), difficult to deal with, and do not support their existing
business models. This may explain that consequently then, they tend to favour defensive
strategies.

Trends of Evolution
Altshullers analysis (1996) of technical systems proposes that products progress towards
ideality by moving stepwise along certain development paths. Altshuller identified 35 different
trend paths, with each path containing 4 or 5 jumps. The following graphic presents the trend
path dynamisation:
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It is outside the scope of this paper to discuss these trends in detail. They are discussed
fully by Mann (2002). However an important trend path is shown in the diagram above. The
trend shows that structures evolve to move and permit users to become more mobile. Solid to
liquid/gas to field are highly disruptive jumps when they happen. When functions move to a
field-based delivery, this is often the death knell for non-field based delivery systems. The reason
of this is that field-based functionality is close to ideal for the user and fields can add so many
more functions. A clear example is the evolution of the camera, where development jumps
progressed from single (immobile) photographic plates to (fully flexible) rolls of film, and
ultimately a field-based image capture system (the digital camera) suggesting one explanation for
the success of digital photography vs. the established analogue counterpart.

Each trend jump adds additional functionality for the user. Notably when the function of
image capture becomes entirely digitally then there occurs an explosion of benefits and new
functionalities for the user (in the case of the camera examples are zero cost image capture,
instant image capture, vanishing small image capture devices, image enhancement and
manipulation, image sharing, etc, etc). Important from the Sony and Toshiba strategic
perspective is that a field-based delivery system (movie downloads) was already established
before Blu-ray and HD DVD were launched. This fact and trend should have sounded alarm
bells in the boardrooms of both companies, and is another clue that the decline will continue,
despite heavy investments in the Blu-ray technology.

Outcome Based Analysis
The main advantage that a Blu-ray disc has over a standard DVD is that it has an order of
magnitude higher data storage capacity. The resulting benefit to the consumer is that higher
quality video can be stored on a disc. To what extent is this outcome one that customers wish to
have? Customers buy solutions that allow them to achieve
outcomes better than they can achieve currently [getting a job
done] (Christensen et al. 2004). The left diagram allows these
outcomes to be mapped. The template divides the world into four
outcome quadrants, each focusing on tangible or intangible,
individual or collective dimensions. The innovation of increased
data storage is very much about trying to solve tangible level
problems associated with the capture and consumption of films.
However, buying decisions are almost always driven by
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intangibles, and the real reason for making a purchase is probably to be found in the top right
hand corner of the left-hand template.
A consideration of the tangible and intangible benefits of Blu-ray can be compared to
Internet downloads and/or cable services:

Outcome Based Assessment of Blu-ray

The left hand graphic suggests that the
assessment for Blu-ray considers a contrast to
download, which is divided in personal and more
factual criteria. However it has to be assumed that the
Internet will catch up with the disadvantages of lower
quality and as well it needs to be stated that among the
young generation, for those, who Prensky has suggested
as digital natives, quality aspects are of less concern
and as it can be observed in consumption patterns,
watching a movie is frequently shared by watching it on
a computer screen (2001). Furthermore, convergent
technologies create increasingly opportunities to
transfer films on TV-screens.
A further proposition is that the tangible Me
quadrant involves further investments, as Blu-ray needs
special screens, a different player and an audio
investment, which sum up in substantial extra spending.
5. Outcome Based Assessment of Internet
Downloads
The contrast between Blu-ray and download
(right hand graphic) proposes significant differences
with regard to access, mobility, immediate consumption
and necessary investments. I.e., the Internet downloads
offer significantly more intangible benefits than Blu-
ray, and additionally. the tangible benefits such as
instant access and no need to purchase new hardware
are powerful and play more nearly to the Ideal Final Result that the consumer is looking for.

Struggle for Survival
There are many contributing factors that help explain the decline of the DVD. It is
suggested, despite a number of other reasons for the decline, that in developing Blu-ray in the
first place Sony has solved the wrong problem. Whilst many consumers will certainly appreciate
the improved quality that Blu-ray offers, it is arguable that conventional DVD is good enough for
most people, and Blu-ray does not satisfy unmet needs (Christensen. 2003, Christensen et al.
2004). Already simple innovation analysis tools clearly indicate that competitor technologies can
deliver more ideal solutions to the customer than Blu-ray.
Unless Blu-ray can add new intangible functions to the consumption of films, then it
will be replaced in the short term by Internet based solutions. How far away that future is will
depend on how innovative it will appear in delighting the customer (e.g.):
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3-D Films?
Blu-ray systems that stimulate other senses in addition to sound and vision (touch,
taste, smell)?
Films where the ending is different every time it is watched?
Films where the story develops differently, depending on who is watching it?
A library of films on a single disc?
Films in which the viewer can see him/herself present in the film as an extra?
The Case of Innovation by Technology and Market Linkages
A conclusion via assessment by the arguments presented is suggesting that Blu-ray is the
wrong solution, which does not sufficiently meet consumer requirements. This proposition
supports the research of Christensen et al. expressed by the disruptive innovation theory. This
theory tends to hold that incumbents flee upmarket, when attacked by disruptive technologies
and face the problem to overshoot customer expectations (2004, Oestreicher. 2009). This attitude
may find support in the resources, processes and value theory since the physical Blu-ray is a
solution, which the industry considers as means for further exploitation of established ways of
doing business. This way favours additionally the market and content control for institutional
benefits, neglecting market linkages (Moyon.2006, Abernathy et al. 1983, 1984).

The Dilemma Involved
The overarching dilemma of the prior statement lies in its simplified perspective. It is not
about one industry and it is not about Blu-ray alone. And additionally, it is much about
consumers, their shifting behaviour and consumption patterns.
Blu-ray has its own logo and is considered as a brand offering its own set of features
making it a valuable market proposition. But Blu-ray is not a unified product per se involving a
huge number of different stakeholders. Blu-ray is first of all a technology, led by Sony and
supporters. Next, Blu-ray is a medium transporting content being in possession of content
owners and thirdly, Blu-ray is an optical disc manufactured most times by licensed replication
plants. Finally, Blu-ray involves many other institutional stakeholders in the field of the
additional devices, players, screens and loudspeakers, needed. Sony and its surrounding group
have high interest in the success, since the license business is a steady return for its huge
investments stated here earlier. Content owners have a vested interest, since they can sell either
new content for a more expensive price to consumers offering a better margin than regular
DVDs, whose profit pools have been destroyed. Manufacturers need urgently a replacement,
since prior formats of other optical discs are in sharp decline. Further stakeholders of other
industry sectors manufacturing players, screens, speakers and so on benefit from Blu-ray
additionally. Kim et als. blue and red ocean strategies having roots in their models of
conventional and value innovation logic, suggested that this paradigm is part of the conventional
logic and remains strongly in industry-given boundaries (2005, 1998). It is an institution-centred
model.
A further supporting criteria for the aforesaid is the creation of the BD4C licensing group
comprising four global players, Toshiba, Mitsubishi Electrics, Thomson Licensing and Warner
Bros (dvd-intelligence. 2010c). (Surprisingly, Sony as a major Blu-ray stakeholder is not part of
the founding group.) The categories offered for licenses provide evidence that Blu-ray licensing
is a major issue for increased revenue streams. Contrasting the four founding members shows, as
the categories for which license fees are requested, the variety of institutional interests across
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habitats, but in given industry boundaries. With regard to the model of Kim et al., little can be
found, if anything, assisting to argue that value innovation logic takes place (1998). This
argument raises further doubts about the sustainability of the Blu-ray developments in a context,
where downloads are further increasing rapidly and Blu-ray struggles. Positive reports about the
raise of Blu-ray demand need to be evaluated critically. Reports of shooting up by 167% in 2009
or 98% in Holland are meaning little, since a) demand is still far lower as replication capacities
and b) such huge increase is based on very small figures making it easy to announce a positive
development (dvd-intelligence. 2010d, 2010e, 2010f).
As Schulze-Garg and others stated in interviews, a further criterion is that a high number
of content owners possess content, which cannot be used for high definition, since the source of
content is not supporting the necessary quality, limiting the exploitation of the Blu-ray format
even from within industry boundaries further and reducing its capabilities to become the mass
product or future dominant design (2010). Another industry opposition arises consequently
within replicators. As the conducted interviews proved, replication plants are aware that the vast
majority of content owners do not own content, which provides the necessary prerequisites for a
representation on a high definition format (2010).
Therefore replication factories are very reluctant in investing in adequate replication lines
and specific glass mastering equipment. From a strategic perspective, this builds a second (inner-
industrial) front against Blu-ray, limiting opportunities further and restricting the formats
exploitation. A supporting statement is that manufacturers of replication lines have also stopped
to invest in further developments of replication lines and, not to forget, that the financial
performance of these manufacturers has declined due to a lack of demand for replication lines,
including those for Blu-ray manufacturing. Hong Kong based Anwell Technologies, one of the
latest entrants, joined the Blu-ray bandwagon recently announcing its own development of Blu-
ray replication lines, but interestingly in its announcement Anwell uses the official low figures
for Blu-ray as justification, e.g. household representation in the USA of just 19.4 millions by
June 2010 (2010). But more important, Singulus AG, likely the most renowned replication line
manufacturer, is a highlighting example, since having started to exit the replication industry by
addressing new fields, like solar energy (Krause. 2010). This shift to solar energy, i.e. industry
exit, is shared by the second acknowledged company M2 intensifying the scenario for a likely
unhealthy Blu-ray future even more (2010, Harrigan et al. 1983).
I.e., a new young format (Blu-ray) with improvements was introduced, but in a market-
related top-down hierarchy. Therefore, it is argued:
1. After an extremely short period of time, pressure on retail prices and manufacturing
prices is high due to very slow market acceptance.
2. Many content owners do not possess Blu-ray compatible content, restricting the
formats market opportunities as a mass product needed for a commodity medium.
3. Replication factories are reluctant to invest in the new technology due to high
uncertainties with regard to achievable workload from their customers.
4. Manufacturers of replication lines are looking for new opportunities outside the
Home Enter-tainment Industry
Generally, this is suggested as a further chain of arguments supporting immediately a
next, refined chain for the hypothesis that Blu-ray is the wrong solution resulting now in a two-
front battle:
1. A rather limited range of opportunities inside the industry itself, which suggests being
in favour of the very few globally acting replicators (Technicolor, Cinram, Sony
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DADC and alike), since only they have real access to the so-called majors
(Hollywood studios, music industry), those which have the content for high definition
formats.
2. Such restrictions speak against a Blu-ray mass market in which pre-recorded content
may replace the older standard DVD-format. I.e., the two fronts are as stated
i. in 1.), only opportunities in specific areas, which count nevertheless for a
huge market share, since representing the major participants of both
content owners and replicators/distributors by quantity of discs sold, but
only a minority of the total amount of both content providers and
replication plants;
ii. the second front in which Blu-ray does not only fight against virtual
downloads, but tries to cannibalise the existing DVD-business at the same
time.
So far, all the argumentation is more concerned with technology. But innovation has its
second stream of major importance, market linkages (Abernathy et al. 1983, 1984, Oestreicher.
2009). The deeper meaning is, the final point of consumption, the consumer, has little
consideration in the institutional-centred model above. It is suggested that this model is 1)
against dAlmeidas concept of the shift from an economy of transactions to an economy of
relationships and 2) furthers the old model of industry-controlled offers within given industrial
boundaries (Moyon. 2006, Kim et al. 1998, Oestreicher et al. 2009).
It seems difficult to elaborate a scenario, which allows saying that Blu-ray fulfils the
requirements for sustainability. A majority of research findings draws attention to obvious and
severe underlying problems, and there is a worst case scenario for all strategists even a third
front leading to the assumption of a next dilemma within which the various institutional
stakeholders forgot to respect an (extended) understanding, consideration and application of
transactions and emotions and tangible and intangible values, i.e. formulating a consumer-
centred, instead of an organisation-centred strategy, since ...consumers are doing it for
themselves (Antorini. 2009)
A crucial aspect in the game that the industry plays by conserving and improving its prior
status quo is the postmodern hyper-consumer. This pattern is suggested in this context as
innovations market linkages having high relationships with the concept of P2P. Another
dilemma, being an odd one for the industry is consumers are doing it for themselves while
the physical market decreases, in some areas like CD dramatically (from 2000 to 2009 = app. -
70%, from 2008 to 2009 20.5% alone), consumption increases (RIAA. 2008, 2009, Anderson.
2007, Kusek et al. 2006, Kusek. 2009). The Nielsen SoundScan 2009 provides, despite a few
positive messages, even more evidence for the negative industrial trend (Smith. 2009). It is
suggested that the real underlying aspect needing attention for answering the initially asked
question, whether this industry has to prepare endgame strategies for its physical distribution and
to a good extent of its market control, can be found here, since all the evidence tends to suggest
that the industrial offers do not meet consumer expectations. Whether it is about CD or DVD or
Blu-ray, whether about music, films or may be games, is proposed as being of secondary nature.
By respecting the disruptive innovation theory, a further suggestion is that Blu-ray is not more
than another industrys attempt to flee upmarket overshooting most customers expectations,
which are consequently not honouring the quality improvements by an adequate premium
(Christensen et al. 2004, Oestreicher. 2009). This cause and effect logic may help understanding,
why Blu-rays profit pools are quickly disappearing, so short after its inauguration and, as
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expressed earlier in this paper, Blu-ray faces a rather hostile environment, which none of the
prior formats experienced at the same point of its lifecycle. This again pleads for the assumption
that the Home Entertainment Industry may have addressed the wrong solution: Marginal
improvements against the radical forces of the probably architectural Internet solution of the
virtual, dematerialised product download overshooting consumers expectations.
Consumers, one suggestion of the P2P-concept, supported by the consumer culture
theory, enjoy sharing experiences for which the thing (the product) is a means to share social
links (Rmy. 2009). Movies, music, games, the major content of the Home Entertainment
Industry, are one of the favourite topics for such social interaction between consumers (Kusek et
al. 2006, Anderson. 2007). This proposes that consumers enjoy content, want to do it for
themselves, without institutional restrictions and may therefore be prepared to exclude
organisations (Antorini. 2009). This third front of rejection of industrial offers has its origin in
the content, but affects other habitats, too, since the physical product may be considered as
disadvantageous and restricting such social interaction and file sharing. This may help to explain
the rapid increase of downloads and that consumers disregard legal aspects (IFPI. 2010). Assink
defines disruptive technologies as the successful exploitation by radical new product, process, or
concept that significantly transforms the demand and needs of an existing market or industry,
disrupts its former key players and creates whole new business practices or markets with
significant societal impact has significance for the key role ICT plays in the changing value
chain of the Home Entertainment Industry (2006). One time more it is suggested that Blu-ray
does not represent the right solution, since not concurring with the parameters of Assinks
definition and not offering enough space for postmodern or hyper-consumers to do it for
themselves, too.

Assessment by the Buyer Experience Cycle (Kim et al. 2005)
Altshuller identified 35 different trend paths in the field of innovation, the IFR suggests
the ideal result consumers are looking for (1996). Instant access, full mobility, immediate
consumption on multiple devices and the criteria of P2P-sharing of experiences are suggested
outperforming the higher quality of Blu-ray in the eyes of the mass of consumers. These
consumer criteria correspond much to Kim et als six utility levels for buyers, which can unlock
extraordinary blue ocean values (2005). Within this framework Blu-ray struggles again, as
a short, qualitative, unstructured and non-representative research among German consumers
undertaken by Oestreicher in 2007 provided evidence for two specific arguments 1.) the desire
for buying only such content they desire and 2.), they do not want to support an industry (content
owners) anymore for which they have little love marks (values of sympathy) since controlling
what a consumer can see, hear and has to purchase. The first argument contributes to the
discussion of this paper, while the second suggests that there may be a further field, outside the
discussion of physical and virtual products, but probably influencing their viability nevertheless.
The latter area needs further research to shed light on the extent and size of this influence,
especially since Kusek et al. argue in the same direction (2006).
The outcome-based assessments above can be complemented by a Blu-ray-relevant
selection of criteria in Kim et als Buyer Experience Cycle (2005):

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Buyer Experience Cycle
(Kim et al. 2005)
Download Blu-Ray
Purchase
(finding, attractive place, accessibility, speed
of purchase)
- Easy finding by many download platforms
and online retailers
- Immediate access
- More selection than in any shop
- Restricted finding due to shop space
- Shops may be difficult to reach
- Restricted product offer (not all content is
available on/compatible with hi-def
requirements)
- Purchase can be timely extensive
Delivery
(time, easy to store product, easy access):
- Download has immediate delivery - Allows
to store thousands of tracks on a mini-device
- Websites are always and easily accessible
- Time for shopping in city or delivery from
online shops
- Restricted storage space for discs at home
- Access channels are sufficient (physical
stores or online retailers)
Use
(Effectiveness of product features,
overcharged with bells and whistles)
- Very effective with regard to social links
[the link is more important than the thing,
as consumer culture theory sheds light on]
(Rmy. 2009)
- The charge is only for the exact purchase
and not for pre-recorded unwanted tracks,
extras and other gimmicks
- Pre-recorded content, which cannot be
changed and forces to buy what the industry
prescribes
- Reduced ways of interaction in a P2P-
environment
- Quality and features overshoot likely most
consumers require-ments, which do not
want to pay the premium for such features
Supplements
(Other products and services to make the
product work, if so, cost for them, how much
time do they take, how obtainable are they)
- No further devices needed
- No extra cost (see IFR)
- Player
- HD-screen
- 5:1 or higher speaker system
- Rather costly
- But easy and quick to obtain
Maintenance
(Requirement of external maintenance,
maintain or upgrade the product, cost of
maintenance)
- No general external maintenance
- Upgrade by improved landlines and high-
speed Internet connections
- Upgrade by higher defined online files (e.g.
You Tube)
- No maintenance needed
- No general external maintenance
- Potential of upgrade, e.g., exchange of
player against recording player
- Robust product, maintenance-free
Disposal
(Waste and waste-related criteria)
- Digital files, no disposal - By the quantity of discs, waste is an
environmental issue, but of little consumer
concern
The Buyer Experience Cycle is shaping a framework on a macro level, which can be
complemented on the micro level by Vandermerwes Customer Activity Cycle (CAC) detailing
all activities needed to perform a job. As Oestreicher stated in the application of the CAC, any
disc competes by 18 steps to listen to a disc-based track against just eight to listen to a download,
a list, which does not respect the increased efforts of the purchasing process of a disc reducing
the easiness of consumption of the physical product further (2009). This is of additional
disadvantage for any physical product this industry has and may develop by applying
conventional logic (Kim et al. 1998).
Summary
It is suggested to be short sighted and too simplified stating that the wrong solution is
Blu-ray. The assumption being a centre in the further research is that any physical, pre-recorded
medium is unlikely to meet todays market needs, which seem to be addressed better by the
virtual offer with its versatility in both areas, technology and market linkages. The latter may
even exclude the industry increasingly, fostering P2P behaviour, but as well c2c business
models. Even the professional body IFPI suggested to its members to reflect about strategies of
access, but as Christensen et al.s and Utterbacks studies suggest that incumbents wait until it is
too late (2009, 2004, 1996). The arguments presented here, underpinned by the many official
statistics available, nurture the assumption that it is already rather, if not already too late.
Therefore, the repetition of a majority of arguments presented is a conscious endeavour
for this case to underpin that not regarding which framework is used or applied for an
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assessment, the outcome is at least similar and does not support Blu-ray, since its major
characteristics as a commodity and mass product are not meeting the turbulent market place in a
size and extent being important for industrial survival. The mere amount of these frameworks
leading towards comparable results provides rather convincing evidence that this industry needs
to reflect rapidly on far better solutions. Better solutions does not necessarily mean another new
disc format, like the development of the holographic disc, which may result in a similar dilemma,
since being part of the conventional logic. The holographic disc may face a similar fate as the
digital VHS cassette, the prior desperate answer of the VHS duplication industry, which was
heavily announced, but never released, since markets overruled the rules of the game quicker in
favour of the DVD. The Ideal Final Result, unlocking extraordinary values may have to be found
by value innovation logic reframing and reshaping the whole industrys boundaries, as far as
they still exist (Kim et al. 2005).
Returning to the prior argument of habitat as explained by Cassia et al. creates a
differentiated assumption for each industry sector (2006):
Content owners: This habitat owns the necessary content, which is digitised. I.e., the
format of transport is of little interest. This is suggested to count as long as the control
over the content and its usage is protected. They are supposed to have a perception
and branding problem, but this has little to do with Blu-ray (Kusek et al. 2006,
Anderson. 2007). Their established physical distribution system is heavily challenged
being a major source of revenues and the entire business model. Its likeliness to
become obsolete is rather high.
Disc manufacturers: This group is likely to go into an endgame scenario, since the
attack of the radical ICT-based technology will not stop and each improvement the
physical product made will be balanced by the Internet-offer. The timeframe of three
to five years (as mass product) is considered as being realistic. Harrigan et al.s
strategic endgame consideration of remaining pockets is probable and will allow a
longer survival for some very few players (1983).
It is suggested that a cascading effect will take place, since it is an imperfect
distribution between those players having access to the group of majors of content
owners with wider opportunities of Blu-ray and those, whose customer portfolio does
not provide major Blu-ray compatible content.
Other industrial sectors (players, loudspeakers, etc) will be affected, too, but
consumption of any Home Entertainment software of which style ever needs screens
and loudspeakers of one way or the other. Convergent technologies, e.g. bringing
Web content to TV-screens may be supportive.
Consumption patterns: These are expected to shift further away from institutional
offers and favouring increasingly models in which consumers can do it for themselves
(P2P), using the thing for creating social links (Antorini. 2009, Rmy. 2009).
The big hope of 3-D offers will need further studies and evaluation. But, if the Home
Entertainment Industry will try to make it a stand-alone offer, some form of panacea for its
present dilemma, which will allow returning to the status quo, then it is likely to fail, as Blu-ray
will likely not be more than a short episode. Again additional investment in special devices will
be required. Again the social linkage among peers will be missing. On the other hand, it is
assumed that 3-D solutions will again overshoot the majority of consumers expectations, for
who present solutions will likely be good enough [jobs-to-be-done theory] (Christensen et al.
2004).
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For the time remaining an interesting correlation between the Harrigan et al. endgame
model and Abernathy et als resilience map may be of advantage. By totally different
perspectives both address the quadrant niche (1983, 1983, 1984). Here, in this quadrant Blu-ray
may find pockets, which by a combination of both models (further research is suggested)
may offer interesting developments as suggested under chapter II. of this paper. It seems unlikely
that these will easily address a mass market, but may find interest in special consumer segments.
If this is the case, it may be much easier to achieve profitable business models, since these
customers or consumers are interested in such solutions beyond commodities and are prepared to
pay an extra price then.
The Ideal Final Result and Further Consequences
Blu-ray this is dared to state is the wrong solution, especially, but not only, since it is
a) part of the conventional logic and not the value innovation logic, b) not developed as the IFR
and c) a defence strategy for obtaining the status quo (Kim et al. 2005, 1998, Oliver. 1991). As
Oestreicher argued before, Blue-ray addresses the wrong development and offers a number of
disadvantages it shares with other product launches, which finds further evidence in the
argumentation of this paper (2009). Christensen et als and Utterbacks studies underpin that
fighting with marginal (product) improvements against radical technological forces produces the
loser always on the side of marginal developments (2003, 2004, 1996). Abernathy et al.
concluded in their studies that it is possible to revitalise a decreasing lifecycle, but this is not an
easy endeavour and needs more than just simple quality improvements. Even harder in this
scenario is that both forces of innovation, technology and market linkages have united and turned
against the physical product (Abernathy et al. 1983, 1984).
Sun-Tzu has recommended that all forces have to be concentrated at the decisive point of
the battle, but the proposition is that this decisive point are the market linkages, but the Home
Entertainment Industry has obviously concentrated its forces at the point of the institution-
centred status quo, being likely the wrong front, since secondary at best (2001). By application of
the lessons of the Prussian general von Clausewitz this is less a strategic move, it is only a
tactical manoeuvre at best, but to be successful it needs clear strategies for the development of
sufficient counter-forces (2004). The IFR needs to be developed consumer-centric to meet a
challenging environment and market demands (Johnson et al. 2008b).
A case study tends to develop a new theory (Charmaz. 2009, Goulding. 2002, Eisenhardt.
1989). This limited research around the Home Entertainment Industry and the Blu-ray disc
cannot develop a new theory. However a short view on next developments in a different market
provides a next, but comparable dilemma, that of e-books vs. printed books. The new device
Kindle is an apparent and next attack against the established physical book market. The threat of
e-books is not new. Since quite a while e-books are available, but never took off the ground. This
long-term and slow development meets again the results of Utterbacks and Christensen et als
research (1996, 2004). Disruptive, discontinuous innovation tends to develop for a longer time
without shaping major inroads to markets until suddenly a spark ignites the radical forces of the
wind of creative destruction (Schumpeter. 1950). The arising and parallel questions with regard
to the case here are:
Will Kindle be the enabler for this discontinuous development, the igniting spark?
Will the iPad become the destructive force more books than you can read as its
advertisement states?
How will the habitat of the book market react?
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Will it follow the same pattern and flee upmarket with marginal improvements as the
disruptive innovation theory explains (Christensen et al. 2004)?
This final suggestion wants to draw attention to the fact that it is not only about the Home
Entertain-ment Industry and its marginal answer Blu-ray to radical forces, but that the wind of
creative destruction will affect more and more industries not to be forgotten, 3-D laser printers
are a next threat to many more and totally different industries (Schumpeter. 1950, Anderson.
2007).
This case study is inductive, but following the argumentation it looks for ways to explain
organisational behaviour beyond a single industry allowing us to understand the driving
institutional forces.
Conclusion
This paper has analysed the declining competitive position of Blu-ray technology in the
light of new competitive threats from ICT-Based virtual products. There are now serious doubts
regarding the sustainability of the industry, which is illustrated by the responses of existing
companies within the sector. If an advanced phase of strategic drift is to be avoided and an
irreversible decline in the industry lifecycle is to be averted, imminent strategic measures are
required.
However, owing to the unique nature of the competitive threats red ocean strategies are
likely to be inappropriate (Kim et al. 2005, 1998). However, the industry incumbents need to
rapidly develop the brand equity of Blu-ray in the short-term in order to stave off further declines
in market share. In the long-term, some form of blue ocean reinvention is likely needed and
should include a radical review of the existing business model and the paradigm surrounding the
definition of content ownership and the rights of consumers.
Once more it is summarised and suggested that the identified pattern is repeated:
Incumbents tend to wait until it is too late, try to fight with marginal developments against
radical forces, while fleeing up-market. This low-strategic approach had already failed in a good
number of other industries before (Utterback. 1993, Christensen et al. 2004). Despite that the
conclusion is that Blu-ray was the wrong solution, this assessment concerns the industrys effort
to create another format enabling it to recreate market dynamics in the endeavour to re-establish
its status quo. All the existing odds, from both ends of innovation, technology and market
linkages, plead against a successful outcome. But there is another important fact of innovation,
what was invented cannot be made un-invented, hence Blu-ray is an existing format having its
advantages. Therefore, by a different perspective, Blu-ray may find a market and develop, but it
is more likely to find its place in specific niches, where these advantages can be specifically
exploited. Such strategies will likely have to be formulated meeting the requirements of
Abernathy et als quadrant of niche in the transilience map (1983, 1984, Oestreicher. 2009). This
will mean a change of institutional strategies and even more to create real strategies as Johnson
et al. have defined (2008b). Additionally, from a marketing view, the Blu-ray brand needs a
much stronger strategy itself to position it in the mind map of relevant market segments (Aaker
et al. 2002, Lindstrom. 2005).
In the present situation it might even be possible that Blu-ray may replace the standard
DVD as the Home Entertainment Industrys dominant design, but the conviction, based on the
assessments presented here, is that a) prices will have to be equal to those of standard DVDs and
that strong support will be needed from, e.g., digital TV equalling the further consumer
investment, e.g. in HD-screens, due to convergent technologies. But this will be unlikely
- 289 -

equalling shifting market linkages and consumption patterns. Therefore, the assumption is that in
this scenario Harrigan et als niche quadrant will play its role making the endgame only
smoother and with regard to the replication industry only for a part of its incumbents (1983).
Overall, the case of Blu-ray supports the researched paradigm that incumbents tend to be
reactive, act by wrong assumptions and when it is too late.

- 290 -

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- 293 -

Cultur ally I ntelli gent for Sati sfi ed Wor ker i n
Multi nati onal Or gani zati on: Role of
I nter cultur al Communi cati on

Dong Soo Park
Abdoukhadre Diao
Abstract
The productivity of bicultural or global workers is likely to be limited because of cultural
difference in their work setting. This can reduce self-esteem and heighten anxiety and stress
among global workers. In order to remedy this situation organizational management should
improve the quality of life of cross-cultural workforce. However the interconnectedness of the
global community requires a highly diversified workforce as a result of equal employment
opportunity, it is imperative that firms ensure job satisfaction among their global workforce by
providing a safe work environment in which workers can effectively apply their knowledge and
skills and enhance their job performance. This study investigates the relationship between
cultural intelligence (CQ) and job satisfaction among global workers and examines the
moderating role of intercultural communication competence (ICC) in the relationship. The data
were collected from 400 workers at a U.S Army base in Daegu-Gyeongbuk, South Korea.
Both cultural intelligence and intercultural communication competence were moderately
related to job satisfaction. The two aspects of CQmotivational (MCQ) and behavioral
(BCQ)had significant positive relationships with some specific aspects of job satisfaction.
Intercultural communication competence had a significant moderating effect on the relationship
between cultural intelligence and job satisfaction; it also had a significant relationship with job
satisfaction.
Some important implications for the management of global workers as well as practical
guidelines for international dimensions of human resource management policies are discussed.

Keywords: Cultural Intelligence, Job Satisfaction, Intercultural Communication Competence,
Global Worker

Introduction

The success of multinational organizations depends on the availability of globally
competent workers. Due to the extensive globalization, global workers need to embrace cultural
intelligence, which is one of the most important factors influencing job satisfaction. Global
workers face many obstacles to job satisfaction because of cultural diversities and language
barriers. Consequently, some expatriate leave the organization or fail to accomplish their
overseas assignment.
Thomas and Inkson (2004) suggested that cultural intelligence can help employees to
become more effective in decision making, communication, and negotiation across cultures by
enabling them to lead and motivate others who are culturally different and to better manage their
international careers.
- 294 -

The process of intercultural communication, however, entails heightened uncertainty and
ambiguity, which in turn result in high levels of anxiety (Gudykunst, 2005). As a consequence,
mutual misunderstandings among individuals from different culture are likely when those
individuals interact in the workplace (Hammer, Nishida & Wiseman, 1996).
In this regard, the present study examines the issues involved in efforts to develop global
workers cross-cultural adaptability through the enhancement of their cultural intelligence and
intercultural communication competence for job satisfaction.

Theoretical development and hypotheses:
Cultural Intelligence refers to a persons capability to adapt effectively across cultural
contexts, not just within cultures (Earley & Ang, 2003; Ng & Earley, 2006). However, it does
not mean that someone who is culturally intelligent is able to learn the ways in which people
should act and behave in a new culture. It is not sufficient for cultural intelligence to be
appropriate and accurate for understanding different cultures, and desirable cultural intelligence
requires individual motivation and capability to respond appropriately (Earley & Ang, 2003).
More specifically, cultural intelligence addresses a set of skills, from basic to advanced, that
allow an individual to become effective at eventually transferring social skills from one cultural
context to another (Brislin, Worthley & Macnab, 2006). An individual with high cultural
intelligence is expected to adapt to a new cross-cultural context faster and more effectively.
However, an individual who is effective in a particular cross-cultural situation should not be
presumed to possess high cultural intelligence (Ng & Earley, 2006).
Brislin et al. (2006) mentioned the following four steps to developing ones cultural
intelligence: (a) the identification of new behaviors, (b) the identification of reasons for
behaviors, (c) the consideration of emotional implications of behaviors, and (d) the use of this
new understanding and awareness for inductive reasoning for larger cultural implications.
Looking back on the old construct of cultural intelligence developed by Ng and Earley (2006)
other conceptual models like three property models introduced by Hampden-Turner and
Trompenaars (2006) and by Thomas and Inkson (2004).
Hampden-Turner and Trompenaarss (2006) arguments included (a) the ability to synergize
contrasting values of different cultures, (b) the ability to treat opposing values as complementary,
and (c) the ability to understand the presence of, and the interplay between, dominant and latent
values within a culture. Thomas and Inksons (2004) three factors included (a) knowledge of
culture and the fundamental principles of cross-cultural interactions; (b) mindfulness, which
entails awareness of, and attention to, the new cultural environment; and (c) the behavioral
ability to generate appropriate behaviors in a new cultural setting.
Further, Earley and Ang (2003) constructed cultural intelligence as a four-factor model
composed of the meta-cognitive, cognitive, motivational, and behavioral dimensions, which has
been widely used in recent CQ research (e.g. Ang et al., 2007; Brislin, Worthley & Macnab,
2006). The meta-cognitive factor refers to the mental capability to acquire and understand
cultural knowledge; the cognitive factor refers to general knowledge and knowledge structures
about cultures; the motivational factor refers to the individuals capability to direct energy
toward learning about and functioning in intercultural situations; and the behavioral factor refers
to the individuals capability to exhibit appropriate verbal and non-verbal actions in culturally
diverse interactions. These four dimensions of CQ are qualitatively different facets of the overall
capability to function and manage effectively in intercultural settings and together form the
overall construct of cultural intelligence.
- 295 -

Ang et al.(2007) extended the enhancing theoretical refinement of cultural intelligence when
they demonstrated that CQ can function effectively in culturally diverse settings by developing
and testing their research model positing differential relationships between the four CQ
dimensions (metacognitive, cognitive, motivational, and behavioral) of cultural intelligence and
three intercultural effectiveness outcomes (cultural judgment and decision making, cultural
adaptation, and task performance in culturally diverse settings).
On the other hand, motivational CQ demonstrates the capability to direct attention and energy
toward the job at hand and to function well in situations characterized by cultural differences.
Job satisfaction, a proxy for an employees well-being at work, has a close relationship
with work motivation. The widely used research definition of job satisfaction is the one by
Locke (1976), who defined it as a pleasurable or positive emotional state resulting from the
appraisal of ones job or job experiences (Sari, 2004).
Workers can be satisfied with specific activities of the job, with the place and working conditions
under which the job is performed, or with specific factors such as economic rewards, security, or
social prestige. Job satisfaction has been described as an extremely complex construct that
cannot be fully explained by a single model (Hagerdorn, 2000). It may be viewed, at one level,
as an outcome of being able to succeed in acting in accordance with ones motivation (Jnsson,
2005).
Intercultural communication motivation is the set of feelings, intentions, needs, and
drives associated with the anticipation of or actual engagement in intercultural communication
(Wiseman, 2002). It consists of three elements: anxiety, trust, and self-efficacy. These three
elements are related to two of the Big Five personality characteristics: emotional stability
(anxiety and trust) and extroversion (self-efficacy), which has frequently been linked to the
success of expatriate employees.
To overcome this apprehension of being exposed to different cultures, expatriates and their
counterparts in the host culture require mutual high levels of trust (TT) and self-efficacy (SE),
which would allow both parties to achieve their respective goals. Motivation has been recognized
as a central factor of intercultural communication competence in communicative interactions
(Bolten, 2005; Hammer et al., 1996; Imahori & Lanigan, 1989; Martin, 1993; Spitzberg, 2000;
Wiseman, 2002).
Based on relevant literature reviewed, we developed hypotheses which are displayed as research
model of the current study in Figure 1.

- 296 -

Fig. 1: A simplified theoretical framework

The effect of cultural intelligence on job satisfaction
Previous studies of motivational CQ demonstrated that it predicted adjustment of global
professionals, beyond realistic job and living conditions previews. Ang et al. (2007) argued that
motivational and behavioral CQ can predict cultural adaptation and that metacognitive and
behavioral CQ can predict task performance. However, other studies demonstrated that
motivational CQ has the capability to direct attention and energy toward learning about and
functioning in situations characterized by cultural differences. Kanfer and Heggestad (1997)
argued that this motivational capacity can provide a genetic control of affect, cognition and
behavior that facilitate goal accomplishment.
Behavioral CQ reflects the capability to exhibit appropriate verbal and non-verbal actions
when interacting with people from different cultures. Those with high behavioral CQ exhibit
situational-appropriate behaviors based on their broad range of verbal and non-verbal capabilities,
such as exhibiting culturally appropriate words, tone, gestures, and facial expressions
(Gudykunst & Nishida, 2001). Thus, CQ should also influence global workers job satisfaction
through behavioral and motivational factors. In other words, CQ may work differently under
different cultures and strategies in globalized organizations and help talented workers to focus on
culturally relevant archetypes to develop and enhance their international careers. By referring to
relevant research on job satisfaction, CQ effects in the international job environment, and
interaction strategies for effective adaptation, we propose the following hypothesis:
Hypothesis 1: Cultural intelligence is significantly related to job satisfaction
among global workers.

The effect of intercultural communication competence (ICC) on job satisfaction
Intercultural Communication Competence (ICC)

Self-Efficacy (SE)
Trust (TT)
Cultural Intelligence (CQ)

Meta-Cognitive CQ
Cognitive CQ
Motivational CQ
Behavioral CQ
Normative CQ
Job Satisfaction (JS)

Pay and Promotion Satisfaction (PPS)
Environment Satisfaction (ES)
Co-worker & Supervisor Satisfaction (CSS)
- 297 -

Intercultural communication motivation is defined as the set of feelings, intentions,
needs, and drives associated with the anticipation of or actual engagement in intercultural
communication (Wiseman, 2002). It consists of three elements: anxiety, trust, and self-efficacy.
According to Caligiuri (2000a, 2000b), these three elements are related to two of the Big Five
personality characteristicsemotional stability (anxiety and trust) and extroversion (self-
efficacy)which have frequently been linked to expatriate success.
Wiseman (2002) suggested that although an individual may be skilled and knowledgeable,
issues surrounding the individuals anxiety and trust can negatively affect his or her perception
of other cultures and inhibit communication across cultural boundaries. The resulting avoidance
of social interaction may reduce the effectiveness of the expatriate in the international
assignment.
As job satisfaction is closely linked to work motivation, it may be viewed, at one level, as
an outcome of being able to succeed in acting in accordance with ones motivation (Jnsson,
2005). In this sense, job satisfaction arises from the ability to have a need or motive satisfied, not
from job performance. It is assumed that a high level of motivation may have both psychological
and behavioral consequences: psychological consequences include job satisfaction and
organizational commitment, whereas behavioral effects include higher output, lower absenteeism,
and a lower likelihood of leaving the job (Foster, 2000).
The close relationship between intercultural communication motivation and job
satisfaction implies that studying the indicators of job satisfaction may lead to a better
understanding of employees needs and the factors influencing their job behavior. Based on these
studies of the effects of intercultural communication competence in the context of the cross-
cultural work setting, we propose the following hypothesis:
Hypothesis 2: Intercultural communication competence is significantly related to
job satisfaction among global workers.

The moderating role of intercultural communication competence (ICC) in the relationship
between cultural intelligence (CQ) and job satisfaction (JS).
A number of studies have examined and have attempted to improve cultural
understanding at an individual level (e.g., Ang et al., 2006; Early and Ang, 2003). The different
ways in which people from different backgrounds behave may be related to a primary part of
human intelligence, which means the capability to solve problems and adapt to changing
situations. Cultural intelligence can be defined as a type of higher-level social intelligence that
enables people to effectively address different cultural circumstances reflecting distinct values
and norms (Brislin, Worthley & Macnab, 2006). According to cross-cultural work theory,
adaptation to a new environment is fundamental to subsequent outcomes in job satisfaction.
Consistent with the nature of intelligence, cultural intelligence is an ability that is expected to
improve with experience in different cultures. Developmental experiences involving cross-
cultural interactions (e.g., overseas work assignments and overseas study) may increase the
individuals cultural intelligence over time (Ng & Earley, 2006).
Motivation has been recognized as a central factor of intercultural communication
competence in communicative interactions (Bolten, 1999; Hammer et al., 1996; Imahori &
Lanigan, 1989; Martin, 1993; Spitzberg, 2000; Wiseman, 2002). Caligiuri (2000a, 2000b) argued
that expatriates who build relationships with both host nationals and other expatriates tend to
adapt more quickly to the host culture, to be more productive during their sojourn, and to
complete their assignments successfully.
- 298 -

The probable explanation for this outcome is that culturally intelligent employees can
handle work challenges better by using personal resources involving core characteristics of
cultural intelligence (e.g., motivational intelligence and behavioral intelligence) and intercultural
communication competence as well as core interpersonal and intrapersonal skills for adapting to
new environments and managing stress and moods. Drawing on these studies, we propose the
following hypothesis:
Hypothesis 3: In cross-cultural job environments, intercultural communication
competence moderates the relationship between CQ and individual job
satisfaction.
Data and Methods
Data were collected from a convenience sample of 400 workers (200 for Koreans and 200
for Americans) at a U.S. military base in Daegu-Gyeongbuk region in South Korea, a bicultural
organization in which Koreans and American worked together. Using a questionnaire survey, we
obtained 304 valid responses (a 76% response rate): 191 from Koreans (a 95% response rate) and
111 from Americans (a 55.5% response rate). Table 1 shows the characteristics of the sample.

Table 1. Demographic variables
Demographics Types Frequency
Percentage
(%)
Valid Percentage
(%)
Gender
Male (1) 213 70.1 70.1
Female (2) 91 29.9 29.9
Nationality
Korean (1) 191 62.8 63.0
American (2) 111 36.5 36.6
Other (3) 1 .3 .3
Missing 1 .3
Status
Military personnel (1) 77 25.3 25.6
Civilian (2) 220 72.4 73.1
Other (3) 4 1.3 1.3
Missing 3 1.0
Employment Type
Regular (1) 279 91.8 93.0
Temporary (2) 13 4.3 4.3
Other (3) 8 2.6 2.7
Missing 4 1.3
Age
Younger than 25 (1) 68 22.4 22.4
Between 25~35 (2) 37 12.2 12.2
Between 36 ~40 (3) 36 11.8 11.9
Between 41 ~45 (4) 52 17.1 17.2
Between 46 ~50 (5) 110 36.2 36.2
51 or older (6) 1 .3 .3
Education Level
Grade to middle school (1) 2 .7 .7
High school (2) 73 24.0 24.0
Community college (3) 99 32.6 32.6
University (4) 107 35.2 35.2
Graduate school (A masters degree) (5) 21 6.9 6.9
A doctoral degree or equivalent (6) 2 .7 .7
Job Experience
3 years or less (1) 31 10.2 10.3
4~7years (2) 40 13.2 13.2
8~11 years (3) 38 12.5 12.6
12~15years (4) 29 9.5 9.6
16~20 years (5) 65 21.4 21.5
More than 20 years (6) 99 32.6 32.8
Missing 2 .7
Job Title
Agent (1) 131 43.1 48.5
Section Chief (2) 27 8.9 10.0
Branch Chief (3) 18 5.9 6.7
Deputy Division Chief (4) 18 5.9 6.7
Division Chief (5) 17 5.6 6.3
- 299 -

General Manager (6) 11 3.6 4.1
Other (7) 48 15.8 17.8
Missing 34 11.2
Cross-Cultural
Experience
2 times or less (1) 17 5.6 5.6
3~4 times (2) 45 14.8 14.9
5~6 times(3) 48 15.8 15.8
7~8 times(4) 26 8.6 8.6
9~10 times (5) 166 54.6 54.8
Other (6) 1 .3 .3
Missing 1 .3
Job Type
Management (1) 154 50.7 51.2
Technical (2) 124 40.8 41.2
Other (3) 23 7.6 7.6
Missing 3 1.0
Total 304 100.0 100.0
Measures
Cultural Intelligence (CQ)
Earley (2002) suggested that the general structure of cultural intelligence is composed of three
facets: cognitive, motivational, and behavioral elements. The cognitive facet refers to cognitive-
processing aspects of intelligence, and a useful way to conceptualize it is through self-concept
theory. The motivational basis for cultural intelligence focuses on a persons self-efficacy and
personal motives. The behavioral facet refers to behaviors of an individual engaging in
intercultural interactions. Earley and Ang (2003) proposed a new concept of cultural intelligence
(CQ) in their book Cultural Intelligence: Individual Interaction Across Cultures. They argued
that CQ can explain individual differences in the ability to effectively adapt to new cultural
contexts. According to their perspective, cultural intelligence consists of four categories:
cognitive, meta-cognitive, motivational, and behavioral. A year earlier, Earley (2002) combined
cognitive and meta-cognitive dimensions into one facet based on the manuscript Cultural
Intelligence: Individual Interaction across Cultures. Earley and Peterson (2004) analyzed the
construct of cultural intelligence and proposed a model of CQ consisting of three categories:
meta-cognitive, motivation, and behavior.
Earley and Mosakowski (2004) advanced a self-scored diagnostic tool (12 items) that
includes three aspects (cognitive, physical, and emotional/motivational), each of which has 4
items. However, this tool has not been widely used in practical studies; the self-report measures
of CQ constructed and validated by Ang et al. (2004) has been the only available assessment tool
for measuring CQ (Ward et al., 2009). Ang et al. (2007) described the development of this
Cultural Intelligence Scale (CQS). In the present study, we employed the 20-item CQ measure of
Ang et al. (2004). This inventory contains four items for meta-cognitive CQ, six for cognitive
CQ, five for motivational CQ, and five for behavioral CQ. Examples include I am conscious of
the cultural knowledge I use when interacting with people with different cultural backgrounds
(meta-cognitive CQ), I know the legal and economic systems of other cultures (cognitive CQ),
I enjoy interacting with people from different cultures (motivational CQ), and I use pause and
silence differently to suit different cross-cultural situations (behavioral CQ). The response
format is a 7-point Likert-type scale (1 = strongly disagree; 7 = strongly agree).

Intercultural Communication Competence
Rubens (1976, 1977) studies are two of the earliest studies of the concept of intercultural
communication competence. Ruben identified seven elements and created a general model of
intercultural communication competence. In addition, Ruben designed the Intercultural
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Behavioral Assessment Indices to measure intercultural communication competence. The
instrument has been found to be reliable (Ruben, 1976), and Koester and Olebe (1988) developed
a simplified version.
Recent studies have provided support for the proposition that intercultural
communication motivation (ICM) influences the quality of relationships that expatriate workers
build while working abroad. Spitzberg (2000) paid close attention to the employees sufficient
motivation to apply knowledge and skills appropriately and effectively. Therefore, the
measurement of ICM becomes relevant, and the need for a validated instrument arises. However,
an extensive literature review revealed that no such instrument exists. Having determined that
ICM consists of intercultural anxiety, intercultural trust, and intercultural self-efficacy, we
developed the Intercultural Communication Motivation Scale (ICMS) based on those three
components. However, Kupka et al. (2009) proposed an instrument that can enable HR
practitioners to assess ICM in the context of worldwide assignments. This instrument can assess
the intercultural communication motivation of candidates for expatriate assignments. We used
twelve diagnostic items reflecting the following three aspects: anxiety, trust, and self-efficacy.
The scale was relative (numeric intervals) and devised to prevent answer styles by employing an
odd number of response choices on a 7-point Likert-type scale (1 = strongly disagree; 7 =
strongly agree). An answer choice (dont know or neutral) was provided outside the scale to
avoid forcing the respondents to make uncomfortable judgments or skip questions (Frey et al.,
2000; Nunnally, 1978).

Job Satisfaction
Herzberg, Mausner, Peterson, and Capwell (1957) stated that the concept of job
satisfaction is multidimensional: there can be satisfaction with the specific activities of the job;
with the place and working conditions under which the job is performed; or with specific factors
such as economic rewards, security, or social prestige. Previous research has focused on topics
such as the ways in which job satisfaction can be measured and the dimensions that constitute
job satisfaction. Smith, Kendall, and Hulin (1969) created the Job Descriptive Index (JDI) to
measure employee job satisfaction. The indexs questionnaire measures job satisfaction based on
the following five factors: pay, promotion and promotion opportunities, coworkers, supervision,
and the work itself. The JDI has been highly regarded and well documented as valid and reliable.
According to Kerr (1985), the JDI possesses good content validity (including concurrent,
predictive, convergent, and discriminate validities), impressive construct validity, and adequate
reliability, and very few instruments in industrial organizational psychology have received the
attention of researchers that the JDI has.
Further, Locke (1976) added additional facets such as recognition, working conditions,
and organizational management. Weiss, Dawis, England, and Lofquist (1967) developed the
Minnesota Satisfaction Questionnaire, which measures job satisfaction based on twenty aspects:
ability utilization, co-workers, moral values, achievement, creativity, recognition, activity,
independence, responsibility, advancement, security, supervision human relations, authority,
social service, supervision-technical, company policies, social status, variety, compensation, and
working conditions. The present study used 15 items reflecting some aspects mentioned above
and a 7-point Likert-type scale (1 = strongly disagree; 7 = strongly agree).

Socially Desirable Response Set
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In studies using self-report measures, respondents are likely to answer questions in
socially desirable ways according to social norms when their personal attitudes, behavior, and
feelings are asked. To objectively evaluate whether the self-report by the respondents were
reliable and honest enough for a meaningful statistical analysis; the present study examined the
socially desirable response set (SDRS) items in the questionnaires. We used a very short form of
the SDRS measure developed by Hays, Hayashi, and Stewart (1989), which includes five items.
Of these five items, three were reverse scored. The present study used a 7-Likert point scale that
had been slightly modified from the original scale so that it could align with the other scales used
in this study. The scores ranged from 1 to 7 (extremely negative to extremely positive).

Other Control Variables
To control for potential effects of the demographic variables, we measured the
respondents nationality, gender, social status, employment type, age, educational level, job
experience, job title, job type, and cross-cultural experience.
Analysis and Results
Descriptive Statistics, Reliability Coefficients and Correlations
Table 2 shows the descriptive statistics, reliability coefficients, and correlations for all the
variables. The results of the correlation analysis indicate that all the dimensions of CQ and job
satisfaction were significantly correlated with ICC (p < .01). Although these results were roughly
consistent with the hypotheses, we conducted a regression analysis to further steps. The Pearson
correlation coefficients of ICC and other variables ranged from .394 (which reflected the
correlation between others cultural intelligence and intercultural communication competence) to
.747 (which reflected the correlation between intercultural communication competence and job
satisfaction).
Table 2: (N = 304).

Variabl
es Mean

S.D.
1 2 3 4 5 6 7 8 9 10 11
1.
McCQ
4.9021 1.28975
2. CCQ 3.6173 1.34992 .394
**

3. MCQ 4.5428 1.28593 .568
**
.490
**

4. BCQ 4.5737 1.18454 .595
**
.375
**
.680
**

5. NCQ 5.3539 1.32684 .640
**
.171
**
.577
**
.644
**

6. SE 4.9556 1.12769 .554
**
.327
**
.702
**
.600
**
.696
**

7. TT 4.6086 1.03430 .522
**
.383
**
.654
**
.566
**
.533
**
.747
**

8. PS 4.7125 1.35826 .354
**
.129
*
.454
**
.387
**
.417
**
.636
**
.510
**

9. ES 4.6173 1.34078 .422
**
.282
**
.512
**
.433
**
.485
**
.695
**
.619
**
.698
**

10. CSS 4.8257 1.31615 .322
**
.217
**
.471
**
.422
**
.444
**
.643
**
.562
**
.761
**
.724
**

11. OC 4.4863 1.26658 .322
**
.302
**
.451
**
.420
**
.434
**
.600
**
.504
**
.800
**
.628
**
.757
**

12.
OCB
4.8895 1.36574 .278
**
.167
**
.460
**
.409
**
.495
**
.581
**
.456
**
.642
**
.544
**
.733
**
.714
**
Note: correlation denotes significance at the 0.01 and 0.05 levels.
*** p < .001, ** p < .01, * p < .05,
+
p < .10.
Hypothesis Testing
- 302 -

To test Hypothesis 1 (cultural intelligence is positively related to job satisfaction), we
conducted a hierarchical regression analysis with SPSS program. The first step was to introduce
the control variables nationality, gender, major, grade, and income into the regression
model (Block 1) to observe their contribution to job satisfaction, from which their influence on
different individuals was able to be held down. In the second step, the dimensions identified
above were entered in Block 2 of the regression model in order to determine the contribution
made by the variables to job satisfaction. As in the analysis of the relationship between CQ and
JS, a hierarchical regression analysis was conducted to determine whether cultural intelligence
was positively related to job satisfaction. The results are shown in Table 3.
In terms of the effect of cultural intelligence on job satisfaction, both models were
significant at p < .001 (F = 3.139 for Model 1 and F = 9.437 for Model 2). The R
2
change (.254)
can be interpreted by the result show in Block 2, that is, the contribution of cultural intelligence
to job satisfaction. The tree dimensions of CQMCQ (= .408, p < .001), BCQ (= .177, p <
.05), and CCQ (= -.164, p < .05)were found to be positively related to JS.

Table 3: Results of the hierarchical regression analysis of the relationship between cultural
intelligence and job satisfaction (N = 304)
Variables
Model 1 Model 2
Beta Sig. Beta Sig.
Gender .058 .372 .006 .918
Nationality -.181* .023 -.200** .006
Status -.098 .290 -.070 .376
Employment type -.119
+
.059 -.093
+
.098
Age .203
+
.057 .147 .108
Education level .078 .236 .040 .477
Job experience -.123 .219 -.021 .811
Job title -.011 .871 -.015 .795
Experience in cultural differences .167* .010 .005 .925
Job type -.039 .553 -.069 .225
McCQ .017 .830
CCQ -.164* .010
MCQ .408*** .000
BCQ .177* .034
NCQ

.061 .481
R
2
.111 .364
R
2
(sig.)
.111** (.001) .254*** (.000)
F (sig.)
3.139*** (.000) 9.437*** (.000)
*** p < .001, ** p < .01, * p < .05,
+
p < .10.
We tested the hypothesis that ICC is positively related to job satisfaction. A hierarchical
regression analysis was conducted in the same way as above. Because ICC was the moderating
variable in our research model, we controlled for the independent variable (CQ), the dependent
variable (JS), and the demographic variables in the first block to determine the effect of ICC on
JS. Table 4 shows the results: SE (= .505, p < .001) and TT (= .211, p < .01). The full model
was statistically significant: R
2
= .497, F (9, 189) = 14.254, p = .001. However, ICC had a
significant positive effect on JS.
Table 4: Results of the hierarchical regression analysis of the effect of intercultural
communication competence on job satisfaction (N = 304)
Variables
Model 1 Model 2
Beta Sig. Beta Sig.
Gender .000 .994 -.030 .561
Nationality -.160* .028 -.200** .002
Status -.078 .332 .002 .973
- 303 -

Employment type -.033 .562 .036 .479
Age .096 .295 .031 .710
Education level .017 .771 .033 .519
Job experience -.090 .307 -.029 .716
Job title -.037 .529 -.032 .542
Cross-Cultural Experiences .047 .414 -.034 .519
Job type -.060 .298 -.084 .101
McCQ -.136+ .081 -.128+ .063
CCQ .002 .971 -.041 .473
MCQ .287** .001 .042 .608
BCQ .166* .048 .121 .108
NCQ .269** .002 -.016 .848
SE .505*** .000
TT .211** .009
R
2
.358 .497
R
2
(sig.) .358*** (.000) .139*** (.000)
F (sig.) 9.189** (.000) 14.254*** (.000)
*** p < .001, ** p < .01, * p < .05,
+
p < .10.
In terms of the hypothesis that ICC moderates the relationship between cultural
intelligence and job satisfaction, we conducted a regression analysis in the same way as above.
The independent variable (CQ) and the moderating variable (ICC) in the research model were
mean-centered, and then they were multiplied to determine their interaction. The values of
tolerance and VIF indicate that multicollinearity was not a major problem for effective
alleviation. Table 5 shows the regression results indicating the moderating role of ICC in the CQ-
JS relationship. Table 5 shows that the F values for Models 1, 2, and 3 were .111, .530, and .570,
respectively, and that all the models were significant (p < .01). The coefficient of determination
(R
2
) increased by .40 from Model 2 to Model 3. Of the 20 interactions related to the sub-
variables, 4 were significant related to job satisfaction. ICC moderated the relationship between
JS and CCQ (= -.209, p < .001), self-efficacy (SE) moderated that between BCQ and JS (=
.575, p < .001), and trust (TT) moderated the relation between JS and MCQ (= .201, p < .05)
and the relation between JS and NCQ (= -.252, p < .01). These results provide evidence for the
moderating role of ICC in the relationship between job satisfaction and cultural intelligence.

Table 5: Results of the hierarchical regression analysis of moderating effects of intercultural
communication competence on the relationship between CQ and job satisfaction (PS) (N =304)
Variables
Model 1 Model 2 Model 3
Beta Sig. Beta Sig. Beta Sig.
Gender .058 .372 -.029 .554 -.043 .383
Nationality -.181* .023 -.240*** .000 -.274*** .000
Status -.098 .290 .016 .817 -.006 .930
Employment type -.119
+
.059 -.019 .699 -.036 .466
Age .203
+
.057 .075 .344 .091 .247
Education level .078 .236 .056 .254 .066 .174
Job experience -.123 .219 .046 .545 .032 .673
Job title -.011 .871 -.012 .821 -.016 .748
Experience in cultural differences .167* .010 -.082 .105 -.078 .122
Job type

-.096
+
.051 -.064 .202
McCQ

.025 .710 -.314 .314
CCQ

-.209*** .000 -1.121*** .000
MCQ

.139
+
.078 .463 .259
- 304 -

BCQ

.131
+
.071 .643 .106
NCQ

-.252** .003 -.339 .308
SE

.575*** .000 .144 .711
TT

.201* .011 .331 .409
McCQSE

.343 .594
CCQSE

1.108* .034
MCQSE

- .336 .641
BCQSE

.326 .696
NCQSE

-.464 .554
McCQTT

.241 .704
CCQTT

.139 .798
MCQTT

-.150 .840
BCQTT

-1.186 .167
NCQTT

.568 .473
R
2

.111 .530 .570
R
2
(sig.)
.111 (.001) .419 (.000) .040 (.018)
F (sig.) 3.139 (.001) 16.241 (.000) 11.552 (.000)
*** p < .001, ** p < .01, * p < .05,
+
p < .10.

Discussion

Because managers have increasingly viewed human resources as social capital, emotional
behavior has become an important issue. Further, employees emotions in the workplace have
contributed to the development of cultural intelligence in globalized organizations.
The present results suggest that workers with higher cognitive CQ are more likely to
develop higher behavioral CQ and good motivational CQ. Further, cultural values among
bicultural workers in multinational organizations may influence both role expectations and role
perceptions. In particular, global employees who perform work in cross-cultural environments
tend to show high cultural intelligence with high capacity of intercultural communication.
Previous research has suggested that those with high cultural intelligence and intercultural
communication competence tend to adapt, maintain, and enhance their general job satisfaction by
engaging in activities such as collaborating with people in work environment and interacting
with locals (e.g., Caligiuri, 2000b; Hechanova, Beehr, & Christiansen, 2003).
In the present study, bicultural workers experiencing a cross-cultural situation for the first
time in their life were more likely to be affected by the culture shock when interacting with
people from another culture and to have difficulties pursuing their goals. The results suggest that
cultural intelligence is a potent factor and can help global workers to be satisfied with their job
environment. These results are consistent with the findings of previous studies (Ang et al., 2007;
Earley et al., 2004; Peterson, 2004; Ward et al., 2009; Smith et al., 1969). A logical explanation
of this result is that cultural intelligence influences job satisfaction.
Various dimensions of cultural intelligence, such as motivational CQ and behavioral CQ,
are needed by workers to accomplish their goals, particularly in cross-cultural workforce
situations.
In addition, the results indicate the moderating effect of intercultural communication
competence on the relationship between job satisfaction and cultural intelligence. This is
- 305 -

consistent with the findings of previous research (Wiseman et al., 2002; Tung et al., 1998;
Kristof-Brown et al., 2005; Johnson et al., 2006; Kupka et al., 2009). The results suggest that
although job satisfaction does not have a very strong relationship with cultural intelligence, the
relationship is moderated by ICC. This may be because culturally intelligent employees can
handle work challenges better by using personal resources involving core characteristics of
cultural intelligence (e.g., motivational intelligence and behavioral intelligence) and intercultural
communication competence as well as core interpersonal and intrapersonal skills for adapting to
new environments and managing stress and getting favorable moods.
Limitations and future research
This study cannot be considered as complete and consistent in its current form. First, there
may be potential errors related to the measurements used in this study as a result may involve
some weaknesses in translating the questionnaire from English to Korean for the bicultural
respondents, because the wording used in the original questionnaire might not be as clear as it
should be. Although the reliability of the well-tested measures was satisfactory, there were some
differences and instability in the JS scales used to measure job satisfaction under different
cultural contexts. Consequently, the reliability of the job satisfaction dimensions was less than
.70, which was in the extreme lower level of acceptance. Second, the items in the questionnaire
might have been skewed toward the neutral point, which might have made the respondents
impatient, inducing them to provide neutral answers. Third, because of the nature of the military
organization, the respondents might have been concerned about some information seemingly
sensitive to the security issues, and then they may be defensive in responding to those questions
by answering more positively than their real opinions. Fourth, to maintain the acceptable level of
reliability of the scales, the present study combined the American and Korean samples for the
data analysis, which might have resulted in several differences and biases from the translation of
the items for the two culturally different groups.
Both cultural intelligence and intercultural communication have been applied to the world
of international management. Although many studies have focused on these factors, few have
been able to provide notable findings. Further, no study has examined the effect of the putative
cause intercultural communication competence on job satisfaction, let alone that between cultural
intelligence (which appeared a few years ago) and job satisfaction. Although the present study
provides some promising results, and more studies examining these factors in different contexts
are needed. For example, these factors should be examined using data from various countries on
different types of workers with different cultural backgrounds working in multinational firms or
non-business organizations. Because this study provides a preliminary comparison of different
levels of CQ, ICC, and JS between American and Korean workers, future research should
compare these two employee groups by addressing some dominant culture factors such as power
distance, masculinity/femininity, and uncertainty avoidance, among others.

Conclusion

This study examines the relationship between global workers cultural intelligence and
job satisfaction along with the moderating role of ICC. The results indicate that high cultural
intelligence significantly influence job satisfaction through motivational and behavioral factors.
In addition, a global worker with high intercultural communicational competence is likely to be
more committed to his or her job by achieving the capability to adapt to different cultures. The
- 306 -

results suggest that personality traits can determine the level of the individuals cultural
intelligence, which is consistent with the findings of previous research (Lee & Badri, 2007).
Moreover, cultural intelligence can affect the level of global workers job satisfaction by
enabling them to develop positive perceptions and to adapt to different cultures for job
performance.

- 307 -

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Wiseman, R. & Watt, C. (2002). Experimenter differences in cognitive correlates of paranormal belief and psi.
Journal of Parapsychology, 66, 4, 371-385.
Weiss, D. J., Dawis, R. V., England, G. W., & Lofquist, L. H. (1967). Manual for the Minnesota Satisfaction
Questionnaire. Minnesota Studies in Vocational Rehabilitation. University of Minnesota, Industrial
Relations Center. (No. XXII), 1119.

About the authors
*Dong Soo Park is a professor of management at Yeungnam University, Gyeongsan-si, South Korea. He received his Ph.D. in
strategic management and organization from the University of Minnesota. His current research interests include international dimensions of
human resource management, organizational behavior, leadership, and cross-cultural management. He can be contacted at dspark@ynu.ac.kr.
*Diao Abdoukhadre is currently a doctoral student/research assistant in the Department of Business Administration at the graduate
school of Yeungnam University. He received his M.A. (2005) in business administration from the Graduate School of Human Resource
Management at the National School of Applied Economics in Senegal. He can be contacted at diaofara15@hotmail.com.

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The CSR Poli cy Fr amewor k the State and the
Rati onal for CSR i n Ser bi a's Context

Vladimir Petkovski
Aleksandar Nikolov
The State of CSR in Serbia understanding and scope
Although activities to promote corporate social responsibility (CSR) have created some
degree of awareness of the term and the concept, it can still be considered vague to the wider
audience in the country. On the other hand, the Government has been undertaking serious steps
to incorporate CSR issues in the laws and regulations as part of the EU approximation process of
the country.
As for the business sector itself and its CSR engagement, it is noticeable that still a
number of companies in Serbia consider CSR as a public relations tool which helps improve
their image or reputation in the society. CSR has a potential to become much more than this, i.e.
to create social, economic and environmental value added, and thus bring benefit not only to a
small elite, but to the entire society. It is encouraging that a number of companies purposely
avoid marketing their CSR activities, indicating increased awareness of the inherent benefits of
practicing CSR.
As in other countries in transition, there are examples when companies consider CSR as
being equal to legal compliance, and do not strive to go beyond legal requirements in an effort to
minimize the negative and to maximize positive effects on the society and the environment. In a
situation where rule of law is still not to be taken for granted it is common for companies to
boast how they are paying taxes and salaries instead of recognizing that legal compliance is a
prerequisite, and that companies must go beyond that in order to be characterised as socially
responsible.
With this in mind, we can define corporate social responsibility in the following manner,
as operating on three key levels:
Firstly, it involves compliance with legal obligations (e.g. tax, health and safety,
workers rights, consumer rights, environmental regulations) and industry standards.
Secondly, it includes minimizing or eliminating the negative effects of business on
society and managing risk (for example, of human rights abuses or pollution).
Finally, it concerns increasing the positive effects of business and creating value
through innovation, investment and partnership aligned towards social and
environmental good (for example, job creation, social and economic development and
conflict resolution).
The largest Serbian companies have high awareness of the importance of CSR, and a
strategic orientation towards responsible and constructive role and contribution in the
community. Still, the practice is mostly employed by foreign owned companies, especially those
within multinational corporations, although such perception can be somewhat attributed to the
abovementioned practice employed by some smaller companies to avoid publicizing their CSR
initiatives. Some trans-national corporations (TNCs) have an innovative approach to CSR,
trying to adapt their global CSR approach to the specifics of the local environment and take
advantage of past domestic experiences and achievements. Other TNCs employ poorer CSR
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practices in the host country, than in their home countries, demonstrating double CSR
standards. Nevertheless, the integration of CSR in the business strategies and the organizational
structure of companies is only gradually increasing.
A recent report on good CSR practices in Serbia
107
provides information on the state of
CSR involvement in several important areas of CSR, namely: environmental protection, health
and safety at work, human rights, community engagement, business standards and marketplace
practices. The areas in the forefront of CSR implementation are the ones concerning the
environment and the fair treatment of employees. In these areas companies seem to be fully
abiding to the laws and regulations, but are also able to offer original solutions and demonstrate a
proactive approach in the quest for best modes of improvement. Most notable progress has been
achieved in the development of volunteering programs, which have spread to a large number of
companies.
As for the community engagement, the main focus is on philanthropic activities and
sponsorships, as opposed to the lesser engagement in support to science and education,
scholarships and infrastructure improvement. In some instances large privatized domestically
owned companies are main CSR drivers in smaller communities and provide the basis for the
wellbeing and the livelihood for entire regions. In general, the business community still lacks
CSR initiatives that would be simultaneously beneficial for the community and turn profits for
the companies.
Also, CSR positively contributes to competitiveness as it leads to a competitive
advantage, particularly by improving the companys image, increasing its customers loyalty and
fostering the employees motivation and workplace satisfaction. As to this regard it is important
for companies not to see CSR as something fashionable, but to develop and apply a CSR
strategy that is embedded in the overall business strategy in order to guarantee its sustainability.
Serbia as a country which is still undergoing the process of transition has been
additionally affected by the world economic crisis which is making a deep imprint on its
social map. The world economic crisis has seriously affected a large number of
companies in Serbia, especially the export oriented ones and companies affiliated to
multi-national corporations, resulting in the decrease of philanthropic and charitable
activities. In a period of economic hardship, companies could demonstrate their
responsibility in other more appropriate ways, such as maintaining good communication
with employees, as well as responsible approach towards downsizing in terms of giving
adequate notice periods to employees, providing vocational counselling, vocational
retraining, financial assistance, etc. On the other hand, the crisis could offer an
opportunity for companies that are innovative enough to utilize the CSR concept as an
integral part of their business strategy to enhance their competitiveness. Emphasizing a
long-term approach to CSR could represent one of possible ways to overcome the crisis,
or to build a better competitive position once it is over.

CSR system
In the development of the CSR system, it is evident that there is an increased number of
corporate foundations and endowments, as well as growing number of companies with assigned
individuals and departments in charge of CSR.

107
Database of Good CSR Practice: Analysis and Recommendations; Working-Team of the Vice-President of the
Government of Serbia in charge for the implementation of the Strategy for poverty alleviation, Serbia Investment
and Export Promotion Agency; Belgrade; May 2009.
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As for the integration of the CSR concept in the business strategy, surveyed companies
are demonstrating a high level of awareness of the importance of CSR, reflected in the findings
in the previously mentioned report that 90% of the companies have reported that their CSR
programs are permanent (76%) or semi-permanent (14%).
According to the same source, the weakest link in the CSR system is the reporting on
non-financial performance, i.e. the social and environmental impact. Although in 2009 the
percentage of companies that have reported on such aspect of their operations is reasonably high
(84%), still only 22% of the surveyed companies do so through a separate report (sustainability
report, citizenship report, etc.). The number of reports prepared in accordance with some of the
globally accepted standards (such as GRI), is only 18%.

Community engagement
In this area, most of the activities are aimed at children and youth perceived as
investment in the future. Also, there are a significant number of activities oriented towards the
persons with disability, although admittedly the number of projects for employment of this
category is still low.
Philanthropic activities, sponsorships of cultural and sport organizations and events, as
well health and social care projects are predominant, while engagement in activities related to
stimulating entrepreneurship and employment of socially vulnerable groups is still lacking.
Examples of good CSR practices in this field:
Constructing an entrance platform on the Faculty of Philology in Belgrade by the
LOreal-Paris company on the occasion of its 100 year jubilee;
Construction of a park of inclusiveness in New Belgrade, which is accessible for
children with disabilities, financed by EFG bank;
Employment of children with mental disability in the McDonalds restaurants under
their cooperation with the Creative-educational centre (KEC MNRO).

Environment
This area of CSR engagement is relatively better legally regulated and companies are
more familiar with their obligations, as well as with the possibilities for engagement that goes
beyond legal compliance. This is partly due to the visible and measurable results that can be
achieved and the possibility for introducing specific and relatively standardized approaches.
However, the majority of the companies are not quite aware of the importance of
reporting on the environmental impact, with the exception of affiliations of multinational
companies and those with predominant foreign ownership. Thus the environmental reporting
comes down to submitting legally required reports and studies to the competent institutions and
the sporadic public disclosure through company web-sites, media and PR activities.

Workplace environment
The vast majority of surveyed companies are committed to the wellbeing of employees
and the creation of a safe and stimulating work environment:
86% of companies have clearly formulated and easily available internal codes of
conduct and corporate values, with 28% of them explicitly addressing the
commitment to CSR and sustainable business practices;
Equal opportunities policies and protection of employees rights policies are
transparent in almost all of the companies (96% and 98% respectively);
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In the domain of health and safety at work remarkable progress has been made,
demonstrated through the drastic increase of the number of companies with the
OHSAS 18001 standard;
The continuous education of employees is present in all surveyed companies (96%);
A large number of companies strive to maintain dialogue with the employees in order
to identify their workplace satisfaction and attitudes on the business operations of the
company (over 80%); almost one-third of the companies have relatively good
cooperation with the labour unions;
Employee volunteering programs are present in half of the surveyed companies a
stunning progress when compared with previous years predominantly in foreign
owned companies.

Corporate governance
Vast majority of surveyed companies publicise data on their governance structure and the
annual financial reports, and in 74% of the cases they have been made available on the internet.

Marketplace practices
Surveyed companies are paying more attention to the relations with the consumers than
other stakeholders:
One third of the companies consider their price-formation policy as transparent or
semi-transparent;
More than one third of the companies have implemented quality management
standards such as ISO 9001 and HACCP;
Almost 60% of the surveyed companies employ all of the good practices in relation to
consumers (clear labelling, ethical advertising, consumer complaints and claims and
consumer satisfaction surveys);
supply chain relations are less developed less than half of the surveyed companies
have special programs for the suppliers, and 60% of the companies impose on the
suppliers their business standards;
The number of companies that support the economic development of the local
community is relatively small (38%), while only one quarter of companies have
developed programs to support local entrepreneurship.
Generally speaking, Serbian companies still do not fully differentiate CSR from corporate
philanthropy and legal compliance. Such lack of understanding results with predominant
engagement in activities related to support of activities of other actors, such as local
governments, charitable organizations and sporting and cultural events. On the other hand,
companies investment in the local infrastructure are relatively rare, and the number of programs
developed and conducted by companies on their own initiative is even smaller (such as,
responsible downsizing, training and equipping of people that would gather waste and materials
for recycling, providing special credit lines for stimulating local entrepreneurship, etc.).
The Rationale for CSR in Serbias Context
Rationale for the involvement of the business community
The ongoing process of economic globalisation and the emergence of new commercial
and technological capabilities have shifted the balance between responsibilities of governments
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and those of business. Companies now face growing pressure to commit explicitly to voluntary
measures for the environment and society on top of legal requirements. They are required to
accept their responsibilities beyond the factory gate and the frontiers of their home country.
As well as meeting the expectations of their stakeholders, companies that make real
achievements in protecting the environment, ensuring the wellbeing of their employees and
helping society to develop sustainably are also serving their own immediate vital interests.
Companies that adjust to the increased expectations in their operating environment at an early
stage promote acceptance of their actions, gain new competitive advantages and reduce their risk
exposure. Hence a companys performance in sustainability matters has a material impact on its
prospects for long-term commercial success.
As a result, the financial markets are starting to pay more attention to corporate social
responsibility, sustainability and socially responsible investment (SRI). The outperformance of a
number of SRI indexes is encouraging more and more conventional investors to also consider
social and ecological company assessments as a way of further reducing their investment risk.
108

CSR positively contributes to competitiveness as it leads to a competitive advantage,
particularly by improving the companys image, increasing its customers loyalty and fostering
the employees motivation and workplace satisfaction.
Nevertheless, it should be noted that the pressures that are being mounted on the Serbian
enterprises by the media, non-governmental organizations, consumers, the labour unions,
investors, business partners and the state, as a reaction to socially irresponsible behaviour are
incomparably weaker than those in the developed countries. On the other hand, the companies
with socially responsible activities are not being sufficiently acknowledged on the domestic
market (i.e. by the domestic consumers, business partners and investors), by the media and the
government.
Small and medium size enterprises (SMEs) are increasingly becoming a very important
part of national economies, worldwide. As for Europe, The European Commission as early as
2001 emphasised the need for SMEs to be fully engaged in the public debate on corporate social
responsibility and for their good CSR practices to be better promoted. In Serbia, in the period of
2004-2007 the number of SMEs in the overall number of companies has amounted to 99.7%,
while in the number of employees and the revenues, participated with 60.6%, and 67.2%
consequently which by itself emphases the need for these companies to be included in the CSR
system. Although they do not poses the capacities and capabilities of the large companies in
terms of being able to offer big donations, provide scholarships or get involved in infrastructural
and environmental projects, SMEs are generally better integrated in the local communities than
the large entities. Oftentimes, SMEs perform a variety of CSR activities in the local communities
without being adequately recognised as such. Occasional by appearance, these activities in most
cases reflect the ethical principles of their owners rather than the notion that they could bring
business benefits and advantages to the owners. All in all, the main obstacles to the SMEs
involvement in CSR are the lack of awareness and the lack of resources, as well.
Having in mind the upcoming process of EU integration, on one hand there is an
increasing opportunity for Serbian enterprises to improve their access and presence to the
common market of the Union, but on the other there they face expectations of consumers,
regulators and investors regarding the implementation of practices of CSR. Aside from this, for
the Serbian companies that aspire to conclude outsourcing agreements with large foreign

108
Corporate Social Responsibility: An Introduction from the Environmental Perspective, Sabine Braun, Thomas
Loew, Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, 2006.
- 315 -

companies or to be their suppliers a need arises to introduce CSR practices, because often that
will be set as an explicit requirement for business cooperation in accordance with the policies of
the leading global companies.
Rationale for Government support
Social inclusion
Social inclusion is a process which ensures that those at risk of poverty and social
exclusion gain the opportunities and resources necessary to participate fully in economic, social
and cultural life and to enjoy a standard of living and well-being that is considered normal in the
society in which they live. It ensures that they have greater participation in decision making
which affects their lives and access to their fundamental rights.
According to the Report on monitoring of social inclusion in Serbia
109
the country has
been facing two impeding factors with regard to social inclusion: postponed post-socialist
transformation and consequences of the wars during the break-up of Yugoslavia. The increase in
unemployment, the impoverishment of a large part of the population and the dysfunctional
institutions pushed the elements of social integration from the formal to the informal sector. The
informal labour market, the informal networks of social support, finance and education, provided
the most important mechanisms of integration. However, the informal forms of integration
cannot ensure a stable integration of individuals in the wider society, which resulted in a
worsening socio-economic status of a number of social groups. Aside from the traditionally
marginalized groups, such as the Roma and persons with disability, other groups as well were
faced with a deteriorating status such as the refugees, the internally displaced persons, the
pensioners, the unemployed, the unskilled workers, etc. Aspects of social inclusion are already
part of the key strategies of Serbia, such as the Poverty Reduction Strategy and the Sustainable
Development Strategy, while the National Employment Strategy 20052010 explicitly mentions
basic objectives of the Lisbon strategy, including enhancing social cohesion and inclusion in the
labour market.

Adoption and implementation of technical regulations
The systematic adoption and implementation of technical regulations in accordance
with international agreements undertaken by the Republic of Serbia, the needs of the Serbian
economy, and the capacity of the technical bodies should ensure harmonisation with the
technical regulations of the EU. The harmonisation should be conducted in accordance with
precisely determined priorities for transposing the European directives in the national legislation.

Employment, treatment of employees and industrial relations
The systemic and normative regulation of the sphere of employment and the
advancement of industrial relations are two of the key areas related to CSR that were singled out
by the relevant actors in Serbia including the Ministry on Labour and Social Policy, the Team
on implementation of the Poverty Reduction Strategy, the Ministry of Economy and Regional
Development, the Economic Chamber of Serbia, the labour unions and the Union of employers
of Serbia.

109
Working-Team on Implementation of the Poverty Reduction Strategy, SECONS, CESID, National Social
Protection Bureau, 2009.
- 316 -

In the area of regulating employment the most important interventions regarding
harmonisation with the rules and regulations of the European Union is the professional
rehabilitation and employment of persons with disability. The Law on professional rehabilitation
and employment of persons with disability (Official Gazette of the Republic of Serbia No. 36/09)
completely redefines the relations between the persons with disability as potentially employed
and the employers. In accordance with the EU criteria the Law envisages for individual
consideration of the working capabilities and opportunities of each person. On the basis of the
EU legislation and the intention to achieve harmonization with the regulations of the European
Union, the legislation should enable the inclusion in the labour market of this category of
citizens, and thus in the other spheres of social life.
Despite the fact that the development of industrial relations and the quality of corporate
governance has not yet reached the level present in developed countries it is important to have
awareness among all social partners the state, employers, and labour unions that they have to
be continuously developed and advanced, in order to achieve harmonisation with the relations in
the countries of the EU.
According to the Union of employers of Serbia, the further institutionalisation and
establishment of new industrial relations, or the development of socially responsible behaviour in
this area, would require gradual deregulation of industrial relations, in accordance with the
principles and standards of the EU. There is also appreciation that preventative inspection
controls could help the employers to more comprehensively and adequately introduce measures
that contribute to health and safety at work. This is backed up by the experiences of the EU
member states that in most instances have taken several years to gradually introduce measures
ensuring full protection and safety of employees and other persons that happen to be in the
working area of the employers.

Environmental protection
Aside from legal compliance in this area, additional requirements will be placed on
organizations related with the implementation of the Eco-Management and Audit Scheme
(EMAS). This system is generally defined with the Law on protection of the environment
(Official Gazette of the Republic of Serbia 135/04, articles 44-50) and with its amendments
(Official Gazette of the Republic of Serbia 36/09, articles 19-22). Financing of environmental
activities which go beyond the scope of legal compliance can be ensured both from domestic
sources and the pre-accession funds of the EU (IPA), as well as from bilateral donations and
loans from developed countries.

EU integration harmonization with acquis communautaire
For any country, aspiring to accede to the EU will require embracing EU norms and
practices, including recognizing and promoting CSR and its contribution to social cohesion and
sustainable competitiveness and development. This would inevitably require reviewing of
governmental policies in areas affected by the CSR concept, developing a comprehensive CSR
agenda, implementing supportive actions and monitoring progress in achieving established CSR
objectives.
The social aspect of development has tended to be given a much lower priority and has
only been given attention rather late in the accession process. Given the dominance of the EU
process in policy thinking there is then a risk that the social aspect of development becomes
somewhat neglected. Recently, the EC reiterated the importance of the social dimension and the
- 317 -

need to ensure that economic, employment and social policies interact in a positive way and that
social protection is regarded as a productive factor. Hopefully this emphasis within the EU on a
more balanced approach will be reflected in the accession processes in future.
The Republic of Serbia is gradually deepening its relations with the EU (Stabilization and
Accession Agreement and status of a candidate country) in which the issues of poverty reduction
and social inclusion will be a major component in the harmonisation and integration process. The
Government of the Republic of Serbia is determined to fulfil the requirements that were defined
at the summits in Lisbon and Copenhagen and which relate to social inclusion, Millennium
Development Goals (MDG) and the goals defined in the Poverty Reduction Strategy.
In order to do so it is necessary to update the policies that deal with the matters of social
inclusion and to develop a strategic framework that will take into account a broad spectrum of
exclusion based on numerous social factors. The challenge for the country will thus be to
combine into a single framework the new demands for the country to develop a Social Inclusion
agenda as part of its efforts to adapt its social policies to those of the EU and the internationally
agreed MDG targets, both of which are similar and in the case of Serbia complementary in the
countrys efforts to reduce poverty (as it is still a low income country with important issues to
resolve related to universal coverage of basic services and human resource development).
The processes that need to be developed will be based on the knowledge and the good
practice examples of the European countries, as well as the experience that the Government of
the Republic of Serbia has gained during the preparation and the implementation of the national
policies, including relevant documents such as the National programme on integration of the
Republic of Serbia in the EU, the priorities in the European partnership in the area of economy
and social inclusion, and the Poverty Reduction Strategy.

Attracting foreign investment
Promoting CSR is also relevant for attracting foreign investment as there is a rapid
increase of investment funds that supplement financial objectives with social, environmental or
ethical considerations in the selection, realization and retention of investment. This socially
responsible investment designates approving loans to or investment in securities of enterprises
that fulfil some of the criteria for social responsibility. For instance in 2007, total socially
responsible investment assets in professionally managed portfolios that embrace certain socially
responsible investment practices rose to $2,710 milliards
110
in the US. The European market for
socially responsible investing grew from 336 milliards in 2003 to 2,665 milliards at the end of
2007
111
. Serbian enterprises aiming to seize this opportunity and utilize part of these funds will
be faced with the challenge of changing the manner in which they conduct their day-to-day
business activities so as to incorporate the principles of socially responsible behaviour.
Along these lines is the involvement of the Serbia Investment and Export Promotion
Agency in the development of the Database of Good CSR Practice. Responsible foreign
investors are seeking countries and companies with a proven CSR track-record, in an effort to
reduce the inherent risks associated with doing business in developing countries. In todays CNN
world bad news associated with unethical business practices of company affiliates or business
partners throughout the world have the potential to spread quickly and to affect companies
business arrangements, bottom lines, reputation and market valuation. Tracking and

110
Social Investment Forum, 2007 Trends Report.
111
Eurosif, the European social investment forum, European SRI Study 2008.
- 318 -

documenting CSR activities of domestic businesses, and especially of good examples, can serve
to attract foreign investors and business partners.

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Found i n translati on: A Li brary Outreach
Pr ogr am for I nter nati onal Students
Todd Quinn

Abstract
During the last few years Northern State University has increased recruitment of
international students for its programs. Currently, international students comprise approximately
7-9% of the student population. Most of these students attend NSU for one academic year or less
(e.g. study abroad or ESL programs). The Williams Library offers a welcoming atmosphere to all
students, though it recognizes that many students new to campus have difficulty using or
navigating an academic library, either because their limited research experience, or they have not
been exposed to a library with so many resources or services. For international students, these
difficulties seem to be compounded by the obvious cultural and language issues, but more
importantly that the American academic library system is different than that of their home
country. Over the years this has caused challenges. The library staff have noticed specific issues
and have tried to address them, but with limited success.
During the fall 2009 semester, the library took steps to gain more insight into student
library (the facility and web site) usage. Thus, the librarys public services librarian approached
the International Student Advisor and the English as a Second Language coordinator to discuss
ideas for better communication between the library and international students. Over the course of
a few discussions the Library Ambassador program was created.
This pilot program plan is in the process of building a bridge between the library and the
international students. Four international students participated in the program during the Spring
2010 semester with the goal of learning about the library to eventually convey this information to
incoming international students prior to (and during) the 2010 fall semester.

NSU & Aberdeen

Northern State University is a small public liberal arts college with an approximately
3000 students (head count) enrolled in its programs. NSU offers bachelor degrees in the fields of
arts, music, business, education, science, humanities, and master degrees in education and
psychology. The campus is located in Aberdeen, South Dakota, a micro-metropolitan statistical
area (US Census). It is a rural town of 25,000 residents with all the usual amenities, including
cultural/entertainment events from the community and campus. The town offers taxi service, but
very limited local public transportation and none to larger towns or cities (Sioux Falls, SD and
Fargo, ND are a three-hour drive, and Minneapolis, MN is a six-hour drive).
International Students
Over five years ago NSU began to heavily recruit international students, mainly from
Asian countries. Prior to this push, only a handful of international attended NSU in any one year.
Currently, most (95%) of the international students attending NSU come from South Korea or
China, though there are students on campus from Europe, Africa, and Latin America countries.
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In the fall 2010 semester, approximately 230 international students, approximately 8% of the
total student population, enrolled in one of three programs: Exchange, English as a Second
Language (ESL), or degree-seeking. The Exchange students (60% of international students)
attend NSU for one academic year for the personal experience, but most attend to complete a
study abroad requirement for their home institutions' degree. The ESL students (20%) attend one
or two semesters to improve their English fluency. The degree-seeking students (20%) attend to
earn a bachelor's degree, often in conjunction with a home institution. Some of the Exchange
students become degree-seeking (Schmidt et al., September, 2010).
As the numbers above indicate, NSU experiences an 80% turnover of international
students each year. This turnover is a major challenge to the campus (academically and
logistically), including the library. Luckily, during the 2007-08 academic year the campus hired
an International Student Advisor (IS Advisor), who serves as academic advisor to international
students, coordinates logistics, and also is the international student liaison to the other campus
departments. Each fall the IS Advisor and the ESL Coordinator are the main people who oversee
many of the incoming students issues and concerns, which also continue throughout the
academic year. They have worked together to help the campus solve some international students
concerns. For example, the students normally do not arrive with bedding (due to luggage weight
restrictions), and they do not have personal transportation. Now some bedding materials and
bicycles have been donated to the campus from local entities to help ease these issues. In
addition, the campus recently created the International Student Office with a director to provide
more support to the international student programs and house the offices of the IS Advisor, the
ESL Coordinator, and Study Abroad Coordinator. This office will help the campus better meet
the needs of international students by coordinating the efforts of its internal offices, and help the
campus take a more systematic approach for long-term planning (Schmidt et al., September,
2010).
Library and International students
The Williams Library on the NSU campus provides a welcoming facility to students and
faculty. The building has many open areas, eight group rooms, and quiet space for studying,
along with two computer labs, and a physical collection of over 200,000 items. The staff consists
of a director, three degreed-librarians, six professional support staff, and 15 student workers.
Every week the building is open 88.5 hours, including being open until 11pm Sunday through
Thursday.
Since NSU began recruiting more international students, the library staff noticed a
dramatic increase in the number of international students using the physical building. From
anecdotal evidence, these students usually compromise at least 50% of the patrons using the
library building at any one time. As Shaffer states, *the library+ is essentially a perfect storm
of academic, telecommunication, and social resources, with lengthy hours of operation (Shaffer,
2010) In addition, the staff is available 88.5 hours a week to answer questions concerning
course assignments, research, technology, the campus, and the region. The other factors that may
contribute to the heavy usage include the fact that all but a few international students live in the
residential buildings (currently they comprise over 30% of the total NSU residential students),
the lack of personal or public transportation, the physical proximity of the library to the student
center and academic buildings, and the harsh winter climate.
As a whole, the library has been able to accommodate research and study needs of
international students because they are not terribly different from those of American students.
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After some time, however, the library staff began to notice particular challenges with
international students and have tried to address them in one form or another, but with limited
success. The largest concern was students leaving their materials (books, computers, cell phones,
etc.) unattended for hours in group rooms or other spaces. The unattended materials concerned
the library staff for two reasons, 1) materials may be stolen, and 2) other students were not able
to use the resources (e.g. group room, computer, etc). To deal with this issue the library instituted
a policy of collecting all materials left unattended after an hour (every hour student workers
perform the task of counting people in the building and now noting unattended material) and
placing the items at the front desk. Unfortunately, the library did not publicize the new policy,
and students were surprised when their materials disappeared. Slowly most students learned
about the policy by asking at the front desk or via the informal grapevine. Later in the semester
the public services librarian spoke with the IS Advisor about this issue and asked her to convey
the library's concern to the international students. In hindsight, this should have happened first.
During the fall 2009 semester, the library conducted surveys which provided the library
staff more insight into some specific international student issues. First, three librarians (Jonna
Underwood, Jodie Barker, and Jackie Hanson) conducted a photo survey based on Nancy Foster
and Susan Gibbons ethnographic study of the University of Rochester's library. They asked for
student volunteers (all students were eligible) to take photographs of specific items (e.g. all items
in book bag) or concepts, then be available to discuss the photographs taken with the librarians.
Several international students participated, and during the subsequent interviews the librarians
discovered why many Chinese and Korean students leave unattended materials in the library for
hours. It appears study space is limited at their home institutions, so students leave their
materials early in the day so they will have a space after classes. At NSU, the library usage is
high among students, but rarely is one unable to find a study space.
This author conducted an informal survey of business students in a particular professors
business courses. Students were asked to complete one of two questionnaires of open-ended
questions about the library. One survey dealt with the physical library, the other with the library
web site. Many international students participated in these surveys as well. No particular insight
on international students was learned in this survey other than that it was felt that the library
needed to do more to connect with international students.
Library Ambassador Program
The two surveys and past challenges prompted the public services librarian to contact the
IS Advisor and ESL Coordinator to meet to discuss issues and solutions on helping the library
build a better relationship with the international students (formal groups and individuals). During
the meeting in early January 2010, the IS Advisor was able to provide more information about
the programs offered to international students and share other information. A few ideas were
discussed, and both the IS Advisor and ESL Coordinated showed high interest in the public
services librarians idea of creating a library program with international students to help the
library and international students learn from each other to overcome issues and challenges
(Schmidt et al., January, 2010). In this way the Library Ambassador Program was born.
The basic premise was to recruit a few international students to learn about the library
function, resources, services, and policies and act as liaisons between the library and
international students (formal groups or individuals). Since the IS Advisor had the most personal
knowledge of individual students, she was asked to select a few students for the pilot project. She
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selected four students based on their interest and their academic performance to become Library
Ambassadors. Three of the students were exchange students, and one degree-seeking (English).
The public services librarian set a meeting with the four Library Ambassadors to provide
an overview of the program. After the initial meeting each student was provided an individual
orientation session. The session lasted 60-90 minutes, which provided the students with basic
over of the library, public services, the various collections and the classification systems (Library
of Congress), time with a library student worker, and a tour. From the public service librarians
point of view the discussions with the informal discussion during the orientation was most
valuable. It allowed him to learn about the individuals, as much as common challenges
international students encounter. In addition, the orientation sessions for each student allowed
her/him to ask questions and form a more complete idea of the library. This provided us a
starting point to decide what products to create that would help future international students at
NSU.
The group, with some prompting from the public services librarian, decided to create a
welcome letter and video. This author wrote the letter and it was translated into Korean and
Chinese by the Library Ambassadors. The one-page letter displayed one paragraph in English
and then the translation of the paragraph in Chinese or Korean.
The video was created from still photographs of the Library Ambassadors in various
locations in the library (e.g. group room, open-study area), to provide a sense of the library to
others. The digital photographs were compiled by the public services librarian and he created a
video using Camtasia Studio software. The 90-second video is narrated by the librarian, but
includes subtitles (one in Korean, one in Chinese). The videos are housed on the library web site,
and the Library Ambassadors seemed to enjoy the process. Both the letter and video were well
received by the IS Advisor and ESL Coordinator. The IS Advisor plans to distributed them to
potential international students or their institutions. The hope is that these products will introduce
incoming international students to the library prior to their arrival.
Conclusion
The library hopes the Library Ambassador program will continue and become part of its
goals to help better meet the needs of international students. This pilot project was able to create
two products with the help of international students, though the program ideas are larger. This is
the beginning of a proactive approach, and more work needs to be completed to sustain the idea.
In addition, the program will help the library staff build realtionships with individual
international students, which in the long run will benefit the librarys approach to other national
and international groups. In the future, the library plans to offer workshops with the assitance of
the Library Ambassadors on specific issues (e.g. plagiarism), and programs celebrating the
various international cultures. By working with the IS Advisor, and degree-seeking students this
program has the potential to grow and serve the campus well. It also may serve as a model for
the library or campus to meet the needs of other specific student groups.
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Works Cited
Foster, S., & Gibbons, S (2007), Studying students: The undergraduate research project at the University of
Rochester. Chicago, IL: Association College and Research Libraries. Retrieved from
http://docushare.lib.rochester.edu/docushare/dsweb/View/Collection-4436/
Shaffer, C., Vardaman, L. & Miller, D. (2010). Library usage trends and needs of international students.
Behavioral & Social Sciences Librarian, 29(2), 109-117.
Schmidt S. & Clipperton A. (personal communication, January 6, 2010).
Schmidt S. & Smith, C. (personal communication, September 20, 2010). Underwood J., Barker J., & Hanson J
(2009). Photo Survey. unpublished.
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Developi ng Spor t Busi ness wi th Spor t
Management Studi es The Fi nni sh appr oach
Risto Rasku

OECD Programme for International Student Assessment (PISA) has reported
exceptionally high attainment of Finnish students in PISA 2000, 2003 and 2006 in all three
literacy domains. This has aroused continuous international interest toward the Finnish education
system.
A short overview of the Finnish education system on the whole
Focusing on Sport Management studies as an example, aiming at showing how the
structure is designed to support the student performance and Sport Business research and
development.

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New Legal For ms for Soci al Enter pr i ses: A
Compar i son of Str uctur e Opti ons and
Exper i ences i n the Uni ted States and Gr eat
Bri tai n
Jaclyn J. Rundle
Abstract
This paper discusses new legal structures being created in the U.S. and Great Britain to
facilitate the formation of social enterprises, i.e., organizations created to achieve social good.
Questions about the limitations of using existing for-profit and nonprofit legal structures for
social enterprises has produced a search for new, hybrid legal structures for social enterprises. In
April 2008, Vermont passed a law pioneering a new structure called the Low Profit Limited
Liability Company or L3C. A social enterprise using the Vermont L3C structure commits its
resources and operations to achieve specific charitable or educational goals; but the enterprise
also can make a profit, even a substantial profit, as long as profit is not the organizations
primary aim. By Summer 2010, six more states had legalized the L3C structure and fifteen more
states were considering adoption. A federal L3C statue is anticipated in the near future.
As U.S. social entrepreneurs begin to create new L3C enterprises, and as U.S. lawmakers
consider the impact of the new L3C structure, it is instructive to consider the British experience
with hybrid social enterprise structures. In Great Britain, a legal structure called the Community
Interest Company or CIC was created in 2004. Since its development, more than 4000 social
enterprises have been formed using the CIC structure.
This paper describes the link between the rise of social enterprise and establishment of
the new L3C and CIC structures; defines the L3C and CIC; gives examples of U.S. and British
enterprises that have adopted the new legal structures; highlights problems and challenges of the
new structures; and discusses the prospects for the U.S. L3C structure based on the British
experience to date.
The rise of social enterprise
Traditionally in the U.S., when societal needs or problems arose, nonprofit organizations
were formed to address them. The so-called Third Sector, consisting of more than 1.5 million
nonprofit organizations (Wing, Roeger & Pollak, 2010), has long undertaken to feed the hungry,
fight for environmental reforms, build arts programs, and resolve social ills. In the past, anyone
aiming to address unmet societal needs typically created a 501c3 charity, organized to address
one of eight purposes allowed by the Internal Revenue Service: charitable, religious, educational,
scientific, literary, fostering national or international amateur sports competition, testing for
public safety, and preventing cruelty to children or animals.
But in recent years there has been a shift away from treating the nonprofit 501c3 as the
default structure for achieving social good. Many have questioned the efficacy of the nonprofit
structure, noting its unwieldiness and restrictions. In an era of shrinking resources, nonprofit
organizations raising funds to pay for social programs have faced heightened competition for
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donors dollars; and government grants, formerly available to nonprofits, have become a less
reliable source of funding due to budget shortfalls.
New ideas have emerged about how best to organize entities aiming to solve social
problems. One approach that has gained particular attention is the concept of the social
enterprise, defined as a business that strives to accomplish a social mission while also meeting a
double or triple bottom line (Husock, 2006). Unlike nonprofits, social enterprises support their
social goals by actively seeking to earn profits from products and services, using strategies
typically employed by for-profit businesses (Community Wealth Ventures, Inc., 2009). Social
enterprises blur the distinctions between for profit and not for profit entities and can adopt any of
a multitude of different forms. A social enterprise may be a freestanding for-profit business; a
for-profit with an add-on social venture; or even a nonprofit organization with a subsidiary for-
profit business.
Social entrepreneurs have grappled with many challenges arising from the hybrid, for-
profit-nonprofit nature of their organizational structures. Locating funds to finance growth is one
such challenge. Sources of funds available to nonprofits, such as donations and grants, typically
are not available to social enterprises that have adopted for-profit legal structures, even when the
social enterprises have a strong and beneficial social mission. Turning to outside investors
produces a different set of issues. Social entrepreneurs have learned that many investors are
reluctant to wait patiently for a slow investment return from a socially motivated investment. In
addition, investors may push to increase their own financial returns at the expense of the social
enterprises social mission. Meanwhile, traditional financial institutions, sometimes skeptical of
hybrid social enterprises, may be reluctant to provide growth capital (Field, 2007-2008).
Similar circumstances have been present in the United Kingdom, where social enterprises
have been increasing in numbers and impact. A 2005 survey by the British government revealed
that 55,000 social enterprises existed in the UK, accounting for almost 1% of GDP (Blyth, 2007).
The British government, recognizing the potential of social enterprise to revitalize communities
and to improve provision of public services, announced in 2003 that it would develop a new
legal structure for social enterprises, to be called the Community Interest Company or CIC
(Benjamin, 2003). The new structure was legalized in 2004; since then, more than 4000 social
enterprises have been formed using the CIC structure. The U.S. L3C experience has been
considerably slower paced. Beginning with Vermont in 2008, various states have created an
LLC-based social enterprise structure, dubbed the Low Profit Limited Liability Company or
L3C. But there is as yet no federal law legalizing the L3C structure for U.S. social enterprises.
Defining the L3C and CIC structures
The Low Profit Limited Liability Company (L3C) Structure in the U.S.
Definition of the L3C: Prior to creation of the L3C, social enterprises could structure
themselves either as nonprofit organizations or as for-profit entities. No legal structure existed to
bridge the gap between these two options. In April 2008, Vermont became a pioneer in the social
enterprise movement when it legalized a new business structure called the Low Profit Limited
Liability Company or L3C (Blum, 2008; Williams, 2009). Under the Vermont statute, to become
an L3C, a social enterprise must meet three tests. First, it must be formed to achieve a social or
educational mission as defined by the IRS. Second, the organization cannot be formed for the
primary purpose of making profits. An L3C is allowed to make a profit, even a substantial one,
as long as profit is not the organizations primary aim (Burak, 2008). Third, the L3C cannot be
formed to achieve legislative or political purposes (An act relating to low-profit limited liability
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companies, 2008). In the two years since Vermonts L3C law went into effect, seven more states
Illinois, Maine, Michigan, North Carolina, Utah, and Wyoming have passed L3C legislation
with requirements similar to Vermonts law (L3C Update, 2010). To date, no federal L3C law
has been passed but proponents are optimistic that such a law soon will be created (Legislation:
Laws and legislative watch, n.d.).
Robert Lang, CEO of both the Mannweiler Foundation and the nonprofit Americans for
Community Development, is widely recognized as the originator of the U.S. L3C structure.
Langs goal was to create a means for social enterprises to receive investments from U.S.
charitable foundations. Foundations are required by law to spend some portion of their
endowments on their missions each year but the IRS places restrictions on what the foundations
can invest in. As a foundation CEO himself, Lang understood that foundations would be willing
and perhaps eager to invest in social enterprises if they could do so without risking IRS
revocation of their tax-exempt status. The L3C structure, with its requirement that a social
enterprise place social mission above profit, was Langs answer to the foundations investment
restriction dilemma (Coren & Lang, 2009-2010). As soon as Vermont legalized the L3C
structure in 2008, Lang created and registered the first U.S. L3C, L3C Advisors, L3C, a firm that
advises social entrepreneurs interested in forming L3Cs (Coren & Lang, 2009-2010).
Key features of the L3C: Compared to their British Community Interest Company (CIC)
counterparts, legal requirements for U.S. L3Cs currently are quite general and loosely defined.
However, all U.S. L3Cs share several important features, described below.
Modified LLC form: All states with L3C laws have created the L3C structure as a hybrid
modification of the Limited Liability Company or LLC form. The LLC was first established in
Wyoming in 1977 and now is in widespread use across the United States. When state legislatures
legalize the L3C structure, they do so by amending existing LLC laws, in order to take advantage
of the established body of law applicable to LLCs (Legislation: Laws and legislative watch, n.d.).
Both the LLC and the L3C are for-profit structures, but an L3Cs stated business objectives must
incorporate one or more of the charitable purposes defined by the IRS (Davis & Woodrow,
2009).
Program Related Investments or PRIs: L3C laws are carefully worded to allow L3Cs to
be recipients of Program Related Investments, or PRIs, from private, tax exempt U.S.
foundations. The wording of L3C laws identifies three legal requirements for an L3C: having a
charitable mission, not being primarily profit seeking and not forming for political and legal
purposes. These L3C legal restrictions theoretically enable tax-exempt foundations to make PRIs
in L3Cs without falling astray of IRS restrictions.
One of the main goals in developing the LC3 structure was to signal tax exempt private
foundations that an L3C social enterprise was eligible for PRI investments (Coren & Lang, 2009-
2010). Private foundations are viewed by L3C proponents as an especially potent source of
investment funds for social enterprises. Such foundations must adhere to the IRS payout rule, a
requirement to spend at least 5% of the foundations endowment each fiscal year in support of
mission-related programs and projects. Current U.S. law allows foundations to make PRIs in
either for-profit or nonprofit ventures, but the IRS applies three strict rules. First, a PRI must be
related to the foundations stated tax exempt mission; second, the investment may earn a return
but the investment cannot be made with the primary goal or purpose of earning a return; and
third, the PRI cannot be used for lobbying or campaigning activities (Davis & Woodrow, 2009).
Despite the legal ability to use their endowments to make PRIs, foundations in the past
were reluctant to do so. Because any violation of IRS rules jeopardizes their tax exempt status,
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foundations have viewed PRIs with caution and have tended to seek a private letter ruling from
the IRS for each individual PRI before making any investment. The costly and time consuming
process of seeking private letter rulings has inhibited PRI investments. Only about 5% of private
foundations made PRIs prior to the passage of the first L3C laws (Davis & Woodrow, 2009). By
wording L3C laws to accommodate current IRS PRI rules, it is hoped and expected that
foundations will become more proactive in making PRI investments in L3CS.
Tranched investments: A final feature of L3Cs is their ability to tranch investments.
Tranched investments are set up in multiple layers, with each layers investors having different
risk-return expectations. For example, investors eager to support an L3Css social mission can
agree to accept a lower rate of return than would conventional investors, who seek a market rate
of return. Generally, foundation PRI investments are made on high risk projects where the
expected return is lower than market rate and lower even than the rate social investors would
accept. To L3C proponents, L3C access to private foundation PRIs is critically important for two
reasons. First, a private foundations PRI investment in an L3C signals that the L3C is a worthy
investment opportunity for outside investors. Second, because the foundations PRI theoretically
absorbs the greatest amount of risk while receiving the lowest rate of return, other L3C investors
have a greater chance of receiving a higher return for their own investments in the L3C.
Proliferation of L3Cs to date: As of September 2010, 227 L3C organizations had been
formed in the U.S., with roughly half of these registered in Vermont (L3C Update, 2010). The
L3Cs are varied, ranging from agricultural cooperatives to international development projects,
from chess camps to yoga collaboratives. Many L3Cs appear to still be in the conceptual stage.
Of the twenty L3Cs formed in Utah since March 2009, only nine have established websites; and
of the 23 L3Cs formed in Illinois since January 2010, only three have established websites. Still,
the passage of Vermonts L3C law seems to have sparked a social movement and already an L3C
support system has begun to emerge. Recently formed L3Cs such as interSector Partners
(http://www.intersectorl3c.com/) and Americans for Community Development
(http://www.americansforcommunitydevelopment.org) are L3C advocates who advise
prospective L3C founders and state legislators. The L3C structure also has received support from
social enterprise proponents such as the Social Enterprise Alliance (http://www.se-alliance.org/).

The Community Interest Company (CIC) Structure in the United Kingdom
Background of the CIC: In the United Kingdom, a legal structure similar to the U.S. L3C
has existed since 2004. The Community Interest Company or CIC structure arose in the UK as a
result of the British governments interest in social enterprises (The third way in action, 2002).
The British Department of Trade and Industry (DTI) established a Social Enterprise Unit in 2001
to investigate the potential of social ventures to address problems of social exclusion and to
improve delivery of some types of public services (Minister to boost, 2001; Cowe, 2002). In a
2002 report, the DTI announced a comprehensive social enterprise strategy with three goals: To
create an environment to foster creation and operation of social enterprises; to improve the
effectiveness of social enterprises through education and training; and to publicize the value of
social enterprise (Department of Trade and Industry, 2002).
In 2003, as an outgrowth of the work of its Social Enterprise Unit, the DTI announced
plans to create a new legal structure for social enterprises, to be named the Community Interest
Company structure (Benjamin, 2003; Judge, 2003). The British Parliament legalized the new
CIC structure in Part 2 of the Companies Act of 2004 (In Parliament, 2005). The CIC, which
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became the first new legal business structure created in the UK in two hundred years, went into
effect in July 2005 (Blyth, 2007).
Immediately following passage of the 2004 CIC law, the British government issued a full
set of procedural requirements governing CICs. The Community Interest Company Regulations
(2005) addressed the definition of what constitutes community interest for the purposes of the
CIC; how and to whom CICs would report on their activities; and what financial restrictions
would apply to CICs. The 2004 CIC law also established the office of the CIC Regulator to
monitor CICs. The first CIC Regulator was appointed in April of 2005. The law emphasizes that
the Regulator should use a light touch in regulating CICs. The CIC Regulator reviews all CIC
applications and approves those that meet CIC requirements. The regulator also is charged with
tracking the total number of CICs and reviewing CICs required annual reports. The regulator
issues guidance notes (accessible online at http://www.cicregulator.gov.uk/ ) to explain details
regarding the many different aspects of forming and operating a Community Interest Company
(CIC Regulator, 2009).
In 2003, when the DTI proposed the new CIC structure, it was believed that CICs could
potentially improve the efficiency and effectiveness of public services and could assist in
bringing economic revitalization to deprived areas (Benjamin, 2003). In an era of tight budgets
and privatization, the British governments strong support for the new CIC structure was
undoubtedly motivated by a desire to find trustworthy new noon-government providers of public
services throughout the UK (Mathiason, 2005). The government hoped to shift provision of some
services such as job training, transport, and health care services to outside contractors and
recognized that the shift would be easier if the new service provider were a Community Interest
Company committed to the communitys best interest, rather than a for-profit company with a
main goal of enriching shareholders.
Not everyone welcomed the 2004 CIC legislation; some questioned the need for a legal
structure specifically accommodating social enterprises. A Financial Times editorial published
just before the CIC law went into effect contended that all companies, not just social enterprises,
create social value and claimed that CICs might have an unfair advantage over conventional for-
profit companies when bidding for public sector, taxpayer-funded business contracts (Capitalism
with a conscience, 2005). In a similarly skeptical vein, some critics referred derisively to CICs
as GM [genetically modified] firms that would be ripe targets for fraudsters (Atkinson, 2005).
CIC Structure Definition: In Great Britain, the Community Interest Company or CIC is a
variant of the Limited Liability Company or LLC structure. The CIC has added features such as
an asset lock and a dividend cap, as well as unique requirements such as a Community Interest
Test. As long as the required Community Interest Test is satisfied, CICs can be formed by almost
any entrepreneur or set of entrepreneurs (although a CIC cannot be formed as a political or
lobbying organization). Almost any person or group can form a CIC an individual social
entrepreneur; a for-profit business or charity; or a collection of community advocacy groups.
Any existing organization has the option to restructure as a CIC. So, for example, a charity can
give up its tax-exempt status to become a CIC if its board of directors approves the change.
When the 2004 Companies Act creating the CIC was passed, a number of charities indicated that
they would consider adopting the CIC structure (Mills, 2005a) and some have done so (Blyth,
2007; Hetherington, 2008) . However, while UK charities increasingly are creating their own
social enterprises (West & Palmer, 2006), there is no evidence that large numbers of charities
have switched to the CIC legal structure.
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Key features of the CIC: The CIC structure was studied and discussed for several years
before being legalized in the UK effective in 2005. Prior to establishing the CICs current form,
the British Department of Trade and Industry, in conjunction with the Home Office and the
British Treasury, sought feedback from charities, civic associations and social entrepreneurs
(Department of Trade and Industry, 2003). As a result, the structure and features of the
Community Interest Company are more comprehensive in scope than is the case for the L3C
structure in the U.S. The key features of British CICs are as follows.
Community Interest Test: At the time it is formed, a CIC must demonstrate that it is, in
fact, forming to accomplish a specific community benefit and thus deserves CIC status. To meet
the Community Interest Test, the CIC must submit to the CIC Regulator Form CIC37, detailing
what benefit the CIC will provide to the community, how it will produce that benefit and which
community will be helped (CIC Regulator, 2009). Once submitted and approved, the CICs
proposed community benefit cannot be changed unless the CIC reapplies for CIC status. There is
no hard and fast definition of what constitutes community interest and, unlike in the case of the
U.S. L3C, there is no requirement that the CICs proposed community benefit be linked to any
charitable purposes defined by tax authorities. Instead, each CIC must make its case and be
judged by the CIC Regulator, who approves or rejects the CICs application based on the
standard that would be employed by a reasonable person (Davies, 2004).
Asset lock: A CICs assets, income and profits are meant to be employed for the benefit
of a clearly defined community. Thus, a CIC may not transfer assets at below market value
except to another asset-locked entity (CIC Regulator, 2009). This provision ensures that CIC
assets will be retained for use in the interest of the community.
Dividend cap: Just as CICs have an asset lock, so also they have a profit lock in the form
of a dividend cap. A CIC can raise money by issuing and selling shares of stock. However, its
primary aim is to serve community interest rather than to earn profits for shareholders.
Therefore, CIC regulations cap dividends payable to CIC shareholders, balancing the need to
reward investors with the goal of placing community benefit at the heart of the social enterprise.
Originally the dividend cap was set at 5% above the Bank of Englands base lending rate,
applied to the value of each share. However, in response to complaints that the original dividend
cap was dampening investor enthusiasm for CICs, the CIC Regulator raised the dividend cap for
CIC shares issued after April 2010 (Department for Business, Enterprise & Regulatory Reform,
2009). The new maximum payable dividend is 20% of paid up share value (CIC Regulator,
2009).
Light touch regulation: By direction of the government, the CIC Regulator approves
CIC applications and reviews annual reports but does so with a light touch, i.e., without
engaging in intensive or proactive investigation of CICs. The Regulator serves the role of
facilitating formation of CICs and disseminating information (Doeringer, 2010). However, when
needed, the Regulator can exercise his/her authority to appoint a CIC manager, remove or
appoint CIC directors, order the transfer of CIC shares, and initiate civil legal actions on behalf
of a CIC, including action to dissolve the CIC (CIC Regulator, 2009).
Annual Community Interest Report to the CIC Regulator: To ensure transparency and
accountability, CICs must submit an annual report to explain and justify how the CIC is
continuing to operate in the interest of the community. The required CIC34 annual report
provides information related to seven areas: description of the years activities and results;
description of efforts made to consult with stakeholders and outcomes of those efforts; details of
amounts paid to directors; details of any assets transferred for below market value; information
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about current dividend payments; information about dividends paid in previous years; and a
description of any interest paid by the CIC (Nicholls, 2010).
Allowable Investments: Interestingly, unlike in the case of U.S. L3Cs, PRI-style
investments in CICs are rarely mentioned by CIC proponents. This suggests that private
foundation investments are not viewed as a critical element in advancing Community Interest
Companies. According to Doeringer (2010), nothing in existing CIC law prevents private
foundations from making investments in CICs, but the law also does not explicitly allow such
investments. Before investing in a CIC a private foundation must file for the equivalent of a
private letter ruling from the UK Charities Commission. Community Interest Companies are
allowed by law to obtain funds from the UK Social Enterprise Unit and from the national lottery
fund.
Proliferation of CICs to date: Unquestionably, the introduction of the CIC structure in the
UK has been a resounding success. When they first announced the new CIC structure, DTI
representatives hoped that one hundred to three hundred CICs would be formed each year (Social
regulator planned, 2003). Those hopes have been greatly exceeded. Within three months of its
official July 1, 2005 start date, thirteen CICs had been formed in the UK (Department of Trade
and Industry, 2005). In the first two years after passage of the law creating the CIC structure,
roughly 1000 CICs were formed, a formation rate of more than 500 per year (CIC Regulator,
2009). The formation rate had increased by April 2009, by which time 2600 CICs had been
formed (Department for Business, Enterprise & Regulatory Reform, 2009). By September 2010,
five years after the legalization of the CIC, the CIC Regulators website listed nearly 4100
registered CICs in the UK ((http://www.cicregulator.gov.uk). UK CICs vary widely, serving a
multitude of different community interests. They range in size from micro-organizations
operated by a single person to fairly large entities with subsidiary CICs.
Within the United Kingdom, the rapid increase in the number of CICs has been
accompanied by increasing awareness of and enthusiasm for social enterprise in general
(Doeringer, 2010). To a greater extent than in the U.S., an organizational support system has
emerged in the UK to foster the growth and performance of CICs. Organizations such as the
Social Enterprise Coalition (http://www.socialenterprise.org.uk/) provide support and advice to
all social enterprises, including CICs. The CIC Association (http://www.cicassociation.org.uk),
formed in 2009, focuses exclusively on publicizing and advocating for CICs. In addition, the
CIC Regulator (http://www.cicregulator.gov.uk) continues to provide information to prospective
and current CICs with respect to legal and operational requirements in addition to providing a
continually updated and searchable list of all registered CICs.

Comparison of US L3Cs and UK CICs
L3Cs and CICs have some significant differences, which might impact the effectiveness
of social enterprises in each country. One important L3C-CIC difference relates to motivations
behind the passage of social enterprise legislation in each country. In the US, the primary
motivating force behind passage of L3C legislation has been the expectation that tax-exempt
charitable foundations will make Program Related Investments or PRIs in L3Cs, providing
significant amounts of new funding for social entrepreneurs. In contrast, the British government
proposed the CIC structure not to encourage foundation investments in social enterprises but
rather to encourage social entrepreneurs to develop solutions for local and regional problems,
problems the government itself might otherwise have to address. Interestingly, UK CICs can
legally receive PRI investments (with UK Charities Commission permission) but there is almost
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no mention of PRIs in the UK. Instead, the community aspect of the CIC is emphasized as social
entrepreneurs are encouraged to get involved in solving local problems.
Structurally, the UK CIC is more clearly defined and regulated than the US L3C. CIC
applicants must pass the CIC Regulators required Community Interest Test before attaining CIC
status. A system is in place to track and regulate CICs in the UK; annual reports are required and
the regulator can revoke CIC status when a CIC strays from the requirements. In comparison, in
the US no national or state regulatory body tracks L3Cs once they have formed. Entities applying
for L3C status must confirm that the L3Cs purpose is charitable or educational as defined by the
IRS but otherwise no eligibility test is applied and there is no systematic follow-up by any
authority. On the other hand, the IRS charitable purpose eligibility rule for L3Cs might be
viewed as unnecessarily constraining. The UK Community Interest Test does not limit CICs
operation to specific charitable missions, thus allowing CICs broader scope for their business
activities.
Examples of U.S. L3Cs and British CICs
American and British social entrepreneurs have applied the L3C and CIC structures with
great ingenuity, forming businesses ranging from yoga education to recording studios and from
bicycle rentals to ballet studios. In the U.S., attempts are underway to employ the L3C structure
for economic development in depressed areas such as Michigan and in depressed industries like
newspaper publishing (Blethen, 2009; Capriccioso, Zwetsch & Shaver, 2010; Hamilton, 2009).
Some UK observers contend that the CIC is best suited for particular social purposes such as
childcare and employment training but that the CIC structure is not appropriate for large
community organizations such as hospitals or schools (Burrows, 2004). This section contains six
brief descriptions of English CICs and U.S. L3Cs. The examples illustrate the variety of ways
used by UK and U.S. social entrepreneurs to maximize the impact of the new legal structures.

British CICs: A sampling
TalentStar (http://www.talentstar.net/) was the first CIC ever formed in Great Britain
(Department of Trade and Industry, 2005). When it officially adopted the CIC structure on
August 11, 2005, TalentStar gave up its former registered charity status, which it had held since
the organization was founded in 2001. TalentStars original social mission was to improve the
image of youth in the northeastern part of England by holding music and media events featuring
local youngsters. The organization first made a name for itself by producing TalentStar
Roadshows, which showcased the talents of young people. Buoyed by the success of the talent
shows (which were paid for by ticket sales) and inspired by the way young people blossomed as
they demonstrated their artistic gifts, founder Adam Chetter tried to expand TalentStar by
establishing summer multimedia workshops for students. But he quickly discovered that families
could not afford to pay workshop fees for their children (Blyth, 2007). Upon learning of the new
Community Interest Company structure, Chetter chose to restructure as a CIC for two reasons: to
free his organization from the restrictions of the UKs registered charity status and to gain easier
access to investment funds (Mills, 2005b). Since becoming a CIC, TalentStar has been able to
receive Lottery Funds for its projects (Blyth 2007).
Founder Chetter claims that restructuring as a CIC improved TalentStars image and
enhanced its ability to forge connections with charities and community groups (Blyth, 2007). But
TalentStar, which is based in Durham, continues to be a small-scale organization with only two
full time employees and 40,000 GB pounds revenue in 2005 (Mills, 2005b). Information on the
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companys website (http://www.talentstar.net) also indicates that the organization shifted its
focus after becoming a CIC. The companys website states that TalentStar now is a media
production company that specialises in community based projects. As of 2008, TalentStar no
longer produces talent shows for school aged youngsters but instead focuses on producing
promotional and educational DVDs for regional government, nonprofit and community groups,
with clients including youth groups, sports clubs, police departments and city councils. This
redirection of effort away from talent productions and into the media business may suggest that
switching from charity to for-profit CIC status triggered the realization that TalentStar could be
more effective by spending its limited resources on different types of community interest
projects than originally envisioned.
Green Rocket CIC (http://www.greenrocketgroup.com/) was created in 2007 as an East
Sussex CIC (Blyth, 2007). As an environmentally focused media relations company, Green
Rocket CIC serves both public and private sector clients, offering services such as PR campaign
development, competitor research and message creation. Social entrepreneur Kim Stoddart
formed Green Rocket CIC with two goals: to help environmentally aware businesses get their
messages out and to assist non-green companies in improving their environmental profiles.
Green Rocket is sister company to Stoddarts Blue Rocket LLP, a conventional public relations
firm. As a CIC, Green Rocket directs 75% of its profits to support environmental awareness
causes, such as its own campaign to raise the environmental awareness of businesses.
In early 2010 Brighton Housing Trust (BHT), a UK registered charity, acquired both
Green Rocket CIC and Blue Rocket LLP. This marked the first time a UK charity had purchased
a PR firm intending to run it as a social enterprise (BHT buys Blue Rocket, 2010). BHT
purchased the two companies in an effort to diversify and regularize its own revenue stream
(BHT buys PR business, 2010). BHT bought both PR companies for less than GB pounds
100,000 (Wiggins, 2010). At the time of the purchase, BHTs CEO stated that BHTs
primaryacquisition target was Blue Rocket, with its six-year record of profitability. BHT did not
view Green Rocket CIC as an attractive acquisition target on its own but made a deal to buy both
companies from founder Stoddart (Giotis, 2010). All Green Rocket and Blue Rocket profits now
will support BHTs charitable mission of providing programs for the homeless. Brighton
Housing Trust intends to buy additional social enterprises to increase funding streams for BHTs
core mission.
Ealing Community Transport (ECT) Group CIC (http://www.ectgroup.org.uk) is perhaps
the most intriguing CIC story in the United Kingdom. One of the first major successes of the CIC
movement, ECTs recent experiences serve as a cautionary tale for social entrepreneurs. Ealing
Community Transport first was created in 1979 as a local council in the London borough of
Ealing. The councils goal was to provide local registered charities with vans and buses, to
transport the charities needy, disabled and elderly clients (Macalister, 2008). Within a decade
the fledgling organization was providing transportation services directly to community clients.
The council soon restructured and registered as a UK tax-exempt charity (The third way in
action, 2002; Ealing Community Transport, 2009a).
Over time, ECT became adept at identifying the transport needs of Ealings citizens. It
offered a dial-a-bus service, transported single mothers and their children to schools and
provided personalized door-to-door transport for the elderly, disabled and others whose needs
could not readily be met by standard public transport. ECT expanded beyond Ealing and
diversified its vehicle fleet to include minibuses, vans, private cars and large buses. Emboldened
by success, ECT sought growth opportunities beyond transportation, entering industries such as
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health care, engineering, railway service, street cleaning and recycling. ECT Bus Company won
City of London bus service contracts; ECT Rail provided rail service to underserved areas of
England. ECT Recycling filed winning bids for waste management and recycling contracts in a
number of boroughs and even formed a joint venture with a Northern Ireland recycling company.
Structurally, each new ECT business was formed as a subsidiary of a holding company
named the ECT Group. After passage of the UK CIC law, the ECT Group formed a CIC in 2005
(Ealing Community Transport, 2009b). ECT Group CIC fulfilled its legal requirement to serve
the community interest by using the profits of its more successful subsidiaries to finance the less
successful ECT businesses. For example, profits from the ECT Recycling unit were donated to
the more financially precarious ECT Rail and ECT Engineering companies.
At its peak, ECT was a highly lauded, multi-faceted, GBP 50 million (roughly $77
million US) community service business whose operations were on a par with those of its for-
profit competitors. But ECTs success did not last. ECTs directors have acknowledged making
some poor decisions, such as relying on a small number of contracts to generate the bulk of
ECTs revenues; but financial problems ultimately proved to be ECTs downfall. When ECTs
management sought outside investment to fund new ventures, the CIC dividend cap seemed to
deter private investors. ECTs directors then took on substantial debt as a means to finance its
rapid growth, a decision that in hindsight was poorly timed. ECT faltered badly as the global
financial crisis began to unfold in 2008 (Stone, 2006). As ECTs railway subsidiary began
experiencing major losses, the British banking crisis heightened and ECTs line of credit was
withdrawn. Facing a financial crisis, ECT was forced to sell its most valuable businesses. It sold
its highly successful recycling business to a private sector company. Its rail business was
purchased by a private U.S. investment group; its healthcare business became independent
(Macalister, 2008; Ealing Community Transport, 2009b; Doeringer, 2010). Today, ECT Group
CIC is a shadow of its former self. ECT is active only in the local transport industry, where it
originally started. While ECT Group CIC still exists, it is now a dormant entity. In 2009, ECT
began the process of restructuring its main business as a registered charity (Ealing Community
Transport, 2009a).

American L3Cs: A sampling
Because the L3C structure is so new in the U.S., many registered L3Cs are still in the
concept stage and they lack a public presence. For example, of eighteen Illinois L3Cs reviewed
during Summer 2010, only five had yet created websites. Some L3Cs appear to have business
models that at first glance seem to be of questionable sustainability. Nonetheless, a number of
U.S. social entrepreneurs already have employed the L3C structure in creative and interesting
ways.
Prosperity Candle, L3C (http://www.prosperitycandle.com), a Vermont L3C based in
western Massachusetts, partners with non-governmental organizations (NGOs) to provide
financially imperiled women in war zones with the knowledge and tools needed to create candle
making businesses. The women who participate in Prosperitys program pay part of the cost of a
candle business kit and receive candle making instruction. Women also can opt to learn
entrepreneurial skills to form their own candle making businesses, which then can employ
additional women to make candles (Grabbe 2010). Prosperity Candle, L3C, shares profits from
sales of the handcrafted candles with both the candle makers and, in the form of donations, with
Prosperitys NGO partners. After completing a pilot project in Iraq to test its business model,
Prosperity Candle, L3C, began selling candles online in Spring 2010.
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The three founders of Prosperity Candle, L3C, have backgrounds and experience in
global economic development and micro-business creation. Prosperity Candle L3Cs mode of
operation is very similar to that of a nonprofit organization. It partners with NGOs; taps local
resources for discounted or donated goods and services; relies on voluntary help from advisors
and interns; and employs fundraising techniques often seen in the nonprofit world. The L3C
recently formed its own nonprofit foundation, filing with the IRS for 501c3 status. The
foundation, which is intended to support the L3C, will accept donations to fund the candle
business kits. Prosperity Candle, L3C, also has its own microfinance project. Interested
supporters attend Prosperity Circle gatherings, at which they can provide interest-bearing micro-
loans to Prosperity Candle L3Cs women entrepreneurs.
SEEDR, L3C, a global development consulting company in Atlanta, GA, is registered as
a Michigan L3C. The companys website (http://www.seedrl3c.com) states its mission as
reinventing global development with technology, design, collaboration and social enterprise.
SEEDR takes on projects in areas such as global health, infrastructure and energy. It was formed
as the L3C subsidiary of the for-profit company SEEC, Inc., an Atlanta business incubator that
brings technology applications to global markets. According to SEEDRs website, 80% of
SEEDRs profits will be reinvested in its global development mission. SEEDRs three top
managers have extensive backgrounds in the public, private and nonprofit sectors and are skilled
in law, finance and strategic management. SEEDR, L3C currently has five employees and
approximately $500,000 million in revenue (Company description: SEEDR, L3C, 2010).
SEEDR, L3Cs projects are complex and involve a variety of institutions around the
globe. For example, in late 2009, SEEDR began work on a project to improve the cost,
performance and environmental impact of special reverse cold chain containers, vessels which
provide temperature control for vaccines during their transport to remote locations. As it
manages the process of improving these containers, SEEDR will collaborate with product
designers and manufacturing engineers, the US Centers for Disease Control and Prevention,
academic institutions and non-governmental organizations. SEEDR, L3Cs reverse cold chain
container project is funded by the Bill and Melinda Gates Foundation (LBO Capital Corp.,
2009).
Maines Own Organic Milk Company, L3C, LLC, or MOOMilk (http://moomilkco.com),
is a dairy business which is registered both as a Vermont L3C and as a Maine LLC. In this quasi-
cooperative venture, ten organic dairy farms collectively produce, process, market and distribute
organic milk. The L3C was formed when the dairy farmers were dumped by their major
customer, national dairy distributor H.P. Hood, which had found a more conveniently located
source of organic milk (Socialist milk, 2010). Fearful of losing their family farms, the dairy
farmers joined forces with the Maine Farm Bureau, the Maine Organic Farmers and Gardeners
Association, the Maine Department of Agriculture, a local production facility, a local distributor
and private investors. Together, they formed an L3C with a social goal of preserving farmland
and a business goal of developing high quality organic milk products with a strong brand image.
Using grants, donations and $500,000 from investors, the dairy farmers produce and sell
MOOMilk in the Northeast. To cultivate customer loyalty, MOOMilks marketing has embraced
the buy-local trend, emphasizing the fact that its locally-made goods are fresher than
competitors organic milk products. MOOMilk cartons feature stories about the participating
dairy farms; there are plans to install webcams so that customers can watch the milk being
produced (Quimby, 2010). MOOMilk continues to look for new retail outlets (Mack, 2009). The
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multi-partner arrangement developed by MOOMilk, L3C, is considered a model for other
agricultural businesses in the state (Socialist milk, 2010).
What can be learned from the British CIC experience?
What can current and prospective U.S. L3C creators and L3C proponents learn from the
CIC experience in Great Britain? Four issues seem particularly relevant: legal clarity and
regulatory structures; tax and investment-related challenges; extent and impact of government
support for CICs and L3Cs; and public lack of awareness and confusion about the new legal
structures.
Benefits of legal clarity and systematic regulation: In the United Kingdom, the
Community Interest Company or CIC structure was legalized at the national level, providing
immediate credibility and systematic regulation for the new CIC structure. The 2004 CIC law
created the post of CIC Regulator, whose incumbent is responsible for reviewing all CIC
applications to determine whether applicants meet the Community Interest Test and thus are
eligible for CIC status. Each CIC must submit an annual report to the regulator, to verify that the
CIC continues in its community-oriented mission and to provide financial updates. The CIC
Regulator also tracks the total number of CICs, maintains a registry of CIC names and locations
and provides updated guidance and information to CICs and the public.
In contrast, prospective L3C founders in the U.S. face a more ambiguous legal climate.
L3Cs have been legalized by individual state statutes, but not in a federal statute. The IRS has
yet to weigh in on requirements for L3Cs and private foundation Program Related Investments or
PRIs; so social entrepreneurs are wary of adopting the new L3C structure and tax exempt
foundations still avoid making PRI investments in L3Cs (Capriccioso, Zwetsch & Shaver, 2010;
Williams, 2009).
In the absence of a federal L3C law, no uniform social benefit test is applied to L3C
applicants and no federal regulatory structure exists to monitor whether registered L3Cs are
operating as intended. At the state level, to date none of the seven L3C states has created any
systematic means to monitor L3Cs once they attain legal status. There is no formal eligibility
screening nor is there a follow-up system to ensure that an L3C maintains its social mission.
L3C regulatory oversight may be put in place if and when a federal L3C law is passed.
Since the original purpose of the L3C structure was to allow tax-exempt foundations to make
PRIs in L3Cs, it is likely that the IRS will want to exercise oversight. Future L3C regulation may
be modeled after current IRS oversight of U.S. nonprofit organizations. Nonprofits must file
annually with the IRS to verify that they meet IRS requirements for tax-exempt organizations.
Challenges associated with taxes and regulation: Tax-related concerns are a recurring
theme in UK CIC discussions. Unlike UK registered charities, CICs receive no tax exemptions;
they pay VAT and income tax (Mason, 2008; Burrows, 2004; Doeringer, 2010). CICs can use
tax credits available to all British businesses but some hesitate to do so for fear of violating CIC
regulations. CIC proponents have urged the government create CIC-specific tax advantages and
efforts are underway to do so (Ainsworth, 2010). But some object that it is unfair to give tax
advantages to for-profit CICs unless non-CIC for-profits receive the same benefits (Blyth, 2007).
There also are concerns in the UK that private, for-profit businesses will set up CIC
subsidiaries as a way to shelter assets (Atkinson, 2004). It is unclear to what extent for-profits
see the CIC structure as a potential sheltering device but many of todays CICs are quite small
and unlikely to engage in asset-hiding. Since the U.S. has no L3C regulatory structure currently
in place, asset-hiding potential can be said to exist in the U.S.
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With respect to attracting funding, British social enterprise leaders have complained that
CICs attract little outside investment because of the restrictions on financial returns contained in
the CIC law. Particular concern has been voiced about caps placed on CIC investment dividends.
Some frustrated CICs have gone so far as to reorganize as charities in order to increase access to
growth funds (Mason, 2008). Responding to these complaints, the CIC Regulator changed the
CIC dividend cap after a Spring 2009 review (Department for Business, Enterprise & Regulatory
Reform 2009). For CIC shares issued after 2010, dividends will be capped at 20% of share value,
allowing investors a more generous return (CIC Regulator, 2009).
Impact of government support or lack thereof: In the United Kingdom, since CICs first
were legalized in 2004, the government has proactively supported the CIC structure - not
surprisingly, since the CIC structure was a government creation. The British government has
been adept at communicating that the CIC structure is the best choice for social entrepreneurs
who seek solutions to local community issues and problems. It also has succeeded at promoting
the CIC structure as a brand for social enterprises; social enterprises adopting the CIC structure
signal to the public that the CICs goal is to operate for the community interest. Given that CICs
have formed in Great Britain at the rate of almost 800 per year since 2005, the governments
encouragement of CICs seems to have been a rousing success. In contrast, in the US, L3C
formation has been scattered and diffuse in the absence of a federal L3C statutes. No
government, federal or state, has expressed a particular rationale or unitary purpose for US L3Cs,
which is perhaps why the U.S. rate of L3C formation is still well below what it might be. Since
2008, approximately 400 L3Cs have been created, a formation rate one quarter that of the UK.
Confusion about and potential misapplication of the new legal structures: L3Cs and CICs
are hybrid structures that exist in the middle ground between charities and conventional for-
profit organizations, so it is perhaps not surprising that their hybrid qualities sometimes can
create confusion. Despite British government efforts to promote CIC status as a social enterprise
brand, Community Interest Companies do not always identify themselves as CICs and even CIC
founders dont always understand the CIC concept. For example, Green Rocket CIC describes
itself as an ethical organization rather than as a CIC. Similarly, TalentStar CIC states on its
website that a CIC is a not for profit social enterprise when, in fact, CICs are for-profit entities.
Thus, progress must be made before the CIC concept is fully understood.
In the US, too, there is misunderstanding of the L3C. Some business entities have
become L3Cs despite seeming better suited to sole proprietorship or nonprofit structure. Other
L3Cs seem to have been attracted to the L3C structure for reasons related to low profit
expectations rather than to achieve a social benefit. A review of currently registered L3Cs raises
a number of questions as to why founders adopted the L3C form. In some cases it is hard to
discern what social good might be created by the L3C. If a few bad actors distort the intended
purposes of the currently unregulated L3C structure, the result might be a negative image for
L3Cs and skepticism and mistrust for the structure among potential L3C funders and the broader
public.
Conclusion: Questions for future study
L3Cs and CICs have significant potential to advance social enterprise in the United States
and Great Britain, but many questions remain about their long term prospects and future patterns
of development. One set of questions revolves around the response of existing for-profit
businesses toward L3Cs and CICs. If social enterprises are given tax-favored status in the UK
and the U.S., will for-profits react negatively to a perceived competitive disadvantage?
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Alternatively, will for-profits choose to form their own L3C or CIC organizations to advance
corporate social responsibility initiatives, as they now often form corporate foundations? Will the
for-profit and nonprofit worlds begin to coalesce?
Another set of questions relates to how charities and nonprofit organizations will respond
to the availability of the new social enterprise structures. Will charities and nonprofits resent and
resist the proliferation of L3Cs and CICs? Or will they form their own L3Cs and CICs, following
the lead of British charities such as BHT (which acquired Green Rocket CIC) and US nonprofits
like Chicago-based Harborquest (which formed Civic Staffing, L3C, the first L3C formed in
Illinois)? Will particular nonprofit sectors experience competition from L3Cs and CICs? Will
nonprofits in some charitable sectors disappear, overtaken by more competitive, better financed
L3Cs and CICs? Will a pecking order emerge, in which the least glamorous types of social and
charitable operations will be relegated to the charity and nonprofit sector while more attractive
types of operations are dominated by better-funded CICs or L3Cs?
A final set of questions relates to the operational effectiveness of L3Cs and CICs. How
might size impact the effectiveness of L3Cs and CICs? The experience of ECT Group, CIC
suggests that a large L3C or CIC may become almost indistinguishable from ordinary private
sector, for-profit competitors in terms of operations and even ethos. Does becoming too large
cause a social enterprise to lose sight of its social mission and lose touch with its customers? And
will L3Cs and CICs be more effective to the extent that they maintain strong connections to a
local or regional base, as is suggested by the example of MOOMilk, L3C?
Ultimately, a variety of external forces will impact the development of U.S. L3Cs and
UK CICs. The only certainty is that the social enterprise experiment represented by the L3C and
CIC structures will be worth watching in the future.

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Best Pr acti ces i n Ter mi nology Wor k
Hans Schwarz
Introduction
Only a few years ago, terminology work seemed to be an exotic subject. The only persons
involved in problems related to unambiguous terminology were terminologists, lexicographists
and translators.
Growing globalization, increasing quality requirements, changing processes, stricter
legislation, and the use of new technologies in Technical Documentation and Technical
Translation resulted in a modified view of terminology. Companies realized that professional
terminology work can be a competitive advantage. Corporate wording is part of a corporate
identity. It adds not only to trouble-free communication within a company, but also to an
expanded market position by conveying credibility and enhancing the recognition value of a
brand. Other positive effects are better comprehensibility of the entire documentation (in source
and target languages), decreasing translation costs, and improving knowledge transfer.
In view of the increasing importance of in-house terminology work, the Deutscher
Terminologie-Tag e. V. (DTT), the German Society for Terminology, founded a group of experts
in April 2008. Their task was to collect and work out recommendations for every-day
terminology work enabling companies to enter the new terrain of terminology work or to
continue their own projects in terminology successfully. (DTT, 2010)
This paper covers the main aspects of these recommendations.
Basic principles of terminology
Terminology is defined as the set of all terms related to a given subject field or discipline,
a profession, or a social entity like a company or organization, for example, the terminology of
construction engineering or the terminology of aircraft pilots or the terminology of Boeing. To
be more precise, its aim is the systematic study of the labelling or designating of concepts
particular to one or more subject fields, through research and analysis of terms in context, for the
purpose of documenting and promoting correct usage. (ATIA, 2004)
The core idea of terminology is the introduction of the concept as a unit of thought
constituted through abstraction on the basis of properties common to a set of objects. (ISO
1087, 1990). A concept covers objects that may be designated by the same term and separates
these objects from other objects that have to be designated by another term. This means that a
concept is not bound to a particular language, it is language-independent, and so is terminology.
A concept might, at most, be influenced by the social or cultural background.

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Figure 1: Freges triangle: object concept term.

A term is then the designation of a defined concept in a special language by a linguistic
expression (ISO 12620). A term may be:
a word,
an expression,
a symbol,
a chemical or mathematical formula,
a scientific name in Latin,
an acronym,
an initialism,
the official title of a position, organization or administrative unit.
Consistent terminology is based on the following principle: An unambiguous correlation
is established between the concept representing all objects with the same characteristics and the
term in one or more languages. Within the same range of application only one term per language
may be used; different terms for one concept in one language so-called synonyms should be
avoided, although included in a term collection and marked accordingly. In this case a priority
term has to be specified, e.g. heat-resistant glass in favour of heat-insulating glass. Terms from
more than one language are considered equivalent, if they represent the same concept, e.g. heat-
resistant glass and Wrmeschutzglas. The concept is to be described clearly by a definition and
supported with meaningful contexts and graphics, if applicable.
The subset of terminological data that contains all the information that pertains to a
single concept is called a terminological entry. It includes the terms assigned to a concept,
descriptive information pertinent to the concept, and any administrative information concerning
the entry itself. (TTT, 2005)
In other words, terminology is not merely a compilation of words and expressions. It is
based on the differentiation between extralingual concepts. A technical writer just like a
technical translator has to discover the scope of a concept first, before he selects the
appropriate term.
Methods of terminology management
Sometimes, terminology management tends to be thought of as a 2-column collection of
words: source terms on the left side, target terms on the right. These collections might be hand-
Concept
Object
Term
table
Concept
Object
Term
table
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written as exercised in foreign-language courses at school. Other users have discovered the
benefits of spreadsheets such as Microsoft Excel tables.

Deutsch English
Allgemein general
Angebot supply
ausgewogenes Konsumbndel balanced consumption bundle
Ausmass magnitude
Austauschverhltnis exchange relationship
Bedingung condition
Befriedigung satisfaction
Beliebige arbitrary
besserstellen (j-n) better off (to make s.o.~)
Bezeichnen denote
Budgetgerade budget line
Einkommen income
Elastizitt elasticity
Empfindlichkeit sensitivity
erfllen (Bedingung) satisfy (condition)
Ergebnis outcome
Erhhung increase
Figure 2: Example of a 2-column collection of vocabulary words. (TU Berlin, 2010)

These compilations are not appropriate for serious terminology work. This is for two
reasons:
First, they only contain linguistic equations without covering any information on the
underlying concept. The English noun supply, e.g., can have a number of different meanings:

Figure 3: Entry in a monolingual dictionary: supply. (Merriam-Webster, 2010)

When translated into German, the equivalent Angebot given in Fig. 2 represents just one
meaning of supply: quantities of goods offered for sale. There is a high risk that a translator is
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choosing the wrong translation when relying on a vocabulary list, unless he checks the
situational context in which the target-language expression is supposed to be used and compares
it to the source-language situation.
In general, this is true in case of any dictionary, which is basically not appropriate for
giving reliable information for translations unless the target terms listed in the dictionary are
checked against the meaning of the term as it is used in the source text.

Figure 4: 2-column collection of words as part of an online dictionary. (LEO, 2010)

Second, terminology employs a systematic arrangement of concepts within a specialist
language. It represents an organized arrangement of knowledge accessed through a system of
signs, i.e. the terms. Alphabetically arranged dictionaries and glossaries do not provide any
indication of systematic arrangement and consequently any information about the relations
between concepts in a given field.
The structure underlying the system represents the relations between concepts. Concepts
can be arranged in various ways (genus-species, part-whole, etc.). They are represented by terms.
In a multilingual system, terms are called equivalent, when they are representing the same
concept.
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Figure 5: Concept system MRI scanners (Otto, 2010).

Structured information can only be stored in a database. Modern relational databases have
entities spread among separate tables that are linked by a common key. Thus, the system is able
to identify data associated with a single entity instance distributed across several tables. A
terminological database provides the user with easy access to all data at any time. It is able to
store vast quantities of data, it can be sorted quickly and facilitates complex searches on specific
fields. Such a database application should be designed from the start for efficient data storage
and fast retrieval.
It is admitted that full term entries are considerably more work to set up and maintain
than a table. However, they provide a number of benefits in everyday use. The most important
feature of terminological database structures is the single-concept structure that underlies
terminology, where each entry represents a unique concept. Moreover, since most data entry is
done on a computer, contexts (and occasionally definitions) can simply be cut and pasted into the
data category entry field, which saves time and eliminates errors.

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Figure 6: Entry in a terminological database.
Supporting arguments for terminology work
All parties involved in terminology work have to be motivated and convinced before
introducing terminology in an organization or company. However, they have different priorities
depending on their own position. So, the first step is to collect arguments for the different target
groups. These groups may be divided into administration, accounting, marketing & sales,
technical documentation, translation & interpreting, research & development, quality assurance,
customer service, purchasing & stockkeeping, product design & production, and others.
A number of arguments refer to all target groups, e.g. statements like Terminology is a
prerequisite for technical communication and Terminology eliminates comprehension
problems. Other arguments are related to only one target group, e.g. Terminology allows the
definition and re-usability of words and their meanings with respect to research & development
and Terminology is a marketing instrument regarding the marketing & sales department.
Planning terminology work as a process
There are different ways to conduct terminology work properly. Based on a number of
acknowledged basic principles, there are conventions stipulated with reference to the company or
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organization. The essential idea is that every party involved in technical communication is aware
of the fact that terminology is indispensable for communication and knowledge transfer.
Terminology work requires the knowledge and expertise of both language and technical
experts. Cooperation should take place in a so-called terminology circle where apart from the
terminology manager every department as well as language experts should be involved. The
terminology circle meets on a regular base or if needed.
Terminology management is introduced in a company or organization as a project. It is
therefore essential to analyze the scope of terminology work, the languages and subject fields
involved and software programs, infrastructure as well as any terminology inventories already
existing.
There is some preliminary work to be carried out. This includes:
Kick-off meetings with all participants (preparing the project concept, appointing a
terminology manager, rough scheduling, compiling an action plan)
Testing, selection and installation of the terminology management system and/or
other tools
Compilation of the relevant corpus (documents serving as a basis for terminology
extraction)
Collection, sorting and conversion of existing terminology inventories (glossaries,
parts lists, etc.)
Appointing language experts and specialists from the subject fields to be involved
Definition of the data model for the terminological database to be created and
subsequent database configuration
Compilation of terminology guidelines (processes, roles and tasks; guidelines for
collecting terms, quality standards and requirements; entry validation)
Import of revised terminology inventories into the terminology management system
Before entering into the terminology process, costs have to be estimated and calculated
by conducting the following steps:
Estimation of time and calculation of cost for non-recurring preliminary work
Estimation of recurring expenses after project initiation (staff units required for
terminology work; system updates; entry creation, maintenance and dissemination;
further research/meetings)
Estimation of economic efficiency (cost-value ratio) (Schwarz, 2009)
During the project phase, the scope of terminological data to be included in the
terminological database i.e. the data structure as well as the quality standards have to be
defined.
Managing terminology effectively typically involves the following processes:
Production of terminology
Process and delivery of terminology
Use of terminology
Validation of terminology

Production of terminology
The production process of terminology covers four steps:
Generating terminology: a technical editor or translator requires and submits a term, or
the terminology manager processes a term deriving from an extraction from a corpus or from
research.
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Validating terminology: The terminology manager validates a term candidate for existing
identical entries or similar entries with respect to concept interferences. An expert from the
subject field checks the correctness and conventionality of the term.
Capturing terminology: The terminology manager creates a definition in order to
differentiate between the individual concepts. He collects term candidates and categorizes them
regarding their status (e.g. admitted, deprecated, etc.). He also collects all additional
information regarding the terms.
Harmonizing and releasing terminology: This is accomplished under two different
aspects: in terms of content (e.g. regarding language, subject field, law) and in terms of form
(e.g. formal aspects regarding the entry within a terminological database).
The decision process regarding terminology covers several decision levels. The main
discussion is supposed to be about the selection of an allowed term. In the easiest case, e.g. if
there is only one term, the terminology manager will decide on his own. Sometimes it is
necessary to come to an agreement with the term submitter so that the term selected corresponds
to his requirements. If this step gives no result or if several departments are involved, the
decision is transferred to the terminology circle. It is advisable to restrict the time needed for the
creation of an entry.
There are two other process steps in case of multilingual terminology work:
Capturing multilingual equivalence: The language expert quite frequently the translator
collects the target terms that are equivalent to the source term together with any required
additional information. In case of questions in terms of content he consults an expert from the
specialist department.
Harmonizing and releasing the equivalent terms: The procedure is the same as shown
with the source terms.

Process and delivery of terminology
The process of processing and delivering terminology features the following four steps:
Defining output formats: A database expert configures target-group oriented output
formats, e.g. mono- or bi-lingual glossaries, database exports for translators or other tools, e.g.
terminology validation, or for internet or intranet solutions.
Defining access rights: The database expert manages accounts and privileges for
accessing terminology inventories and creates target-group oriented input models or layouts.
Exchanging terminology files: The database expert manages database import and export
formats and procedures for internal or external users.
Publishing terminology: The database expert makes terminology available to the
organization.

Use of terminology
There are four steps within the process of the use of terminology:
Training terminology users: A terminology trainer trains all user groups in the proper use
of the terminology database and instructs them in the rules and processes of terminology work.
Using terminology: The user uses the harmonized and released terminology in his own
work.
Monitoring the use of terminology: Terminology is used by authors, translators,
engineers, and service assistants to check the quality of documents or to communicate with other
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persons. There might be some software installed for checking terminology automatically or
semi-automatically.
Offering service and support in terminology: The terminology manager is responsible for
the organization of support and service in terminology.

Validation of terminology
The process of validating terminology has also four steps:
Validating the contents of the terminological database: Terminological entries have to be
double-checked against defined quality criteria. This includes checking for completeness of data
categories, sources, functioning hyperlinks and cross references; optimizing and revising existing
terminological entries based on feedback from quality checks or external feedback; continuously
maintaining terminological inventories, i.e. updating obsolete contents, completing missing
contents, expanding existing definitions, correspondingly marking obsolete concepts and
correcting mistakes.
Checking for duplicates: The terminology manager identifies and merges duplicate
entries.
Handling feedback on terminology: If needed, the terminology manager has to carry out
formal modifications, e.g. when new spelling rules are introduced, internal guidelines for
creating entries are modified, or concepts have to be reassigned in case of restructuring subject
areas.
Reporting on the quality and progress of terminological inventories: The terminology
manager prepares reports analyzing the quality and progress of terminological inventories.
It is admitted that the extensiveness of some quality control and assurance processes does
not allow their execution on a regular base. In this case, they have to be organized as
independent projects.
Terminology project for tool manufacturer HAZET
The objective of this seminar project was to create a terminology management system for
HAZET. It was conducted in winter 2009/10 as part of the course in Terminology held at the
Department for Communication and Media. HAZET, established in 1868, is a leading
international company in the fields of tool manufacturing and forging die construction with
headquarters in Remscheid, Germany, and production plants in Remscheid and Heinsberg,
Germany. Because of the large number of non-German clients the company had decided to
establish a multilingual workflow for their product documentation and at the same time introduce
a terminological database.
In a first step, a terminology management system had to be installed. It was decided to
use SDL MultiTerm 2007. This terminology management system allows to update
terminological entries on a regular base, to expand the database to include more languages, if
needed, and to integrate terminology management into the workflow of the companys technical
documentation.
Then the source material was examined. It consisted of German- and English-language
HAZET texts of the following types:
Catalogues
Manuals
Installation instructions
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Training manuals
Product presentations in printed and hypertext format
Website
Other marketing-oriented material, some in PowerPoint format
Ad-hoc word lists in Excel format
The next step was to define a database structure. As the database had to cover German-
and English-language terms, the following language data categories were selected:
<de> German
<en> English
Another category contains bibliographical information and will give the opportunity to
search for sources used for terminology research.
<biblio> bibliographical information of sources used for terminology research
The next step was to identify the product sectors of the company to be listed in the data
structure:
General workshop equipment tool cabinets, work benches, tool trolleys, accessories,
tool assortments, tool cases, service jacks
Wrenches, tire irons, chisels, center punches, valve tools open-end wrenches, hex-
nut drivers, combination wrenches, box-end wrenches, flexible head wrenches, tire
irons, four-way rim wrenches, chisels, center punches, grip pliers, universal pliers,
rim wrenches, valve tools, piston ring pliers, brake spring pliers, hose clamp pliers,
pliers for dismantling door panels
Screwdrivers screwdrivers for electricians, electronic screwdrivers, scrapers, screw
extractors, thread repair sets, stud extractors
Sockets and socket sets HINOX tools, square drives, screw driving tools sets
Pullers and extractors
Pliers, shears, body and fender tools, hammers, sheet metal snips, lights, adapters
pliers, shears, body and fender tools, flange tools, hammers, sheet metal snips, impact
pullers, LED lights, hack saws, work safety, offset screwdrivers, tube cutters, tube
flaring tools, screwdriver bits, adapters
Fuel supply, oil service, battery, and exhaust systems, shock absorbers and axles,
brakes fuel supply, oil service, generator, battery service, motor electricity /
electronics, exhaust system, spark plug / glow plug, cylinder head, cooling system
and testing devices, body and fender, shock absorbers and axles, brakes
Torque wrenches, insert tools, testers
Impact wrenches, air ratchets, air drills, grinders, cutting tools, pneumatic tools and
maintenance units impact wrenches, air ratchets, air drills, grinders, pneumatic
cutting tools, chisel hammers / needle scalers, rivet guns, air blow tools, pneumatic
tools and maintenance units
Components and spare parts
The following concept-related categories were introduced into the database structure:
<product sector> with options General workshop equipment; Wrenches, tire irons,
chisels, center punches, valve tools; Screwdrivers; Sockets and socket sets; Pullers
and extractors; Pliers, shears, body and fender tools; Hammers, sheet metal snips,
lights, adapters; Fuel supply, oil service, battery, and exhaust systems; Shock
- 353 -

absorbers and axles, brakes; Torque wrenches, insert tools, testers; Impact wrenches,
air ratchets, air drills, grinders, cutting tools; Pneumatic tools; Maintenance units
<definition> describing the concept behind one or several terms in German language,
not the term itself
<figure> providing the possibility of including a graphic, if needed.
The term-related categories covered the usual grammatical categories:
<part of speech> with options noun, verb, adjective
<gender> with options masculine, feminine, neuter (only in case of German-language
nouns)
<number> with options singular, plural (only in case of nouns with only singular or
plural forms)
<usage register> with options neutral, technical, in-house
<term status> with options standardized, preferred, admitted, deprecated,
recommended.
<context> giving a text example of the usage of the term helping to understand the
concept behind the term
Apart from these categories the database was provided with the following administrative
categories:
<source> source of a term
<d-source> source of a definition
<c-source> source of a context
<g-source> source of a graphic
<note> note to any other category.
Some attention was given to the documentation of the references used for the definition
and context data. Under each <biblio> entry the following bibliographical information may be
found:
<author>
<institution>
<title>
<edition>
<volume>
<city>
<publisher>
<publication date>
<ISBN>
<URL>
<access date>
After all data categories had been implemented, the entry structure, i.e. the order of the
data categories, was determined. There are three levels available:
entry level containing data referring to the concept and with that to the entire
entry
index level containing data referring to one language
term level containing data referring to every single term
The source subcategories had to be subordinated to the corresponding categories.
- 354 -

Figure 7: Database structure.

The next step was to identify the products in each product sector. They were arranged in
hierarchical groups. Each group has its own set of characteristics.

Figure 8: Product structure.

The relevant terms had to be extracted from the various source texts, validated, and
entered into the database, together with any further information, e.g. grammatical information,
etc. A definition was created for each product.
Great attention was given to the question of synonymy, i.e. different terms for one
product. As expected, there were numerous synonyms found in the source texts. With the help of
specialists from the respective subject field, a preferred term was chosen, while the competing
terms were marked accordingly.
Screwdrivers
HEXAnamic
screwdrivers
HEXAnamic
screwdrivers
short style
screwdrivers
wooden handle
screwdrivers
for electricians
electronic
screwdrivers
screwdrivers
with T-handle
offset
screwdrivers
mains testers
for slotted screws for Phillips screws for Torx screws for Pozidriv screws
- 355 -

By arranging concepts systematically on the structural basis of existing objects, an
organized arrangement of knowledge is accessed through a system of signs, i.e. the terms.

Figure 9: Full entry in a terminological database.

The terminological database enables the HAZET company to manage terminology
effectively. Due to its concept-related structure it offers the possibility to include a number of
data categories facilitating the verification of equivalence between two terms.
Conclusions
Efficient communication requires terminology work.
Terminology is based on the concept as a unit of thought constituted through abstraction on the
basis of properties common to a set of objects. (ISO 1087, 1990).
Terminology management is based on the differentiation between extralingual concepts and not
merely a compilation of words and expressions.
The terms assigned to a concept, descriptive information pertinent to the concept, and any
administrative information concerning the entry itself are organized into terminological entries.
This structured information is stored in a database compiled with the help of a terminology
management system.
A terminologist should be involved in the development of a project planning at a very early stage
so that terminology needed can be compiled and delivered to the technical editors and at the
same time to the translators.
Basically, it is very difficult to quantify the real costs for a single terminological entry or for
terminology management in its whole as well as its benefits of the service it provides, as they are
influenced by a variety of factors. However, it is obvious that after a break-even point the effort
of terminology management begins to effect reduced costs.

- 356 -

References

DTT (2010): Terminologiearbeit. Best Practices. Kln
Kltsch, Philipp (2008): Entwicklung eines Konzeptes fr die Terminologiearbeit und Terminologieverwaltung
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Kommunikation und Medien, Magdeburg
LEO (2010): LEO Deutsch-Englisches Wrterbuch. Online: http://dict.leo.org/ende (08-29-10)
Merriam-Webster (2010): Dictionary. Online: www.merriam-webster.com/dictionary (09-07-10)
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Blasphemy: A Hammer on Consumer Pur chase
I ntenti ons and Br and Loyalty i n Paki stan

Muhammad Shahbaz Shabbir
Amjad Shamim
Abstract
Purpose The purpose of this paper is to explore the impact of Blasphemous Caricatures
lampooning Prophet Muhammad (P.B.U.H) shown by Norway on the consumer purchase
intentions and brand loyalty of Norwegian products in Pakistan.
Design/methodology/approach Quantitative data was gathered from 350 respondents
through close ended questionnaire by using simple random sampling technique. Blasphemy
impact on consumer purchase intentions and brand loyalty has been checked by deeming the
mediating role of emotional values, effected values and brand image.
Findings The results revealed the significant impact of blasphemy on consumer
purchase intentions and brand loyalty directly as well as in the presence of mediating variables
i.e. emotional values, effected values and brand image. Blasphemy impact on brand image is
observed normal where as highly significant impacts observed on emotional values and effected
values.
Research limitations/implications Sample can be extended to consumers in other
countries to provide more comprehensive insights into consumer purchase intentions and brand
loyalty towards Norwegian brands after blasphemous caricatures.
Practical implications For successful business, business plans are not enough.
Countrys image, political situations, environments impacts, religious impacts and other related
situations influence the business. Therefore, business managers should keep keenly observes
these impacts all the time and strategies business accordingly to face challenges and survive in
the competitive market.
Originality/value The results provide significant insights of blasphemy on Pakistani
consumers purchase intentions and brand loyalty of Norwegian products.

Keywords Brands, Emotional values, Effected values, Brand image, Norway
Introduction
On the publication of blasphemous caricatures lampooning our Holy Prophet Muhammad
(P.B.U.H) by Norway in 2005, a large number of Muslims around the world protested against
this anti Islamic propaganda. The purpose of these blasphemous activities was to demolish the
feelings and emotions of Muslims and to demoralize them religiously. Considering the
sensitivity of the situation, this research compiled the motives behind these immoral activities by
the anti Muslim countries and studied pros and cons of these activities on the image of
Norwegian products in Pakistan. This research investigated the impact of Blasphemy on
Consumer Purchase Intentions and Brand Loyalty by deeming the mediating role of Emotional
Values, Effected Values and Brand Image. Since, Pakistani Muslims started strikes against this
excruciating issue, boycotting Norwegian products individually as well as started spreading
- 358 -

messages via emails, SMS, telephones and word of mouth appealing Muslims to boycott their
products, therefore, it was considered very important issue to be investigated whether these
immediate actions impacted consumer purchase intentions and brand loyalty of Norwegian
brands in Pakistan?
Literature Review
Its a Globalizations compassion that every day business organizations are entering into
new markets within and across the boundaries. Consumers have an access to a large number of
local and foreign brands at their doorsteps (Lee, Knight and Kim, 2008). Since they have
multiple choices products and services available, therefore, market is considered very complex.
To compete and survive in this intricate market needs lot of efforts especially to build long term
customers equity, maintain good brand image, maximize consumer purchase intentions and build
brand loyalty.
Brand Loyalty
In recent years, brand loyalty became a massive field of research for academicians and
practitioners in the field of consumer behavior and marketing (Jan Mller Jensen and Torben
Hansen, 2006). Long term associated and loyal customers are the assets for the business
organizations and they often express positive word of mouth which ultimately leads towards
higher rate of return. Therefore, most of the firms encourage their marketing specialists to build
and maintain brand loyalty among the customers (Jan Mller Jensen and Torben Hansen, 2006).
Different definitions of brand loyalty have been used in the literature but a most relevant
definition of is given my Oliver (1997) that, it is propensity to be loyal to a specific brand where
consumers intention is to buy the brand as their primary choice. This definition depicts the
association of purchase intention with the brand loyalty (Min-Young Lee, Dee Knight and Youn-
Kyung Kim, 2008). Purchase intentions can be called as a first stride to brand loyalty. (Nam-
Hyun Um, 2008) describe the two dimensions of brand loyalty, behavioral brand loyalty and
attitudinal brand loyalty. Behavioral brand loyalty as conceived by Chaudhuri and Holbrook
(2001) consists on customers repeat purchase intentions towards brand whereas attitudinal brand
loyalty is the natural commitment to a brand in terms of some unique value allied with it.
Behavioral brand loyalty is also supported by Jacoby (1971) as a repeat purchase and considered
it as a function of psychological processes. In other words, repeat purchase is a result of some
proceeding factors not a subjective response (Jan Mller Jensen and Torben Hansen, 2006) and
factors can be psychological, emotional or situational.
Consumer Purchase Intentions
Kumar, Lee and Kim (2009) cited that purchase intention refers to a consumer tendency
to purchase the brand routinely in the future and resist switching to other brands (Yoo et al.,
2000). They explained that consumers may purchase a brand which is of good quality and
features and meet their requirements. The high quality perception of a specific brand may lead
consumers to distinguish a particular brand from other brands in the market and hence they
prefer it over others in the future (McConnell, 1968).
Emotional Values and Effected Values
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Sweeney and Soutar (2001) defined emotional values as the advantages derived from the
feelings or sentimental states (i.e. delight or pleasure) that are engendered by a product. Certain
brands and products generate distinct emotional values that are cherished by end users
(Holbrook, 1986). Emotions directly affect consumers decision making and change their
behavior within few seconds from positive to negative or from negative to positive. Some time
emotions are affected by environment and other circumstances which can change consumers
mind and consequence the change in behavior what we call effected values.
Brand Image
It is observed that Pakistani consumers has less national tendencies, therefore, they often
prefer to buy imported products than local products. That is the reason that European brands are
being preferred by Pakistani consumers and European brands have established good brand image
in the consumers mind as well. Brand image is defined by Keller (1993) as the perceptions
about a brand as reflected by the brand associations held in consumer memory which plays an
important role in the consumer decision making process as it influence and strengthen the brand
associations (Min-Young Lee et. al, 2008). Brand image is not static and is influenced by many
other factors and decisions taken by the company about its brands (Eva Martinez and Leslie de
Chermatony, 2004). Brand image play an important role in consumer decision making. Higher
the level of image of a brand in the market, more will be the confidence of consumers to buy that
product. This is a very sensitive step for brand managers because it can take years to build good
image in the market but it can become negative in a moment. Therefore, organizations should
pay special attention on it as future business depends on good image.
Blasphemy
Jackson (2000) defined blasphemy as it is an anglicized form of the Greek term
blasphemia, which scholars believe probably derives from two rootsblapto, to injure, and
pheme, to speak. The word would thus suggest injurious speech. Contextually, though, the noun
blasphemia, and its kindred termsthe verb blasphemeo and the adjective blasphemoscan
refer to a variety of attitudes and actions. Muslims in any corner of the world cant control this
unbearable word used by any one for our GOD or Holy Prophet (P.B.U.H). It was a hard and
excruciating issue for the Muslims when Danish and Norwegian newspapers published cartoons
of our Holy Prophet (P.B.U.P) in 2005. Muslims at every corner of the world started strikes
against this hot issue and started boycotting the products of these two countries. In Pakistan,
people started spreading messages through emails, SMS, telephones and all other available
networks by urging people to boycott Danish and Norwegian products. Since Norway and
Danish based companies are operating in Pakistan, therefore, it was an important issue which
needs to be investigated that whether these activities affected Pakistani consumers purchase
intentions and brand loyalty towards Norwegian brands? This research has investigated the same
by deeming the mediating role of brand image, effected values and emotional values.
Conceptual Paradigm
Two paradigms are used in the article, first to measure the impact of blasphemy on
consumer purchase intentions and in second, impact of blasphemy on brand loyalty was
measured. Paradigms are as follows:
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Model 1: Blasphemy impact on consumer purchase intentions in the presence of emotional values, effected values and brand image as a
mediating role

Model 2: Blasphemy impact on brand loyalty in the presence of emotional values, effected values and brand image as a mediating role
Methodology
Sample and Data collection
Data were collected in the city of Islamabad, Capital of Pakistan by using the simple
random sampling technique. Educational background of 95% respondent was either Graduate or
Post Graduate. A total of 500 questionnaires were distributed among the respondent from which
363 questionnaires were returned (representing a response rate of 72.6 percent) but only 350
questionnaires were usable for data analysis. Rest were either incomplete or were inappropriate
for use.

Measurements
The main theme conceived in this paper is to measure the impact of blasphemy on
consumer purchase intentions and brand loyalty by expressing the mediating role of emotional
values, brand image and effected values. Different hypothesis were drawn. Initially impact of
blasphemy (independent variable) on emotional values, brand image and effected values
(mediating variables) were measured separately through regression analysis.
4.2.1. Blasphemy and Emotional Values
Initially the impact of Blasphemy on Emotional Values was measured for which Hypothesis
developed was:
Emotional
Values
Effected
Values
Brand
Image
Blasphemy
Consumer
Purchase
Intentions
Emotional
Values
Brand
Image
Effected
Values
Blasphemy
Brand
Loyalty
- 361 -

H
1
: Blasphemy has significant impact on Emotional Values
Blasphemy was measured with three self developed items which includes I deeply hurt
by cartoons shown by Norway lampooning Prophet (P.B.U.H), I started boycotting Norways
products after this issue and I participated in strikes against this issue. In order to check the
reliability of the instrument, Del Siegle (n.d.) reliability calculator was used and the values of
Cronbachs Alpha stand at 0.6 which indicated that the instrument is reliable. Similarly,
emotional values were measured with three instruments i.e., the brand from this country would
give me displeasure, I couldnt control my passions for using this countrys products anymore
and my emotions didnt permit me to use their products now. Same calculator was used for
reliability check which indicated the Cronbachs Alpha values 0.63, hence, the instrument look
reliable.
4.2.2. Blasphemy and Brand Image
In the next stage, impact of blasphemy on brand image was measured and hypothesis was
H
2
: Blasphemy has significant impact on Brand Image
Brand Image was measured with three instruments i.e., Generally, I believe that Company A
has better image than its competitors, Company A created good brand image in the minds of
customers and This issue affected Company As image in the market. Cronbachs Alpha
value for this instrument was 0.54 giving the clue of its reliability.
4.2.3. Blasphemy and Effected Values
In the third stage, blasphemy impact on effected values was measured for which the hypothesis
was:
H
3
: Blasphemy has positive impact on Effected Values
Three instruments were used for the measurement of effected values. Items include In my mind,
this issue resulted dissatisfaction of using their products, I changed my services from Company
A to others networks due to this issue and I will never use Norways products in future.
Cronbachs Alpha value for this instrument stands at 0.56 which indicates the reliability of
instrument.
In next stage, impact of mediating variables on dependent variable (consumer purchase
intentions) was measured
4.2.4. Emotional Values and Consumer Purchase Intentions
Emotional values impact on consumer purchase intentions was measured by the following
hypothesis:
H
4
: Emotional Values has a significant impact on Consumer Purchase Intentions
Consumer purchase intentions were used through three instruments which includes I am using
and will continue to use Company As services, I intend to buy Company As products in
future and I prefer service quality rather than image of country and reliability of instrument
was proved through Cronbachs Alpha value which is 0.68.
4.2.5. Brand Image and Consumer Purchase Intentions
Here the impact of mediating variable on dependent variable was measured with the following
hypothesis:
H
5
: Brand Image has a significant impact on Consumer Purchase Intentions
Since consumer purchase intentions are shaped by many factors and general image about
specific brand in the market is one of the important variables for consumer decision making,
therefore, it was considered important to check its impact of consumer purchase intentions.

- 362 -

Other hypotheses developed are as follows:
4.2.6. Effected Values and Consumer Purchase Intentions
H
6
: Effected values has a significant impact on Consumer Purchase Intentions
4.2.7. Blasphemy, Emotional Values and Consumer Purchase Intentions
H
7
: Emotional values has a mediating role between Blasphemy and Consumer Purchase
intentions
4.2.8. Blasphemy, Brand Image and Consumer Purchase Intentions
H
8
: Brand Image has a mediating role between Blasphemy and Consumer Purchase Intentions
4.2.9. Blasphemy, Effected Values and Consumer Purchase Intentions
H
9
: Effected values has a mediating role between Blasphemy and Consumer Purchase Intentions
4.2.10. Emotional Values and Brand Loyalty
H
10
: Emotional Values has a significant impact on Brand Loyalty
4.2.11. Brand Image and Brand Loyalty
H
11
: Brand Image has a significant impact on Brand Loyalty
4.2.12. Effected Values and Brand Image
H
12
: Effected Values has a significant impact on Brand Loyalty
4.2.13. Blasphemy, Emotional Values and Brand Loyalty
H
13
: Emotional values has a mediating role between Blasphemy and Brand Loyalty
4.2.14. Blasphemy, Brand Image and Brand Loyalty
H
14
: Brand Image has a mediating role between Blasphemy and Brand Loyalty
4.2.15. Blasphemy, Effected Values and Brand Loyalty
H
15
: Effected values has a mediating role between Blasphemy and Brand Loyalty
4.2.16. Blasphemy and Consumer Purchase Intentions
H
16
: Blasphemy has significant impact on Consumer Purchase Intentions
4.2.17. Blasphemy and Brand Loyalty
H
17
: Blasphemy has significant impact on Brand Loyalty
Discussion
The descriptive statistics for all variables are presented in Table 1 along with the
correlation matrix. Brand Image does not correlate with any of the variable whereas remaining
variables have exposed some correlation with each other. Emotional values have shown
correlation with blasphemy where as effected values have shown correlation with both
blasphemy and emotional values. Interestingly correlation of effected values is stronger (i.e., r =
0.427) with emotional values as compared to blasphemy. Consumer Purchase Intentions also
showed positive correlation with blasphemy, effected values and emotional values. Brand loyalty
has shown positive correlation with four variables i.e., blasphemy, emotional values, effected
values and consumer purchase intentions. Its correlation with consumer purchase intention
remains highest in the model i.e., r = 0.602 whereas the lowest correlation is observed between
brand loyalty and blasphemy i.e., 0.168.

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Table 1: Descriptive statistics, Reliability Coefficients and Pearson Correlations
_______________________________________________________________________________________________________
Variable Mean SD V1 V2 V3 V4 V5 V6
___________________________________________________________________________________________
Blasphemy (V1) 3.9257 .94391 -

Emotional Values (V2) 3.8314 .80850 .382(**) -

Brand Image (V3) 3.2049 .81234 .052 .025 -

Effected Values (V4) 3.5594 .83076 .304(**) .427(**) .079 -

Consumer Purchase 2.4223 .97975 -.207(**) -.220(**) .032 -.338(**) -
Intentions (V5)

Brand Loyalty (V6) 2.1634 .83945 -.168(**) -.263(**) .071 -.297(**) .602(**) -
__________________________________________________________________________________________
** Correlation is significant at the 0.01 level (2-tailed), N = 350
Hypotheses tests
To test hypotheses, regression analyses were performed. First it was examined the extent to
which the independent variable (i.e., Blasphemy) predicted the emotional values, effected values
and brand image. Regression results for testing Hypothesis 1-3 has been summarized in Table 2.

Table 2: Relationship between Independent Variable and Mediating Variables
______________________________________________________________________________
Variable B S.E Beta t R
2
F
______________________________________________________________________________

EV = f (B*) 0.327 0.042 0.382 7.702 0.146 35.369

BI = f (B*) 0.045 0.046 0.052 0.977 0.003 0.955

EdV = f (B*) 0.267 0.045 0.304 5.947 0.092 35.369

______________________________________________________________________________
Independent Variable (IV): Blasphemy (B*)
Mediating Variables (MV): Emotional Values (EV), Effected Values (EdV) & Brand Image (BI)

Results show that there is a significant relationship between blasphemy and emotional
values and overall the model is good (i.e., t = 7.702, F = 35.369), therefore, first hypothesis has
been approved and accepted. An insignificant relationship is observed between blasphemy and
brand image (i.e., t = 0.977), hence, second hypothesis is rejected. Effected values has also
shown a significant relationship with blasphemy (i.e., t = 5.947) where model is also proved
good (F = 35.369), therefore, third hypothesis has also been accepted.

In the next stage, mediation affects of emotional values, brand image and effected values
on Consumer Purchase Intentions (CPI) has been observed. The results summarized in Tables 3
are as follows:
Part (a) is showing the impact of mediating variables on dependent variable i.e.,
consumer purchase intentions in which significant impact of effected values on consumer
purchase intentions is observed hence hypothesis 6 has been accepted. Whereas insignificant
impact of emotional values and brand image on consumer purchase intentions is observed,
therefore, Hypothesis 4-5 has been rejected.
- 364 -

Part (b) is showing the impact of independent variable on dependent variable (Consumer
Purchase Intentions) in the presence of mediating variables i.e., emotional values, brand image
and effected values. Only one Hypothesis H
9
(i.e., t = 5.070) has been accepted whereas
remaining Hypothesis H
7
, H
8
& H
10
has been rejected. Overall model is good i.e., F = 13.188.

Table 3: Blasphemy impact on consumer purchase intentions in the presence of emotional
values, effected values and brand image
______________________________________________________________________________
2
F
______________________________________________________________________________

(a) MV and DV
CPI = f (EV) -0.111 0.067 -0.091 -1.643
CPI = f (BI) 0.070 0.061 0.058 1.153
CPI = f (EdV) -0.357 0.066 -0.303 -5.430 0.124 16.357

(b) IV, MV and DV
CPI = f (B + EV) -0.073 0.070 -0.060 -1.040
CPI = f (B + BI) 0.074 0.061 0.061 1.219
CPI = f (B + EdV) -0.337 0.067 -0.286 -5.070
CPI = f (B) -0.105 0.057 -0.101 -1.830 0.133 13.188
______________________________________________________________________________
Independent Variable (IV): Blasphemy (B)
Mediating Variables (MV): Emotional Values (EV), Brand Image (BI) & Effected Values (EdV)
Dependent Variable (DV): Consumer Purchase Intentions (CPI)

Table 4 is showing the mediation affects of emotional values, brand image and effected
values on Brand Loyalty. The results summarized are as follows:
Part (a) is showing the impact of mediating variables on dependent variable i.e., brand
loyalty in which significant impact of emotional values and effected values on brand loyalty has
been observed (i.e., t = 2.962 & t = 4.181 respectively) where as brand image has an insignificant
impact on brand loyalty i.e., t = 1.818, therefore, Hypothesis H
13
has been rejected.
Part (b) is showing the impact of independent variable on dependent variable (brand
loyalty) in the presence of mediating variables i.e., emotional values, brand image and effected
values. Emotional values and effected values have significant impact on Brand Loyalty i.e., t =
2.581 & t = 3.981 respectively, therefore, Hypothesis H
13
& H
15
has been accepted. Results
shows an insignificant Impact of Brand Image on Brand Loyalty i.e., t = 1.885 respectively,
therefore, Hypothesis H
14
has been rejected.

Table 4: Blasphemy impact on Brand Loyalty in the presence of emotional values, effected
values and brand image
______________________________________________________________________________
2
F
______________________________________________________________________________

MV and DV
BL = f (EV) -0.172 0.058 -0.165 -2.962
BL = f (BI) 0.097 0.052 0.094 1.858
BL = f (EdV) -0.236 0.057 -0.234 -4.181 0.120 15.679

IV, MV and DV
BL = f (B + EV) -0.156 0.061 -0.151 -2.581
BL = f (B + BI) 0.099 0.052 0.095 1.885
BL = f (B + EdV) -0.228 0.057 -0.226 -3.981
BL = f (B) -0.042 0.049 -0.047 -0.854 0.122 11.933
- 365 -

______________________________________________________________________________
Dependent Variable (DV): Brand Loyalty (BL)
Independent Variable (IV): Blasphemy (B)
Mediating Variables (MV): Emotional Values (EV), Effected Values (EdV) & Brand Image (BI)
In the last, direct impact of Blasphemy in Consumer Purchase Intentions and brand
Loyalty has been checked. Results are shown in Table 5 below:
Part (a) significant impact of Blasphemy on Consumer Purchase Intentions has been
observed representing t = 3.956, therefore, Hypothesis H
16
has been accepted.
Part (b) significant impact of Blasphemy on Brand Loyalty has been observed
representing t = 3.189, therefore, Hypothesis H
17
has also been accepted.
Table 5:
(a). Blasphemy has significant impact on Consumer Purchase Intentions
(b). Blasphemy has significant impact on Brand Loyalty
______________________________________________________________________________
2
F
______________________________________________________________________________

(a) CPI = f (B) -0.215 0.054 -0.207 -3.956 0.043 15.648

(b) BL = f (B) -0.150 0.047 -0.168 -3.189 0.028 10.167
______________________________________________________________________________
(a). Dependent Variable (DV) = Consumer Purchase Intentions (CPI), Independent Variable (IV) = Blasphemy (B)
(b). Dependent Variable (DV) = Brand Loyalty (BL), Independent Variable (IV) = Blasphemy (B)
Conclusion
The study shed light on recent issues related to Norway when they showed caricatures
lampooning Holy Prophet (P.B.U.H). Muslims around the world protested against this
horrendous issue and boycotted their products. This research investigated the impact of
blasphemy on consumer purchase intentions and brand loyalty of Norways products in Pakistan.
Results indicate that blasphemy significantly shocked the emotional values, effected values,
brand image, consumer purchase intentions and brand loyalty of Pakistani consumers towards
the Norway brands. Muslims are very conscious about their religion and they cant tolerate any
activity against their Holy religion. Results of this study evidenced that these excruciating
activities not only impact on the emotions of religious people but also on the business, economy
and general image of the country in the world. It is, therefore, conclude that before unveiling
these actions, countries must think about the pros and cons of its impact on their business,
economy and image in the world.

- 366 -

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I mpact of OCB on Br and Equi ty and
Or gani zati onal Per for mance

Shahbaz Shabbir
Fauzia Sayyed
Hans Rdiger Kaufmann
Abstract
Purpose Main theme of current study is to examine the impact of organizational
citizenship behaviour on brand equity and the consequent organizational performance.
Design/methodology/approach Organizational citizenship behaviour and brand equity
are conceptualized as multi-dimensional constructs. Beginning with a brief review of the
conceptual background of organizational citizenship behaviour and brand equity, this paper
proposes a model to test these relationships empirically. Validated structured questionnaires of
the constructs are used to collect data from telecom, education, travel agencies and banking
sectors. Reliability, correlation and regression analyses are done to validate the results.
Findings Overall, fairly moderate evidence exists supporting the relationship between
organizational citizenship behavior and brand equity. Results show that there is a positive
correlation between organizational citizenship behaviours and brand equity. Organizational
citizenship behaviours moderately impact brand equity. Besides regression analysis reveals that
among the dimensions of OCB only Courtesy seems to have a significant but weak impact on BE
as a whole and on its component variables including brand awareness, perceived quality, brand
loyalty and brand association as well. A more interesting finding is that although the link is weak
due to autocorrelation but conscientiousness and civic virtue show a negative relation with BE as
well as all of the variables that develop the construct of BE. Thus by increasing citizenship
behaviours within organizations their brand equity could be enhanced. Besides that courtesy
directly relates to perceived quality and brand associations, which means by increasing courtesy
among employees of the organizations we can enhance brand equity.
Research limitations The major shortcoming of research is that due to time constraint
probability convenience sampling technique is adopted. In future simple random sampling
technique should be incorporated in order to generalize the results. Future studies should check
the relationships among citizenship behaviours and brand equity in more detail and contextual
manner. In conclusion, this study does not compel a change in the concept of organizational
citizenship behaviour and brand equity; rather it highlights the need to scan fundamental
influences of these behaviours in specific situations.
Practical implications Marketing managers should take into account organizational
citizenship behaviour to identify the sources of brand equity and the importance of incorporating
this construct in their brand equity measurement. The findings suggest that supervisors can not
only play a facilitating role in creating and sustaining cooperative behaviour of employees but
through incorporating brand equity measurements, they could better analyze and determine the
future of their firms.
Originality/value The present study is the opening to conceptually and empirically
examine the possible impact of organizational citizenship behaviour on the brand equity of a
firm. It analyzes the relationship and its nature between the constructs.
- 368 -

Keywords Brand equity, organizational citizenship behaviour.
Introduction
This research is an endeavour to procure the heed of practitioners and researchers
towards a significant gap in literature by corroborating relationship between two well researched
rivulets; i.e. organizational citizenship behaviour and brand equity. Although extensive literature
exists in both domains but up to the knowledge of authors, relationship between organizational
citizenship behaviour and brand equity is unexplored. So the speciality of the study is to evoke
and gain the attention of the organizational and marketing theorists and practitioners towards this
omission in literature. Rather the authors accentuate that these relationship insights could result
in achieving high organizational performance. The study investigates and develops propositions
regarding the impact of organizational citizenship behaviour on brand equity. Authors findings
may serve as a spark for further work in this issue. Organizational citizenship behaviour has been
explicitly and implicitly researched in all known behavioural aspects of individuals/groups
included in organizational perspective. On the contrary brand equity from marketing literature is
an important and coherently researched multi-dimensional construct. This paper is organised as
follows; the next section delineates conceptual domain of organizational citizenship behaviour
and brand equity, followed by literature review to build propositions. Then next sections detail
the methodology adopted, followed by a discussion of the results and managerial implications.
The final section presents limitations as well as future research directions.
One note worthy point in stating propositions is that; there is no or very weak support
available in literature regarding propositions, they are stated on the basis of wisdom gained from
literature and are subject to great empirical testing for support.
Organizational Citizenship Behavior
Organizational citizenship behaviour transpired in the area of organizational behavior
about twenty years ago (Pawar, 2008). Bateman and Organ (1983) coined the term
organizational citizenship to define the extra-role behaviour of workers that is not prescribed
as job requirement but transpire freely to help others achieve the task at hand. Bateman and
Organ (1983) introduced the construct of organizational citizenship behaviour, on the basis of
concepts of supra-role behaviour advanced by Katz and Kahn (1966). Literature provides various
definitions of organizational citizenship behaviours. Organ (1988) defined it as: individual
behaviour that is discretionary, not directly or explicitly recognized by the formal reward system
and that in the aggregate promotes the effective functioning of the organization (Organ, 1988, p.
4). And as those organizationally beneficial behaviours and gestures that can neither be
enforced on the basis of formal role obligations nor elicited by contractual guarantees or
recompense (Organ, 1990, p. 46). Robbins (2001) defined organizational citizenship behaviour
as a discretionary behaviour that is not part of an employees formal job requirement but that
nevertheless promotes the effective functioning of the organization (Robbins, 2001).
Literature theorizes that value of organizations is expected to enhance because
successful organizations usually have employees that go ahead of the call of duty and offer their
time and energy freely to support fellow workers to accomplish organizational goals (Organ,
1988). Such altruism is not obligatory but it contributes to the effective performance of the
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organization (Smith, Organ and Near, 1983; Organ, 1988; Organ and Konovsky, 1989;
Podsakoff, MacKenzie, Paine and Bachrach, 2000).
OCB has become essential in today's corporate world, where organizations face ever-
increasing competition and difficulty to survive. The significance of OCB is reflected in large
number of researches (see Moorman, 1991; Wayne, Shore, & Liden, 1997). Organizations
cannot endure without their members engaging in all types of positive behaviours (Smith, Organ
and Near, 1983), because of this implication organizational scholars have given much
precedence in understanding the nature and sources of OCB (Organ, 1988).
OCB provides a means of managing the interdependencies among members of a work
unit, which results in increased combined outcomes; frees up scarce resources of the firm for
productivity; releases time for more resourceful planning and problem solving, (Organ, 1988;
Organ and Konovsky, 1989; Podsakoff et al., 2000). So far OCB research has focused mainly on
antecedents of OCB (Bateman and Organ, 1983; Organ and Konovsky, 1989; Smith et al., 1983),
correlates of OCB such as job satisfaction (Bateman and Organ, 1983; Moorman, 1993; Puffer,
1987), organizational commitment (Schappe, 1998; Williams and Anderson, 1991),
consequences of OCB in terms of performance (Podsakoff and Mackenzie, 1997), and
relationship to the profits of the organizations (Koy, 2001). But very few studies incorporated
marketing constructs in the study of OCB such as Bell and Menguc (2002) and Yoon and Suh
(2003), argued that OCB positively impacts customer perceptions of service quality (Bell and
Menguc 2002; Yoon and Suh, 2003).
Most research suggests that OCB is multidimensional (Organ, 1988). A different view on
the dimensionality of OCB comes from Williams and Anderson (1991). They divide OCB in two
types; OCB-I, the behaviours directed at specific individuals (such as altruism and courtesy), and
OCB-O, the behaviours concerned with benefiting the organisation as a whole, (such as
conscientiousness, sportsmanship and civic virtue). Podsakoff et al. (2000) organized the
constructs of OCB into seven dimensions: helping behaviour, sportsmanship, organizational
loyalty, organizational compliance, individual initiative, civic virtue, and self-development. On
the other hand Organ (1988) proposes five distinguished dimensions of OCB. These dimensions
are most widely accepted and are used in current research:
They are altruism (helping others), civic virtue (keeping up with important matters within
the organisation), conscientiousness (dedication to the job and desire to exceed formal
requirements in aspects such as, punctuality or conservation of resources), courtesy (consulting
others before taking action, and treating others with respect), sportsmanship (not complaining
about trivial matters and accepting less than ideal circumstances, i.e. have positive attitudes).
Brand Equity
Discernible propaganda and proposition regarding a brand is a characteristic of brand
equity (Keller, 1993, 2003; Keller and Lehmann, 2006; Bogomolova, 2009). The concept that
brands add value to products is brand equity. Brand equity has been conceptualized as a multi-
dimensional construct (e.g. Aaker, 1991; Baumgarth and Schmidt, 2010). The broad meaning
attached to the term brand equity is analogous to the definition provided by Farquhar (1989) as
the value provided by the brand to the product. Cobb- Walgren, Beal and Donthu (1995)
argued that there is value to the investor, the manufacturer and the retailer only if there is value
for the consumer (Cobb- Walgren et al., 1995, p. 26). Most researchers provided definitions that
are similar to Farquhars definition (e.g. Aaker, 1991; Keller, 1993; Leuthesser, 1988;
Srinivasan, 1979; Srivastava and Shocker, 1991; Yoo and Donthu, 2001). Since the 1990s, the
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definition of brand equity has altered because of changes associated with reporting of the
financial value of intangible assets in the international accounting standards (Feldwick, 1996).
Since then, research has shifted to focus on non-financial brand equity or values (Hoeffler and
Keller, 2002; Schultz and Gronstedt, 1997).
Literature shows that most of the time, brand equity is measured with a financial
perspective, based on cost, margins, profit, etc. (Simon and Sullivan, 1993; Brasco, 1988;
Barwise, 1993). Kamakura and Russell (1993) measured brand value from tangible and
intangible components. Some studies measure the value of a brand through the brands ability
to withstand competitors and maintain a long-run lead (Blackett, 1991; Murphy, 1990).
Several researchers (e.g. Cobb-Walgren et al., 1995; Sinha and Pappu, 1998; Yoo and
Donthu, 2001, 2002; Yoo, Donthu and Lee, 2000; Washburn and Plank, 2002; Motameni and
Shahrokhi 1998; Bendixen, Bukasa, and Abratt 2003) conceptualised brand equity similar to
Aaker (1991) and Keller (1993) and used the term consumer-based brand equity to refer to brand
equity.
In this paper, authors conceptualize brand equity in accordance with Aaker (1991), using
a consumer perspective (as opposed to a financial one). Aaker (1991, p. 15) provided the most
comprehensive definition of brand equity as: a set of brand assets and liabilities linked to a
brand, its name and symbol, that add to or subtract from the value provided by a product or
service to a firm and/or to that firms customers. Aaker (1991) found brand awareness, brand
associations, perceived quality and brand loyalty to be the four most important dimensions of
brand equity. Brand awareness is the ability of a potential buyer to recognize or recall that a
brand is a member of a certain product category. A link between product class and brand is
involved (Aaker, 1991, p. 61). Brand association as anything linked to the memory of a brand
(Aaker, 1991, p. 109). Perceived quality is the customers perception of the overall quality or
superiority of a product or service with respect to its intended purpose relative to alternatives
Aaker (1991, p. 85). Brand loyalty is defined as the tendency to be loyal to a focal brand, which
is demonstrated by the intention to buy the brand as a primary choice (Yoo and Donthu, 2001,
p. 3).
Relationship Between OCB and Brand Equity
A better understanding of the linkages between brand equity and OCB is important for a
number of reasons. The issue, how OCB influences brand equity is valuable to marketing
practitioners, because for them brand equity quantification and identification of elements that
lead to changes in brand equity are two important issues (Biel, 1993, p. 77). Despite exhaustive
research on brand equity over the past few decades, the marketing literature does not explain
how OCB (high or low) can impact brand equity in organizational contexts. Neither is it clear
that the impact of OCB on brand equity would be worth mentioning or not.
The available empirical research clearly supports that OCB is related to organizational
performance (Podsakoff et al., 2000). Similarly literature in brand equity states that higher brand
equity is the important feature of successful organizations. Good organizational citizens work
hard for their organization and its mission (Organ 1988, 1990, Podsakoff et al. 2000). So such
individuals will strive for the strengthening of their brand so that its value could be increased in
terms of brand equity.
Literature also reveals that trust and attitudes which lead to brand loyalty are important
factors in achieving competitive advantage in services (De Ruyter et al., 2001). Therefore, it can
be argued that, similar to brand loyalty of customers, internal customers may exhibit
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organizational loyalty or in other words customers high in OCB may appear to be more loyal to
the companys brands and they would promote the product or service brand more willingly to
outside customers. Meanwhile, both academicians and practitioners acknowledge the
significance of building and developing brand trust in order to enhance customer loyalty
(Delgado-Ballester and Munuera-Aleman, 2005). As brand trust leads to satisfaction, literature
suggests that OCB results in increased satisfaction and employees loyalty. So it can be inferred
that loyal employees will better enhance and promote the brand awareness and image resulting in
higher brand loyalty. In the same way it could be stated that brand loyalty could result in the
same advantages to the organization as the employee loyalty could fetch, such as performance
efficiencies and effectiveness, financial strength, success, and competitive advantage etc. Kelley
and Hoffman (1997) proposed that a positive relationship exists between OCB and customer
loyalty for service-oriented organizations (Kelley and Hoffman, 1997).
The original conceptualization of OCB stresses that employees OCB, when spreads over
time and across people, influences organizational effectiveness (Bolino & Turnley, 2003; Organ,
1997). Brand equity is also an important asset which results in improving organizations
performance and effectiveness (Aaker, 1991). From this it could be inferred that high OCB and
brand equity could be directly related as both work at enhancing organizational effectiveness.
Brand equity is regarded as a very important concept in business practice as well as in
academic research because marketers can gain competitive advantages through strong brands
(Aaker, 1991; Keller, 1993, 2000). Similarly Organ (1988) argued that OCB is held to be vital to
the survival of an organization. Organ (1988) further elaborated that OCB can maximize the
efficiency and productivity of both employees and the organization that ultimately contributes to
the effective functioning of an organization. Based on this literature it could be suggested that as
brand equity is the asset for the organizational success so are the good soldiers (employees
performing OCBs).
Brand equity, when correctly and objectively measured, is the appropriate metric for
analyzing the impact of marketing decisions in the long-run (Simon and Sullivan, 1993). Positive
brand equity can lead to greater revenues, lower costs, and higher profits; which are the direct
consequences of higher OCBs and has direct implications for the firms ability to demand higher
prices, search for new distribution channels, the usefulness of marketing communications, and
the accomplishment of brand extensions and licensing opportunities (Keller, 2003). Thus it could
be inferred that high brand equity yields higher chances of success for the organizations,
resulting in satisfied customers and higher OCBs.
The above literature helps in stating the respective propositions.
Proposition 1: High OCBs will yield higher chance of organizational success and
higher brand equity.
Proposition 2: Organizations having satisfied internal customers are expected to have
high brand equity and high OCB.
Proposition 3: Individuals high in OCBs will try to work in organizations favour to
build strong brand equity.
Proposition 4: Organizations with high brand associations, brand awareness, brand
loyalty and perceived quality are expected to have high OCBs.
Research Questions
Q1. What possible relations could be built among OCB and Brand equity, and what
will be the direction of relationship?
- 372 -

Q2. Does OCBs have any impact on the brand equity of the organization?
Q3. Which brand equity dimension can directly affect the OCB of the customers?
Methodology
Samples and Derivation of Variables:
The data for OCB is collected from employees and managers of twenty one organizations
of four target sectors (education, banking, telecom and travel agencies), and brand equity data is
collected from end consumers of the respective organizations, with approximate 665-742 sample
size.

Data Collection Instrument and Measures:
Structured questionnaire is used as data collection instrument. Total 800 questionnaires of
brand equity and 780 questionnaires of organizational citizenship behaviour were filled by the
respondents of which a set of 742 questionnaires were complete, depicting effective response
rate of 93.92%. In order to increase reliability and retrieval rate of questionnaires self visits and
one to one correspondence is adopted. All scales employed in this study were measured on
seven-point Likert scales ranging from 1 (strongly agree) to 7 (strongly disagree).

Questionnaire construction
The study instrument employed close-ended questions. OCB questionnaire was adopted
from the working paper 2 of Simon J. Bell and Bulent Menguc (2002), and brand equity scale
was adopted from Isabel, Chernatony and Eva (2008).
Proposed
Model
Fig. 1: Proposed Model representing possible relationships among OCB and Brand Equity.
Discussion and Results
Organizational
Citizenship
Behaviour

(1) Altruism

(2) Sportsmanship

(3) Courtesy

(4) Conscientious-
ness

(5) Civic virtue

(1) Brand
Awareness

(2) Perceived
Quality

(3) Brand
Loyalty

(4) Brand
Associations

Brand Equity
- 373 -

As the original scales were modified so to proceed further a pilot study was conducted to
check the reliability of the scales. Reliability of OCB scale was 0.921 and that of brand equity
scale was 0.952. As described in methodology the researchers want to investigate the link
between organization citizenship behaviour (OCB) and Brand Equity (BE). Before moving
towards actual data analysis reliability of all the variable constructs was again calculated
separately and was found sufficient to proceed with further analysis using all of the variables.
Reliability Statistics
Brand Equity
(BE)
Organization Citizenship Behavior
(OCB)
Variable
Reliability
Value Variable
Reliability
Value

(Cronbach's
Alpha)
(Cronbach's
Alpha)

Brand
Awareness 0.874 Altruism 0.834
Perceived
Quality 0.932 Sportsmanship 0.856
Brand Loyalty 0.822 Courtesy 0.838
Brand
Association 0.902 Conscientiousness 0.812
Civic Virtue 0.61
Correlation Analysis:
At second stage, correlation was conducted to check the relationship between OCB and
brand equity dimensions. The results are given in Table 1, 2 and 3.
These simple correlational results provided general but mixed support for the
propositions. The results of correlation are given below in tables 1, 2 and 3.

Table 1: Crosstabulation.Count

ADJUSTED BRAND EQUITY: (1-1.40=1); (1.41-
2.80=2); (2.81-4.20=3); (4.21-5.60=4); (5.61-7=5) otal

Strongly
Agree

agree
u
ndecided
d
isagree
S
trongly
diagree
ADJUSTED
OCB: (1-1.40=1);
(1.41-2.80=2); (2.81-
4.20=3); (4.21-5.60=4);
(5.61-7=5)

Strongly Agree
2
3
6
4
1
8
5 1
11
Agree 1
29
3
07
5
5
1
6
8
15
Undec
ided
2
0
6
7
1
7
3 4
11
Disagr
ee
1 2 0 0 0
Strong
ly disagree
1 1 0 0 0
Total 1
74
4
41
9
0
2
4
1
3 42

- 374 -

Table 2: Symmetric Measures showing correlation between OCB and brand equity as a
whole.

V
alue
A
symp. Std.
Error(a)
A
pprox. T(b)
Appr
ox. Sig.
Interval by
Interval
Pearson's R .0
06
.0
37
.1
53
.878
(c)
Ordinal by
Ordinal
Spearman
Correlation
.0
06
.0
37
.1
56
.876
(c)
N of Valid Cases 74
2

a Not assuming the null hypothesis.
b Using the asymptotic standard error assuming the null hypothesis.
c Based on normal approximation.

Table 3: Correlation between OCB and brand equity dimensions.

ALTRUIS
M:

SPORTS
MANSHI
P:

COURTE
SY:

CONSCIE
NTIOUSN
ESS:

CIVIC
VIRTUE:

BRAND
AWAREN
ESS:

PERCEIV
ED
QUALITY
:

BRAND
LOYALT
Y:

BRAND
ASSOCIATIO
N:

ALTRUISM
VALUES:
Pea
rson
Correlation
1
Sig.
(2-tailed)

N 7
42

SPORTS
MANSHIP
VALUES:
Pea
rson
Correlation
.
397(**)
1
Sig.
(2-tailed)
.
000

N 7
42
7
42

COURTESY
VALUES:
Pea
rson
Correlation
.
619(**)
.
372(**)
1
Sig.
(2-tailed)
.
000
.
000

N 7
42
7
42
7
42

CONSCI
ENTIOUSNESS
VALUES:
Pea
rson
Correlation
.
655(**)
.
464(**)
.
705(**)
1
Sig.
(2-tailed)
.
000
.
000
.
000

N 7
42
7
42
7
42
7
42

CIVIC
VIRTUE VALUES:
Pea
rson
Correlation
.
371(**)
.
299(**)
.
300(**)
.
426(**)
1
Sig.
(2-tailed)
.
000
.
000
.
000
.
000

N 7
42
7
42
7
42
7
42
7
42

BRAND
AWARENESS
VALUES:
Pea
rson
Correlation
.
025
.
052
.
066
.
001
-
.064
1
Sig.
(2-tailed)
.
489
.
157
.
072
.
978
.
080

N 7
42
7
42
7
42
7
42
7
42
7
42

- 375 -

PERCEIVED
QUALITY
VALUES:
Pea
rson
Correlation
.
038
.
049
.
124(**)
.
025
-
.079(*)
.
782(**)
1
Sig.
(2-tailed)
.
307
.
183
.
001
.
500
.
031
.
000

N 7
42
7
42
7
42
7
42
7
42
7
42
7
42

BRAND
LOYALTY
VALUES:
Pea
rson
Correlation
-
.005
.
064
.
083(*)
.
003
-
.091(*)
.
688(**)
.
767(**)
1
Sig.
(2-tailed)
.
902
.
084
.
023
.
940
.
013
.
000
.
000

N 7
42
7
42
7
42
7
42
7
42
7
42
7
42
7
42

BRAND
ASSOCIATION
VALUES:
Pea
rson
Correlation
-
.010
.
043
.
099(**)
.
002
-
.087(*)
.
722(**)
.
836(**)
.
845(**)
1
Sig.
(2-tailed)
.
795
.
244
.
007
.
953
.
018
.
000
.
000
.
000

N 7
42
7
42
7
42
7
42
7
42
7
42
7
42
7
42
742
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).

The above analysis shows that both OCB and brand equity are moderately positive
correlated.
Altruism is significantly positively related to sportsmanship, courtesy, conscientiousness
and civic virtue at 0.000, 0.000, 0.000 and 0.000 respectively and altruism shows moderate
correlation to these factors. Brand awareness and perceived quality are insignificant positively
related to altruism at .489 and .307 respectively .brand loyalty and brand associations are
negatively insignificant relation to altruism at .902 and .795 respectively. Altruism shows weak
correlation to Brand awareness and perceived quality, brand loyalty and brand associations show
weak correlation.
Sportsmanship is significantly positively related to courtesy, conscientiousness and civic
virtue at 0.000, 0.000 and 0.000 respectively and sportsmanship shows moderate correlation to
courtesy, conscientiousness. Brand awareness and perceived quality, brand loyalty and brand
associations is positively insignificant to sportsmanship at 0 .157, 0.183, 0.084 and 0.244
respectively. Sportsmanship show weak correlation to civic virtue, brand awareness and
perceived quality, brand loyalty and brand association.
Courtesy value is insignificantly positively related to conscientiousness, civic virtue,
perceived quality, brand loyalty and brand associations at 0 .000, 0.000, 0 .001, 0.023 and 0.007
respectively. Courtesy value is insignificantly positively related to brand awareness at
0.072.Courtesy value show strong correlation to conscientiousness and weak correlation to civic
virtue, perceived quality, brand loyalty brand associations and brand awareness
Conscientiousness is significantly positively related to civic virtue at 0.000 and is
insignificantly positively related to brand awareness, perceived quality, brand loyalty and brand
associations at 0.978, 0.500, 0 .940 and 0.953 respectively. Conscientiousness shows moderate
correlation to civic virtue and weak correlation to perceived quality, brand loyalty brand
associations and brand awareness.
Civic virtue is insignificantly negatively related to perceived quality, brand loyalty and
brand associations at 0.03, 0.013 and 0. .018 respectively and insignificantly negatively related to
0.080. Civic virtue has weak correlation to perceived quality, brand loyalty brand associations
and brand awareness.
- 376 -

Brand awareness is significantly positively related to perceived quality, brand loyalty and
brand associations at 0.000, 0.000 and 0.000 respectively. Brand awareness shows strong
correlation perceived quality and brand associations and shows weak correlation to brand
loyalty.
Perceived quality is significantly positively related to brand loyalty and brand
associations at 0.000 and 0.000 respectively. Perceived quality shows strong correlation brand
loyalty and brand association. Perceived quality is significantly positively related to brand
loyalty and brand associations at 0.000 and 0.000 respectively. Perceived quality shows strong
correlation brand loyalty and brand association
Brand loyalty is significantly positively related to brand associations at 0.000 .brand
loyalty show strong correlation to band association.
Regression Analysis:
To further explore the relationships between variables regression analysis was done.
Details of which are as follows:
In the first step the two grand constructs that is OCB and BE were regressed. The results
obtained were insignificant as the impact of OCB on BE was insufficient. A Durbin-Watson
value of 1.33 was obtained indicating a high degree of autocorrelation.
In the second step the individual variables used in the construct of OCB namely altruism,
sportsmanship, courtesy, conscientiousness and civic virtue were regressed with BE. The results
indicated that only courtesy had a significantly positive impact on BE indicated by a beta value
of 0.327 while the overall impact was indicated by the R value of 0.194. Two other variables
conscientiousness and civic virtue were also found to be significant but showed negative impacts
on BE. All other variables had insignificant impacts on BE. The next step involved a regression
of only the significant variables obtained in the last step with BE. The results showed that the
overall impact did not drop much (R=0.188) as compared to the last step. Courtesy still had a
higher beta value of 0.301 and conscientiousness and civic virtue still showed a negative relation
with BE but a Durbin-Watson value of 1.23 indicated that the results are skewed showing high
autocorrelation. When courtesy was regressed independently with BE still the result was
significant, but a high degree of autocorrelation was obtained.
In the next step all the variables in the construct of BE namely brand awareness,
perceived quality, brand loyalty and brand association were regressed independently with all the
variables of OCB combined. The findings replicated the results obtained earlier. Courtesy has a
significant and higher impact on all of the variables while conscientiousness and civic virtue
have significant but negative impact on all of the variables. Durbin-Watson values again indicate
a high degree of autocorrelation in all of the analysis.
Conclusion
Based on the results it can be concluded that OCB as an overall concept does seem to have any
significant impact on BE as overall concept. In the constructs of OCB only Courtesy seems to
have a significant but weak impact on BE as an overall concept as well as its component
variables including brand awareness, perceived quality, brand loyalty and brand association. A
more interesting finding is that although the link is weak due to autocorrelation but
conscientiousness and civic virtue show a negative relation with BE as well as all of the variables
that develop the construct of BE. A possible reason could be that the concept of branding itself is
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based on the idea of differentiation which plays on the behaviour of materialism, self indulgence
and pride; which according to common knowledge are opposed to the sociological concepts of
conscientiousness and civic virtue. Nevertheless this link does demand further investigation.
Overall, authors find fairly moderate evidence on relationship between organizational
citizenship behavior and brand equity. Results show that first three propositions are accepted on
moderate relationship; on the other hand the fourth proposition is weakly supported. OCB and
brand equity show moderate positive correlation as a whole. Besides that courtesy directly
impacts perceived quality and brand associations. Thus it supports that if courtesy of the
employees in the organizations is enhanced it could result in considerable increase in intangible
asset (brand equity) of that organization. From this it could be inferred that future studies should
check in depth relationships of these dimensions in different organizational settings to check the
strength of the relationships. Authors have provided some tentative empirical evidence of the
idea that brand equity when linked with OCB can help organizations in building strategies that
could enhance survival of the organizations. At the same time, it is illustrated that OCBs are one
likely path by which brand value can be enhanced in organizational context. The present findings
contribute to a growing body of evidence suggesting that complex relationships between
dimensions of brand equity and organizational citizenship can be fruitful when correctly and
objectively measured and applied to organizational settings. The need now is to examine with
increasing depth how these relationships could be managed between external and internal
consumers of the firm, as both these internal and external customers are equally important for the
success of the organization.
Future Research Directions/Limitations
Being a preliminary attempt to examine the impact of OCB on brand equity, this study
provides a foundation for further research. From the academic research perspective, researchers
may also find this framework useful in refining the research topic, developing additional
propositions and hypotheses, and designing their empirical testing methodology. It would be
desirable to conduct more in-depth and in-breadth research to enrich the literature by
incorporating other variables of organizational loyalty and organizational success with brand
equity dimensions. Other organizational variables such as personality and organizational loyalty
should be combined with current study variables in order to get greater insights of employing
OCB and brand equity measures together to acquire high organizational success rates. In short
this study can serve as a base for stating and testing further propositions in brand equity context.
Authors hope that future research will continue to investigate the basic connections between
OCB and brand equity established here and broaden this level of assessment to encompass
longitudinal studies, cross-cultural research, and societal-level factors that shape these
relationships.

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About the authors
Dr Shahbaz Gill is A. Professor in Marketing at Graduate School of Management in the
International Islamic University, Islamabad; Department of Management Sciences,
Sector-H/ 10, Islamabad, Pakistan. The author has more than eight years experience of
mentorship at national and international educational institutions. Besides that did
consultancy for several international organizations.
Ms Fauzia Syed is Visiting Faculty Member and MS. Management Sciences Student at the
International Islamic University, Islamabad in Department of Management Sciences,
Sector-H/ 10, Islamabad, Pakistan. The author has three & a half year teaching
experience in different institutions to higher standards (classes).

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Developi ng Cultur ally-Tar geted Mar keti ng
Str ategi es by Explor i ng Consumer Deci si on-
Maki ng Styles (CDMS) on Ethni c Golfer s
Shoppi ng Behavi or : An Empi r i cal Study for
Kor ean Amer i can Consumer s
Han Kil Shin
John C. Barnes

For years, marketers have attempted to understand the behavior of sport consumers.
Knowledge of sport consumer behavior is a prerequisite for sport marketers to reach their target
market more efficiently and effectively. Based on these understandings, marketers can develop
and implement various marketing strategies that fit the needs of their customers. The increased
ethnic diversity of the U.S. population and especially the rapid growth of Asian American
markets make it critical to assess the importance of developing marketing strategies specifically
targeted to these particular ethnic market segments (Kang & Kim, 1998). As stressed by several
researchers (Kim, Laroche, & Joy, 1990; Royce, 1982), consumer groups from different ethnic
backgrounds, although sharing the values and norms of the dominant culture, express certain
distinct differences from consumers of other ethnic categories and warrant differential marketing
efforts.
Culturally-targeted marketing is an important strategy for marketers who are willing to
sell their sport products to consumers from particularly different cultures in multicultural
markets. In such cases, marketers must learn the specific culture of their potential target market
in order to find out if their sport products will be suitable to its members, and how they can best
communicate the characteristics of their sport products to convince the target market to purchase
them.
The importance of cultural influence on consumer decision-making has been discussed
extensively in the literature (Henry, 1976; McCort & Malhotra, 1993; Radford, Mann, Ohta, &
Nakane, 1993; Tse, Lee, Vertinsky, & Wehrung, 1988). These studies showed that culture plays
a significant role in individual decision-making and affects individual attitudes, norms, and other
cognitive process. Based on the cognitive and decision styles research published in psychology
and management, the conceptualization of consumer decision styles has received some attention
recently in the marketing literature (Bao, Zhou, & Su, 2003; Lysonski, Durvasula, & Zotos,
1996; Wickliffe, 2004). Lynsonski, Durvasula, and Zotos (1996) categorize research on
consumer decision style into three areas: the consumer typology approach, the
psychographics/lifestyle approach, and the consumer characteristics approach. Among the three
areas, the consumer characteristics approach seems to be the most utilized and powerful
approach since it focuses on the metal orientation of consumers in making decisions
(Lynsonski, Durvasula, & Zotos, 1996, p. 11).
A consumer decision-making style is defined as a consumers mental orientation toward
making choices for product purchasing in the market place (Sproles & Kendall, 1986, p. 268).
Sproles and Kendall (1986) developed the Consumer Styles Inventory (CSI) which has been
used in many studies and appears to be a systematic, robust methodology for measuring
shopping orientations and behaviors of consumers.
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A Model Measur i ng I nfluenti al Factor s and
Employee Response towar d Change
Management:
A Test i n the Telecommuni cati on Compani es
Oper ati ng i n I ndi a
Karamjeet Singh
M. Saeed
Andy Bertsch
Abstract
This research explores employee response toward change initiatives in order to create a
working model to identify factors which influence employee response toward changes in the
organization. Change issues include re-structuring; merger and acquisition; transfers, lateral
moves and hiring; etc. This study identifies a workable model to allow management within
organizations undergoing change and transformation to predict the response of its employees
with respect to the identified factors. The resulting instrument is proven to be highly reliable and
will assist organizations managing change initiatives.
Introduction
Background to the Research Topic
Change is essential for survival in todays economy. In fact, in todays global
environment, no organization can survive without change. Change is very simple to define:
replacing the old one with new, but it is incredibly difficult to achieve. Many corporate mergers
fail not because of economic or financial reasons, but because two corporate cultures resist
merging into a single cohesive whole. The problem with effective change is implementation.
Change Management means to plan, initiate, realize, control, and stabilize the change
process on both the corporate and the personal level by handling obstacles carefully. Changes
originate from two primary sources. Change may result from external or internal factors that are
beyond the firms control; or, change may result from planned and intentional implementation.
Whatever the reason for change, employees are apt to resist it. Nonetheless, management cannot
avoid change simply because of fear of employee or organizational resistance. Todays effective
practices and procedures are certain to fail tomorrow so we must update our procedures and
practices through effective change management.
Employees resist change because of fear of loosing jobs, fear of additional tasks and
responsibilities, and fear of adapting to the new order. It has been said that employee resistance
is energy waiting to be released. It is not something to be circumvented but, rather, something to
be harnessed for greater results. Firms must strike a delicate balance between having employees
feel the need to change and having them feel overwhelmed by change; otherwise the change will
result in shock, denial, anger, strike, bargaining, depression, and the like. So it becomes
important for management to analyze the factors that influence employee response towards
change and to deal with them in a manner that facilitates the smooth incorporation of the change
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into the existing system. It is perceived that the change process always passes through seven
phases. These seven phases of change are (i) shock and surprise; (ii) denial and refusal; (iii)
rational understanding; (iv) emotional acceptance; (v) exercising and learning; (vi); realization;
and (vii) integration. Only if change managers understand these phases of change, and only if
they act accordingly, will they be able to successfully manage change processes without
destroying employees motivation and commitment.
Theories of Change
While there are many types of change models, two very different goals typically drive a
change initiative: near-term economic improvement or an improvement in organizational
capabilities. Harvard Business School professors Michael Beer and Nitin Nohria coined the
terms Theory E and Theory O to describe these two basic goals.

Theory E: An Economic Approach
The explicit goal of change within Theory E is to dramatically and rapidly increase
shareholder value, as measured by improved cash flow and share price. Popular notions of
employee participation and the learning organization take a back seat to this overarching goal.
Financial crisis is usually the trigger for this approach to change. Driven to increase shareholder
value, Theory E proponents rely heavily on mechanisms likely to increase short-term cash flow
and share price: performance bonuses, headcount reductions, asset sales, and strategic reordering
of business units.

Theory O: An Organizational Capabilities Approach
The goal of Theory O change is to develop an organizational culture that supports
learning and a high performance employee base. Companies that follow this approach attempt to
invigorate their cultures and capabilities through individual and organizational learning. Theory
O requires high levels of employee participation, flatter organizational structure, and strong
bonds between the organization and its people. Few companies studied by Beer and Nohria
adopted a pure Theory E and Theory O solution; rather, organizations preferred a mix of the two
theories to suit their needs.

The need for a workable model
The rate of change in management within organizations is growing at a rapid pace. A
study by the American Management Association revealed that 84% of US companies were in the
process of at least one major change initiative, while 46% said they had three or more change
initiatives in progress (Peak, 1996). Organizations are under tremendous pressure to execute
changes in management in order to survive in increasingly turbulent environments. Management
scholars know that increasing the occurrences of change negatively affects productivity as
employees resist the change efforts. Employees may be highly skeptical of planned change
initiatives and both actively and passively resist change, resulting in unsuccessful change efforts,
decreases in morale or productivity, and increases in turnover or subsequent organizational
failures (Dervitsiotis, 1998; Eby et al., 2000; Greiner, 1992; Goldstein, 1988; Osterman, 2000).
Conversely, effective management recognizes that positive employee response toward change is
often vital to achieving organizational goals (Eby et al., 2000; Martin, 1998). Past literature has
identified important employee responses for successful change efforts within organizations.
Research suggests that successful implementation of planned change may depend on an
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environment that is conducive to innovation and change (Glover, 1993; Zammuto and OConnor,
1992).
The authors of this study seek to identify and analyze the factors influencing employee
response toward change. In order to identify the influencing factors, three large Information
Technology companies operating in India that have recently implemented significant change
were identified and analyzed. A relevant survey was conducted on each organizations
employees to determine their feedback and responses.
Literature Review
Vakola and Nikolaou (2005) argue that good and effective relationships with employees
are very important for formulating positive attitudes towards change and consequent success of a
change initiative. They find that the most significant factor affecting employee attitudes toward
change is occupational stress. The indicators of occupational stress are work relationships, work-
life balances, overload, job security, control, resources and communication, pay benefits, and
aspects of job. These factors may cause negative attitudes toward change and therefore inhibit
change processes. They suggest that to ensure success of any change program, management must
reduce occupational stress.
Lowder (2009) classifies the organizational change within four-level framework as
processual change, functional change, cultural change and power change. Every change is likely
to bring denials, anger, bargaining depression and acceptance. He argues that every adaptive
leader must embrace a multi-dimensional paradigmatic perspective including systems approach
and actors approach to create an adaptive work environment and ensure successful
implementation of change.
Vithessonthi and Schwaninger (2008) try to establish a relationship between employee
resistance to change and job motivation and self-confidence for learning and development and
find negative relationship between employee resistance to change and job motivation while there
self-confidence for learning and self development was not associated with employee resistance.
Zwick (2000) uses a unique firm-level data set of German firms and finds that employee
opposition is not only related to institutional factors, psychological factors, or union activities but
is closely related to business strategies, goals of innovation or change, and firm size and sector.
He finds that employee resistance to change is less if the strategy of the business is
differentiation and is more if the strategy is gaining competitive advantage by lowering costs and
prices. He also finds that if the goal of change is to increase the performance of employees then
resistance is greater compared to the situation when the goal is to increase product range by
innovation. Lastly, employees oppose change less in smaller and computer software and
technical consultancy sector as compared to other sectors.

The Change Environment
The general perception is that employees will display positive response towards the
changes in management after they have been trained and have experienced the benefits of these
changes. It has been suggested that individuals progress through phases of acceptance of change
(Isabella, 1990; Kets de Vries and Miller, 1984; Janssen, 1982). That is, after a change has been
introduced in an organizational system, employees tend to fear the unknown and demonstrate
limited support for management and the proposed change effort. After training has been
conducted and employees have had initial experiences with how the change initiative will impact
them, they may demonstrate greater understanding and support of the change initiative. This
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research is focused on the interim period when sufficient training has not yet been provided or
prior to the employees having clarity on the proposed or implemented changes. While the factors
influencing employee response towards changes in management are seen as vital to successful
organizational transformation, very few studies have gathered empirical data on employee
response with respect to the critical factors before and after the change effort has been initiated in
that organization.

Employee Resistance towards Changes
Millions of dollars are spent each year by corporations to increase profits through the
implementation of new processes, updated systems, and acquisition of companies (i.e. change).
It is becoming commonplace for corporations to readjust annual profit outlook due to lackluster
results. Organizational and economic benefits sustained from restructuring projects are not only a
result of a network of business processes and technologies; but also the acceptance and
involvement of employees with respect to these changes. It is common knowledge that many
employees will resist change. Their resistance and their choices influence the success of any
organizations change projects. Employee resistance has a great impact on productivity,
employee morale, and ultimately employee turnover.
When change initiatives are implemented within an organization, employees may
experience considerable anxiety about letting go of the known and moving to an uncertain future.
People may be unsure whether their existing skills and contributions will be valued in the future.
They may also have significant questions about whether they can learn to function effectively
and to achieve benefits in the new situation (Tichy, 1993). This resistance to change can be
divided into three main classifications: technical resistance, political resistance, and cultural
resistance. Technical resistance is derived from the habit of following common procedures and
the consideration of past effort in maintaining the status quo. Political resistance is a type of
resistance that arises when organizational change threatens powerful stakeholders, such as top
executives. Political resistance often arises due to an implied change in the allocation of scarce
resources, such as capital, budgets, and quality employees. Cultural resistance takes the form of
systems and procedures that reinforce the status quo, promoting conformity to existing values,
norms, and assumptions about how things should operate (Cummings & Worley, 2005).
An area of focus for this study is employee resistance toward change. Change is a
common occurrence within organizations and resistance to change is just as common. There are
several types of resistance to change. Understanding these different types can help in
understanding ways to reduce resistance and encourage compliance with change. Models used to
analyze employee resistance to change are sometimes discussed at various organizational levels
such as organization-level resistance, group-level resistance, and individual-level resistance
(George et al., n.d.).

Organization-Level Resistance
Organization-level resistance includes resistance to change due to power and conflict,
differences in functional orientation, mechanistic structure, and organizational culture. This type
of resistance stems from power and conflict when a change initiative benefits one department
within the organization while harming another department within the organization. Resistance to
change due to differences in functional orientation occurs because employees or departments
with different functions will see problems and issues differently, thus making it harder to come
to an agreement regarding change. Resistance caused by the mechanistic structure of an
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organization occurs because employees working "within a mechanistic structure are expected to
act in certain ways and do not develop the initiative to adjust their behavior to changing
conditions". Resistance due to organizational culture occurs when change disrupts the values
and norms within the organizations culture (George et al., n.d.).

Group-Level Resistance
Group-level resistance includes resistance to change due to group norms, group
cohesiveness, and groupthink and escalation of commitment. When change alters interactions
between group members due to changes in task and role relationships within a group, group
norms are disrupted and resistance can occur. Resistance due to group cohesiveness occurs
because members of a cohesive group wish to keep things such as members or tasks the same
within the group. Resistance due to groupthink and escalation of commitment occurs because
members ignore negative information, even when they realize that their decisions are wrong, in
order to agree with each other, thus making a change in group behavior incredibly difficult.

Individual-Level Resistance
Individual-level resistance includes resistance to change due to uncertainty and insecurity,
selective perception and retention, and habit. Uncertainty and insecurity can result in resistance
when employees do not know what the outcome of the change will be. When employees direct
attention to how the change will affect their department, their function, or them personally, they
are exhibiting selective perception and retention as a type of resistance to change. Resistance due
to habit occurs when employees are comfortable in their daily habits and do not want to alter.

Exhibiting Resistance to Change
The ways that employees exhibit resistance to change include passive resistance, active
resistance, and aggressive resistance. Employees passively resist change when they harbor
negative feelings and opinions. This may include "agreeing verbally but not following through,
feigning ignorance, and withholding information" (Bolognese., n.d.). When an employee is
actively resisting change, (s)he is actively opposing the change with more overt behavior such as
participating in strikes or increased absenteeism. Behaviors that include attempts to block the
change effort are classified as aggressive resistance to change. Signs of aggressive resistance
may include subversion or sabotage. Aggressive resistance is rare and can become dangerous.

Positive Resistance
Resistance is often perceived negatively, and employees who resist are viewed as
disobedient and obstacles the organization must overcome in order to achieve the new goals. In
certain instances, employee resistance may play a positive and useful role in organizational
change. Insightful and well-intended debate, criticism, or disagreement do not necessarily equate
to negative resistance; but rather, may be intended to produce better understanding as well as
additional options and solutions. De Jager (2001, p. 25) claims, the idea that anyone who
questions the need for change has an attitude problem is simply wrong, not only because it
discounts past achievements, but also because it makes us vulnerable to indiscriminate and ill-
advised change.
Piderit (2000) points out that positive resistance by employees may be withheld as a
result of an employees ethical principles or by desire to protect the organization. However,
positive resistance from employees may force management to rethink or reevaluate a proposed
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change initiative. It also functions as a filter which can help organizations choose from all
possible changes the one that is most appropriate to the current situation. According to de Jager
(2001), "resistance is simply a very effective, very powerful, very useful survival mechanism
(p. 26). Folger & Skarlicki (1999) claim "that not all interventions are appropriate as
implemented -the organization might be changing the wrong thing or doing it wrongly. Just as
conflict can sometimes be used constructively for change, legitimate resistance might bring
about additional organizational change" (p. 37).

Transition and Transitional Phenomena
The process of change is simply moving from the current way of doing things to a new
and different way of doing things. Bridges (1991) believes that it isn't the actual change that
individuals resist, but rather the transition that must be made to accommodate the change. He
states, "change is not the same as transition. Change is situational: the new site, the new boss,
the new team roles, the new policy, a new culture, etc. Meanwhile transition is the psychological
process people go through to come to terms with the situations and new environments. Change is
external while transition is internal. Unless transition occurs, change will not.
The theory of transitional phenomena provides valuable insight into organizational re-
structuring and employee resistance. It explains that change will occur spontaneously only when
people are prepared to relinquish what they hold dear for the purpose of acquiring something
new or if they can find a way to bring that which was valued in the old into the new. The
organization must assist its employees in "letting go" of the current way and moving forward to
the new way. Apart from that, the theory of transitional phenomena also suggests that in
situations of voluntary change the person doing the changing must be in control of the process.

Managing the Change Management
Change is essential for survival in todays economic environments. To be successful with
change efforts, organizations will do well to circumvent negative employee resistance to change.
When negative forms of resistance to change exist, organizations and employees are left in a
conflicting environment. There are various measures and actions that an organizations
leadership can take in order to reduce resistance due to uncertainty and insecurity. This type of
resistance can be countered with education and communication (Kotter, n.d.). Management must
explain why the change is needed, identify the benefits of the change to individuals and
departments, and be willing to answer all questions as they arise. Topics regarding the change
that must be covered are why, what, when, where, and how (Woldring, n.d.). Communication
between management and employees can occur in the form of discussion groups, memos, formal
reports, scheduled meetings, one-on-one meetings, etc. It is equally important for management to
ensure that the employees have clear understanding after the educational and communication
activities; education and communication has little value without understanding.
If management does not understand, accept, and make an effort to work with resistance, it
can undermine even the most well-intentioned and well-conceived change efforts. Coetsee
(1999, p. 205) states "any management's ability to achieve maximum benefits from change
depends in part of how effectively they create and maintain a climate that minimizes resistant
behavior and encourages acceptance and support". Studies show that the change associated with
an initiative or project implementation will impact how stakeholders perceive their role.
In the initial stages of any change process, expectations or impressions are created based
upon the perceptions of benefits as a result of the transformation. From these expectations,
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employees will seek clarification of how the change initiative will impact them and their work
group. Should they face negative perceptions due to inappropriate answers, their productivity
will begin to diminish. The lack of information or the presence of misinformation will cause
them to fill in the blanks for themselves with information that may or may not be factual, thus
creating barriers to the change. On the other hand, should their questions be addressed effectively
and they see how they will eventually fit into the solution, their perception would be positive
which leads to an increase in productivity.
Generally, employee resistance can be easily managed by knowing the factors for
employee resistant. There are four main factors that cause employees to resist change:
1. employees are usually unaware of the change initiative;
2. employees do not understand how the change will affect them
3. employees are worried how the transformation may change their roles and
responsibilities; and,
4. Employees are concerned if they will be able to master the needed skills and
knowledge to perform in the changed environment.
Thus, based on these four factors, top management can actively play the role in assisting
the employees to cope with the changes. Basically, management can communicate the change
measures and how the change will affect the employees. The necessary training, skills, resources,
and other materials should also be prepared in order for the affected employees to cope with the
changes. This is especially true if the transformation will change their roles and responsibilities.
Such training and assistance can be offered via a proven change management program with a
proven change management methodology that will reduce employee resistance. This can help
lessen any dip in employee productivity.
Employees can also participate in four stages of engagement. The outcome is that each
impacted stakeholder group is empowered to develop their own change implementation plan.
These four stages of engagement are (i) Ready - Engage us to be Ready; (ii) Set - Set my
direction; (iii) Go - Go Develop my Skills; and (iv) Perform - Continuously Perform.

At each stage of engagement, the change affecting each stakeholder group and the
relevant change components are analyzed. Appropriate change activities for that stage and that
stakeholder group are determined. These four stages utilize eight change components: Executive
Sponsorship & Stakeholder Management, Team Readiness, Organization Change Readiness,
Communication, Organization Design and Transition, Education and Training, Engaging
Ownership, and Performance Readiness.
Implementing the eight change components in conjunction with the stages of engagement
will result in stakeholders building a comprehensive understanding of the following key aspects
of managing change:
Why changes are needed and how employees and the business will be impacted.
Why, when, and how the changes will be implemented.
Importance of checkpoints to monitor and adjust the plan accordingly based upon
employee awareness and understanding of the required changes.
Social, process and technical skills education and training required to be successful in
the new business environment.
Establish readiness criteria to determine if employees have developed the skills and
knowledge to operate effectively in the new business environment.
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Metrics designed to align desired performance and behavioral changes with business
objectives to ensure benefit sustainability and continuous improvement.
These action items are examples of some of the activities that management can use to engage
their employees in order to cope with the challenges of resistance toward change.
Problem Formulation
The twenty first century has seen almost all organizations undergoing some kind of
change varying from re-structuring, downsizing, retrenchment, layoffs, merger and acquisition,
and even bankruptcy. These changes will mainly affect the employees within that organization.
Many employee-related matters do not remain unchanged or become unclear such as job
security, employee benefits, changes in job scope and work processes, and multi-tasking. Such
changes will often create anxiety and uncertainty among employees. Generally, people naturally
refrain from moving out of a current position especially if they feel comfortable in such
positions. People resist change due to fear of the unknown, uncertainty due to any form of
changes, and fear of moving out of comfort zones. This fear often creates resistance among the
employees.
For this study, six demographic factors have been selected as variables that influence
employee response towards change. The six factors are (1) Gender; (2) Age; (3) Income; (4)
Years of service to the organization; (5) Academic qualifications; and (6) Job position. This
research is guided by a specified time-frame. Generally, the change in management has an
impact on the employee for a specific time frame only. It may not be a lasting impact because
employees are either able to adapt to these changes or they may voluntary or involuntary
separation if they are unable to cope with the changes.
Organizations that experience a change in management usually take the first year to
analyze its current policies and practices, plan its counter measures, and execute the new changes
in the management. The next three to four years would be crucial to this research as the
employee response (whether positive or negative) toward the change initiative would be very
significant during this period. Therefore, in order to ensure the validity of this research, the
analysis is carried out on the sampled organizations that have experienced changes in
management within the last five years. However, the specified time-frame is very subjective and
heavily depends on the type of changes introduced, characteristics of individual employees,
compatibility of the companies involved in the merger and acquisition, leadership style of the
new top management, and other factors.
The research is subject to certain boundaries. For example, the degree of changes in
management may differ from organization to organization which influences employee response.
However, the authors maintain that the current research serves is a valid contribution as it
enables other organizations to predict and anticipate employee behaviors and responses should
the organization experience change initiatives.

Research Question
Can a reliable instrument be designed to measure demographic factors such as Gender,
Age, Income, Years of Service, Academic Qualifications, and/or Job position and correlate those
variables influence on employee response toward change initiatives in their organization?

Research Objectives
1) To determine if gender is a reliable variable in employee response toward change.
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2) To determine if age is a reliable variable in employee response toward change.
3) To determine if income level is a reliable variable in employee response toward
change.
4) To determine if years of service is a reliable variable in employee response toward
change.
5) To determine if academic qualifications is a reliable variable in employee response
toward change.
6) To determine if job position is a reliable variable in employee response toward
change.
Theoretical Framework & Hypotheses

Based on the presented theories and research materials, a conceptual framework is
presented above and designed as such that positive response occurs when employees are able to
adopt and accept the change initiative in their organization. Alternately, negative responses are
classified as when employees' resist change in their organization.
Methodology
The Instrument
The data for testing the instrument was collected using a close-ended survey divided into
two main sections. The first section consisted of six independent variables which are
hypothesized as affecting employee response to change initiatives. The second section measures
employee perceptions across several variables. There are 18 questions in the second section that
cover areas such as job satisfaction, working environment, relationship with the management,
motivation, benefits and remuneration, stress and the like.

The Test Sample: Telecommunication Companies
Almost every organization undergoes transformation in order to remain or survive in the
business. Some of these changes are unavoidable and present few, if any, alternatives. Some
change efforts such as mergers or acquisitions create management changes within an
organization. Changes in management usually result in changes in leadership styles and
organizational cultures which directly impact employees. Other significant changes directly
affecting an employee include employee transfers or other movements within an organization.
Interdepartmental employee transfers result in new direct management for the employee. Other
forms of change that can directly impact an employee include changes in top management,
restructuring, downsizing, strategy deployment, quality-driven change, technology change,
culture change, business expansion, and the like. In order to test the theoretical model described
in this paper, a specific industry and country were identified and described herein.
Variables which influence the response toward
change (Gender, Age, Income, Years of
Service, Academic qualification, J ob position)

Change Initiative
Employee Response to
Change
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Introduction of Telecommunication in India
The `telecom revolution', which arrived in India in the 19th century, continues with great
momentum in the 21st century. India's 21.59 million-line telephone network is the largest in
Asia, 3rd largest among emerging economies (after China and Republic of Korea), and the 12th
largest in the world. India's telecom network comprises of 27,753 telephone exchanges. The total
number of stations connected to National Subscriber Dialing (NSD) is over 18,000 and this is
increasing quickly. Yet the present tele-density is very low at about 2.2 per hundred persons,
offering a vast scope for growth. In the field of International communications, tremendous
progress was made by the use of Satellite Communication and submarine links. It is therefore not
surprising that India has one of the fastest growing telecommunication systems in the world with
system size (total connections) growing at an average of more than 20 percent over the last 4
years.

Telecommunication Industry in India
The telecommunication companies in India have witnessed stupendous growth over the
last eighteen years due to the liberal economic policy adopted by the government of India. The
economic renaissance affected in the early 1990s brought around a paradigm shift on the overall
business scenario of India. The telecommunication companies in India went through a huge
make-over during the implementation of the open-market policy of India. The erstwhile closed
market policy was replaced by a more liberal form of economic policy. A whole new form of
Indian Telecommunication Policy was drafted to compliment the change effected in the
economic policy of India. The amendment affected the new telecommunication policy of India
and made huge changes with respect to investments and entry of Foreign Direct Investments
(FDI) and Foreign Institution Investors (FII) into the virgin Indian telecommunication market.
This resulted in a proliferation of private, domestic, and foreign telecommunication companies in
India. The economic contribution made by these newly formed telecommunication companies of
India is worthy of mention as this industry witnessed accelerated growth along with the Indian
Information Technology industry. The robust growth of the Indian economy after the economic
liberalization in the 1990s induced massive changes in telecom policies by the 'Telecom
Regulatory Authority of India' (TRAI) and 'Department of Telecommunication' (DOT), under the
Ministry of Telecommunication of India. The main aim of these telecommunication companies
in India is to provide basic telephony services to each and every Indian.
With the advent of private telecommunication companies in India, the industry witnessed
introduction of mobile telephones into the Indian market and it quickly became popular among
the Indian population. Today two types of mobile phone service providers operate in the Indian
market: Global System for Mobile Communications (GSM) and Code Division Multiple Access
(CDMA).
The main binding objectives for all the telecommunication companies operating in India
are:
To facilitate telecommunication for all,
Ensuring quick availability of telephone connectivity,
Achieve universal service access at affordable prices covering all Indian villages,
Providing world class telecommunication services,
Solving consumer complaints, resolving disputes, and paying special attention to
public interfaces,
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To provide the widest possible range of services at reasonable prices,
To emerges as a major manufacturing base and major exporter of telecommunication
equipment, and
To protect the defense and security interests of the country.
Three types of service providers exist in the Indian telecommunication sector:
State owned companies such as Bharat Sanchar Nigam Ltd; Videsh Sanchar Nigam
Ltd; and Mahanagar Telephone Nigam Ltd
Private Indian owned companies such as Reliance Infocomm and Tata Teleservices
Foreign invested companies such as Hutchison-Essar; Bharti Tele-Ventures; Escotel;
Idea Cellular; BPL Mobile; and Spice Communications.
This research is to test a theoretical model of factors influencing employee resistance
towards change management. The authors selected three telecommunication companies
operating in India. These companies were selected because they experienced a significant change
initiative within the last five years at their respective organization. The three companies selected
to be suitable for this research are: Hutchison-Essar, Idea Cellular, and Reliance Infocomm.

Hutchison-Essar
Hutch India is now known as Vodafone limited. Vodafone, in joint collaboration with the
Essar group, is registered as Vodafone Essar Limited. Vodafone started operations in India in
1994 when Hutchinson Telecom group acquired the cellular rights in Mumbai. Known as one of
the most respected telecom companies and the best mobile service in the country, it has
operations in 16 circles with almost 50 million customers. Vodafone is the worlds leading
telecom company and has operations in several countries. Vodafone India provides various
services to Indian customers. It has also created headlines recently with the launch of Apple
iPhone 3G service. On June 15, 2007, The Vodafone-Hutchison Essar integration process was
finalized. UK's Vodafone picked up Hong Kong-based Hutchison Telecommunication
International's stake of 52% in Hutchison Essar. The new board includes eight nominees from
Vodafone and four from the Essar Group. Mr. Ravi Ruia of the Essar Group is Chairman, Mr.
Arun Sarin, CEO of Vodafone, is Vice-Chairman, and Mr. Asim Ghosh is Managing Director.
The other six nominees from the Vodafone side are Mr. Paul Donovan, Mr. Gavin Darby, Mr.
Vittorio Colao and Mr. Robert Barr. Mr. Analjit Singh and Mr. C.R. Dua are independent
directors. The major change in management is
Ravikant Nandkishore Ruia is the new Chairman of Vodafone-Essar. Mr. Ravi was
earlier Non-Executive Chairman of Hutchison Essar Ltd. He was responsible for
setting up overseas ventures of Essar Group. He is connected with several industry
and trade associations both at the national and bilateral level.
Mr. Arun Sarin took over as vice - chairman of Vodafone-Essar. Earlier, he was the
Chief Executive Officer of Vodafone Group PLC from July 30, 2003. He was the
Chief Executive Officer at Accel-KKR. Prior to working with Accel-KKR Telecom,
he served as the Chief Executive Officer and the President at InfoSpace, Inc. from
April 2000 to January 2001 and served as the Vice Chairman beginning in May 2000.
He also served as the President and the Chief Executive Officer of AirTouch
International from April 1994 to June 1999.
Mr. Asim Ghosh took over as Managing Director of Vodafone-Essar. Beginning in
1998, he served as the Chief Executive Officer of Vodafone India, a subsidiary of
Vodafone Group plc. Mr. Ghosh had been Managing Director of Hutchison Max
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Telecom Private Limited, an operating company of Hutchison Telecommunications
International Ltd. He serves as Managing Director of Vodafone Essar Ltd., (formerly
Hutchison Essar Ltd.) and served as its Chief Executive Officer. Mr. Ghosh obtained
a Bachelor of Technology in Electrical Engineering from Indian Institute of
Technology, Delhi, and an MBA from Wharton Business School in the USA.

Idea Telecommunications Limited
Idea Telecommunications Limited was incorporated on December 16, 1997, as Escorts
Gleneagles Health-Care Private Limited. It became a public limited company on March 31, 2000
and its name was changed to Escorts Telecommunications Limited on November 16, 2000. The
Company acquired the shares of Idea Telecommunications Limited on June 28, 2006 and
subsequently on August 1, 2006, its name was changed to Idea Telecommunications Limited. It
is among the leading mobile operators and currently operates in 11 circles in India. In addition,
the company holds licenses for the Metropolitan Circle of Mumbai and the category C Circle of
Bihar. It is ranked among the top three operators in six of the Established Circles and currently
one of the fastest growing mobile operators. Idea has consistently grown in the established
circles and new circles with an increasing market share. They have an experienced and well-
positioned GSM service provider with original licenses in seven 13 circles. Idea has a history of
expanding, integrating, and rebranding circles.
The competitive strengths of this company include attractive existing footprint; a critical
mass of 12.44 million subscribers; strong distribution channels; high quality network structure; a
national brand; and part of the Aditya Birla Group. Further, it is well positioned to grow in the
rapidly expanding Indian telecommunications industry due to its growth strategies of building on
its strong position in established circles; deriving synergies and economies of scale from an
expanding operation; building a meritocratic organization with a strong focus on people; and
focusing on customer service to enhance brand appeal.
The change initiative stems from the major change in the management, which is as
follows.
Dr. Kumar Mangalam Birla, aged 39, Chairman of the Aditya Birla Group, was
appointed as Chairman in June 2006. He is also a director on the board of the Aditya
Birla Groups international companies spanning Thailand, Indonesia, Malaysia, the
Philippines, and Egypt. He is a director of the Central Board of Directors of the
Reserve Bank of India; Chairman of the Advisory Committee constituted by the
Ministry of Company Affairs; member of the Prime Minister of Indias Advisory
Council on Trade and Industry; Chairman of the Board of Trade reconstituted by the
Union Minister of Commerce and Industry; member of the Government of Uttar
Pradeshs High Powered Investment Task Force; member of the National Council of
the Confederation of Indian Industry (CII); and member of the Apex Advisory
Council of the Associated Chambers of Commerce and Industry of India.
Mr. Sanjeev Aga, aged 54, was appointed Managing Director of the Company for a
period of five years beginning November 1, 2006. Mr. Aga has previously been the
Managing Director of Blow Plast Limited; Marketing Manager of Jenson and
Nicholson Limited, Chellarams (Nigeria); and Regional Sales Manager of Asian
Paints.
Mrs. Rajashree Birla, aged 61, was appointed to Ideas Board of Directors in June
2006. She is a director on the boards of all the major Aditya Birla Group international
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companies spanning Thailand, Indonesia, Philippines and Egypt. Mrs. Birla is a
member of the prestigious Tirumala Tirupathi Devasthanams Development Advisory
Council. As a patron of arts and culture, Mrs. Birla heads the Sangeet Kala Kendra,
as its President.
Mr. Debu Bhattacharya, aged 58, was appointed to Ideas Board of Directors in June
2006. Managing Director of Hindalco Industries Limited, Mr. Bhattacharya is the
honorary President of the Aluminium Association of India and a director of the
Fertilizer Association of India and also the Chairman of the National Committee on
Non Ferrous Metals, Confederation of Indian Industry. Mr. Bhattacharya is also the
recipient of the prestigious India Business Leader of the Year Award (IBLA) 2005
and The Asia Corporate Citizen of the Year Award 2005. Prior to joining the
Aditya Birla Group, Mr. Bhattacharya was working for Unilever during which time
he held several key positions and worked in several roles in its Indian and overseas
operations. He led the chemical business of Unilever in India before moving to the
Aditya Birla Group.
Mr. Saurabh Misra, aged 59, was appointed to Board of Directors in June 2006. Mr.
Misra has over 35 years of experience in management and was the Deputy Chairman
of ITC Limited before joining the Aditya Birla Group. Mr. Mohan Gyani, aged 55,
was formerly President and the Chief Executive Officer of AT&T Wireless Mobility
Group and has considerable telecommunications and GSM-based industry
experience. He holds an MBA in finance from San Francisco State University. Mr.
Gyani led AT&T Wireless Services domestic voice and data mobility businesses,
focusing on completing the expansion of the companys footprint across the United
States and accelerating growth, particularly in the wireless data business. Prior to its
merger with Vodafone, Mr. Gyani was Executive Vice President and Chief Financial
Officer of AirTouch Communications.
Mr. Arun Thiagarajan, aged 62, was appointed to the Board of Directors in September
2006. Started his career with Asea AB Vasteras, Sweden in 1969, he became
Managing Director of Flakt India Limited (previously SF India Limited), Calcutta. He
has been active in the Confederation of Indian Industries, having been Chairman of
the CII National Committees on Technology, IT and Quality.
Ms. Tarjani Vakil, aged 70, was appointed to Board of Directors in September 2006.
She retired as chairperson and Managing Director of Export Import Bank of India in
October 1996. She has 40 years of experience in the field of Finance & Banking. She
was the first lady to head a financial institution in India. She has several awards to her
credit. She placed among the top 50 women executives worldwide by a KPMG
survey in 1966.

Reliance Communications
Reliance entered telecommunications space when the sector was opened up for private
participation in the 1990s under the leadership of Dhirubhai Ambani. On December 30, 2008,
Reliance Communications became the first telecom operator in the history of Indian
telecommunications to simultaneously launch its GSM services in 15 circles thereby establishing
itself as a pan-India operator. It had already operated GSM services in 8 circles. Today, Reliance
Communications is Indias largest information and communications services provider with over
20 million subscribers, and offers the full range of integrated telecom servicesat prices that are,
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by far, the lowest anywhere in the world. It is ranked among Indias top three private sector
business houses in terms of net worth. The following changes were noted.
Regarded as one of the foremost corporate leaders of contemporary India, Shri Anil D
Ambani, 48, took over as Chairman of Reliance Telecommunication on June 26,
2005. He is the chairman of all listed companies of the Reliance ADA Group. He is
also Chairman of the Board of Governors of Dhirubhai Ambani Institute of
Information and Communication Technology, Gandhi Nagar, Gujarat. He is credited
with having pioneered a number of path-breaking financial innovations in the Indian
capital markets. He spearheaded the countrys first forays into the overseas capital
markets with international public offerings of global depositary receipts, convertibles,
and bonds. He is a member of the Wharton Board of Overseers, Wharton Business
School, USA; Central Advisory Committee, Central Electricity Regulatory
Commission; Board of Governors, Indian Institute of Management, Ahmedabad; and
the Board of Governors Indian Institute of Technology, Kanpur. In June 2004, he was
elected for a six-year term as an independent member of the Rajya Sabha, Upper
House of Indias Parliament (a position he chose to resign voluntarily on March 25,
2006).
Shri Deepak Shourie was appointed as independent director of Reliance on May,
2006. He has more than 37 years experience with an emphasis on media, consumer
goods, and corporate affairs. He is presently holding the position of EVP and
managing director of Discovery Communication India.
Shri S.P.Talwar and Prof. Ramachandran were appointed as directors in February
2006. Prof. Ramachandran is BOC Chair Professor of Business Policy at the Indian
Institute of Management, Bangalore. A qualified Chartered and Cost Accountant,
Professor Ramachandran obtained his doctorate from the Indian Institute of
Management, Ahmedabad. His major research interest is in the area of
internationalization of firms from emerging economies. A former member of the
Board of Governors of the Indian Institute of Management Bangalore, Professor
Ramachandran has been the Harry Reynolds Visiting International Professor at the
Wharton Business School, USA; and a Visiting Professor at INSEAD, Fontainebleau,
France and the Carlson School of Management, University of Minnesota, USA.

Summary
The research was carried out in the above three telecommunication companies operating
in India. As highlighted above, all three companies have recently experienced change initiatives
at the executive level in their respective organization.

Sampling & Data Collection
The target population for pretesting the developed instrument was selected in order to
ensure a representative mix of the six independent variables. The survey was handed out to
employees by batches at their respective office at different intervals in order to not interrupt daily
business operations. The respondents were briefed on the purpose of this research and they were
ensured that their responses would be treated confidentially. In total, there were 153 completed
samples.
The data obtained from the pretest was analyzed using SPSS. The reliability of the
instrument was highly significant with a Cronbach Alpha of 0.796. This is very encouraging as it
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is above the acceptable threshold of 0.7. In performing the frequency analysis, it was
determined that the six independent variables were well represented in the initial sample. The
tables below illustrate the representation of the six independent variables. As can be seen, each
category of the respective independent variable was properly represented.

Frequencies Table
Total Percent
Gender Male 81 52.9
Female 72 47.1
Total Responses 153 100.0
Total Percent
Age Below 20 24 15.7
20 30 48 31.4
30 40 36 23.5
40 - 50 31 20.3
Above 50 14 9.2
Total Percent
Income

Below Rs. 5000 15 9.8
5000 - 10000 29 19.0
10000 - 20000 36 23.5
20000 - 30000 38 24.8
30000 - 40000 27 17.6
Above Rs 40000 8 5.2
Total Percent
Duration Below 1 Year 1 .7
I year - 2 year 30 19.6
2 year - 5 year 51 33.3
5 year - 10 year 41 26.8
Above 10 years 30 19.6
Total Percent
Qualification Under Grad. 11 7.2
Graduate 72 47.1
Post Grad. 45 29.4
Professional 25 16.3
Total Percent
Status Non-Executive 37 24.2
Executive 43 28.1
Front Line Mgr. 36 23.5
Mid level Mgr. 29 19.0
Senior Mgr. 8 5.2
Discussion and Limitations
The subject of change management in organizations is very wide and versatile. There are
numerous types of changes that can be implemented in an organization. Organizational
restructuring is but one type of change that organizations and employees face. However, the
methods of implementation can vary greatly. For example, downsizing, retrenchment, job
rotation, and transfers, are some examples of organizational change. Each of these methods has
its own benefits and effects based on employee resistance. A restructuring process is also very
industry-dependent. For example, the technology industry is more susceptible toward changes
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since the life cycle of these products evolves rather quickly. Employees in such an industry are
more familiar with the need for change as compared to employees in more stable industries such
as food services where changes take place at a slower pace. As a result, employee resistance is
also dependent on the degree of familiarity of employees toward change.
Competency in effective change management facilitates a smooth transition from the old
to the new. The process of change management consists of getting those involved and affected to
accept the introduced changes as well as manage any resistance to them. This process includes
communication, education, training, motivation, assurance, rewards and compensation.
Limitations
Since this research was performed on three particular companies in the
telecommunication industry, the findings may not be generalizable to the greater population.
Another limitation of this research is in the difficulty of obtaining organizations that meet the
predefined requirement of having undergone a significant change initiative within the last five
years. There are companies that have unions representing its employees. In such companies, the
levels of employee resistance may vary greatly as compared to companies whose employees do
not have union representation. This is because the employees will be well represented and the
general rule applies where many voices is louder than one voice. Positive resistance is also
more effective via unions. Therefore, this project paper could be improved further by carrying
out research to distinguish the difference of employee resistance in companies with and without
employee unions.
Conclusion & Recommendations
Employee resistance toward change initiatives is a challenging issue faced by
management in the constantly evolving organizations of today. The re-structuring process of
change is ubiquitous and employee resistance is one of the most critical contributors to the
failure of many well-intend and well-conceived efforts to initiate change within the organization.
In many cases, vast amounts of resources are utilized by organizations on employees to
transform new ways of achieving desired goals. Naturally, most employees resist change
especially if it disrupts their convenience, comfort, and norms. This is the challenge that
management must overcome in order to bring about desired change. Management must also
seriously take into account and consider the myriad of problems that may result if they are not
responsive to issues of resistance in the workplace.
With a Chronbach Alpha of 0.876, the authors feel that the theoretical model, the
instrument, and the methodology are valid means to measure employee acceptance of change
initiatives. Further application of the proposed model, instrument, and methodology are
necessary to continue the discussion surrounding this complex issue. As of this writing, few
quantifiable and applicable tools (instruments) are available to assist management when
initiating and managing a change effort within their organization. The presented instrument has
been tested for reliability and has proven to be highly reliable. A next step for this discussion
would be to test the validity and correlate the demographic variables with the outcome of change
initiatives.

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Envi r onment & Mar keti ng: A Study of Ethi cal
Response Behavi or i n I ndi an Consumer s
Karamjeet Singh
M. Saeed
Andy Bertsch
Abstract
This paper studies the ethical response behavior of Indian consumers. Data was collected
from 374 respondents using a questionnaire survey covering issues on the environment and
marketing of products. The study reveals that respondent awareness of the extent of damage
done as a result of economic activity is steadily growing. Consumers are becoming conscious of
adverse affects and are willing to pay more for eco-friendly products. Further, it is evident from
this study that Asian Indians are aware and concerned about the environmental conditions but the
commitment level to take proactive individual actions is moderate.
Introduction
Your planet needs you. Unite to respond to climate change. is a slogan from the World
Environment Day celebrated in India on June 5, 2009. The President of India - Smt. Pratibha
Devi Singh Patil on that eventful day at Vigyan Bhawan, New Delhi - said that this slogan is a
reminder of the need for collective effort to tackle the threats emanating from climate change,
with a major global environmental concern of our time. She also said that this challenge is
global. It impacts each one of us in our habitats and affects our way of life. Hence, there is a
responsibility of every citizen on the globe to contribute to the efforts to ensure the health and
diversity of the planet as well as to protect and conserve its resources for future generations.
With the steady increase in air, water, and noise pollution came an increase in average
global temperature, increased glacial melting, decreasing forests, over extracting of minerals,
nuclear testing and armaments, which collectively affect the worlds eco systems, agricultural
industrial production, the availability of fresh water level, and forest life. With all this, the
struggle of human beings to balance the environment for mere survival increases. In the end,
consumers are becoming aware of environmental issues and are trying to change their lifestyles.
As consumers are becoming aware of environmental issues, the challenge for business is to
develop products and services that deliver environmental benefits, without compromising and
even improving on quality, functionality, and performance at reasonable prices. Some industries
might be struggling to face the challenge, while many industries in India have already carved out
a niche for marketing environmentally friendly products. A number of businesses are responding
to this challenge by redesigning the business model and focusing on the service demanded rather
than the product. This is creating new opportunities for the innovative business. The role of
governments and media becomes very important. They should provide detailed information to
end consumers and should invest in research and development of environmentally friendly
products. Consumer behavior has been slow to adapt as there are still consumers buying paper
produced directly from trees rather than recycled paper, consumers buying conventional bulbs
instead of energy-efficient, consumers preferring to use air travel rather than ground
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transportation such as train service - even for short distance. The decisions of such consumers are
based on utility maximizing behavior but there should be a trade-off between utility derived from
preferred characteristics of a product vs. the moral behaviors of buying green which is
becoming an expected trait of every member of society. So merely chanting mantras Go Green
will not help. What is required is active participation, especially by consumers.
It is our ethical duty to act properly in order to reduce the threat of climate change even if
one assumes there is more scientific uncertainty about the causes and impacts of climate change.
Nevertheless, there is a swell of scientific consensus most recently articulated by the
Intergovernmental Panel on Climate Change (IPCC). In its fourth assessment in November of
2007, the IPCC made the following key conclusions:
It is very likely that observed increases in global average temperatures since the mid-
20th century have been caused by increases in anthropogenic greenhouse gas (GHG)
emissions.
Warming of the global climate system is clear.
Anthropogenic warming and sea level rise would continue for centuries due to the
timescales associated with climate processes and feedbacks, even if greenhouse gas
concentrations were to be stabilized.
The probability that this is caused by natural climatic processes alone is less than 5
percent.
World temperatures could rise by between 1.1 and 6.4 C (2.0 and 11.5 F) during the
21st century.
There is high confidence (greater than 90%) that there will be more frequent warm
spells, heat waves and heavy rainfall.
There is a 66 percent confidence level that there will be an increase in droughts,
tropical cyclones and extreme high tides.
Both past and future anthropogenic carbon dioxide emissions will continue to
contribute to global warming and sea level rises for more than a millennium (IPCC,
2007).
In environmental controversies such as global warming where there is legitimate
scientific concern, important ethical questions arise when scientific uncertainty prevents
unambiguous predictions of human health and environmental consequences. This is so because
decision-makers cannot duck ethical questions such as how conservative should scientific
assumptions be in the face of uncertainty or who should bear the burden of proof about the
collective harm. To ignore these questions is to decide to expose human health and the
environment to a legitimate risk; that is, a decision to not act on a serious environmental threat
could have consequences, particularly if waiting until all uncertainties are resolved could
increase the overall adverse effects. Science alone cannot tell us what assumptions or concerns
should be considered in making a judgment about potentially dangerous behavior. For this reason,
environmental decisions in the face of scientific uncertainty must be understood to raise a
combination of ethical and scientific questions.
From the standpoint of ethics, those who engage in risky behavior are not exonerated
simply because they did not know that their behavior would actually cause harm (e.g. ignorance
is not an excuse). As a matter of ethics, a relevant question in the face of scientific uncertainty
about harmful consequences of human behavior is whether there is a reasonable basis for
concluding that serious harm to others could result from the behavior. Yet, as we have seen, in
the case of climate change, humans have understood the potential threat from climate change for
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over one hundred years and the scientific support for this concern has been building at a
quickened rate over the last thirty years. In fact, for more than 18 years, the IPCC, a scientific
body created with the strong support of governments around the world to advise them about the
conclusions of peer review climate change science, has been telling the world, with increasing
levels of confidence, that the harm from climate change is not only possible but likely.
Literature Review
Various studies conducted on environmental degradation reveal that awareness is steadily
growing concerning the extent of damage done through economic activity. Consumers are
becoming conscious of adverse affects and are willing to pay more for eco-friendly products. For
example, eight in ten Americans consider themselves to be environmentalists and half claim to
be strongly so while acknowledging the need to modify their lifestyle (Gutfield 1991). It appears
that consumers are concerned about the environment and are ready to modify their purchasing
behaviors (Polonsky et a1. 1995) to support a "green" brand (Oyewole 2001). Environmentally
conscious consumers were found to be very much willing to pay premium prices to purchase
environmentally friendly products (Dunlap and Scarce 1991; Michael Peters Group 1991). Many
researchers suggest that consumers concern for environmental issues is growing (Lee and
Holden, 1999; Berger & Corbin, 1992; Lord, 1994; and Schwartz & Miller, 1991). However,
there is little evidence that this has led to appropriate changes in pro-environmental consumer
behavior (Schwartz & Miller, 1991). Lee and Holden (1999) suggested that in order to change
consumer behaviors, it is important that producers understand the determinants of pro-
environmental consumer behavior and appreciate the motivations underlying these conscious
behaviors by examining attitude-behavior consistency. However, using this model alone is not
a good predictor of behavior (Heslop, Moran, & Cousineau, 1981; Ritchie, Gordon, McDougall,
& Claxton, 1981). Other variables should also be considered including affect (Smith, Haugtvedt,
Petty, 1994), cost-benefit (Wasik, 1992), perceived consumer effectiveness (Berger and Corbin,
1992; Ellen, Wiener, & Cobb-Walgren, 1991), faith in others (Berger and Corbin, 1992), and
demographic characteristics (Granzin and Olsel, 1991; Soutar, Ramaseshan, & Molster, 1994). In
an article titled Earth Island Journal, Global Marketplace, (2000), the most prominent
environmental problem pertains to disposable diapers and plastic bottles. Diapers not only
consume trees but also clog landfills. Chemically treated diapers are also linked to an increase in
diaper rash which caused many parents to drop the use of disposable diapers soon after.
However, producers like Procter & Gamble and Kimberley-Clarks improved their products and
unleashed strategic advertisements to regain the trust of parents by treating the diapers with yet
another chemical. Friends of the Earth (2002) reported that North Americans alone discard 1.5
million plastic bottles a day which mostly end up in landfills. Coca Cola was one of the major
contributors to this problem. Coca Cola tried to use recycled plastics but stopped after only a
few years and returned to virgin plastic claiming that it was too costly to use recycled plastic.
Innovators of these items seem to forget about environmental deterioration during the product
development stage. Producers should consider redesigning their products in order to reduce
these problems.
Based on detailed interviews, Wansink (2000) has outlined specific strategies to help
consumers shop, use, and dispose of products more carefully and less wastefully. According to
Wansink (as cited in Wansink & Despande, 1994), many consumers buy products they never
actually use. It has been indicated that as many as 15% of non-perishable products are never
used and eventually discarded. This is not an issue of wasting money but it is an issue of wasting
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increasingly limited resources. Attitudes seem to vary regarding what causes consumers to buy
products they never use, and how consumers can change their purchase and usage habits to
reduce product abandonment that finally leads to product disposal. This study is an attempt to
analyze how attitude influences consumers product purchase, use, and disposal (Rosli, Abdullah,
Bertsch & Saeed, 2008). Questions germane to this study include: 1. Do Indian consumers
prefer eco-friendly products?; 2. Do Indian consumers aware of the dangers of economic
degradation?; 3. Are Indian Consumers proactive in solving the environmental problems?
Methodology
Instrument and Sample
Data was gathered using a questionnaire tested by Rosli, Abdullah, Bertsch & Saeed in
their study of environmental awareness of Malaysian consumers; a replication of Lee and Holden
(1999) and Wagner (1997). The questionnaire was used after incorporating several local
variables suitable for the Indian environment. A convenience sample of 374 respondents
included employed and unemployed students and retired people. The sample covered urban and
rural areas with respondents ranging between 18 and 70 years of age. The questionnaire included
the demographic background of the respondents; awareness variables (5 questions), and
behavioral variables (23 items). The behavioral measures included inquiry into the respondents
participation in any programs that will ensure a safe environment such as the use of
biodegradable products, public transportation, safe garbage disposal, or any such activities
supporting the environment, a government program, or response to a lobbyist group. A Likert
scale (1 = not at all to 5 = very much) was used. The behavioral section also asked
respondents whether they agree or disagree to a list of statements concerning steps to be
undertaken by individuals, groups, and the government. A Likert scale (1 = strongly disagree
to 5 = strongly agree) was used.
Statistical Analysis
Awareness variables and behavioral variables were analyzed separately. A reliability
analysis was run on both sets of variables. As discussed in Rosli, Abdullah, Bertsch & Saeed
(2008), we have also considered variables deemed appropriate to the Indian context. Reliability
and validity were tested.
To begin, factor analysis was applied on those awareness variables representing
awareness level as shown in Table-1.

Table 1: Awareness Variables (Total Variance Explained: 35.87%)
Factor loading
Aware1: We are in serious danger of destroying the world environment in the very near future. 0.651
Aware2: Drastic change and reductions in mining and others lifestyles are the only way we can save the environment. 0.701
Aware3: Its time for environment groups to get more radical/active. 0.696
Aware4: Protecting the natural environment should be more important than creating economic growth and employment
in poor countries.
0.525
Aware5: I am capable of helping to solve the environmental problems. 0.363
Second, a reliability test was run and illustrated in Table 2. With a coefficient alpha of
0.74, the reliability test for the awareness variables was higher than the 0.70 threshold set Hair et.
al., (1998).

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Table 2: Reliability test on Awareness variables.
Variables (1 strongly disagree, 5 strongly agree) Item-to-total
correlation
Coefficient
Aware1: We are in serious danger of destroying the world environment in the very near
future.
0.587

0.740

Aware2: Drastic change and reductions in mining and others lifestyles are the only way we
can save the environment.
0.687
Aware3: Its time for environment groups to get more radical/active. 0.642
Aware4: Protecting the natural environment should be more important than creating
economic growth and employment in poor countries.
0.552
Aware5: I am capable of helping to solve the environmental problems. 0.489
Table 3 illustrates that the coefficient alpha for the behavioral variables was also high at
0.758. Twenty-two items measuring the behavioral variables indicated that the overall internal
consistency was high except for items 1 and 20 which both had item-to-total coefficients less
than 0.3. When these items were deleted and reliability test rerun, the coefficient alpha showed
no significant improvement so these items were retained for the purpose of further analysis.

Table 3: Reliability test on behavioral variables.
Variables Item-to-total
correlation
Coefficient
Scale: (1 = not at all, 5 = very much)
Behav1: Participate in recycling program during the last year? 0.253

0.758

Behav2: Seek out biodegradable products? 0.464
Behav3: Car pooled, walked, biked, or taken public transport? 0.512
Behav4: Consciously avoid Styrofoam packaging? 0.394
Behav5: Separate garbage for recycling? 0.446
Behav6: Active member of environmental group? 0.451
Behav7: Given monetary help to clean up environment? 0.398
Behav8: Written to the government or lobby group about the environment? 0.305
Behav9: Attended rallies or demonstration on environmental issues? 0.362
Scale: (1 = strongly disagree, 5 = strongly agree)
Behav10: In the interest of protecting the environment, I am willing to pay five cents a liter
more for gasoline to decrease air pollution.
0.517
Behav11: In the interest of protecting the environment, I am willing to pay 10% more for
groceries packaged and produced in an environmentally safe way?
0.438
Behav12: In the interest of protecting the environment, I am willing to pay Rs. 1000 more
for a car that emitted less air pollution?
0.373
Behav13: In the interest of protecting the environment, I am willing to pay 50% more for
garbage collection for safe long-term disposal?
0.435
Behav14: In the interest of protecting the environment, I am willing to buy unbleached
paper products such as toilet paper, and paper towels, which are kind of brown in color, in
place of the bleached white paper products?
0.355
Behav15: In the interest of protecting the environment, I am willing to pay Rs. 250 a year
more taxes to clean up your communitys sewage system?
0.457
Behav16: In the interest of protecting the environment, I am willing to pay 10% tax on all
the energy that you use to promote conservation?
0.449
Behav17: In the interest of protecting the environment, I am willing to support the
environmental campaign? e.g. recycling campaigns.
0.484
government doubling the amount of land designated as natural wilderness?
0.458
Behav19: In the interest of protecting the environment, I am willing to support the law
requiring all household garbage to be separated into different classes for recycling?
0.446
Behav20: In the interest of protecting the environment, I am willing to support tax breaks
and incentives to industry to encourage development and implementation of clean
technology?
0.260
government control to reduce packaging on consumer goods?
0.384
Behav22: In the interest of protecting the environment, I am willing to support stiff
penalties, jail sentences for polluters?
0.379

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The 22 behavioral items were collapsed into four variables as suggested by Rosli, Abdullah,
Bertsch & Saeed (2008):
Personal practice (PRAC): items 1, 2, 3, 4, and 5
Support group (GRPSUP): items 6, 8, 9 and 17
Monetary support (MONSUP): items 7, 10, 11, 12, 13, 14, 15 and 16.
Support government (GOVSUP): items 18, 19, 20, 21, and 22.
The collective reliability test for the above four collapsed variables revealed a coefficient alpha
of 0.758. The reliability coefficient for four collapsed variables is given in Table 4. The
correlation matrix of the variables for the awareness and behavioral variables are given in Tables
5 and 6 respectively.

Table 4: Reliability test on for collapsed variables.
Variables (1 strongly disagree, 5 strongly agree) Item-to-total
correlation
Coefficient
Personal practice (PRAC): 0.513

0.758

Support group (GRPSUP) 0.440
Monetary support (MONSUP): 0.555
Support government (GOVSUP): 0.504
Analysis and Findings
Profile of Respondents
Table 5 illustrates the demographics of the sample. Interestingly, 82.4% of the
respondents were in the age range of 18-40 years old which is a respectable demographic given
the nature of the research. The respondents were mostly educated with 96.3% having at least a
certificate level education. In terms of income, 48.5 % of the respondents have a monthly total
family income of less than Rs. 20,000 while 51.5% have a monthly total family income of more
than Rs. 20,000. There were a similar number of respondents holding managerial and non-
managerial positions (43.5% and 41.2% respectively). As was stated earlier, the sample was
based on convenience; nevertheless, the authors feel the demographic makeup of the respondents
is rather respectable likely allows the results to be generalized to the greater population.

Table 5: Profile of Respondents
Items Frequency
(374)
Percent
100
Gender
Male
Female

209
165

55.9
44.1
Age
18 25
26 30
31 35
36 40
41 45
46 50
51 55
56 and above

107
74
46
81
34
19
09
04

28.6
19.8
12.3
21.7
9.1
5.1
2.4
1.1
Marital Status
Married
Single

153
221

40.9
59.1
Education
Ph.D.
Masters
Graduates
Primary Education

33
84
161
75

8.8
22.5
43.0
20.1
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Items Frequency
(374)
Percent
100
Certificate
Illiterate
7
14
1.9
3.7
Income
Less Than Rs. 5000
Rs.5001 Rs.10000
Rs. 10,001 Rs. 20,000
Rs. 20,001 Rs. 30,000
Rs. 30,001 Rs. 40,000
Rs. 40,001 Rs. 50,000
Rs. 50,001 Rs. 60,000
More than Rs. 60,001

26
65
90
45
43
27
24
54

7.0
17.4
24.1
12.0
11.5
7.2
6.4
14.4
Employment
Management
Non-management
Unemployed
Student

37
35
5
8

43.5
41.2
5.9
9.4
Working Experience
0 - 5 years
6 - 10 years
11 15 years
16 20 years
21 25 years
More than 25 years

108
48
49
85
42
42

28.9
12.8
13.1
22.7
11.2
11.2
Awareness Variables Analysis
Table 6 includes the means and standard deviations (SD) for the awareness variables.

Table 6: Mean and SD of Dispositional Variables
Items Mean Std Dev
Aware1: We are in serious danger of destroying the world environment in the very near future. 4.2086 0.85978
Aware2: Drastic change and reductions in mining and others lifestyles are the only way we can save the
environment.
3.6765 1.04824
Aware3: Its time for environment groups to get more radical/active. 4.2166 .92255
Aware4: Protecting the natural environment should be more important than creating economic growth
and employment in poor countries.
3.8663 .94247
Aware5: I am capable of helping to solve the environmental problems. 3.9545 .95786
With the Likert scale of 1 (strongly disagree) to 5 (strongly agree), the results indicate
that, taken as a whole, respondents awareness on the environmental conditions are quite high.
They agree that the environment is being destroyed (Aware1 mean > 4.00) and that
environmental groups should be more active (Aware3 mean > 4.00). With a mean of nearly four
(Aware mean = 3.955), respondents also feel that they can do something to help save the
environment. Regarding the steps that should be undertaken to save the environment (Aware2
mean of 3.676) and that protecting the environment is important (Aware4 mean of 3.866), the
response is moderate yet above the midpoint of this one to five scale. Thus Indian consumers
have a moderate to high awareness level.

Behavioral Variables Analysis
In Table 7, it can be seen that the respondents are very supportive of governments efforts
to solve environmental problems (GOVSUP mean 3.85); while on their own they are less willing
to put into practice certain behaviors that could help save the environment (PRAC mean 2.843),
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less willing to give full support to environmental groups (GRPSUP mean 3.04), and less willing
to give monetary support (MONSUP mean 3.60).

Table 7: Individual Means of Behavioral Variables (all p values where <0.001)
Variables (1 not at all, 5 very much) Mean
Behav1: Participate in recycling program during the last year? 1.9251
Behav2: Seek out biodegradable products? 2.7674
Behav3: Car pooled, walked, biked, or taken public transport? 3.1684
Behav4: Consciously avoid Styrofoam packaging? 3.3021
Behav5: Separate garbage for recycling? 3.0535
Personal Practice (PRAC, mean of Behave1 thru 5) 2.8433
Behav6: Active member of environmental group? 3.0107
Behav8: Written to the government or lobby group about the environment? 2.9626
Behav9: Attended rallies or demonstration on environmental issues? 2.3048
Behav17: In the interest of protecting the environment, I am willing to support the environmental campaign? e.g. recycling
campaigns.
3.9037
Support Group (GRPSUP, mean of Behave6, 8, 9, and 17) 3.0454
Behav7: Given monetary help to clean up environment? 2.6818
Behav10: In the interest of protecting the environment, I am willing to pay five cents a liter more for gasoline to decrease air
pollution.
3.6417
Behav11: In the interest of protecting the environment, I am willing to pay 10% more for groceries packaged and produced in
an environmentally safe way?
3.7620
Behav12: In the interest of protecting the environment, I am willing to pay RS. 1000 more for a car that emitted less air
pollution?
3.7888
Behav13: In the interest of protecting the environment, I am willing to pay 50% more for garbage collection for safe long-term
disposal?
3.8262
Behav14: In the interest of protecting the environment, I am willing to buy unbleached paper products such as toilet paper, and
paper towels, which are kind of brown in color, in place of the bleached white paper products?
3.8102
Behav15: In the interest of protecting the environment, I am willing to pay RS. 250 a year more taxes to clean up your
communitys sewage system?
3.6364
Behav16: In the interest of protecting the environment, I am willing to pay 10% tax on all the energy that you use to promote
conservation?
3.6658
Monetary Support (MONSUP, mean of Behave7, and 10-16) 3.6016
Behav18: In the interest of protecting the environment, I am willing to support the government doubling the amount of land
designated as natural wilderness?
3.8128
Behav19: In the interest of protecting the environment, I am willing to support the law requiring all household garbage to be
separated into different classes for recycling?
4.0000
Behav20: In the interest of protecting the environment, I am willing to support tax breaks and incentives to industry to
encourage development and implementation of clean technology?
3.8690
Behav21: In the interest of protecting the environment, I am willing to support the government control to reduce packaging on
consumer goods?
3.9920
Behav22: In the interest of protecting the environment, I am willing to support stiff penalties, jail sentences for polluters? 3.5829
Support Government (GOVSUP, mean of Behave18 thru 22) 3.8513
Thus, it can be deduced that the respondents in this study are aware of the worsening
condition of the environment and realize that steps should be taken to protect and save the
environment; however they are not fully committed to undertaking individual actions to remedy
the situations. They would rather expect the government, industries, and environmental
protection groups to undertake these responsibilities. The results are almost similar to the study
conducted on Malaysian consumers (Rosli, Abdullah, Bertsch & Saeed, 2008) except that in
India, there is a higher level of awareness. However, when it comes to behavioral tendencies and
ownership of the issue, the Indian consumers are more dependent upon government rather than
individual efforts compared to the Malaysian study (Rosli, Abdullah, Bertsch & Saeed, 2008).

Regression Analyses
In order to analyze possible relationships between the various awareness variables (Tables 1, 2,
and 6 from above) and the collapsed behavioral variables (Tables 3, 4, and 7 from above), a
series of regression analyses were completed. Results are discussed herein.

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Awareness variables to PRAC
A multiple regression analysis was run using all five Awareness variables as independent
variables and the single collapsed PRAC variable as the dependent variable. Table 8 illustrates
the correlation coefficients and significance of the awareness variables against the dependent
variable PRAC. The results revealed three awareness variables that have no affect on the
practices (PRAC) of the respondents. The awareness variables that had insignificant p-values (at
the 0.05 level) were Aware1, Aware2, and Aware3.

Table 8: Regression analysis #1 between Awareness and PRAC
Independent variable Coefficient p-Value
0.006 0.88
Aware3: Its time for environment groups to get more radical/active. 0.039 0.36
Aware4: Protecting the natural environment should be more important than creating economic
growth and employment in poor countries. 0.079 0.049
Aware5: I am capable of helping to solve the environmental problems 0.108 0.005
A second multiple regression was run with the three insignificant variables removed from
the analysis. Table 9 summarizes the results of this second regression analysis. The p-values for
the two remaining awareness variables improved slightly from the first model in Table 9. This is
not surprising as there was significant correlation between several of the five awareness
variables.

Table 9: Regression analysis #2 between Awareness and PRAC
Independent variable Coefficient P-Value
As a result of the above regression, it is reasonable to conclude that the two awareness
variables (Aware4 and Aware5) influence practices (PRAC) of the Indian respondents. Most
importantly may be the correlation between Indian people feeling they are cable of helping to
solve environmental problems (Aware5) and actually putting those beliefs into practice (PRAC).
However, it is necessary to point out that the relationship described in Table 9 above is very
weak (R-squared = 0.04) where the two awareness variables only explain 4% of the variance in
practices.

Awareness Variables to GRPSUP
variables and the single collapsed GRPSUP variable as the dependent variable. Table 10
illustrates the correlation coefficients and significance of the awareness variables against the
dependent variable GRPSUP. The results revealed two awareness variables that have no affect
on the environmental group support (GRPSUP) of the respondents. The awareness variables that
had insignificant p-values (at the 0.05 level) were Aware1 and Aware3. A rather surprising
result of this analysis was the negative correlation between awareness variable #2 and the
dependent variable GRPSUP. Discussion of this interesting result will be reserved until the
insignificant variables are removed from the model.

Table 10: Regression analysis #1 between Awareness and GRPSUP
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-0.145 0.000
Aware3: Its time for environment groups to get more radical/active. -0.016 0.725
Table 11 summarizes the results of a second multiple regression which was ran after
removing the insignificant variables Aware1 and Aware3. The p-values for the three remaining
awareness variables remained relatively unchanged from the first model above. As stated earlier,
a surprising finding is the negative correlation between Aware2 and the respondents support of
environmental group efforts. However after closer look, this seems rather reasonable as the
Aware2 variable actually queries respondents perceptions of things that can be done to help save
the environment. If respondents feel there are other things that can be done (indicative of a
negative response to this particular survey item), they may seek out environmental groups that
are worthy of their support.

Table 11: Regression analysis #2 between Awareness and GRPSUP
can save the environment. -0.135 0.001
economic growth and employment in poor countries. 0.122 0.005
The Awareness vs. Group Support regression analysis illustrates a correlation between
Indian respondents feeling there are additional things that can be done to help save or improve
the environment (beside those pointed out in Aware2) and a willingness to be supportive of
environmental group efforts. Similar to the practices (PRAC) analysis performed earlier,
Aware4 and Aware5 are two variables that significantly contribute to the respondents
willingness to support environmental group efforts. The two significant variables of
environmental protection is important (Aware4) and respondents seeing themselves as a part of
the solution (Aware5) are significantly correlated to environmental group support (GRPSUP).
However, like the PRAC model above, it is necessary to point out that the relationship described
in Table 11 is very weak (R-squared = 0.06) where the three awareness variables only explain
6% of the variance in group support.
Awareness Variables to MONSUP
variables and the single collapsed MONSUP variable as the dependent variable. Table 12
illustrates the results of this regression. Results reveal only two significant awareness variables
(Aware2 and Aware5) that affect the monetary support variable (MONSUP) of the respondents.

Table 12: Regression analysis #1 between Awareness and MONSUP
0.105 0.001
Aware3: Its time for environment groups to get more radical/active. -0.010 0.796
A multiple regression was run again after removing the insignificant variables from the
model above. Table 13 summarizes the results of this second regression analysis.
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Table 13: Regression analysis #2 between Awareness and MONSUP
can save the environment. 0.133 0.00002
As a result of the Awareness vs. Monetary Support analyses, it is reasonable to
conclude that feelings of things that can be done to help save or improve the environment
(beyond those listed in the Aware2 variable) and being part of the solution do, indeed, result in
an increase in monetary support. This finding is similar to the previous two behavioral variables
(PRAC and GRPSUP) where respondents feel they are capable of making a difference (Aware5)
and are doing so through practices (PRAC) and group support (GRPSUP). However, the trend of
weak yet significant relationships continues as the relationship described in Table 13 above is
also very weak (R-squared = 0.08); whereby the two remaining awareness variables only explain
8% of the variance in monetary support.

Awareness Variables to GOVSUP
variables and the single collapsed GOVSUP variable as the dependent variable. Table 14
summarizes the results of this regression where three awareness variables (Aware1, Aware2, and
Aware5) have statistically significant affect on the respondents support of governmental efforts
to save or restore the environment (GOVSUP).

Table 14: Regression analysis #1 between Awareness and GOVSUP
future. 0.078 0.023
0.156 0.00000009
Aware3: Its time for environment groups to get more radical/active. 0.015 0.644
economic growth and employment in poor countries. 0.032 0.293
A multiple regression was run again after removing the insignificant variables from the
model above. Table 15 summarizes the results of this second regression analysis.

Table 15: Regression analysis #2 between Awareness and GOVSUP
future. 0.086 0.0095
Aware2: Drastic change and reductions in mining and others lifestyles are the only way
we can save the environment. 0.165 0.000000004

As a result of the Awareness vs. Government Support regression analysis, it is
reasonable to conclude that Indian respondents who feel the environment is in danger (Aware1)
and feel that efforts must go beyond changes in mining and lifestyles (Aware2) are supportive of
governmental efforts to save and restore the environment. Indians also see themselves as part of
the solution through their support of governmental efforts. As has been a common theme to
these regression models, the relationship described in Table 16 above, although the strongest of
all the final regression models, is also very weak (R-squared = 0.16); whereby the three
awareness variables only explain 16% of the variance in governmental support.
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Awareness Variables to All Behavior
Regression was run on all five Awareness variables and the average of all the Behavioral
variables. The only two significant awareness variables in this regression run were Aware4 (p <
0.0005) and Aware5 (p < 0.00002). However, these two variables only explain 8% of the total
variance in the collective behavior of the respondents (R-squared = 0.08).
Although the above models were rather week (all R-squared values were below 20%), an
encouraging finding can be taken away from this research effort. In all of the regression analyses
described above, a significant contributor to each and every behavioral variable is the notion that
Indian respondents do, indeed, see themselves as part of the solution. The awareness variable
(Aware5) exists as a significant variable in each of the final four models - practices, group
support, monetary support, and support of governmental efforts.

Demographic variables to Awareness Variables
A final regression analysis was undertaken to determine if a relationship exists between
any of the demographic variables (age, employment status, marital, education, income &
working experience) and the four collapsed behavioral variables Personal Practice (PRAC),
Support Group (GRPSUP), Monetary Support (MONSUP), and Support Government
(GOVSUP). Table 16 summarizes the significant (yet weak) findings. A weak yet significant
relationship (negative) was found to exist between Income and Personal Practice (PRAC) (R
square = 0.014, p = .022). This was a rather odd finding due to the counter-intuitive outcome of
an increase in income reducing the respondents likelihood of modifying their personal practices.
Also, a weak negative significant relationship was found to exist (R square = .016, p=.015)
between age and Support Group (GRPSUP). This is not surprising as younger generations are
more environmentally concerned and likely to find comfort in group support networks. A weak,
yet statistically significant relationship was found between Employment status and Support
Government (GOVSUP) (R square= 0.014; p = 0.023).

Table 16: Regression analysis between behavior and demographic variables
Dependent variable Demographic variable R-square Standardized regression coefficient
Personal Practice
(PRAC)
Income 0.014 - 0.119
Support Group
(GRPSUP)
Age 0.016 -0.126
Support Government
(GOVSUP)
Employment status 0.014 0.117
Rise in literacy rates and exposure to the West, satellite television, newspapers, foreign
magazines, and newspapers have all led to the accelerated rise of the knowledgeable Indian
consumer. Today, more and more of Indian consumers have become choosy and demand quality
products at competitive prices. They prefer to purchase from renowned retail stores, where
accountability is evident. In India, big brand products are endorsed by celebrities to promote
specific products and brands. Known as brand ambassadors, these stars are said to lend
personality to products thereby building a perpetual presence in the minds of consumers. As
visual media gains more popularity, the number of celebrities being employed in the TV media
has also increased significantly. Celebrities help create hot-selling headlines. Their activities and
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movements are closely monitored by media outlets. Celebrity product endorsements are picked
up by the common masses with consummate ease. Using celebrities in advertisements has
become common place. Indians love their heroes and heroines. So if a consumer finds their
lovable celebrity endorsing a particular brand, it becomes easier for them to relate to the product
and therefore have more optimistic feelings towards the advertisement and the brand itself.
Moreover, it is an established fact that marketing strategies that include celebrity endorsement
has high recall rates. Celebrities also aid in repositioning of products. Products with dropping
sales can be rescued by smart selling ads by leading celebrities. Thus, Indian consumers prefer
eco-friendly products.
The responses in this study suggest that Indian consumers are concerned about the
deteriorating environmental conditions, but they are not doing much to preserve or protect the
environment (see the low R-squared values of the four regression models above). The research
finds that Indians are very much concerned about environmental degradation but they are doing
very little to save the environment. This conclusion is clearly evident from the low R-squared
values in each of the regression models. Although they feel there is much that can be done
(Aware4) and they also feel somewhat empowered (Aware5), these two variables only account
for very little of the variance in the behavior of the sampled Indians (see above regression
analyses). It is further established that the topic of environmental awareness is not included in
school and college teachings. A regression analysis between the education level and behavior of
the respondents shows an insignificant relationship indicating that education has yet to be able to
influence the behavior of Indian consumers.
Our study also suggests that Indians are not proactive in taking the initiative to solve the
problem of environmental degradation. However, in Indias quest for continued high economic
growth, the government is taking steps to ensure that environmental and social considerations are
not neglected and are in line with the nations philosophy of balanced and sustainable
development. Article 21 of the Constitution of India has become an effective tool for
preservation of the environment and ecological systems. For the preservation of the environment,
the Central Government and State Governments have enacted many statutes such as the Wildlife
Protection Act of 1972, the Environmental Protection Act of 1986, the Air (Prevention and
control of Pollution) Act of 1981, the National Environment Tribunal Act of 1995, among others.
In hopes of educating the people, the Central Government has launched the National
Environmental Awareness Campaign through the Ministry of Environment and Forest every year
since 1986 with the objective of increasing the environmental awareness level throughout India.
To achieve this, environmental and conservation considerations should increasingly be integrated
with development planning.
In recent times, a lot of pressure has been exerted on the environment due to three factors:
growing population; increased industrialization; and the persistence of poverty. These pressures
have been exacerbated by the recent economic downturn in the region, which has had economic
and social consequences on the capacity of some governments to implement planned activities
relating to environmental protection and sustainable development. Developed countries are
mostly industrial in nature, and have faced environmental problems much earlier. They have
pioneered various environmental protection mechanisms to counter environmental problems.
They have learned through their grave mistakes. Thus in order to protect their environment,
education and information are provided during early childhood. There is much for the Indian
government as well as Indian people to learn from the experiences and models of developed
countries. Environmental awareness is currently not part of the education curriculum in India,
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and thus early exposure of environmental awareness does not take place. This contributes to the
poor response toward environmental protection in India. Indians feel that it is the responsibility
of the government to provide information and to educate the public toward environmental
protection.
There is a need to change the mind set of younger generations. Environmental awareness
education should be a part of early curriculum. In fact, the Indian Government has already
started taking steps in this regard and many Universities are including environmental awareness
education in their curriculum. It is hoped that the younger generations will become supportive of
preserving the environment and bringing about an awareness revolution. India is predominantly
an agricultural country. Green revolution has helped India to be self sufficient in food supply.
However, excessive use of pesticides, herbicides, and fertilizers has contributed to a degradation
of nature. The underground water supply is contaminated due to the presence of harmful
minerals like zinc and magnesium. The consumption of such water can become a significant
public health issue.
The Indian people wish to promote sustainable national development. So, the Indian
business community should have the objectives to innovate and disseminate the means for
creating sustainable livelihoods on a large scale and to mobilize widespread action to eradicate
poverty and regenerate the environment. Further, institutional systems should be developed to
save the environment from further degradation. The need to preserve and clean the environment
must be an integral part of the formal education process. Environmental education must be
promoted through existing educational/scientific/research institutions. In addition to formal
education, encouragement should be given to non-governmental organizations, mass media, and
other concerned organizations for promoting environmental awareness among the people at all
levels. Training must be given to school teachers in environmental education, so that they are
able to mobilize peoples awareness for the preservation and conservation of the environment.

Limitations of the Study
As this research study is confined to selected respondents from the Northern Indian
region, the findings of this research cannot be generalized. However, this study can be regarded
as a starting point for further research in this important area.

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Di gi tal Televi si on Adopti on
An analysi s of i nfluenci ng factor s i n South
Amer i ca
Deb Tech
Jack H. Walters
Abstract
Purpose - This paper proposes a model of the decision factors used by countries to decide
which digital television (DTV) broadcast standard to adopt. The focus is on countries in Latin
America that are in the midst of adopting and/or implementing new standards.
Design/Methodology/Approach This paper uses a multiple case study approach and
independent inter-rater techniques to extract a set of decision factors used by four Latin
American countries to select a digital broadcast television standard.
Findings Two decision factors expected by the researchers were confirmed. In addition,
two additional decision factors were identified.
Research limitations/implications This research is valuable in developing a deeper
understanding of governmental decision-making processes regarding technology, but is not
intended for predictive purposes.
Originality/value This paper provides an overview of the different global digital
broadcast standards and adoption processes that are underway. It uses this information to develop
a set of factors that encompass the decision process for DTV standards adoptions at the national
governmental level.

Keywords: digital television, Latin America, technology adoption, decision making, broadcast
format standards, DTV

Introduction
The world is in the midst of the first major change in how television signals are
transmitted since the beginning of the industry over 80 years ago. The transition from analog
broadcast to digital television (DTV)
112
will provide improved viewing quality and open parts of
the broadcast spectrum for allocation to other providers such as advanced wireless services and
public service agencies. Nations around the world are making broadcast standard transitions and
are at various points along a continuum that runs from analog-only broadcasts to digital-only
broadcasts. An analog switch-off date (ASO) is defined as the cessation of analog broadcasts
through terrestrial (over-the-air, as opposed to cable or satellite) stations. From those dates
forward, viewers of traditional broadcast stations will receive only digital signals.

112
It is important to distinguish between DTV, which refers to the use of digital signals to deliver programming
and HDTV, which refers to High Definition Television, a higher density (and therefore more vivid) image available
to individual television sets because of the advent of digital television.
- 417 -

This transition will have significant impacts on society for a long time into the future.
The current market for television services is astounding: There are over 995 million television
households in the world. With a population approaching 7 billion and with industrialization
sweeping the least economically- and technologically-developed areas, this number can be
expected to grow rapidly in the coming decade.
Digital television is the umbrella term adopted by the U.S. Federal Communications
Commission (FCC) in 1996 to refer to all digital broadcasts (Kaet-Dt, 2006). DTV is different
than analog broadcast technology, which uses a series of wavelengths, in that it encodes a
broadcast signal via the use of zeroes and ones the same methodology used in computers. The
benefit of DTV technology lies in its ability to compress four or more channels into the same
bandwidth that is required for a single analog broadcast, thus freeing bandwidth for other uses
such as mobile telephone and government emergency broadcast channels (Digital Television,
2004).
Four major standards have been developed over the past 15 years, each representing the
effort of a nation or region. The first deployed standard, Integrated Services Digital Broadcasting
(ISDB), was developed by the Japanese. For technical, transition and other reasons, the United
States-backed Advanced Television Systems Committee developed the ATSC standard as a
successor to the existing NTSC analog standard. Europe developed the Digital Video Broadcast
(DVB) standard. Later, the Chinese entered the competition with Digital Media Broadcast
(DMB) standard.
Initial Expectations
One might expect that the adoption of digital standards would follow patterns similar to
the diffusion of analog standards, due to embedded technologies. Our attention was initially
drawn to these issues by DTV standards adoption decisions in Brazil and Columbia. Before
investigation of those decisions, we would have predicted that DTV implementation would be
driven by two major factors: historical/technological and sociopolitical. Historical/technological
decisions are driven by a desire to remain consistent with decisions that have been made in the
past. For example, one might assume that a country using the NTSC analog standard would
adopt the digital ATSC standard because ATSC is designed to accommodate NTSC technical
requirements while the transition to ATSC is underway.
A second example of historical/technological factors might be found when considering
how television content is delivered. Large proportions of content are transmitted by satellites in
geosynchronous orbits around the Earth, meaning that the satellite is positioned to orbit the
planet at the same rate as the Earth spins and therefore remain continuously over one geographic
area. Because North and South America occupy some of the same longitudes, and because
neither occupies the same longitude as any other major continent or country, it is reasonable to
assume that countries in South America would be interested in maintaining contact with the
North American content providers that use geosynchronous satellites positioned over the
northern regions of South America.
Sociopolitical factors could emerge from long-term political and trade relationships
between standards-developing and standards-adopting countries. We would expect, for example
that extant trade agreements might have an influence on adoption decisions.
The Brazilian and Columbian adoption decisions, however, contained elements that do
not support our initial suppositions about historical/technological and sociopolitical factors, and
led to investigation of other factors that could influence DTV standards adoptions. After years of
- 418 -

using PAL-M, a modification of the European PAL analog standard, Brazil chose to adapt to the
Japanese ISDB standard for digital television. This represented not only a departure from the
existing analog standard, but also a rejection of the ATSC standard, which might have aided the
use of geosynchronous satellite content. We also wondered how a standard created by the
Japanese could spread halfway around the globe in ways that previous Japanese standards had
not.
In Columbia the existing analog television standard is NTSC, developed by and in use in
the United States from the beginning of television until June of 2009. Throughout the history of
analog television in Colombia, the NTSC standard has been used. It is reasonable to believe that,
because ATSC is designed as a successor to NTSC and incorporates transitional elements that
makes the changeover more efficient for broadcasters and viewers, Columbia would select the
ATSC standard. However, Columbia adopted the European digital television standard, DVB, the
successor to the standard that Brazil had just abandoned. This decision had another interesting
effect two countries with a 1644 km (1021 mile) common border would be using conflicting
standards, though it is reasonable to note that the border in question is in the mostly sparsely
populated Amazon basin (and that standards conflict, between NTSC and PAL, had previously
existed on that border).
Clearly our initial assumptions about DTV standards choices that there is some pressure
to maintain technological and/or sociopolitical choices from the past were not the only drivers
of the digital television decisions in Brazil and Colombia. In reviewing cases where the adoption
of a DTV standard did not follow our preliminary model, we realized that a more robust
explanation of adoption decisions was needed, as existing research does not explain how these
decisions are made. We believed that careful consideration of all factors economic, political,
technological, socio-historical would lead to the most complete and useful conceptual model of
the decision process.
We chose to treat the adoption of DTV standards as a classic decision model, out of the
belief that knowledge gained by developing a list of criteria, based on actual decisions, would
provide the increased explanatory power that we sought.
The Decision Making Process
In a typical compensatory decision rule model (Shull, et al., 1970), the user first identifies
a problem, defined as a gap between existing conditions and desired conditions in the future. The
user then identifies evaluative criteria, those aspects of the problem that are believed to have the
greatest impact on the choice that is ultimately made. Based on those criteria, a list of
alternatives is created. In the acquisition of products or services, the list of alternatives is
frequently a set of vendors. Weights are applied so that the importance of various criteria can be
reflected in a simple multiplicative process that results in a range of scores over the alternatives.
In the simple case, the alternative with the highest score is selected.
Because we applied a decision making model in the midst of change rather than at the
beginning as is usually the case, some of the steps must be taken out of order or limited in their
implementation. For example, the alternatives in DTV adoption, meaning the standards
developed by nations/continents around the world, are given. Rather than a subset of providers as
would be typical in a normal product or service acquisition process, we assumed that all four
standards would be considered by any country going through an adoption process.
113
Similarly, it

113
The Chinese standard was not in place when the Brazilian and Mexican choices were made.
- 419 -

could be difficult or even impossible to assign meaningful weights to the criteria that are derived
in a study of this type. However, we believe that the development of criteria suitably frames the
key issues involved in the adoption of new digital television standards without the application of
weights. Finally, it could be presumed that mathematical calculations which emerge from a
model designed by this process would, by their nature, be somewhat predictive in operation. In
other words, it could be presumed that possessing the set of developed criteria for a particular
country's upcoming decision could allow prediction of the choices that will be made. We
strongly urge caution in using the model in this way, as our intention was to develop a
descriptive rather than predictive model and predictive validity cannot be established by the
study design used here.
Overview of the development DTV Standards
The proliferation of digital broadcast standards can be traced back to the introduction of
color television and the development of analog standards. In 1941, the U.S. Federal
Communications Commissions (FCC) National Television Systems Committee (NTSC) created
a standard, named after the committee, in an attempt to prevent the proliferation of conflicting
standards by television manufacturers.

While this standard was adopted in much of the Americas,
it was not successful in some other countries due to the inferior display of color on 50 Hertz (Hz;
cycles per second of alternating electrical current) systems. Subsequently, the Phase Alternating
Line (PAL) standard was developed and adopted by most countries that used 50Hz electrical
systems. A third standard, Sequential Couleur Avec Memoire (SECAM) was introduced by the
French in 1967 (Lee, et al., 2007).

ISDB: The Japanese Standard
Although digital television research began as early as the 1960s, intense DTV
development activity began with the invention of Multiple Sub-nyquist Sampling Encoding
(MUSE) at the Japanese Broadcasting Corporation in 1980. MUSE, the first DTV video
compression and transmission system, was demonstrated to U.S. government officials and
broadcasters in 1987 (Hart, 2004). Continued work on this standard led to the development of the
ISDB standard, which allowed Japan to begin digital broadcasts in December of 2003 and set an
ASO date of July 2011.
ISDB touts its ability to simultaneously broadcast high definition and handheld content.
This standard accommodates building the Digital Terrestrial Television (DTT) system from the
ground-up, allowing for greater flexibility in the design of the broadcast infrastructure as well as
receivers (ARIB, 2007).
According to the Digital Broadcasting Experts Group (DiBEG), 80% (approximately 77.7
million receivers deployed) of Japanese households were equipped with ISDB receivers in 2010
(Dibeg.org, 2010). A concern voiced by industry experts may be the increased cost of receivers
due to the small market size as compared to ATSC and DVB (Gutierrez, 2008).

ATSC: The U.S. Standard
Although the Japanese sought to have ISDB adopted as the global HDTV standard
(Garca Leiva
,
et al.
, 2006)
, the U.S. developed its own terrestrial digital standard to be compatible
with the existing NTSC modulation scheme. U.S. Analog broadcasts ended on June 12, 2009 and
the ATSC standard is in use across the country.
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The ATSC standard was developed to allow analog NTSC broadcasts to co-exist with
digital broadcasts during the transition, and is oriented to a single-broadcaster approach, making
signal interference between channels non-existent and ideal for transmissions in large geographic
areas (Villa, 2008). Other benefits touted by the ATSC commission include better coverage with
less power utilization, use of existing broadcast towers, and more efficient use of the broadcast
spectrum (Graves, 2008).
Sales of ATSC-equipped units in 2008 were near equivalent to total ISDB receivers in
2010, at 80 million units. (Graves, 2008). Underscoring the size of the ATSC receiver market,
the total number of television sets in the U.S. is approaching 250 million, based on an estimate of
2.24 televisions per household (www.csun.edu/science/health/docs/tv&health.html).

DVB: The European Standard
European broadcasters, equipment manufacturers, and regulatory agencies formed a
group in the early 1990s to oversee the development of digital television. The Digital Video
Broadcasting (DVB) project was established in 1993 (Villa, 2008).
DVB proponents claim that it allows mobile broadcasts as well as single frequency
broadcasts to exist within the same geographic area, use of the broadcast spectrum for emerging
technologies (Brennan, 1997), updating of systems during the transition, and lower cost
receivers.
DVB was first deployed in Luxembourg and the Netherlands in 2006, followed by
Finland in 2007 (Dudek, 2008). To date, over 500 million DVB receivers have been deployed
globally (DVB Project, 2008), with much of the African continent under plans of DVB adoption.

DMB: The Chinese Standard
A fourth standard, Digital Multimedia Broadcast (DMB), was introduced by the Chinese
in August of 2006. Positive claims for DMB include combining the modulation schemes of other
standards with the low power consumption found in ISDB, allowing signals to travel longer
distances with less power, and supporting HDTV on handheld devices (Clendenin, 2006).
It is projected that China will have 100 million users of its DMB system by 2013 (Gallen,
2008) and that the total Chinese television equipment market could be worth $125 billion
(Farivar, 2006). Mobile television is expected to comprise about 35% of all of all digital viewing
in China during this period.

Status of DTV Standards Adoption

Figure 1 Figure 2
As shown in figures 1 and 2, the diffusion of digital standards has followed the NTSC
and PAL paths to a limited degree. However, the increased number of standards and the fact that
- 421 -

many countries have not yet implemented DTV leaves an open question about how non-
standards-creating countries decide which system to adopt and why.
Methods
Observations of the digital television standards development processes in the United
States, Japan, and Europe revealed that they involve numerous complex choices affecting not
only technology but also user cost, implementation effectiveness and efficiency, and flexibility
for content providers over the intermediate time horizon. Given the significant complexity of the
technology development process, and assuming that this complexity would also appear in the
technology adoption process, we set out to develop a method that would allow us to extract key
decision elements by observing decisions that have taken place.
For those countries and continents that have developed their own standards, the adoption
process is a given. In other words, the development of ATSC in the United States predestined the
adoption of ATSC in the U.S. The development of ISDB in Japan makes it the new Japanese
standard, DVB in Europe, and DMB in China. Even with these decisions pre-made, only 30
countries of the world's almost 200 countries and containing approximately 2,000,000,000 of the
world's almost 7,000,000,000 people will be locked in to a DTV standard. This paper deals
with the decision process affecting the remaining countries.
The South American transition is particularly interesting because the continents 371
million people live in 12 countries with large differences in population and economic power. For
example, Brazil's economy, as measured by GDP, is five times larger than the next largest,
Argentina. While Spanish and Portuguese are both spoken by scores of millions of people, it is
perhaps more important to acknowledge significant cultural differences among the countries,
both relating to their historical links to Europe and to how immigrant European populations have
interacted with native peoples. The global impact of South America is increasing as both
economic power and political sophistication grows on the continent. In South America there is
no presumed agreement that standards and practices will be the same across countries, as is the
current fashion in Europe. All of these conditions make adoption decisions in South America
interesting to study in terms of the development of common factors.
We chose a model development process that is based on multiple case studies and
concepts from grounded theory (Glaser and Strauss, 1967). Without the advantages provided by
grounded theory approaches, study of issues such as DTV standards adoption processes could
end up as a series of anecdotal accounts from which little useful information can be gained. If we
treat each case study as a possible source of useful information which can be layered on in the
construction of a theoretical model, review of multiple decisions could allow us to create a more
elaborate set of decision factors, providing additional explanatory power in describing DTV
adoption decisions.
The remainder of this paper reviews the status of DTV technology and standards
transitions underway in four Latin American countries and extracts common structural and
decisional elements. We used a multiple independent rater technique to arrive at agreements
about interpretation of events that occurred in standards adoption processes in four nations. Our
repeated case study approach provides two benefits:
(1) Factors that recurred in multiple studies gave weight to their importance as
influencers in the decision process.
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(2) Factors that did not recur can be considered as extensions to the factor set and perhaps
be used to refine and expand the overall group of factors, subject to later review of additional
cases.
Adoption decisions in Latin America
Mexico
Mexico announced its decision to adopt the ATSC standard in 2004. The country had
participated in the ATSC development process for 15 years before the announcement, showing
little consideration of other standards (ATSC.org, 2004). The transition to ATSC is seen as a
direct replacement of the NTSC standards, similar to the strategy used in the U.S. Mexicos ASO
date is projected for 2012.
In a 2006 report to the Canadian Radio-Television and Telecommunications Commission
(McEwen, 2006), several reasons for Mexicos selection of the ATSC standard were presented,
including:
Protection of the U.S./Mexico border markets by beginning digital transition in the 6
large border communities by the end of 2006.
Making sure that the flourishing Mexican programming content industry remained
competitive and dominant in the international market.
Staying competitive with North American counterparts in distribution and production
of HD programming, as Mexico is the largest exporter of Spanish language
programming in the world.
Participating in the production/marketing of wide screen HD televisions.
In addition, cable and satellite broadcasters tend to have cross ownership with U.S.
entities, and this likely reinforced the choice of ATSC.

Brazil
With more than 120 million TV viewers and sales of 10 million televisions annually
(Mitsui Co., 2008), prior to its decision to adopt an existing standard, Brazil was lobbied by
representatives from the three then-active standards ATSC, DVB and ISDB. ATSC proponents
argued that a common digital television standard could be created throughout the Americas. A
huge export market would exist for Brazilian manufacturers of set-top boxes and receivers and
offer a potential boost to its economy (U.S. Embassy, 2006). In addition, the U.S. Overseas
Private Investment Corporation had set aside $150 million for U.S. companies to invest in
information technology development projects in Brazil, with several U.S. companies expressing
their intention to make significant investments in ATSC-related manufacturing facilities in the
country (Wayne, 2006).
During the same timeframe DVB representatives, including executives from Nokia,
Philips, ST Microelectronics, Siemens, and the DVB Project lobbied the Brazilian commission.
DVB representatives also claimed a large number of countries had committed to the DVB
standard, ensuring a low-cost receiver.
In 2006, the Brazilian National Agency of Telecommunications (Anatel) announced that
it would adopt a modification the Japanese ISDB standard (AMEC, 2008), SBDTV. In a report
that year, the Inter Press Service (Osava, 2006) provided an overview of several factors related to
the adoption decision, including:
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Broadcasting companies lobbied the government for the adoption of ISDB, claiming
that it was the only standard which provided HD services for cell phones.
Telephone companies did not support the choice of the ISDB standard, which would
allow broadcasters to reach cell phones without going through phone companies.
Helio Costa, the Brazilian Communications Minister, had a previous affiliation with
the largest South American broadcasting company, TV Globo (headquartered in
Brazil), and may have influenced the decision to follow the broadcasters preference.
A memorandum of understanding between Brazil and Japan, written before the adoption
decision was made, focused on Japans involvement in developing Brazils electronics industry
as well as providing training to local engineers (DVB Project, 2006). This included the
possibility of building a new semiconductor factory.
The Brazilian government obtained agreement from the Japanese to localize the
standard to better fit Brazilian needs. This was emphasized by President Luiz Inacio da
Silva when announcing the decision: "We are not only going to absorb Japanese
technology but will creatively contribute to perfect the system." (Advanced Television
Ltd, 2006).
Other factors, detailed by the NHK Science & Technical Research Laboratories
(Takada, 2008), included the exemption from some of the royalty payments associated
with the ISDB technology.
The transition from the analog PAL to Brazilian ISDB is being financed by the
Japanese Bank for International Cooperation and the Brazilian Development Bank
(Takada, 2008).

Colombia
Breaking from its previous technology affiliation with NTSC (analog predecessor to
ATSC), Colombia announced its decision to adopt the DVB standard in 2008. In 2006, the
Colombian government established priorities for technology, information, and computers. Those
goals, which might have influenced the countrys DTV decision, included:
All Columbians connected and informed
Institutional consolidation and modernization that will generate a strategic sector for
the country
Development and competitiveness of the telecommunications and computer industries.
Policy for public television and radio.
Potential social benefits such as a decrease in the digital divide, increased social
inclusion, and increased democratization of access to information (del Rosarios
Guerra, 2007).
During the decision process, a series of 13 open forums was held to discuss the different
standards. The forums were open to the public and included industry representatives, citizens,
and representatives of the four standards. Notably, this was the first public entry into the
competitive arena by the Chinese DMB standard (CNTV, 2008). Additionally, the Colombian
government established an official website providing information on the four standards as well
as highlights of the forums and meetings that were held regarding this topic.
Upon announcing the decision to adopt the DVB standard, the National Commission for
Television (CNTV) stated that the decision was affected by:
DVBs ability to respond to the high penetration of terrestrial TVs and a relatively low
income population by offering lower-cost devices (DVB Project, 2008).
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A comparison among the proposals regarding cooperation and technology transfer
(Europa Press, 2008).
DVBs ability to adjust for the needs of the television viewers, the audiovisual
industry, and Colombian topography.
DVBs mobile services, multi-channel broadcasts, HDTV, SDTV, and interactivity.
DVBs broader installed based and claims of lower-cost devices and better technical
support.
A desire to be a technology leader in DTV transition. As stated by Mara Carolina
Hoyos Turbay, CNTV Director, Colombia will lead the process of technology
change in all of Latin America. The ears of neighboring countries are listening to
Colombias decision (Europa Press, 2008).

Chile
Showing one of the most pragmatic approaches to analyzing the situation, Chile began
evaluating the different standards by contracting with Pontifical Catholic University of Chiles
School of Engineering to evaluate ATSC, DVB, and ISDB. Since this study was conducted, the
Chinese DMB standard has been introduced, providing a fourth alternative. The Chilean
government subsequently contracted with seven universities to study all standards, including the
Brazilian version of ISDB.
To underscore the pragmatic approach employed by Chile, it is useful to evaluate the
efforts to date in testing the different standards. Since 1999, ATSC, DVB and ISDB have been
transmitted in Santiago in a testing format via the government-owned television station, TVN.
However, the Chilean government has decided to delay the digital television decision until 2009.
That delay notwithstanding, a goal of transition by 2010 for the major cities in Chile has been set
(SUBTEL, 2007).
These criteria have been identified in the Chilean research about DTV standards:
DVB and ISDB allow a mix of different content in one stream (i.e., radio and
television or fixed and mobile reception). ATSC does not have this feature.
ATSC was developed with HDTV in mind, but the other two standards now include
specifications for HD transmission.
Topographical conditions in Chile are such that immunity to multi-trajectory
propagation (ghosting) provided by ISDB and DVB is an important consideration.
ISDB and DVB have similar capabilities in mobile and portable
transmission/reception. The ATSC standards committee is currently in the process of
vetting alternatives.
DVB more efficiently uses bandwidth.
ISDB and ATSC were developed for co-existence with NTSC (existing analog
standard) until ASO.
ISDB receivers could be higher in cost than DVB and ATSC, due to the smaller
market size of ISDB. The cost differential among receivers could be moderated by
world market size (e.g., Brazils planned implementation of ISDB).
On the basis of the analyses above, it was recommended that Chile adopt the DVB
standard for open terrestrial digital television. Contrary to the recommendation, Chile chose to
adopt the modified ISDB standard, SBDTV in September, 2009 with a digital switch-over
planned for 2010.
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Factor
Country
8. Development of common decision factors
As noted earlier, diffusion patterns of analog format television led us to speculate that
technology-succession relationships (e.g., NTSC to ATSC, PAL/SECAM to DVB) and in-use
standards would be the principal drivers of the decision about which DTV standard to adopt.
However, the adoption of ISDB by Brazil and DVB by Columbia led us to search for a set of
factors with greater explanatory power.
Inter-rater-agreement-based content analysis was used to review key events from four
Latin American countries DTV standards adoption processes and develop an expanded set of
factors (see Table 1).

Table 1: Decision Factors and Supporting Evidence

Brazil Chile Colombia Mexico
Economic, market,
and within-country
political
Lobbied by 3 of the 4
standards (DMB did not
participate)
U.S. Overseas Private
Investment Corporation
had set aside $150 million
Possibility of Japans
investment in Brazil for
semi-conductor facility
Exemption from
some of the royalty
payments associated with
the ISDB technology
Transition financed
by the Japanese Bank for
International Cooperation
and the Brazilian
Development Bank
Brazilian
Communications Minister
favored cable company
approach not telephone
companies.
Limited political /
stakeholder related
behavior.
Open forums were held
across country
Stated priority of
Colombian government to
advance in the
IT/Communications sector to
obtain first-mover advantage in
the region
Consideration of standards-
developing countries proposals
regarding cooperation and
technology transfer
Perceived lower-cost
advantage of DVB receivers
Participated in the
ATSC standards
development process
Protect the U.S./Mexico
border markets
Mexican programming
content production industry
remains competitive
Cross-ownership with
US entities
Historical /
Technological
Cited technical
superiority as the reason
for choosing ISDB
Broke from historical
technology affiliation
(PAL)
Pragmatic approach
by government. Several
technology-focused
studies conducted.
Historical
technology affiliation is
NTSC
Initial report shows
DVB as the best choice
still evaluating, choice
not made
Broke from the historical
technology affiliation (NTSC).
DVBs flexibility/ability to
adjust to needs Columbian
viewers, industry needs, and
Colombian topography.
Remained with
historical technology
affiliation (NTSC
ATSC) without serious
consideration of other
standards.
Participated in the
ATSC development process
for 15 years before the
announcement.
Sociopolitical No observable effect
of pre-existing political /
cultural relationships
No observable effect
of pre-existing political /
cultural relationships
No observable effect of pre-
existing political / cultural
relationships
Worked in unison with
U.S. efforts to create ATSC
standard to sustain
relationship with 50+
million person Spanish
language population in the
U.S.
Conclusions and Discussion
Our study validated pre-existing assumptions about the criteria that would drive the DTV
adoption decision in some countries. Particularly in Mexico, the large interests in Spanish
language content development for the North American market, combined with comprehensive
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adoption of NTSC over the preceding decades, made the decision to adopt ATSC fairly
straightforward and limited consideration of other standards.
We did, however, discover other important criteria from our analyses. In particular,
economic support of a particular standard by the nation in which it was developed, or by key
private entities from that nation, had significant influence on the decisions made in Brazil and
Columbia. A significant incident in this category was the willingness of the Japanese to allow
Brazil to modify the ISDB standard, suggesting that flexibility regarding the interaction of
political and technical factors could influence an adoption decision. Relationships among
political decision-makers and key players in the Brazilian decision demonstrated that within-
country politics could play a major role in the selection of a standard.
We also found that technical characteristics of the standards themselves, such as the
ability to deal with certain types of terrain, had influence over some countries decisions. This
factor has also been raised in the Chilean discussion and may ultimately influence that nations
choice.
This research adds to the knowledge of complex technology-based decisions in several
ways. First, we learned that models of technology diffusion based on previous technologies are
not always sufficient to explain diffusion of new technologies. In this case, the expansion of
analog television standards around the world, as a pattern for expected expansion of digital
standards, was not sufficient in explanatory power. It was necessary to search for additional
decision factors that would better encompass the scope and complexity of the decisions being
made about digital television standards adoption.
Second, we discovered that decision factors extracted through a process of this type do
not stand alone or act independently. In many cases, it was not simply the technology that drove
the decision, or the politics, but the interaction of the technology and the politics. As we saw in
the Brazilian case, the ability of ISDB to provide content in certain formats interacted with
political and economic power within the country, and with the behaviors of specific political
leaders, to determine the choice of DTV standard. In the Mexican case, the transition from
NTSC, in place in a similar technological and geographic condition to the U.S., combined with a
desire to sustain politico-cultural relationships with the U.S. and its significant percentage of
Spanish-speaking people, made the transition to ATSC a clear choice.
Third, we observed that the elements of the decisions, such as technical characteristics of
the standards or political/economic support from the standards developing countries, might loom
large at the time that the decision is made, yet not be substantively different when viewed in a
strictly objective context. This is an interesting area for further research, in that the import and
perceived variability of the alternatives is high at the time the decision is made but seems much
less when the decision is reviewed later.
This research and its results have several limitations in how they can be interpreted and
used. The most important of these is using the derived decision factors in a predictive manner. It
was not our purpose to build a predictive model of digital television technology adoption. It
would be inappropriate to attempt to identify events in countries that have not yet decided about
a digital standard and use these decision factors to predict which standard will be selected. Our
purpose was to develop a deeper understanding of the decision-making process for highly
complex technological standards where significant economic and political interests and pressures
are involved. Countries that remain undecided about DTV standards are primarily in South
America, Africa and South Asia. Rather than attempting to use the model developed here to
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project what will occur in the remaining countries, we strongly recommend further research to
refine the set of decision factors based on case studies of countries that have not yet decided.
Regarding the methods of this study, there is a further limitation. While it is true that
content analysis and case study research exist to deal with unstructured information, we believe
that further case studies of digital television adoption decisions could be enhanced by stronger
efforts to structure available case study reports into a common format across countries. We
believe that this approach could assist in developing information about the relative importance of
the factors derived, a task not attempted in this study.
Finally, it should be noted that, despite the existence of four new and not fully
implemented television standards around the world, the delivery of video content to end-users
continues to evolve (e.g., internet protocol television IPTV). We hope that this study leads to
investigations of adoption decisions regarding those new technologies.

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- 431 -

The Poli ti cal Context for US-Chi na Economi c
Relati ons: A Case Study based on Teachi ng
Amer i can Gover nment (Democr acy) i n Chi na
Dur i ng the Spr i ng 2010
Stephen C. Thomas
Abstract
Last Spring, I taught American Government in English to Chinese students in Beijing,
China. I taught in a US-accredited BA degree program jointly sponsored by the University of
Colorado Denver and a Chinese university. In my paper, I will offer my perspectives on the
opportunities and constraints for teaching American Government (democracy) in English to
Chinese students, as well as on the general progress of democracy in China.
Introduction
Chinese attitudes toward American Government, particularly their views on American
democracy, are a significant factor influencing US-China economic and political relations. I
taught two sections of American Government in English to Chinese students in Beijing during
the Spring, 2010. I found most of my Chinese students to be hard working and open to learning
about democratic structures and processes in the United States. Most appeared to support the
value of liberal democracy, in general. I also found doubt by some about the appropriateness of
liberal democracy for China due to its special characteristics.
In the paper, I will describe the program I taught in, the course content and teaching
methodologies of my American Government courses, and the degree to which I tailored the
course to the Chinese educational environment. I will then describe Chinese student reactions to
the concepts of American government and democracy presented in the course. I will do this by
reviewing the research papers students wrote on some aspect of American Government.
Although I did not require students to address the issue of democracy, many did, and some
compared the material presented on American government with their perceptions of Chinese
government structures and processes. Finally, I will offer my views on the future of teaching
American liberal arts courses, and particularly American Government, in China.
I will place my views within the context of official Chinese government discussions of
democracy in the Chinese media that occurred during my recent four months of teaching in
China. Finally, I will describe my research on Chinese official and citizen attitudes toward
democracy and on Chinese government civil and political rights practices.
Background of Democracy in China
China has had 100 years of experience with various Western-style governing systems,
from liberal democracy to Leninist socialism. On October 10, 1911, Chinese revolutionaries, led
by Dr. Sun Yatsen, replaced the 2,000-year-old Imperial dynastic system with the Republic of
China, a democracy based on a liberal democratic constitution and on democratic government
structures modeled loosely on those of the United States. Chinas first provisional President, Dr.
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Sun Yatsen, designed Chinas new democratic government and established a modern political
party, the Guo Min Dang (Kuomintang), or the National Peoples Party, in 1912.

Dr. Sun was a native of the southern Chinese province of Guangdong who had learned
English, converted to Christianity, attended high school in Hawaii, then became a medical doctor
in Macau before turning to revolution. Dr. Sun was the leader of Chinas revolutionary
movement until his death in 1925. He was succeeded by Chiang Kaishek (Jiang Jieshi), who
ruled mainland China as President and head of the GMD from 1927 until 1949, when he lost a
civil war against the Red Army of the Chinese Communist Party (CCP), led by Mao Zedong. In
1949, Jiang then took his Nationalist government and remaining army and retreated to the island
province of Taiwan, where he resumed his role as President and imposed martial law (no
national elections, and little freedom of speech, or civil law) until his death in 1975.
The Republic of China on Taiwan, however, again became a fully functioning democracy
in 1987, when Jiang Kai-sheks son, President Jiang Jing-Guo, lifted martial law and put the
liberal democratic constitution of 1911 back into practice. The GMD (KMT) lost power from
2001 to 2008 in democratic elections, but it regained political power in the national elections in
2008 and has respected the principles of liberal democracy throughout the post-1987 period.
The Chinese Communists, who took over China on October 1, 1949, also accepted the
ideal of a democratic republic, naming their new regime the Peoples Republic of China (PRC).
But in practice, the Chinese Communist Party (CCP) imposed an authoritarian dictatorship on
China and so far has not permitted liberal democratic practices such as a multi-party political
system, free elections, a free press, and protection of civil and political rights.
From 1949 to 1978, the PRC made impressive strides in economic development, but
Chinese citizens suffered from political campaigns that led to millions of Chinese being falsely
accused of political crimes and millions more dying from persecution and policy-created
starvation.
After Mao Zedongs death in 1976, and pragmatic leader Deng Xiaopings economic and
political reforms began in 1978, there was some progress towards democratic practices. Chinese
communist leaders reflected on the costs of Leninism and Maoism and made various modest
democratic-style reforms. They put some of their pre-1978 Maoist leaders on trial for social
fascist crimes during the 1966-1976 Cultural Revolution, but did not kill or torture the
defendants, the so-called Gang of Four. They imposed limits of two five-year terms in office on
their new government leaders. They reopened law schools and moved China toward socialist
legality. They argued that the Chinese National Peoples Congress (NPC) was representative of
the whole people and was democratic because the NPC included representatives from all of
society and from the eight Chinese democratic parties, and because legislators sometimes did not
unanimously approve legislation. They rehabilitated most political campaign victims from the
previous 25 years (since 1954), giving them back their jobs and reputations. They permitted
Chinese citizens to leave the country and/or study abroad. They reformed the economy based on
market socialism, and opened China to the outside world for international trade and foreign
investment. They also permitted Chinese universities to establish academic exchanges and
cooperative programs with foreign universities, such as the two joint educational programs in
which I have taught American Government.
During the 1978-80 period, it appeared that China might embrace liberal democracy, the
5th Modernization (in addition to the 4 Modernizations of industry, agriculture, technology,
and military), as part of Dengs post-Mao reforms. The Democracy Wall movement of the
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1978-80 period permitted widespread public criticisms of the suffering and disasters of the 10
lost years (1966-76) of the Cultural Revolution. The criticisms also provided support for
democratic reform. Hope for democracy, as has come to South Korea and Taiwan, continued
until the violent suppression of the 1989 Tiananmen pro-democracy demonstrations.
Since 1989, although China has achieved miraculous economic growth of 8-10 percent
per year, progress toward democracy has come only slowly, leaving China a somewhat
liberalized but still basically authoritarian socialist one-party state. However, there has been
enough progress that the programs like the one I most recently taught at, are tolerated, and
Chinese leaders do aspire to make China at least economically modern, like Western democratic
countries. Chinese domestic newspapers in English, and the English language media, have
liberalized somewhat. Passive civil rights, permitting private criticism of government policies, if
not of the party itself, are examples of the progress slowly being made.
What are the perceptions of liberal democracy among Chinas elite in the PRC
today? There has been consistent official Communist Party opposition to Chinese elite interest
in democracy, such as was shown in Beijing in 1989, when representatives from virtually all
Chinese bureaucracies in Beijing marched in support of the students. Since 1989, however, there
also have been periodic statements by intellectuals in support of full liberal democracy. The
most recent is the Charter 08 petition, that has so far gathered more than 100,000 Chinese
signatures, with only one major arrest and imprisonment, that of Liu Xiaobo, who just won the
Noble Peace Prize. Though these democratic advocacy documents have been officially
censored in China, general Chinese support of democracy seems to be slowly increasing. On
English-language broadcasts held on Beijing TV this last Spring, many Chinese commentators
acknowledged that they knew where China needed to move toward, that is toward full
democracy.
American Government Class Course Material
I taught a standard introduction to American Government course using a commonly-
assigned American government textbook, The Struggle for Democracy, by Edward Greenberg
and Benjamin Paige. It featured a picture of the Statue of Liberty on the book cover. The book
discussed the Constitution and American political institutions such as Congress, the Presidency,
the bureaucracy and the courts, federalism, voting and political parties, and major issues in
American Government such as the role of the media and public opinion, as well as civil rights
struggles, the question of immigration, and interest groups, domestic policy, and foreign policy.
The book takes a critical perspective on American Government, in that it presents both
positive and negative aspects of various American government institutions and processes, such
as the US party system, electoral campaigns, and the role of money in election campaigns.
Chinese Students
The Chinese students paid a relatively high tuition to enter the program, thereby assuring
that most students were from elite families. They also needed to have a relatively high score on
the Gau Kau or national entrance exams. They took my class in English and their language
skills were generally sufficient to handle the material. The hardest part of the class for them was
the research paper in English. I offered to edit their draft papers without prejudice to their grade,
and most accepted my offer. My two classes of American Government had 23 and 24 students,
and thereby permitted class discussion.
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In general, my students were very interested in American government. They participated
in discussions of American political parties, political elections, the selection of candidates, and
some of the reasons for the success or failure of a particular candidate or party. They learned
the terms, and generally understood the political concepts and the rationale for our various
freedoms (speech, assembly, press, and religion), for having competing candidates and political
parties, and the reasons for different policy outcomes.
Teaching Methodology
I taught the course as I would in the US. Since I was teaching a potentially controversial
topic for Chinese, and I used a very detailed text, an immediate question from students was
whether I would make comparisons with China. I replied that my course would be about
American Government, not Chinese government, though students could make comparisons if
they wanted. I proceeded to follow the outline of the text and left plenty of time for questions
and discussion. I also provided discussion questions for each section of each chapter. After
several weeks, I began to project the lectures on the large screen in each classroom. In my
lectures I included examples from my experiences living and working in the United States, and
from local, state and national US politics.
I involved students in some role-playing of the processes by which US candidates are
selected, of how elections are held, and of some of the factors that determine whether candidates
are elected or not. I also asked the students to role play how interest groups are formed, how
local or individual concerns can become national issues, and how national issues can become the
basis of permanent interest groups and sometimes even political parties.
I brought in examples of politics from pre-revolutionary China, but only rarely. I almost
never discussed current Chinese politics. One possible result of my approach was that students
did not resist learning about American government processes or material from the book or from
class discussions, and occasionally brought up Chinese politics on their own.
I required a midterm, a final, a short paper, and a research paper. When the students
wrote their research paper, near the end of the course, many made comparisons between China
and the US. Some of their comparisons favored the US and some favored some aspect of China.
About 28 or half of the students favored liberal democracy in general. Five students did not
think that liberal democracy was appropriate for China. One student felt that China was already
a full democracy, as stated by the Chinese government, and one felt that
American democracy had led to the destruction of Iraq, leaving it a nation of orphans.
Tailoring the Course to the Chinese Educational Environment
Surprisingly to me, I was not given any direction or even suggestions as to the book to be
used, or topics to be covered, (or not to be covered) in my course. The classes were taught at
regular Chinese class times in Chinese class rooms, next to rooms where Chinese teachers were
teaching other classes. The only monitoring as far as I know was the preview of my text, about
which I received no feedback. That was the first and only oversight that I was aware of.
However, students could and sometimes did complain about teachers and classes to the
Chinese Dean. So it was possible to cross certain lines, but no one knew ahead of time exactly
where the lines might be. Student complaints resulted in one teacher being fired mid-semester.
According to second hand information, the teacher showed a movie that included discussion of a
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gay life style. As far as I know, that was only problem while I was in China concerning a foreign
teacher teaching parts of a US liberal arts curriculum.
The Future
China has been on a building spree in its development of post-secondary institutions.
Over the last 10 years, China has inaugurated many new institutions of higher learning, making it
possible for many more Chinese students to enter college over the coming years. Many of the
best Chinese universities have a liberal arts component. So, even though the program I taught in
was designed to meet American liberal arts standards, because it awarded American BA credit
leading to a BA degree, more and more Chinese universities appear to be offering American-
style educational programs on their own.
Regarding democracy, although some of my Chinese students did not seem to understand
the rationale for power holders being chosen by citizens through competitive elections, rather
than being selected by leaders already holding power, many other students did see the
importance of competitive elections, with competing parties presenting alternative policies
choices.
Conclusion
I strongly recommend a study abroad time in China for American students, and a
teaching assignment in China for US educators. Living and working in China, particularly at the
university level, can give Americans a window on modern China that can be invaluable in
understanding the China that is rising and will play a more and more important role in our world.
A China experience can also help Americans better understand the context for US-China
relations, one of the most important international relations for the United States, and for China.

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Chi na's Sover ei gn Wealth Funds and
the Wor ld Economi c Cr i si s

Stephen Thomas
Ji Chen

Abstract

China's Sovereign Wealth Funds and the World Financial Crisis
China has two of the world's largest sovereign wealth funds (SWFs): the official China
Investment Corporation (CIC) with 288.8 billion USD, and the unofficial State Administration of
Foreign Exchange (SAFE) Investment Corporation (SIC), with 347.1 billion USD. Together they
hold a total of 635.9 billion USD, making China the largest holder of sovereign wealth funds in
the world. During the world financial crisis of 2008-2010, China managed to continue to grow
its economy through a combination of domestic stimuli and continued growth in foreign trade.
Although Chinas foreign exchange reserves grew very little during 2008, China experienced
growth in foreign exchange reserves both before 2008 and since the beginning of 2009. Chinas
foreign exchange reserves increased 20% in 2009 and reached 2.45 trillion USD by the end of
June 2010, the largest of any country in world history. As a result of Chinas continued economic
expansion, even during the world financial crisis, the growth of Chinas foreign exchange
reserves, and the large amount of reserves committed to its two largest sovereign wealth funds,
China has been viewed as one of the most important contributors to world economic recovery. Its
large sovereign wealth funds have the potential to play an important role in world economic
recovery by providing loans to countries, capital to world equity markets, and investments in
individual companies. In this paper, we will examine how Chinas sovereign wealth fund
managers have invested Chinese sovereign wealth funds during 2009 and 2010, and we will try
to determine what effects Chinese investments have had on world financial recovery efforts. We
will also attempt to determine the effects of the proposed continued appreciation of the Chinese
Yuan.

(NOTE: This draft paper is a revision and expansion of the research we presented last year)

China's New Sovereign Wealth Funds and the World Financial Crisis
China's foreign exchange reserves, USD 2.45 trillion at the end of June 2010, are
currently the largest for any government in history. In late 2007, as part of new policies designed
to increase Chinese benefits from its huge foreign exchange reserves, Chinese authorities began
to place about 20 percent of China's foreign exchange reserves into two newly established
sovereign wealth funds (SWFs): the China Investment Corporation (CIC), a formal sovereign
wealth fund set up directly under the State Council; and the SAFE Investment Company (SIC),
an unofficial sovereign wealth fund that was created by China's State Administration of Foreign
Exchange (SAFE).
What measures has China taken during the world economic crisis to continue its
economic growth, including continuing to increase its foreign exchange reserves? How have
these measures affected the world economic crisis? What future policies may Chinese officials
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follow both to further develop China's foreign exchange reserves and sovereign wealth funds and
to address the challenges of China's burgeoning central-government-held foreign exchange
reserves?
To answer these questions, I will first review Chinas post-1978 foreign trade goals and policies,
then show the rapid accumulation of Chinas foreign exchange reserves, and then describe the
planning and establishment of Chinas sovereign wealth funds. Finally, I will analyze how
Chinese financial policy makers have both created large foreign exchange reserves and also have
developed various institutions and policies to employ these large and still growing foreign
exchange reserves.
Post 1978: When the People's Republic of China "opened to the world" in 1978, Chinese
leaders began to reform Chinese economic structures and policies, moving from state-planned
economic development and foreign trade policies to policies based largely on export-led
development and the foreign trade experiences of the four East Asian tigers. Unlike the four
tigers, however, China kept state ownership of most large enterprises in strategic sectors
(transportation, communication, financial institutions, power, and heavy industry), maintained
the non-convertibility of currency, and retained government control over and centralized
accumulation of all foreign exchange. China also developed neo-mercantilist trade policies and
regulations to govern most areas of foreign trade, including the setting of RMB exchange rates at
a low level in order to promote foreign investment and foreign trade (Lardy).
A new Chinese government institution to hold foreign exchange, the State Administration
of Foreign Exchange (SAFE), was created in December of 1980. All foreign exchange, earned
either by individuals or enterprises, had to be sold to SAFE in exchange for China's domestic
currency, the RMB. When individuals or enterprises wanted to purchase foreign exchange, they
had to gain approval from SAFE and to follow strict government regulations in the use of the
foreign exchange.
What were the policies that lead to success in foreign exchange accumulation?
First, despite the many regulations designed to maximize Chinese benefit from foreign
trade, China's post-1978 trade volume rapidly increased, as did its trade surpluses. One of the
most controversial of China's policies designed to increase trade surpluses was the depreciation
of the Chinese RMB in relation to the US dollar (USD), first to 2.8 RMB to USD 1 in January of
1985, then to 5.22 RMB to USD 1 in January of 1990, then 8.7 RMB to USD 1 in January of
1994. The RMB was then pegged to the USD in a managed exchange rate regime. After July
2005, under foreign pressure, China delinked the RMB from the USD, tied it instead to a basket
of foreign currencies, and permitted it to vary in a greater range. In 2005, under US pressure, the
Chinese government began to appreciate the RMB beginning with an immediate 2.1 percent gain
against the USD. Appreciation reached about 22% by 2008, but then was halted beginning in
2008, in the wake of the world financial crisis.
Second, investment opportunities in Chinas special economic zones, favorable tax
treatment for foreigners, and cultivation of foreign direct investment and individual investors,
have helped make China the largest recipient of FDI in the developing world for the last five
years. China has also been one of the top three recipients of FDI in the world (vying with the US
and the UK) from 2003-2007. (See charts by Ke Liu). In the meantime, outbound FDI from
China has been very small, thereby creating a huge capital account surplus. All foreign currency
investment funds have been exchanged for RMB by Chinas State Administration of Foreign
Exchange (SAFE), in accordance with Chinese currency control regulations.
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Third, In July 2005, when China began to appreciate the value of the RMB against the
USD, vast amounts of "hot money," short-term speculative funds looking for returns based on
RMB appreciation, flowed into China. By the end of 2006, Chinese reserves had surpassed the
USD 1 trillion mark, and during 2007, the flow of "hot money" increased still faster, and helped
expand foreign exchange reserves monthly by about 4 percent, or USD 40 billion. By January
2008, China's foreign exchange reserves had reached USD 1.5 trillion, making China's official
foreign exchange reserves the largest in world history. As of June of 2009, Chinese reserves had
reached USD 2 trillion, and by the end of June 2010, reserves had reached USD 2.45 trillion (see
Charts 1 and 2).
China's re-entry into the WTO in 2001 was also an important factor that contributed to
the increased rate of expansion of China's foreign exchange reserves and to more interest by
foreign investors in China's rapidly growing and more open economy.
In 2007, China's ballooning foreign exchange reserves spurred discussions among
Chinese officials, business analysts, and academic researchers to develop policies to reduce the
costs and dangers of the rapid rise in Chinese official foreign exchange reserves. (Interview with
Mr. Chen at CIC headquarters in Beijing).
Thus, in 2008, China may have needed at least USD 670 billion of liquid reserves to protect
against a possible economic crisis where debts were called in and imports had to be paid for in
cash. In addition, foreign exchange reserves might be needed to protect against short-term or
"hot" money outflows. Subtracting USD 670 billion from China's USD 1.6 trillion foreign
exchange reserves would have left about USD 930 billion foreign exchange reserves in excess of
Chinas needs at the end of 2007.
We can also compare China's foreign-exchange-reserves-to-GDP ratio with that of other
developing countries, particularly with the four East Asian "tigers." Less developed countries
generally have had foreign exchange reserves/GDP ratios of 8-12%, with ratios that have risen
over time to about 12% today (Liu). The East Asian tigers have had ratios of 10 to 30%, levels
that have risen to about 35% since the 1998-2000 East Asia Crisis (see Liu chart, pp. 20-21). At
the end of 2008, China had foreign exchange reserves equal to about 38% of its GDP in official
exchange rate terms (USD 1.8 trillion of reserves for a GDP of USD 4.758 trillion) (CIA), a 3%
higher ratio than the highest average for other East Asian countries.
Once excess foreign exchange reserves had been estimated, the Chinese government
could try to find investment alternatives for its excess reserves that could receive a better return
than the modest returns earned by China's central bank SAFE-held foreign exchange reserves.
Of China's 1.6 trillion USD foreign exchange reserves at the end of 2007, 40 to 50% were
invested in long-term USD treasury bonds, as well as semi-official bonds, and most earned 3 to 4
%, or less. Although the 40 to 50% placed in liquid assets such as US treasury bonds could be
considered an appropriate choice based on the above mentioned reasons for holding liquid
foreign exchange reserves, prudent planning would also suggest seeking alternative investment
vehicles for higher returns for China's remaining reserves of about USD 800 billion in 2007.
China's SWFs: The China Investment Corporation and the SAFE Investment Company
The China Investment Corporation (CIC)
In June 2007, the State Council decided to invest about 20% of its then USD 1.3 trillion
of foreign exchange reserves in both domestic and foreign alternative investments. Thus, USD
270 billion was directed to China's two newly established outward foreign investment
companies: USD 200 billion to Chinas official Sovereign Wealth Fund (SWF), the China
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Investment Corporation (CIC), and about USD 70 billion to an unofficial Sovereign Wealth
Fund, the SAFE Investment Company (SIC).
The China Investment Corporation was set up by the Chinese State Council as a
Ministerial level organization on September 29 of 2007, with a registered capital of USD 200
billion (about 15% of China's foreign exchange reserve at the time). CICs top management
team was drawn from officials of China's most important financial organizations: the Ministry of
Finance, the People's Bank of China (China's central bank), the State Administration of Foreign
Exchange (SAFE), which is under the People's Bank of China, and the Ministry of Commerce.
CIC's capital was acquired through the Ministry of Finance (MOF) issuing special RMB treasury
bonds and using the proceeds to purchase foreign exchange from SAFE, then giving the CIC the
foreign exchange as a loan to make alternative investments. The CIC was required to pay the
interest and principal to the MOF. In August of 2009, the CIC renegotiated with the MOF to
convert the loan to equity and therefore no longer to pay interest to the MOF, but rather
dividends based on earnings. (See Sovereign Wealth Fund Institute, SWFI, website)
The MOF issuance of the RMB bonds to collect RMB used to purchase the foreign
exchange for the CIC did help absorb some excess RMB in Chinas economy. About two thirds
of the RMB treasury bonds, however, were purchased by the Peoples Bank of China and other
banks, rather than by Chinese enterprises or individuals.
Although the CIC was allocated USD 200 billion in 2007 for alternative foreign and
domestic investments, about two thirds of those funds were already committed to domestic
investments, namely taking over the joint-stock ownership of 3 of China's largest state-owned
banks and of 13 large stock brokerages. The banks and stock brokerages had earlier been
recapitalized by the Central Huijin Investment Corporation (CHIC) with USD 67 billion. The
CIC bought Central Huijin at the original investment cost of USD 67 billion and then assumed
ownership of the banks and brokerage firms. Another USD 65 billion was allocated to
recapitalize the Agricultural Bank of China and the China Development Bank. Therefore only
USD 68 billion of CICs original capital was available for additional investments, foreign or
domestic. In late 2008 CIC invested USD 19 billion in the Agricultural Bank of China in
exchange for 50% ownership and only invested USD 20 billion in the China Development Bank.
CICs capital allocated, but not actually invested, some USD 26 billion, therefore was added
back to CICs capital, which thereby increased by USD 26 billion, to a total of USD 94 billion.
The CIC has publicly committed itself to operate as an income-seeking Sovereign Wealth
Fund, following international standards of behavior and transparency, much like other SWFs
around the world. The CIC, with USD 332 billion of capital, is currently the fifth largest SWF
in the world. The CIC achieved a transparency rating of 6 out of 10, ranking tying for the
position of 14th best out of 42 SWFs (Linaburg-Maduell Transparency Index, 2nd qrter, 2010,
SWFI website).
In major domestic political constraint on CICs professed strictly commerial goals is that
CIC's board of directors is comprised of important government officials from four different
Chinese ministries and financial institutions: the Ministry of Finance (the current Director is Lou
Jiwei of the Ministry of Finance), the People's Bank of China, the Department of Commerce, and
the State Administration of Foreign Exchange. The directors each have different bureaucratic
interests based on which institution they are employed by. They therefore may not be able to
agree with each other on specific policy directions, even though they all agree on the general
goals of supporting continued Chinese economic development and the desirability of
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experimenting with alternative investments for China's foreign exchange reserves in order to
achieve higher returns.
For example, the CIC has been used by the Chinese government to meet foreign policy
goals. During the 2007 US-China trade negotiations, the CIC was directed to purchase 9.9
percent of the Blackstone Group. Although that investment was made to prove that China was
willing to invest in the US, the US government did not view it positively because it was an
investment in a US financial institution, not a purchase of US goods and services. The
Blackstone purchase was also questioned by both Chinese officials and citizens because its book
value has substantially depreciated.
Two positive aspects of CIC activities so far are (1) that the shares in the banks of which
the CIC gained control when they purchased Central Huijin at cost have increased in value due to
the successful IPOs of the banks in Hong Kong. Thus, (2) the CIC has more equity than in
September 2007 when it began, some USD 332 billion, up from USD 200 billion, an increase
due to its ownership of Chinas three largest state-owned banks. Even though CICs investments
in foreign financial institutions have not been profitable, but CICs overall performance has been
good. It achieved 6.8% in 2008 and 10% in 2009 even with the negative impact of the global
financial crises. (SWFI)
Another interesting note is that the CICs foreign investments have been almost all in the
financial sector of the US, a sector that has been having serious problems. Even making
successful short-term investments in the US stock market during 2009 and 2010 would have
been difficult given the serious problems in the financial sector. In the long term, however, these
investments may prove successful. The CIC also made minority investments in other US
financial institutions, with less than 10% ownership (some of them in nonvoting shares and
guaranteed holding times), hoping to create less controversy. In 2010 the CIC has begun to
actively pursue other investments (such as the April 4, 2008 reported 4 billion USD investments
in the US private equity firm J.C. Flowers).
In 2009, CIC began to put its capital into energy and oil companies, investing a total of
USD 10 billion in energy resource commodities companies alone in 2009, compared with a USD
8 billion investment in all types of investments during 2008. For example, in 2009 CIC invested
USD 1.7 billion in Teck Resources, a Canadian energy company, USD 850 million in the Hong
Kong based Nobel Group Limited, the second largest resources global trading company after
Cargill, USD 300 billion in Noble Oil, and USD 1.2 billion in the Penn West Energy Trust, an oil
company in Canada. CIC also invested USD 1.58 billion in AES, a US wind energy company,
though it declined to follow that investment up with additional capital of USD 533 million in
2010, pending clarity on the direction of US energy policy.

CIC reported increased returns in 2009 compared with 2008. CIC made well over 10%
according to an analyst with Roubini Global Economics, compared to a loss of 2.1% in 2008.
CIC is still learning in its efforts to increase returns. In 2010, CIC lost as much as 10% of its
value, due to losses in their Euro investments (Jesse Wang, CIC Executive Vice President, June
9, 2010, Market Watch) . CIC actually made 17% overseas but lost 6% with Central Huijin,
making its total gain in 2009 only 11%.
Recently the CIC has been asked to make higher returns. But this is difficult for three
reasons: first, long-term investments, such as CIC had pledged to pursue, do not usually have
high returns in the short term. Second, CIC is supposed to invest in foreign markets and
investments, and foreign markets are still trying to recover from the world economic crisis. For
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example, the US market has yet to make a real recovery from S and P levels of last year. Third,
because of uncertain European markets, it is also difficult to predict or benefit from investing in
those markets in the short term, and in fact there can be losses. This summer the CIC lost 10%
of its equity, or USD 30 billion, on its Euro currency investments.
Given these losses, it is probably not going to be possible for the CIC to be granted an
additional USD 100 billion to add to its capital. In this sense, the CIC has found that the size and
unpredictability of the world equity and currency markets have made foreign investments
continue to be dangerous investments for CIC, just as they were with the US companies
Blackstone and Morgan Stanley in 2008, when CIC also suffered heavy losses. In this sense,
although CIC can offer investments that may help other countries and companies recovery from
the world financial crisis, these will not be enough to change things substantially (since CIC does
not have control over the huge Chinese foreign exchange reserve), and in fact CIC can easily
lose in its investments if they are short term and speculative, particularly in this still uncertain
world financial situation.
Let me offer a final word about the CIC from the current directors of the Oxford
University Sovereign Wealth Fund Project They argue that the CIC has been at least as strategic
as commercial, and that despite the recent Santiago Principles, meant to regularize SWR
behavior around the world, The CIC is re-making the rules of engagement in global financial
markets, thereby redrawing the nature and scope of the long-term relationship between the two
superpowers of the twenty-first century: China and the USA. (Gordon L Clark+ and Ashby H B
Monk Nation-state Legitimacy, Trade, and the China Investment Corporation, Oxford
University)
In some quarters, it was hoped that the CIC and other large sovereign wealth funds might
underwrite global financial stability, using their deep pockets to take long-term positions in the
core institutions of the global economy. It was also hoped that these (SWF) investments and
government-led initiatives to stabilize financial markets might forestall a deeper crisis, one that
threatened to fracture the global hegemony of the Anglo-American system of financial
intermediation and market exchange. These hopes were not realized. As the crisis deepened in
2008 the newly-established CIC faced growing domestic (Chinese) public pressure to justify its
investments, the CIC, like most other large sovereign wealth funds that had been established in
the later years of the decade, retreated to the sidelines of western markets. Instead, the CIC has
favored strategic investment, focusing upon the Chinese banking industry and global resource
sectors--its long-term perspective regulated by government concern to secure Chinese
economic development. (Clark and Monk, p. 2)
By our account, American consumers made the CIC possible; that it played a role in
initial attempts at stabilizing US financial markets and banks could be seen as an appropriate
reciprocal gesture of support for an ally in trouble. (Clark and Monk, p.2)
The CIC did not end up playing a role in underwriting financial stability and economic
growth in the world or the American economy. Rather SWFs can be used by countries to protect
themselves during periods of global economic crisis. East Asian countries such as S. Korea that
suffered during the East Asian crisis of 1987-90 have taken this lesson to heart. Even EU
countries such a Ireland and the UK might have benefitted from having SWFs.
The SAFE Investment Company (SIC)
China's second, SWF, the SAFE Investment Company (SIC), is a wholly owned branch
of China's official administrator of its foreign exchange, the State Administration of Foreign
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Exchange (SAFE). (SAFE had already for years been making China's 700 to 800 billion USD
investments in US government-backed bonds, such as treasury bills, and in US backed
mortgages). The Chinese State Administration of Foreign Exchange, the sole owner of SIC, was
established in China in December of 1980, by China's central bank, the People's Bank of China,
to oversee the centralized control and unified management of China's foreign exchange regime.
SAFE's main functions are the collection and management of China's foreign exchange reserves.
From 1997 on, SAFE set up several investment branches worldwide. The New York branch has
been coordinating many of China's foreign exchange transactions in the US, mostly the purchase
of US treasury bonds and other US-backed securities. In 1997, SAFE's Hong Kong branch
established a Hong Kong-registered joint-stock foreign exchange investment company, the
SAFE Investment Company (SIC) that in 2007 began to carry out SWF-like investments.
SIC appears to have begun in the middle of 2007 to make substantial overseas
investments throuts Hong Kong branch, although the very existence of SIC was kept a secret to
the world until January 2008. SAFE Investment Company officials confirmed their company's
ownership by SAFE only after a Financial Times reporter presented a copy of the Hong Kong
registration of shares showing that SAFE holds 99,999,999 shares of 100 million and Ms. Hu
Xiaolian, SAFE's chairwomen from 2007 to 2009, holds the remaining 1 share (Financial
Times).
SIC has had a goal similar to that of the CIC, that is, to begin a diversification in order to
find a better return than SAFE has been able to earn with its various US treasury bonds,
government instruments, and US commercial bonds. SAFE also has been diversifying some of
its reserves from USD investments into a basket of non-USD currencies, but SAFE still
denominates China's foreign exchange reserves in USD and holds about USD 800 billion in US
treasury bonds.
According to the Sovereign Wealth Funds Institute, SIC now has over USD 347 billion to
invest. It has so far invested 2 billion USD for less than 2% ownership of the British oil
company British Petroleum, 2.8 billion USD for 1.6% of the French oil company Total, 531
million USD in three Australian banks, and has made a commitment to invest 2.5 billion USD in
the US Texas Pacific Group private equity fund. SICs investments are concentrated in natural
resources. SIC is rated 3 out of 10 (Linaburg-Maduell Transparency Index, 3
nd
quarter, 2009,
SWFI website) SWF Institute which is amount the lowest rating of world SWFs.
So far there is no apparent sign of direct competition between CIC and SIC, but rather
some indications of cooperation and specialization (China Stakes, June 24, 2008). Some
American analysts however, such as Barry Naughton, suggest that various Chinese ministries
and leaders have begun to compete for bureaucratic power, for control of parts of Chinas huge
wealth, and for the prestige associated with successful management of China's state-owned
resources. Other analysts say that some Chinese officials want to get away from this hot potato
due to difficulty of successful management of these large amounts of foreign exchange. The two
funds will probably be compared in terms of their economic return performance. There also is
some overlap of leadership. The former head of SAFE, Madame Hu Xiaolian who was also the
only private owner of a share of the SAFE Investment Company, served both as the head of
SAFE and as vice-chairman of the Board of the CIC. The current head of SAFE, Yi Gang, is not
on the board of the CIC.

The Future of China's Sovereign Wealth Funds

- 443 -

In the future, there are a number of possible measures that the Chinese government can
institute to address both the issue of "hot money", and the general increases in trade surpluses
and FDI that have begun to present China with the responsibilities of the world's largest foreign
exchange reserve.
First, China can establish a more market-driven and flexible foreign exchange rate system
that will require lower levels of centrally-held reserves needed to intervene in China's foreign
exchange market. A more market-driven, and therefore less predictable, foreign exchange rate
regime might also reduce the huge amounts of "hot money" coming into China to try to take
advantage of known policy-driven foreign exchange rate changes.
Second, as a long-term solution, the Chinese government can decentralize foreign
exchange management; instead of collecting all foreign exchange for deposit in SAFE, more of
the foreign exchange funds earned by Chinese enterprises and banks could be kept by the
companies themselves, to be used for their development. More foreign exchange funds could
also be kept by banks and by city and provincial governments to pursue local capital projects or
be kept by or sold to individuals for individual overseas investment or consumption. In China,
private (either company or individual) ownership of foreign exchange is about USD16 billion.
But in Japan USD 3 trillion is held privately and in the US, USD 10 trillion is held privately.
Since foreign currency purchases by SAFE inject more RMB into the Chinese economy,
requiring fewer SAFE conversions would also reduce both the rate of expansion of the Chinese
money supply and the inflationary pressures that such increases can produce.
In their reserve management policies, Chinese officials have many important factors to be
considered in order to succeed. If they are too slow or too modest in their policy reforms, China
may begin to suffer from inflation, brought on in part by the amount of foreign exchange that
must be purchased by China's SAFE with RMB. To prevent this kind inflation the MOF can
sterilize the RMB injection through the sale of treasury bonds. On the other hand, if the reforms
are too radical or too rapid, or if for example the RMB appreciates too quickly or too much,
China's export-led economy may suffer. Taking the path of gradualism with experimentation has
been a hallmark of Chinese economic reforms and development so far and probably will
continue to be the way that reforms are introduced. Also, all large changes in policy so far have
been studied and debated at a State Council Central Financial Working Conference (last held in
January 2007; the one before that was held in 2002), so that Chinese leaders, as well as ministry
and economic organization officials, can be represented in discussions and decisions.
Chinese authorities do not want their holdings of USD to lose too much value in relation
to the RMB, because the RMB is still denominated in USD and significant part of China's
foreign exchange reserves are held in USD-denominated instruments. The USDs depreciation
since 2005 of about 20% against the RMB has resulted in a financial loss in the value of SAFEs
USD holdings of about 200 billion.
Third, the government can permit the privatization of some of China's major enterprises,
and then permit them to earn, and to invest foreign exchange. This measure would: begin to
make China's state-owned and private enterprises more internationally competitive; help foreign
exchange resource allocations to be made on the basis of commercial rather than political
criteria; and increase transparency.
In sum, China's experiment with SWFs, both the official CIC and the official but less transparent
SIC, may accomplish some of the goals of China's Ministry of Finance and the People's Banks of
China's State Administration of Foreign Exchange, such as helping slow the rate of centralized
foreign exchange reserve accumulation in SAFE, increasing China's rate of economic return on
- 444 -

some of its foreign exchange reserves, and gaining more needed resources and management
experience. SWFs alone, however, will not be enough. Chinese authorities will also have to
develop and implement policies to decentralize control and ownership of foreign exchange and
to deal with the unintended consequences of US-demanded RMB appreciation policies,
particularly increased "hot money" inflows that appear to be rapidly expanding China's total
foreign exchange reserves, both in SAFE and in other Chinese financial institutions.
Nevertheless, SWFs in the short term can play at least a partial role in pursuing these important
macroeconomic goals, particularly if they are slowly developed and can receive feedback about
their effects. Based on experiences in other Chinese financial reform arenas (for example, in
banking), Chinese officials may well be successful in their efforts, though the political and
economic challenges are immense and complicated.
Because of the seriousness of the world financial crisis, Chinas SWFs, though large,
have not had much influence, either positive or negative. Chinas major influence has been to act
as a steadying factor, encouraging world financial markets to believe that Chinas continued
economic growth provides some support for world financial stability and for economic recovery.

- 445 -

Chart 1

Chart 2

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0
500
1000
1500
2000
2500
3000
China's Foreign Exchange Reserve (1950-2009 in
Billion USD)
-200
0
200
400
600
800
1000
1200
1400
1600
1800
b
i
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l
i
o
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U
S
D
Year
China's Trade, Investment and FX reserve
BCA
BKA
FXRSV
FDI(outbond)
- 446 -

Bibliography
Chen, Jiasheng, Guoji Jinrong Tonglun (The Principles of International Finance). China Financial Press, 1985
Feuerwerker, Albert. (1995). The Chinese Economy, 1870-1949, University of Michigan.
Financial Times. The Financial Times is one of the best sources for current information on China's
two sovereign wealth funds.
Green, Stephen (2007). The Real Deal on China's New Mega Fund, Business Week March 26. Retrieved
on-line at: www.businessweek.com/print/globalbiz/content/mar2007/gb20070326_316425
Jiang, Kai-shek, (1947) China's Destiny. China News Service
Liu, Ke. (2007). How to Manage China's Foreign Exchange Reserves? Arhus School of Business, University
of Aarhus
Maddison, Angus (2001) The World Economy: A Millennial Perspective. Development Centre of the
Organization for Economic Co-operation and Development
Martin, Michael F. (2008) Chinas Sovereign Wealth Fund. CRS Report for Congress, RL34337 National
Bureau of Statistics of China 2008
Naughton, Barry. (2008) SASAC and Rising Corporate Power in China. China Leadership Monitor, No. 24
Pettis, Michael. (2008). Money Floods in and Financial System Risk Grows. RGE Monitor, July 20.
Retrieved online at WWW.regmonitor.com/asia-
monitor/252995/money_floods_in_and_financial_system_risks_grow.
SAFE. gov. cn. The China SAFE site describes the State Administration of Foreign Exchange, gives short
descriptions of the members of the Board of Directors, and provides a few hints about SAFE activities
and goals.
Setser, Brad. (2008). What to do With Over a Half a Trillion a Year? Understanding the Changes in
Management of China's Foreign Assets Council on Foreign Relations (January 15).
SWF Institute. (On-line). This source has very complete current data on foreign exchange reserves data and
rankings as well as sovereign wealth fund holdings and rankings.
The East Asian Miracle: Economic Growth and Public Policy (1993). Published for the World Bank by
Oxford University Press
Thomas, Stephen (1984). Foreign Intervention and Chinese Industrialization, 1870-1911. Westview Press.
Truman, Edwin M.. (2007). The Management of China's International Reserves: China and a SWF
Scorecard. Paper Prepared for Conference on China's Exchange Rate Policy, Peterson Institute for
International Economics, (October 19).
World Bank (1978). China's Economy (Unpublished Report).
Wright, Logan. (2008). CIC and SAFE: Coordination or Bureaucratic Conflict? ChinaStakes, June 24.
Retrieved online at www.chinasakes.com/WatchFullArticle.aspex?articleid=456
Zheng, Yongnian, and Jingtao Yi. (2007). China's Rapid Accumulation of Foreign Exchange Reserves and
Its Implications, China and World Economy, 15(1): 14-25.

- 447 -

I mpact of RTA and PTA on Bangladesh Expor t:
Appli cati on of Gr avi ty Model
Muhammad Shariat Ullah
Inaba Kazuo
Abstract
As part of export-led growth strategy, trade liberalization process in Bangladesh has
started in the early 1990s and got further impetus in later years. Growth of total trade (export +
import) as a percent of GDP from 24.4% in 1980-81 to 45% in 2007-08 clearly indicates
increased liberalization as well as growing importance of the external sector in Bangladesh.
Apart from unilateral liberalization, Bangladesh participates to three different trade agreements
namely, SAPTA, APTA and BIMSTEC and has signed preferential trade agreements with D8
(Developing-8) countries. Considering the growing importance of regional trade agreements in
trade flows, this study attempts to investigate the contribution of trade blocs on export flows of
Bangladesh using the gravity model that has become the primary tool for estimating trade effects
of regional integration. The database covers export flows of Bangladesh to 42 major partners
from 1996 to 2008. Empirical results reveal that exports of Bangladesh are positively related to
its GDP growth, depreciation of local currency and market size of importing countries.
Regression results also support the inter-industry export patterns for Bangladesh that fits with the
Heckscher-Ohlin theory. Contrary to the expected effects of regional integration, all the three
regional agreements in which Bangladesh participates have negative sign and two of them are
statistically significant. This brings to the light that export to the bloc members is significantly
less than export to other non-member countries considered in the sample. Considering the low
volume of export to the RTA partner countries and extensive export markets in USA and EU,
priority should be given to develop bilateral trade agreements with those important trade
partners.

Key words: RTA, PTA, Gravity model, trade creation, trade diversion

Introduction

In the present era of multilateralism, regionalization wave is sweeping around the world
at an increasing rate. Along with the deeper regional integration of countries under EU, EFTA,
EEA and NAFTA; there is unprecedented growth of regional and bilateral trade agreements in
the developing world. As of January 2005, the WTO has been notified of 312 regional trade
agreements (RTAs): of these 170 were in force. Another 65 RTAs were estimated to operational
but the WTO was yet to be notified (Crawford and Fiorentino, 2005). The upsurge in regionalism
escalated the debate on potential gains from regionalism and led to the development of anti and
pro-regionalism camp. Krugman (1991), Bhagwati (1993), and Frnakel, Stein and Wei, (1994)
provide intellectual support for the worry that the current pattern of regionalization is likely to be
welfare-reducing114. However, given the uncertain outcome of the multilateral negotiations, the

114
In Wei and Frankel (1995)
- 448 -

regionalism movement currently constitutes the most significant trend in international
commercial policy.
Over and over empirical studies prove that RTA of advanced countries is welfare
enhancing. Baldwin (1997) concludes that almost all empirical studies of European and North
American arrangements find positive impacts on members living standards and regionalism is
half of the trade liberalization wheel that has been rolling towards global free trade since 1958.
Nevertheless, there is dearth of literature on the trade impact of RTAs of developing and LDC
countries, particularly on RTAs in South Asia. Regional integration in South Asia began in 1994
with the formation of SAARC115 preferential trade arrangement (SAPTA) with participation of
seven South Asian countries including Bangladesh. Apart form SAPTA; Bangladesh is a
member of Asia Pacific Trade Agreement (APTA) and Bay of Bengal Initiative for Multisectoral
Technical and Economic Cooperation (BIMSTEC). Although these blocs entice least developed
and some developing countries in South Asia, Southeast Asia and East Asia; most of the
members are common resulting in overlapping membership and it remains unclear whether such
overlapping membership in multiple blocs acts as building bloc or stumbling bloc towards
deeper economic integration. Although trade effect of SAARC/SAPTA has been studied by
Hassan (2001), Tumbarello (2006) and Kandogan (2008); little is known about the effect of these
blocs on bilateral trade flows between Bangladesh and other members. Rahman (2003) studied
foreign trade of Bangladesh with panel data of 1972 to1999 and explored the effect of SAPTA.
Till now, the role of other blocs has been rarely studied.
Indeed, high concentration of Bangladesh export on few developed countries calls for
extensive research to investigate the effect of trade blocs on bilateral trade between Bangladesh
and other members. Bangladesh is now attempting to sign bilateral FTA with some of the
SAPTA countries that further raises question on the viability of existing trade agreements.
Therefore, the present study attempts to address the following research questions: (i) do existing
trade agreements have any significant impact on intra-regional export flows of Bangladesh?; (ii)
has the emergence of SAFTA caused any improvement in export patterns of Bangladesh in
regional markets?; (iii) is the proposed free trade agreement with South Asian countries
including India likely to stimulate export flows of Bangladesh in the future? Based on the
analysis, it intends to identify the operational loopholes of trade agreements and to suggest
strategic actions to stimulate export flows in the future. It also contributes by using the most
recent database. Given the era of globalization and global free trade facilitation under the
auspicious of multilateral organizations, bilateral relation is still a significant determinant of
trade flows especially for developing countries like Bangladesh. Thus, this study is expected to
shed light on the necessity for Bangladesh to strengthen bilateral trade negotiations with key
trade partners. The remainder of the study is organized as follows: section-2 gives an overview
of different RTAs and PTAs; section-3 highlights export scenario of Bangladesh; section-4
reviews the literature on gravity works; section-5 presents model specification and findings and
the final section gives conclusion.
Overview of different RTAs and PTAs
SAPTA116 (SAARC Preferential Trading Arrangement) was signed by seven South
Asian countries in 1993 and entered into force on 7 December 1995. Afterwards, SAPTA has

115
SAARC (South Asian Association for Regional Cooperation) was established in 1985. However, trade agreement was reached in 1994.
116
Table-1 lists SAPTA Members. Membership to Afghanistan was given in 2005.
- 449 -

been transformed into a full-pledged FTA in 2004 and renamed as South Asian Free Trade
Agreement (SAFTA). Tariff reduction under SAFTA began from July 1, 2006. Three non-LDC
countries of SAFTA, namely, Pakistan, India and Sri Lanka are scheduled to bring down their
tariff between 0 to 5 % in 3 years for items that do not appear in the sensitive list117 while LDC
member countries will implement such tariff reduction in 10 years. The sensitive list approach
characterizes the restrictive nature of this RTA.
Table-1: Overlapping membership in RTA and PTA

Member countries Various RTAs and PTAs
APTA BIMSTEC D-8 SAPTA
Afghanistan
Bangladesh
Bhutan
China
Egypt
India
Indonesia
Iran
Lao Peoples Democratic
Malaysia
Maldives
Myanmar
Nepal
Nigeria
Pakistan
Sri Lanka
Republic of Korea
Thailand
Turkey
APTA = Asia Pacific Trade Agreement; BIMSTEC = Bangladesh, India, Myanmar, Sri Lanka, Thailand
Economic Cooperation; D-8 = Developing 8; SAPTA = SAARC Preferential Trading Arrangement.

APTA, previously known as Bangkok Agreement (BA), is the Asias oldest preferential
trading bloc between developing countries and the only one which links East, Southeast and
South Asia. Under the guardianship of United Nations Economic and Social Commission for
Asia and the Pacific (UNESCAP), APTA was signed118 in 1975 with the aim to promote intra-
regional trade through an exchange of mutually-agreed concessions. Its membership is open for
all developing member countries of UNESCAP. Entry of China in 2001 has made APTA the
only RTA linking two fastest growing economies of the world. There have been three rounds of
negotiations119 and resulted in significant progress in the consolidated list of general and special
tariff concessions granted by participating members to each other. Tariff concessions offered by
the member countries at successive rounds of negotiations is presented in Table-2. After the
completion of third round negotiations, Bangladesh gained special tariff concessions for 587
products where as the number of products under special concession was only 3 and 63

117
The sensitive lists of Bangladesh contain 1254 items for Non-LDCs and 1249 items for LDCs; list of India contains 868 items for
Non-LDCs and 480 items for LDCs; list of Pakistan contains 1169 items, list of Sri Lanka contains 1065 items; list of Nepal
contains 1299 items; list of Maldives contains 671 items; list of Afghanistan contains 1072 items and the list of Bhutan contains
157 items.
118
Participants of APTA are listed in Table-1. Membership to China was given in 2001. Thailand was one of the signatories of this
agreement but did not ratify it. Hence, the amendment report of Bangkok Agreement does not recognize Thailand as Original
Participating States (ESCAP 2005).
119
The third round of negotiations was completed in 2006 and the fourth round began in 2007.
- 450 -

respectively after the first round in 1979 and second round in 1990. Since 2006, China provides
100% tariff concessions to 83 items of Bangladesh at 8-digit level and Republic of Korea
provides 100% tariff concessions to 139 items at 10-digit level. Significant increase in the
number of products coverage after third rounds of tariff concessions implies that the agreement is
becoming more open to its members. Recognizing the importance of investment as a source of
knowledge transfer and for sustaining the pace of economic development, APTA member
countries entered into the Framework Agreement on the Promotion, Protection and
Liberalization of Investment in 2009120. Successful implementation of the latter agreement can
play vital role in investment flows not only form nonmember countries but also between the
member countries.

Table-2: Tariff concessions under APTA
Country General concessions (No. of Products) Special Concessions to Bangladesh (No. of
Products)
After
1
st
round
(1979)i
After
2
nd
round
(1990)ii
After
3
rd
round
(2006)iii
After
1
st
round
(1979)i
After
2
nd
round
(1990)ii
After
3
rd
round
(2006)iii
Bangladesh 15 107 209 - - -
China - - 1697 - - 161
India 16 78 570 1 11 48
Lao PDR 28 - - - - -
Republic of Korea 16 176 1367 2 15 306
Sri Lanka 18 77 427 37 72
Total 93 438 4270 3 63 587
Source: i, ii, from Kelegama, S. (2001), iii) ESCAP Secretariat

BIMSTEC, as a framework agreement, was signed in June 1997 comprising of four
countries 121 to strengthen cooperation in the sectors like technology, transportation and
communication, energy, tourism and fisheries. Soon after its formation, members of this sub-
regional group realized the role of trade and investment facilitation towards more effective
economic integration and therefore, signed the Framework Agreement on BIMSTEC Free Trade
Area (BIMSTEC- FTA) on 8th February 2004 having differential provisions for developing and
LDC country members. The BIMSTEC-FTA entered into force on 30th June 2004 by focusing
on progressive liberalization of tariff and non-tariff barriers to promote intra-regional trade in
goods, services and investment. The partner countries also agreed to extend mutual cooperation
in the areas of customs, trade finance, e-commerce, business visa and travel facilitation. Trade in
goods is categorized under fast track and normal track and the article 3 of the FTA sets out
the timeframe for MFN tariff reduction beginning form July 2006 for fast track items and from
July 2007 for normal track items. Moreover, as per the article 7, negotiations for tariff reduction
were scheduled to conclude by December 2005, and afterwards, negations on trade in services
and investments would commence in 2005 and were to be concluded by 2007.
D-8 is an arrangement for development cooperation among the Muslim developing
countries
122
in the areas of trade, industry, communication and information, finance, banking and
privatization, rural development, science and technology, poverty alleviation, human resources
development, agriculture, energy, environment, health, tourism, culture and sport. It is a global
arrangement rather than a regional one and was established in June 15, 1997, to improve

120
Details of Framework Agreement on the Promotion, Protection and Liberalization of Investment is available at:
http://www.unescap.org/tid/apta/fa_inv
121
Member countries of BIMSTEC are mentioned in Table-1. Myanmar was granted membership on December 1997 while Bhutan and Nepal on
2003.
122
The member countries are mentioned in Table-1.
- 451 -

positions of the developing countries in the world economy, diversify and create new
opportunities in trade. Bangladesh signed Preferential Trade Agreement (PTA) among D-8
countries in 2006. However, this organization for development cooperation is approaching to a
PTA. The 7th summit of D-8 held in Nigeria on July 2010 ended with an agreement to form
preferential trade agreement by 2011.
Export Scenario of Bangladesh
Bangladesh has achieved phenomenal growth in export earnings. Export as a percent of
GDP grew from 5.6 percent in 1982-83 to 17.80 percent in 2007-08 and export as a percent of
import grew from 29.44 percent to about 71 percent during the same period. Table-3 shows the
export scenario of Bangladesh based on industrial origin. At present, manufacturing export
generates more than 93 percent of total export earnings with dominant contribution from
textile/readymade garments (RMG) sector. It is quite visible that a single sector always captures
the bulk portion of export earnings in the history of Bangladesh. Although the number of
exportable products has increased from 25 products in 1973 to 154 products in 2007
123
,
Bangladesh has not been successful in diversifying its export basket in a meaningful way. Till
the beginning of 1980s, jute sector was the main pillar of export contributing about 60-80 percent
of total export earnings which eventually dropped to less than 4 percent in the recent past. The
declining contribution of jute sector has been covered by the RMG sector. This sector has
emerged in the middle of 1980s and is the single most important export earners at present with a
share of about 75 percent of total export receipts.

Table-3: Exports by industrial origin (% of
total export value)
Products 1972-73 1982-83 1992-93 2002-03 2006-07
Primary commodities -- -- 13.17 7.06 6.83
Manufactured commodities -- -- 86.83 92.94 93.17
Jute goods 51.35 46.5 12.27 3.9 2.63
Raw Jute 38.45 16.3 3.12 1.3 1.21
Leather 4.6 10.1 6.21 2.9 2.18
Tea 2.9 6.1 1.73 0.2 0.06
Chemical products 0.9 1.1 2.42 1.5 1.77
Frozen Food 0.9 8.5 6.94 4.9 4.23
Textile 0 1 60.64 75.1 75.64
Woven garments 0 1 52.06 49.8 38.25
Knit wear 0 0 8.58 25.3 37.39
Others 0.9 10.4 6.67 10.2 12.28
Total 100 100 100 100 100
Total exports (Million US $) 348.42 686.60 2382.89 6548.44 12177.86
Export Growth rate (over the previous
year)*
- 28.7 22.0 10.3 18.19
Export (as % of GDP)* - 5.60 7.38 12.62 17.80
Export (as % of import)* - 29.44 58.10 67.81 70.98
Source: Authors calculation based on Export Statistics, Export Promotion Bureau (EPB), Dhaka, Bangladesh
*Authors calculation based on Economic Trends (various issues), Bangladesh Bank, Dhaka, Bangladesh

123
Information on the number of export products of Bangladesh can be accessed from www.epb.org
- 452 -

The geographic distribution of Bangladeshs exports in Table-4 reveals that advanced
countries of EU and NAFTA regions constitute the main export markets for Bangladesh with a
share of about 75 to 90 percent of total export since 1990s. In the year 2008, more than 60
percent of total exports were in seven industrialized countries (USA, UK, Italy, Germany,
Netherlands, France and Canada). Among the developed countries, USA is the single largest
export market for Bangladesh while European Union remains to be the largest regional market.
Since the middle of 1990s, USA and EU collectively share more than 70 percent of Bangladeshs
export. In many countries outside the EU and NAFTA, export share of Bangladesh shows a
declining trend. In particular, export share to Asia and Africa has drastically declined from 11
and 15 percent in 1980 to 0.6 and 4.5 percent in 2008. Australia and Japan are the two major
developed markets in Asia where Bangladesh has lost its export share over the years. Such
decline in export share can be attributed to changes in the export composition of Bangladesh and
improvement of bilateral and regional trade relations between countries in those regions.

Table -4: Geographic Distribution of Bangladesh Export (%
of total export)
Areas/Countries 1980 1985 1990 1995 2000 2005 2008
Advanced Economies 47.6 52.1 75.3 87.6 78.0 77.2 74.9
USA 9.3 18.1 30.5 31.9 31.8 23.6 20.7
UK 5.0 5.1 7.1 10.1 7.9 9.4 8.6
Italy 3.8 3.5 6.4 6.2 4.1 3.8 3.9
Japan 3.9 7.2 3.9 3.3 1.2 0.8 0.6
Australia 3.1 1.4 1.8 0.5 0.3 0.3 0.3
Germany 1.9 1.9 6.5 9.4 10.9 13.5 13.2
Netherlands 1.5 1.4 2.3 4.0 4.2 2.8 4.7
France 1.0 0.5 3.7 6.1 5.2 6.4 6.3
Canada 1.0 1.2 1.6 2.1 1.7 3.2 3.2

Developing Africa 11.4 11.4 3.3 1.8 0.6 0.5 0.6
Sudan 4.4 4.5 1.7 0.6 0.1 0.1 0.2

Developing Asia 15.1 10.7 6.2 4.1 3.0 3.7 4.5
China 3.9 1.3 1.5 0.6 0.2 0.5 0.7
Hong Kong 2.1 1.0 1.0 3.7 1.6 1.2 1.0
India 1.0 3.0 1.3 1.1 0.9 1.4 2.3

Developing Europe 9.3 9.0 9.2 2.2 1.0 1.4 3.1
Turkey 0.8 1.2 0.9 0.7 0.4 0.9 1.9

Middle East 12.8 15.3 4.9 3.2 2.4 1.6 1.4
Iran 6.0 7.8 1.8 1.1 0.7 0.5 0.4
Syria 1.6 2.6 0.6 0.8 0.2 0.1 0.2

Other areas, countries 3.7 1.5 1.0 1.1 15.0 15.6 15.4
EU 19.9 21.6 35.3 45.0 40.3 46.9 48.2
Source: Calculated based on Direction of Trade Statistics, (CD ROM), 2010

Table-5 shows export of Bangladesh to different trade bloc partners. Bangladesh
participates in the RTAs and PTAs that mainly involve least developed and developing countries
in Asia. Nevertheless, export flows to RTA and PTA partner countries are negligible. Although
- 453 -

value of export to bloc members has increased from 153 million to 959 million US $ during the
period of 1990-2008, share of export has declined from 9.2 percent to 7 percent during the same
period. This implies that growth of export to RTA and PTA partners is lower than the overall
growth rate of Bangladesh export. Export to SAPTA countries has increased form 84 million
US$ in 1995 to 417 million US$ in 2008. However, SAPTA members still receives a small
percentage of total export even after its conversion into a full-blown free trade area in 2004.
Morever, export of Bangadesh to SAPTA members other than India and Pakistan is very
negligible inspite of their simultaneous particpation in multiple trade blocs. Compared to 1990,
share of export to the APTA (Asia Pacific Trade Agreement) members declined till 2005
indicating that trade agreement does not facilitate export growth. Tariff concession given to
Bangladesh by China and Korea (two different members than SAPTA) under APTA does not
change much the export share of Bangaldesh to those rising economies. BIMSTEC is the other
trade bloc linking the South Asian and East Aisan countries. This RTA has neither fostered
exprot of Bangladesh to its partner coutnries.
Thus, the salient features of Bangladesh export can be summarized as: (i) declining
contribution of traditional export including jute sector; (ii) growing contribution of
manufacturing export; (iii) increasing contribution of ready made garments sector; (iv)
dependency on few products and market destinations; (v) very negligible export to the Asian
countries and (vi) declining share of export to trade blocs members.

Table-5: Export of Bangladesh to blocs member courtiers:
in million US $
1990 1995 2000 2005 2008
Export to SAPTA partners:
Bhutan 0.15 0.27 0.90 3.30 3.16
India 21.68 35.77 50.13 118.88 318.82
Maldives 0.00 0.02 0.00 0.00 0.00
Nepal 7.35 9.97 1.32 3.48 6.01
Pakistan 23.22 26.50 34.51 52.00 78.50
Sri Lanka 8.22 11.49 2.47 8.81 11.05
Total export to SAPTA countries 60.63 84.03 89.32 186.48 417.54
Export to SAPTA countries (% of total export) 3.63 2.69 1.60 2.20 3.06

Export to APTA partners:
China 25.15 18.31 9.56 46.33 94.11
India 21.68 35.77 50.13 118.88 318.82
Republic of Korea 1.18 7.47 11.53 22.86 47.23
Sri Lanka 8.22 11.49 2.47 8.81 11.05
Lao Peoples Democratic na na na na na
Total export to APTA partners 56.23 73.04 73.69 196.88 471.22
Export to APTA partners (% of total export) 3.37 2.33 1.32 2.32 3.46

Export to BIMSTEC Partners:
Bhutan 0.15 0.27 0.90 3.30 3.16
India 21.68 35.77 50.13 118.88 318.82
Myanmar 0.02 1.86 0.70 1.51 3.80
Nepal 7.35 9.97 1.32 3.48 6.01
Sri Lanka 8.22 11.49 2.47 8.81 11.05
Thailand 1.57 4.52 37.17 14.50 17.82
Total export to BIMSTEC partners 38.99 63.89 92.69 150.48 360.67
Export to BIMSTEC partners (% of total export) 2.33 2.04 1.66 1.77 2.65

- 454 -

Export to D-8 partners:
Egypt 13.71 14.62 7.43 11.67 12.42
Indonesia 3.00 5.47 5.88 23.10 19.63
Iran 30.76 33.60 36.37 46.05 52.92
Malaysia 2.39 6.41 7.86 10.36 27.72
Nigeria 0.81 1.40 2.07 4.87 3.87
Pakistan 23.22 26.50 34.51 52.00 78.50
Turkey 14.47 20.34 23.67 75.41 262.08
Total export to D8 partners 88.36 108.34 117.79 223.45 457.13
Export to D8 countries (% of total export) 5.29 3.46 2.11 2.63 3.35

Total export to above 16 partners 153.67 198.03 231.57 443.12 959.15
Export to 16 partners (%of total export) 9.20 6.33 4.14 5.22 7.04
Source: Authors calculation based on Direction of Trade Statistics, (CD-ROM), 2010.
Literature review
Gravity model explains international trade flows as a log-linear function of incomes and
distance between countries. It predicts that bilateral trade depends positively on income while
negatively on distance. Along with these key gravity variables, a number of variables are
included that either facilitate or hinder trade and their sign depends on whether they facilitate or
restrict trade. After being introduced by Tinbergen (1962), gravity model has received
considerable attention for empirical studies of international trade and regional integration. Along
with the empirical application of gravity, much work has been done by Anderson (1979),
Bergstrand (1985, 1989, 1990), Helpman (1987), Deardorff (998), Evenett and Keller (2002),
Feenstra et al. (2001) to provide theoretical justification for the model.
Helpman (1987) affirmed that the empirical success of the gravity model is an evidence
supporting the relevance of the imperfect competition model. Deardorff (1998) demonstrated that
the gravity model is quite compatible with the traditional Richardian as well as Heckscher-Ohlin
models. Studies by Helpman and Krugman (1985) and Feenstra et al. (2001) show that both new
trade theories of product differentiation as well as the classical Heckscher-Ohlin theory of
comparative advantage can provide a theoretical rationale for the gravity model. Wang and
Winters (1991) empirically proves that the signs of main coefficients accord well with
Linnemanns original interpretation of gravity equation which stresses inter-industry trade, but
also with more modern ones which stresses intra-industry trade.
Feenstra et al. (2001) support that the simple gravity equation explains great deal about
the data on bilateral trade flows and is consistent with several theoretical models of trade. These
authors argue that a wider range of theories than previously recognized are consistent with
gravity equation. In order to prove the alternative theories of trade, they have classified exports
into three types of goods- differentiated, homogeneous and an in-between category and
proved that the results for differentiated goods fit with the monopolistic competition model
with free entry while the results for the homogeneous goods fit the predictions of reciprocal
dumping model with restricted entry.
Empirical Application of Gravity Model:
Since its introduction, there has been wide application of gravity equation to study trade
creation and trade diversion effect of regional trading blocs, preferential trade agreements and of
- 455 -

free trade agreements. Review of empirical literature reveals that gravity model has been
primarily applied in the form of country pairs to analyze regional integration of advanced or
industrialized countries. Among others, Baldwin (1994), Oguledo and MacPhee (1994),
Bayoumi and Eichengreen (1995), Gros and Gonciarz (1996) and Montenegro and Sologa
(2006) have applied various extensions of gravity model to analyze EC, EU, EFTA, EEA,
CEEC, CEFTA, EMU, NAFTA, and ANZCERTA. Besides, some authors (e.g. Wang and
Winters, 1991; Hamilton and Winters, 1992; Ekholm et al. 1996; Polak, 1996; Frnakel, 1997;
Soloaga and Winters, 2001; Cheng and Wall, 2005; Tumbarello, 2006 and Kondogan, 2007,
2008) used gravity model to evaluate RTAs of both developed and developing countries.
Although the wave of regionalization has entered into the territory of least developed countries,
there are by far fewer studies on regional integration of developing and LDC countries. Studies
by Hassan (2001), Sandberg et al. (2006) and Kien (2009) focus on regionalization of LDCs and
developing countries. However, the above studies primarily focus on the trade effects of regional
integration in country-pair setting and there has been found to be fewer country specific
studies. Hence, there is still ample scope to carry out country specific studies in the context of
emerging RTAs in the least developed and developing world.
Kandogan (2008) comprehensively studied the trade effect of regional blocs including six
economic cooperation blocs, five PTAs, nine FTAs, two CUs, two economic areas and the only
one full integration bloc. This study finds that both economic cooperation agreements and
preferential trade agreements promote trade among partners, with greater trade effects on the
latter. Considered together, free-trade agreements do not result in any significant incremental
effects over preferential trade agreements. While customs unions promote further trade,
economic areas generally dampen trade. Monetary unions also have significant and positive trade
effects, and the opposite is the case for full integration blocs.
Model Specification and Findings:
Gravity model has become the primary tool for estimating the effects of regional
integration on trade volumes (Cheng and Wall, 2005). It explains bilateral trade flows with
remarkable empirical success since 1960s. Rapid rise of regionalization in the later decades
provided further impetus for its wide application. Wei and Frankel (1995) assert that in order to
make inferences on whether trade between countries inside and outside trade blocs is high or
low, or has gone up or down, we have to control economic, geographic and cultural factors. A
useful framework for this purpose is the gravity model that establishes a norm for bilateral
trade volume as a function of these natural factors. Regarding the extensive use of gravity,
Kandogan (2008) affirmed that gravity equation has proven to be very successful in predicting
international trade flows, resulting in its widespread application in measuring the trade effects of
international blocs.
Since its inception, gravity model has been evolving. Although empirical literature
unanimously accepts that gravity model explains bilateral trade in line with the Newtonians
gravitational force and masses, significant variation exists in its setting for regression. Cross
section methodology with single year database was mainly adopted to analyze international trade
flows between countries and to analyze the impact of trade agreements in bilateral trade. Cross
section gravity usually takes the following form:
ij ij ij ij j j i i ij
u P A D N Y N Y X
6 5 4 3 2 1
0

= (1)
- 456 -

where X
ij
is the volume of export from country i to j, Y is GDP of i and j, N is population of i and
j, D
ij
is the distance between i and j, A
ij
is the adjacency dummy, P
ij
is the preference relationship
enhancing bilateral trade and u
ij
is the normally distributed error term.
However, cross section methodology has some inherent shortcomings and therefore many
authors prescribe panel data analysis (Matyas, 1997, 1998; Egger, 2000; Egger and Pfaffermayr,
2003; and Baltagi et al. 2003). According to these authors, panel data has some advantages over
the cross section such as larger sample size and evaluating changes in the nature of bloc over
time. Nevertheless, panel data analysis with OLS technique is biased. OLS estimates are biased
because of unobserved heterogeneity and in many contexts, correcting for unobserved
heterogeneity can dramatically alter estimates (Mcpherson and Trumbull, 2008). Hence, RE or
FE model is given superiority over OLS. The apparent advantage of RE over FE is that the
former technique accommodates time invariant variables in the regression like distance and
border while the latter technique does not. However, the key assumption of RE model is that
unobserved fixed effect is uncorrelated with explanatory variables. Mcpherson and Trumbull
(2008) noted that random-effects does not overcome the unobserved heterogeneity problem
when correlation does exist (as is almost always the case). In order to formally test the
hypothesis of no correlation between explanatory variables and the unobserved effect, the
Hausman test suggested by Hausman (1981) can be used. If the Hausman test rejects the
hypothesis of no correlation between explanatory variables and unobserved fixed effect as it
happens in most cases, FE is to be adopted. Authors like Matyas, (1997, 1998), Egger (2000) and
Cheng and Wall (2005) have suggested gravity application with FE. Since, FEM does not allow
time invariant regressors and therefore, a two step procedure needs to be followed (Cheng and
Wall, 2005). The first step is to regress all time varying regressors with country specific
individual effect while the second step is to run cross-section regression of country specific
individual effect against time invariant variables and dummies for trade agreements. Following
the two-step procedure outlined above, we estimate the following regression which is also
similar to Antonucci and Manzocchi (2006).
ijt ijt j ijt
X X + + =
(2a)
where
j
is the cross section specific effect; X represent a vector of time-varying

explanatory variables;
stand for the vector of coefficients to be estimated that are assumed to

be same for the whole sample and
ijt
is the error term.

j jm
m
m jk
k
k j j
v RTA RTA adj + + + + =

= =
3
1
3
1
0

(2b)
where
j
is country is specific individual effect; adjj is adjacency dummy for common

land border between Bangladesh and its trade partners.
jk
RTA
is for common mmembership of
importer and exporter in bloc k. In this case, if both the exproter and improter participate to the
RTA k, it takes the value 1 otherwise 0, where k = 1, 2, 3 and each corresponds to APTA,
BIMSTEC and SAPTA respectively.
jm
RTA
captures membership of importer country in each
bloc m where exporter country is not a member. In this case, the value 1 is given if the importer
country belongs to the RTA m otherwise 0 where m = 1, 2, 3 and each corresponds to ASEAN,
EU and NAFTA. Finally,
j
is the cross section error term. Members of the latter three RTAs (
- 457 -

jm
RTA
) share the bulk portion of Bangladeshs export, particularly EU and NAFTA and are
included to estimate whether such RTAs have a trade creation or trade diversion effect on
Bangladesh export.
We estimate equation 2(a) by taking four time varying explanatory variables and 2(b) by
taking one time-invariant explanatory variable, three RTA dummies in which both exporter and
importer countries participate and three other RTA dummies in which only the importer country
is a member. Time varying explanatory variables include exporter and importer GDP, exchange
rate between Bangladesh and its trade partners, and difference in per capita GDP. Originally,
GDP per capita of importer and exporter were included in the first step. However, these variables
are finally dropped because of multicollinearity between per capita GDP and total GDP. Among
the time-invariant explanatory variables, distance and common border are most commonly used
in gravity model although calculating distance between capital cities of two countries and then
including it in the regression as a proxy of transportation cost is not free from inherent
difficulties124. In addition to the difficulty in calculating distance identified by Cheng and Wall
(2005), we found multicollinearity between distance and trade blocs in which Bangladesh
participates. Since this study focuses on the trade effect of trade blocs, distance variable is
dropped in the second step regression. RTA dummies representing common membership of
exporter and importer include APTA, BIMSTEC and SAPTA while RTAs that are solely related
to importing countries are ASEAN, EU and NAFTA. In first step regression, the dependent
variable is the value of export of Bangladesh to country j while individual country specific effect
is the dependent variable in second step regressions. In first step, we apply FEGLS regression
with AR (1) to correct for first order serial correlation detected by DW test. In both steps,
correlation matrix and Kliens rule of thumb (Klein, 1962) are applied to detect
multicollinearity between explanatory variables.
GDP of exporter is the measure of supply of export while importers GDP is the measure
of demand for imports. Exports of a country increases with its own GDP and imports of a
country increases with its own GDP. Therefore, both importer and exporter GDP are expected to
have positive sign. Absolute difference in per capita GDP of importer and exporter is a measure
of H-O vs. Linder effect. The H-O-T states that courtiers with dissimilar levels of per capita
income will trade more than countries with similar levels. Consequently, absolute value of the
difference in per capita GDP will have a positive effect. On the contrary, Linder (1961)
postulates that countries with similar levels of per capita income will trade more and hence,
absolute value of the difference on the two variables will have a negative effect. Bilateral
exchange rates indicate the value of one unit of Bangladesh currency against one unit of partner
countrys currency. A rise in the bilateral exchange rate indicates depreciation of Bangladesh
currency while declining exchange rate indicates appreciation. Depreciation of exporter currency
increases export flows and therefore, it should have a positive sign. Distance between two
countries is a measure of transaction cost. Since cost increases with distance, it should have a
negative effect on bilateral trade flows. Countries sharing the border are likely to trade more as it
reduces transportation cost and hence adjacency dummy should have a positive sign. The dummy
variables capturing membership of importing and exporting countries to the same regional bloc
and bilateral free trade agreement are trade enhancing factors as such agreements reduce tariff
and non-tariff barriers among its partner countries. Thus, APTA, BA and SAPTA should have

124
see Cheng and Wall (2005) for details on difficulties in measuring distance.
- 458 -

positive sign. The sign of the RTA
jm
can be either positive or negative. A positive sign
demonstrates trade creation while negative sign indicates trade diversion.
Data and Findings
Export flows of Bangladesh during the period of 1996-2008 are analyzed against its 42
major partners125. Exports at current US dollar are obtained from IMFs Direction of Trade
Statistics (CD-ROM) 126 and are deflated by export value index (2000=100) taken from
UNCTAD Hand Book of Statistics (Online). Bilateral real exchange rates are calculated
following Montenegro and Soloaga (2006). Nominal exchange rates, CPI, real GDP and real
GDP per capita 127 were taken from WDI (CD-ROM) and IFS (CD-ROM). Finally, information
on trade agreements was taken from official website of the RTAs and from the website of the
Ministry of Commerce of Bangladesh. Regression results are presented in Table-6 and 7.
In Table-6, all the parameters have their expected signs. Real income of both importer
and exporter has significant positive impact on export flows of Bangladesh. The coefficient of
GDP implies that 1 percent growth in Bangladeshs GDP will give rise to 1.24 percent and 1
percent growth in partner countries GDP will give rise to 0.97 percent growth in exports. The
higher elasticity of exports to domestic GDP indicates that the structure of the economy tends to
be more export oriented. In other words, the governments liberalization policy for promoting
export has positive effect. The low export elasticity to the importers income signifies that
exports of Bangladesh are labor-intensive which is usual given the dominance of labor-intensive
industries in Bangladesh. It also suggests that the rapid expansion of Bangladesh exports is
primarily attributable to the rising export capacity and competitiveness of its products, rather
than to income increase in its trading partners. Hence, priority should be given for diversifying
export basket, enhancing export capacity and reducing cost.

Table-6: Panel regression result
Explanatory variables Coefficient
GDP
i
1.24**
(0.27)
GDP
j
0.97**
(0.29)
DGDPPC
ij
0.66*
(0.27)
EX
ij
0.55**
(0.12)
AR(1) 0.64**
(0.04)

R-squared 0.95
F-statistic 791

125
Sample countries include Australia, Austria, Belgium, Canada, China, Denmark, Egypt, Finland, France, Greece, Hong Kong,
India, Indonesia, Iran, Ireland, Italy, J apan, South Korea, Malaysia, Mexico, Myanmar, Nepal, Netherlands, Norway, Pakistan,
Poland, Portugal, Russia, Saudi Arabia, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Syria, Sudan, Thailand, Turkey, UAE,
UK and USA.
126
Export to Belgium is obtained from Annual Export Statistics, Export Promotion Bureau, Dhaka, Bangladesh
127
GDP, GDP per capita, and GDP deflator of UAE are obtained from National Accounts Main Aggregates Database of United Nations.
(http://unstats.un.org).
- 459 -

Durbin-Watson statistic 2.2
Note: i stands for exporter country and j for importer country. All the four main variables are in real terms and in natural
logarithms. White cross-section standard errors are in parenthesis.
*indicates significance at 2 percent level
**indicates significance at1 percent level

High concentration of exports to selected industrialized countries gives the intuition that
export of Bangladesh falls within inter-industry type in which case importing countries hardly
compete against Bangladesh in the world market with same type of export baskets. A highly
significant positive coefficient of difference in per capita GDP justifies the above intuition and
therefore, it can be argued that export patterns of Bangladesh fits with the H-O trade theory. It
means, export of Bangladesh increases with the increase in difference (absolute difference)
between bilateral GDP per capita. Thus, difference in comparative advantage is a key
determinant of Bangladesh export. This finding is consistent with the descriptive analysis of
export flows presented in section-3. Depreciation of Bangladesh currency has significant positive
impact on export flows and therefore, any over-valuation of local currency should be promptly
handled.
Table -7 shows the results of cross-section regression. In line with other empirical
literature, border has positive sign but has no significant effect on export flows implying that
common border does not facilitate more export although transportation cost is usually less
between border sharing countries. In the second regression, border is dropped because of
multicollinearity problem between border and trade blocs. All the three trade blocs in which
Bangladesh participates have negative sign which is contrary to the expectation but is consistent
with literature to some extent. In particular, APTA and SAPTA have significant negative impact
on export flows of Bangladesh. Although not significant, BIMSTEC also has negative sign.
Coefficient on SAPTA dummy (regression-1) shows that Bangladesh has 95% less export [{exp
(-2.97) -1}*100] to SAPTA members than export to non-members of SAPTA. This shows the
failure of regional integration efforts in South Asia after more than two decades of formation of
SAARC. Thus, conversion of SAARC into SAARC preferential trade agreement in 1996 and
formation of SAARC free trade area in 2005 yet to have any positive role in enhancing exports
of Bangladesh in regional markets. Other empirical works on SAPTA shows somewhat mixed
results such as insignificantly positive (Kandogan, 2008; Tumbarello, 2006); insignificantly
negative (Rahman, 2003); and significantly negative (Hassan, 1991). The positive sign in
literature shows the overall performance of SAPTA. Thus, the present result can be interpreted as
a sign of unequal share in intra-regional trade in which case one member gains at the expense of
others.

Table-7: Cross section regression (step-2)
Regression Regression Regression Regression Regression
(1) (2) (3) (4) (5)
Intercept 18.10*** 17.99*** 18.21*** 18.07*** 18.16***
(0.60) (0.64) (1.10) (0.70) (0.65)
BORDER -0.55 -0.85 -0.27 -0.26 -0.44
(1.30) (1.57) (1.10) (1.75) (1.58)
SAPTA -2.97*** -2.53** -3.05***
(0.96) (0.98) (1.07)
APTA -2.13** -1.23 -1.99**
(0.82) (0.85) (0.82)
BIMSTEC -0.75
(1.11)
- 460 -

EU 1.51** 1.63** 1.41* 1.55* 1.46**
(0.73) (0.76) (0.75) (0.81) (0.77)
NAFTA 0.17 0.28 0.06 0.20 0.12
(0.85) (0.88) (0.88) (0.93) (0.89)
ASEAN -0.24
(1.65)

R
2
0.30 0.24 0.31 0.25 0.30
DW 1.74 1.80 1.81 1.80 1.75
N 42 42 42 42 42
Notes: White standard errors are in parenthesis.
*indicates significance at 10 percent level
**indicates significance at 5 percent level
***indicates significance at 1 percent level
The largest and oldest RTA to which Bangladesh participates is the APTA. This RTA has
been found to have significant negative effect and is consistent with literature (Kandogan, 2008).
The estimated coefficients of APTA dummy (regression-2) shows that export of Bangladesh to
APTA member countries is 88 percent less [{exp (-2.13) -1}*100] than export to non-members.
Significant negative impact of APTA is disappointing for Bangladesh because this RTA involves
India and China who are not only the two most populous countries in the world but also the two
top countries for imports in Bangladesh. Although APTA members give special tariff margin on
some selected export products, exportables of Bangladesh has little access to these markets.
When APTA and SAPTA dummies are introduced together (regression-3), coefficient on APTA
becomes insignificant although the sign remains same. This suggests that it is relatively difficult
to disentangle the effect of one trade bloc from another due to overlapping membership such as
five of the seven BIMSTEC members belong to SAPTA while two SAPTA members also belong
to APTA.
EU dummy finds significant trade creating effect in all regressions and justifies its open
regionalism approach. This is consistent with high volume of export flows of Bangladesh to EU
member countries. Estimated coefficient of EU suggests that Bangladesh usually has about 350
percent [{exp (1.51) -1}*100] more export to EU member countries. Thus, expansion of EU is
likely to have increasing effect on Bangladesh export. Although not significant, NAFTA also has
trade creating effect. This finding indicates that Bangladesh has chance to retain existing market
share in EU and NAFTA countries if it can stay in the race of competition with other Asian,
African and Caribbean countries. However, the result on ASEAN dummy shows that there is no
hope of increasing export to the ASEAN countries. One reason for this might be the similarity of
comparative advantage between Bangladesh and many of the ASEAN countries and therefore
they compete in international markets in the same industry segment.
Conclusion
Export of Bangladesh has shifted form agriculture to manufacturing sector. However,
Bangladesh has been historically dependent on few export items and on few export. This study
finds that Bangladesh has not gained any benefit by participating in the regional and preferential
trade agreements. In fact, growth of export to bloc partner countries is substantially lower than
overall growth of Bangladesh export. Although South Asian countries are cooperating since
1985 under SAARC and efforts have been made in the subsequent years to streamline free trade
in the region, there is still no balanced development in intra-regional trade. In particular,
common membership of Bangladesh and India in three existing trade blocs (APTA, BIMSTEC
and SAPTA) along with common land border has not enabled Bangladesh to penetrate Indian
- 461 -

market although the counterpart has done that to some extent. The same is true in case of trade
between Bangladesh and China even though China offers preferential margin to Bangladesh
under APTA. Average rate of export to China and India as a percent of total export of
Bangladesh during last five years was 0.6 and 1.6 percent respectively while average rate of
imports from China and India as a percent of total imports of Bangladesh was 14 and 14.2
percent respectively during the same period. As a consequence of higher import growth than
export, trade deficit of Bangladesh with China and India has reached to 3417 and 3179 million
($) in 2008. Low volume of export to the trade bloc partners brings to the light that special and
preferential margin offered to Bangladesh under different trade agreements seems to have no
significant practical implications. In fact, inter-industry export pattern of Bangladesh has little
chance to penetrate export markets in the region. Thus, there is a need to carry out research to
investigate the real benefits of special and preferential margin offered to Bangladesh under
different trade blocs and to determine the products category in which Bangladesh have
comparative advantage over other members. Most of the SAPTA members have common
membership to multiple trade blocs which might act as impediment towards regional free trade
because of inconsistency in blocs provisions. Besides, Bangladesh is now actively considering
to sign bilateral FTA with some of the SAPTA members which can be simply stated as old wine
in a new bottle. Given the performance scenario of existing trade agreements, it is hard to expect
that the proposed bilateral FTA will produce any significant benefits for Bangladesh in the
future. Recent research also finds that free-trade agreements do not result in any significant
incremental effects over preferential trade agreements (Kandogan, 2008). Besides, bilateral FTA
may undermine wider cooperation in the region and hinder successful implementation of blocs
provisions. Instead of new bilateral agreement, efforts should be made to make regional
agreements more effective and to gain market access for those export commodities in which
Bangladesh has competitive advantage.
High concentration of Bangladesh export on few markets and few products can be
severely affected by global events and changes like financial crisis, developments of trade
relations in other regions and signing of new trade agreement between advanced and developing
or least developed countries. Adverse effect of above mentioned events has already been realized
by decline in export growth rate for the last two consecutive years
128
. In addition to global
events, internal crises like acute shortage of power, inefficiency of ports, escalating violence in
the garment sector and absence of strong backward linkage industries might depress
competitiveness of domestic firms. Therefore, Bangladesh should take stringent and pragmatic
industrialization strategies to increase export capacity and to diversify export basket and export
market. Agro-based industrialization can be the key for export diversification. Strategic plan
should be framed for increasing power supply and upgrading port efficiency. The present
crawling industrial relations must be improved by implementing labor laws. At the same time,
Bangladesh should look for trade agreement with new and important trade partners outside the
region.

128
Growth rate of aggregate export of Bangladesh declined from 32.9 percent in 2005-06 to 18.9 percent in 2006-07 and to 15.1 percent in
2007-08.
- 462 -

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- 465 -

Str ategi es and Per for mance of New Mexi can
Emer gi ng Multi nati onal Enter pr i ses
Jos G. Vargas-Hernndez
Abstract
This paper is aimed to analyze the rise of New Mexican emerging multinational
enterprises (MexEMNEs) into the global market. There is a growing interest in the study of these
emerging multinationals among scholars. Several theoretical perspectives are reviewed which
can give an explanation of the emergence of Mexican multinationals and support their expansion
in overseas markets. Then, it is analyzed the strategies these multinationals implement and their
performance and in doing so, several profiles of MexEMNEs are described and examined. It is
intended to set up scenarios for future development. Finally, it is concluded that the survivor
Mexican firms of this process of creative destruction have transformed into capable and
innovative MNEs in order to look and move ahead and take advantage of the challenging new
opportunities.

Keywords: Mexican emerging multinational enterprises, performance, strategies.

Introduction
The term multinational has meant the expansion of American firms around the globe.
During the 1970s and 1980s Third World multinationals were identified and characterized by a
number of authors. However, their foundations have changed over time under the competitive
advantage strategy of the global economy era. Profound economic changes in emerging
economies during the 1990s resulted in a more competitive environment that forced large firms
to develop new strategies, build new capabilities and move into more global competitive
markets. Newer emerging multinationals enterprises (MNEs) from emerging economies are in
the process of transforming the global foreign direct investment (FDI).
The emergence of rapidly developing economies is characterized by a wave of economic
growth and the rise of local enterprises to become global challengers (BCG, 2009) that are
globalizing their business and challenging the traditional American model of modern
multinational enterprise (MNE). The emergence of this global challengers is a trend, although
this new emerging multinationals are hardly world leaders in their industry or market niches.
Mexico had been host economy for multinationals from developed countries. Foreign
policy entered Mxico when this country changed trade policy from an economic model of
import substitution to an export oriented strategy model. Trade liberalization policy has changed
the behavior of large Mexican firms providing incentives to internationalize their activities. The
Mexican emerging multinational enterprises (MexEMNEs) are involved in broader processes of
economic globalization of Mexico post-NAFTA (North American Free Trade Agreement). After
15 years of the implementation of NAFTA, Mexico has become the 12
th
largest economy of the
world and one of the leading world exporters in manufacturing goods (Banco de Mxico, 2006).
In the late 1990s, large Mexican firms that survived market reform and structural
adjustment policies started to invest overseas. Since then, new multinationals are rising in
Mexico as well as other emerging economies are changing the corporate world. The analysis of
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Suarez and Oliva (2002) shows that emerging multinationals are successful survivors from the
complex competitive environments of structural economic reforms in the stages of turnaround
and catch-up, expansion, acquisition of new capabilities and quest for industry leadership.
Although this New Mexican emerging multinational enterprises (MexEMNs) share
common structural features with emerging multinationals from other countries, they have the
imprinting of specific national experiences. Mexican new multinationals have irrupted on a
global scale multiplying investments beyond the borders to lead their business sectors. Mexican
emerging multinational enterprises (MexEMNs) rank among the most global and largest firms.
Este trabajo tiene por objetivo This paper is aimed to analyze the rise of New Mexican emerging
multinational enterprises (MexEMNEs) into the global market.
Theoretical perspectives
Various social sciences have contributed to study multinational enterprises in emerging
economies. Conventional theories of economics and modern theories of multinational enterprises
have not predicted the emergence of large new multinationals from emerging economies (Wells,
2007). Research on new emerging multinational enterprises began in the eighties when they still
represented a minor threat to the traditional multinationals, which simply ignore the rise of these
new global business corporations.
The multinationals enterprises (MNEs) originating from emerging economies have been
referred as Third-world multinationals by Wells (1983), latecomer firms by Mathews (2002),
unconventional multinationals by Li (2003), Challengers by BCG (2008), emerging
multinationals by Accenture (2008), new multinationals by Guilln and Garca-Canal (2009)
and emerging market multinational enterprises (EM MNEs) by Luo and Rui (2009). However,
the semantic of these terms are confusing the debate although may be other that may describe
better the phenomena.
Emerging market multinational enterprises have been researched from several theoretical
approaches:
The evolutionary process perspective is a behavioral approach that focuses on roots,
causes and features of a gradual internationalization of firms. The Uppsala model
considers that organizations develop incrementally learning processes which affect
the investment decision making behavior. The Uppsala model is one of the theories
describing the internationalization process of firms, stating that firms first choose to
enter nearby markets with low market commitment. This model connects psychic
distance with of density of ethnic ties which result in cultural and institutional
proximity between two countries which provide market opportunities to cater demand
of Mexican products (Vasquez-Parraga and Felix, 2004).
o In this sense, Mexican emerging multinationals enterprises (MexMNEs) have a
strong presence not only in Latin American, Ibero American markets, including
Spain, but also in Hispanic markets in United States and wherever there are
Mexican migrants or population with Mexican background. However, it must be
recognized that determinism is one limitation of the Uppsala model.
The springboard approach sustains that global expansion of MNEs is a response to
their moves on global markets (Luo and Tung, 2007; Mathews, 2002).
Government steward logic approach postulates that MNEs receive political mandate
to invest abroad to acquire the needed scarce natural resources (Deng, 2004; World
Investment Report (WIR), 2006). This political mandate may be more logical for
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state-owned enterprises. State ownership enterprises have enjoyed a protected
domestic market and have received political commitment to invest overseas and have
turned into the new emerging multinationals.
New emerging multinational enterprises as a large monopolistic firms tend to
diversify functions and locations to have more access to scarce resources following a
strategy of international exploitation. Large firms tend to undertake international
expansion expecting that diversification can avoid the costs of inefficient capital
markets (Khanna and Rivkin, 2001). Also these emerging multinational enterprises
may follow a strategy of exploration to capitalize on existing or creating and
developing resources and technological capabilities, which leads to invest more in
home-countries (Goldstein, 2007, Hoskisson, et al., 2000).
Strategic management theory focusing on performance differences of emerging
multinationals considers their competitive advantages in a global context in order to
develop new capabilities and strategies. Bartlet and Ghoshal (2000) concluded that
emerging multinationals overcame the same core challenges to compete in a global
market by adopting strategies to become the late mover as a source of competitive
advantage and developing a cross-border learning culture. Strategic intent approach
considers that outward foreign direct investments (OFDI) by MNEs are aimed toward
the acquisition of strategic assets (Child and Rodriguez, 2005; Rui and Yip, 2008).
One characteristic of trades oriented foreign direct investment is that it is an
investing countrys comparatively disadvantaged industry that invests overseas, to
achieve a stronger comparative advantage trough providing appropriate capital goods
and technologyto its production subsidiary in the foreign country (Goldstein,
2007: 75). In fact, foreign direct investment is one mean of emerging multinationals
to increase market power perpetuating the monopolistic role of multinationals in
foreign markets.
Institutional escapism argue that MNEs try to avoid less developed institutional
arrangements and environments by going global (Cuervo-Cazurra and Gengc, 2008;
Witt and Lewin, 2007; Yamakawa, Peng and Deeds, 2008). Firms may have different
institutional arrangements and environments, however those firms that have domestic
constrained institutional environments may be more willing to search for better
opportunities abroad.
The ambidexterity perspective argues that MNEs are ambidextrous organizations
pursuing simultaneous fulfillment of two disparate, and sometimes seemingly
conflicting objectives (Luo and Rui, 2009: 50). This perspective suggests that MNEs
have four dimensions of ambidexterity: Co-orientation, co-competence, co-opetition
and co-evolution.
Resource-based view and dynamic capabilities approach sustains that the expansion
of emerging multinationals is the result of the growth of the firm. According to the
theory of firm-level growth (Penrose, 1955), management of emerging multinationals
coordinate bundles of resources without any limits to achieve scope economies.
Multinationals arise as efficient instruments to transfer knowledge across borders
(Kogut and Zander, 1993). Firms posses different capabilities.
The eclectic or OLI paradigm based on transaction cost economics emphasizes
categories of ownership or firm specific advantages and core competences,
localization or country specific advantages and internalization or structural
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governance advantages. The eclectic paradigm conceptualizes decisions to invest
abroad in terms of market, product and industry characteristics (Godstein, 2007: 74).
Outward foreign direct investment is driven by differences in rates of return and
capital abundance (Goldstein, 2007: 74).
Expansion of New Mexican emerging multinationals enterprises
New multinationals from emerging countries have either given opportunities or posed a
threat to conventional multinationals from advanced economies. The entries and expansion of
these new Mexican emerging multinational enterprises (MexEMNs) to the international
markets have followed different patterns from that of the American Model of the multinational
enterprise (Guilln and Garca Canal, 2009: 23) which dominated the international economy
during the Post World War II period, characterized by foreign direct investment (FDI) aimed
at exploiting firm-specific capabilities developed at home and a gradual country-by-country
approach of internationalization.
The new multinationals from the emerging economies have followed different pattern
of global expansion. New multinationals from emerging economies invested overseas in wholly
owned subsidiaries, joint ventures or branches (Wells, 1983). In order to invest abroad, emerging
multinationals must have some firm-specific advantages over competitors such as low-cost,
economies of scale, product differentiation, technological know-how and others. However, a
recent trend of Latin American multinationals is described by Goldstein (2007:7) stating that
they have lost leadership that was theirs for most of the 20
th
Century.
The entry to global markets, expansion and proliferation of the new multinational
enterprises (MNs) originating in emerging economies, such as the case of Brazil, China, India
and Mxico, during the last two decades, have surprised policymakers and analysts. The Boston
Consulting Group (2006) identified 6 Mexican MNEs out of top 100 emerging multinationals.
The 2009 Boston Consulting Group (BCG) 100 new global challengers are based on 14 rapidly
development economies (RDEs), including Mexico.
Characterization of New Mexican multinational enterprises (MexMNEs)
New Mexican emerging multinationals (MexMNEs) operates within a range of economic
sectors although they are more concentrated in construction, telecommunications, food and
beverages and some others. Large economic groups and foreign multinationals control industries
in Mxico and there are evidences that these groups will remain playing an important role,
although there is evidence also that the stock market is growing slowly. According to the
analysis of Grosse (2007b), Mexican large economic groups are 100 percent family control,
although the structure of most emerging Mexican MNEs is one of the open societies publicly
listed and no longer directly or indirectly controlled by the state.
The industrial sector has changed in Mxico during the last 30 years in Mexico. A close
analysis to changes in the structure of industry from 1970 to 1992, measured by the structural
change index, shows that engineering intensive industries has grown from 12.0 to 15.6 during
this period and automobiles from 8.4 to 18.6, while natural resource intensive industries and
resources processing industries has dropped from 43.2 down to 40.8 and labor intensive
industries from 36.4 to 25 (Katz, 2007). The automobile industry in Mexico has expanded
strongly.
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According to the KOF (2010) Index of Globalization, Mexico is neither one of the
Worlds 15 most globalized countries nor one of the Worlds least globalized countries. Despite
the structural reform and major economic liberalization efforts introduced in the last three
decades, Mexico is consistently lagging behind in the globalization process. 2010 KOF Index of
Globalization ranks Mexico in 71, and 81 in economic globalization, among 208 countries based
on data from the year 2007.
However, Mexican new MNES are taking advantage of global reach and scale resulting
from economic globalization processes, technological changes and increasing market
competitiveness, by strategizing to succeed in a complex and uncertain international
environment. The Mexican emerging MNEs are taking up the strategy of globalization further
beyond the export phase of economic development. Mexican New MNEs are taking advantage of
free trade agreements to search for partners to make strategic alliances with international
businesses to get into foreign markets. Table 1 shows destinations of Mexican foreign direct
investment in Latin America in 2005.
New Mexican emerging multinational enterprises (MexEMNs) have been investing in
greenfield and acquiring local companies in American, African, Asian and European markets.
Before the 2000s the overseas investments by Mexican companies was very limited and
practically nonexistent. Since 2000, Mexican firms have conducted a massive global expansion
based on outbound mergers and acquisitions mostly through Latin-American, which have given
the New Mexican emerging multinationals (MexEMNs) several positions in the global market.

Table 1. Countrys destination of Mexican foreign direct investment by cumulative inflows
Destination countries Cumulative FDI inflows
Argentina 4
Costa Rica 8

Source: Based on estimations of Goldstein (2007)
Since 2000, there is a pattern of increasing outward foreign direct investment of Mexican
MNEs. In 2004, the Mexican direct investment abroad was 17. 5 billion dollars and the tendency
are to increase as Mexican companies are becoming more competitive (Banco de Mxico, 2006).
In 2005 reached $6.2 billion. More details are provided in table 2.
The Boston Consulting Group (BCG) has identified several patterns that are being
followed by the emerging Mexican MNEs in their strategies of internationalization and
globalization processes of operations: To become global brands, to turn technological
capabilities into global innovation, to acquire and monetize natural resources and commodities
and to implement new business models to multiple markets, such as the case of CEMEX.

Table2- Foreign direct investment (FDI) outflows and outward foreign direct investment
stocks from Mexico (US$ m.)
Year Foreign direct investment (FDI)
outflows from Mexico (US$ m.)
Outward foreign direct investment
stocks from Mexico (US$ m.)
1989 840
1995 2, 572
1992-1998 549
1999 1, 475
2000 984 7, 540
2001 4, 404 11, 944
2002 930 12, 067
2003 1, 784 13, 645
2004 2, 240 15, 885
2005 6, 200
Sources: Based on estimations of Goldstein (2007) with UNCTAD data at www.worldinvestmentreport.com and Banco de Mxico (2006)
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Mexican new MNEs are heterogeneous, from holdings of businesses such as Carso Grupo
to single industry such as CEMEX (Cementos Mexicanos). The diverse patterns of
transformation from domestic to global businesses have been already studied for the most
successful cases: Telecommunications is linked to privatization, engineering services to
professional development, financial and banking sector to privation and media and entertainment
to government restrictions (Lpez Villafane and Ruiz Durn, 2006).
Mexican MNEs have developed a set of technological core competences that enable them
to compete in the international markets. Mexican MNEs in construction, chemicals,
telecommunications, etc., face lower hurdles to adopt technology, have developed technological
capabilities and become competitive in the global market in medium and high technology
manufacturing sectors. High technology business has been developing a culture for
transnational operations (Lpez Villafane and Ruiz Durn, 2006) such as the case of the
software industry. In this sense, the emerging Mexican MNEs are seeking proactively the best
talent available.
The development of ethnic brands is considered a pattern of expansion (Guilln and
Garca-Canal, 2009). Mexican MNEs invest in ethnic markets to cater the consumers that belong
to Hispanic and more specifically the Mexican communities. However, although the ethnic,
language and cultural heritage is considered an advantage, however had been reported by
Mexican MNEs as one of the main barriers to enter foreign markets (Tavares, 2007). As
Mexican MNEs scramble to establish their foothold in overseas markets, the cultural limitations
and impediments are more evident on operational and staffing practices. Therefore, Mexican
MNEs abroad are challenged by local economic and cultural practice.
Strategies implemented by Mexican emerging multinational enterprises
The pragmatic neoliberal economic, fiscal and monetary policies implemented in Mxico
in the last 25 years have pervaded the corporate governance and managerial practices. Also, the
pragmatism of entrepreneurs has provided the moorings for corporate strategies of the emerging
Mexican MNEs (Santiso, 2006; Feenstra and Hamilton, 2006).
A pattern of expansion of Mexican MNEs is that one centered on firms producing goods
based on in raw materials industries and the availability of natural resources, such as cement.
Grosse and Thomas (2007) interviewed 15 Mexican firms in 2004-05 known to have
pursued high levels of business diversification, and found as the key competitive advantages in
large Mexican MNEs for overseas competition. Table 1 gives more details of sources of
competitive advantages in large Mexican multinational enterprises.

Table 3: Sources of competitive advantages in large Mexican MNEs
Competitive advantage Description Examples Sources
Low-cost production Based on small-scale
manufacturing or low wages
Gigante, FEMSA Grosse and Thomas
2007; Wells, 1983; Peres,
1998.
Superior product or service
quality
Better phone service, higher-
quality shows; superior parts
Televisa, TV Azteca, DESC Grosse and Thomas
2007.
Ties to existing clients Suppliers to MNEs DESC Grosse and Thomas
2007; Wells, 1983.
Ethnic connections Televisa, Gigante Grosse and Thomas
2007; Lall, 1984; Thomas &
Grosse, 2005.
Technology CEMEX Grosse and Thomas
2007; Lall, 1984; Thomas &
Grosse, 2005.
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Membership in economic
group
Ability to realize economies of
scope
Multivision; Carso; Salinas Grosse and Thomas
2007; Khanna & Palepu, 2000.
Source: Based on Grosse and Thomas (2007)
The forms analyzed by Grosse and Thomas (2007) developed sprawling distribution
channels involving a massive pool of resources which contributed to the firms to expand abroad.
The key advantages in overseas competition for Mexican firms is the low-cost production
based on small-scale manufacturing or low wages (Wells, 1983; Thomas and Grosse, 2005;
Peres, 1998) and offshore production for industrial-country clients (Wells, 1983), ties to existing
clients such as suppliers to MNS and ethnic connections (Lall, 1984), technology (Lall, 1984;
Grosse and Thomas, 2007 ). Grosse (2007a) found the strengths that enable MNEs to compete in
domestic and foreign markets are high-quality products and services, low-cost production,
control over distribution channels and good relationships with government and other institutions.
Grosse (2007b) also report the key competitive strengths of Mexican economic groups,
production of high quality products and /or services in the industries of auto parts, publishing,
construction, TV and telephone; production of low costs products in auto parts, beverages, books
and retail stores; relationships with existing clients, in industries of auto parts and beverages;
superior distribution network in airline, beverages, conglomerate, publishing, retail stores,
telephone; superior service in airline, retail stores and telephone and diversification in TV and
conglomerate.
The strategies implemented by the New Mexican emerging MNEs range from
restructuring, mergers and acquisitions to attraction of foreign investment, although vertically
integrated business into multinationals in an open economies is becoming an obsolete strategy.
Mexican emerging multinationals use mergers and acquisitions to expand their overseas projects
of innovation and manufacturing bases to build global recognition, even if they lack competitive
advantages such as portfolio of intellectual property rights, economies of scale, market power,
etc. Since 2006 there is a large wave of huge acquisitions from Mexican emerging MNEs
confirming that the strategy of grow through mergers and acquisitions is becoming stronger
among them (See table 4 below).

Table 4: Selected Mexican emerging multinational enterprises acquisitions in the OECD
market
Mexican multinational enterprise Target OECD company Description
CEMEX RMC (UK) Completed the US$4.1 bn. Acquisition in
February 2005.
Gruma Corporation Nuoba de Francheschi and Figli (Italy) The worlds largest tortilla producer
bought 51% of the US$27 m. maize
manufacturer in July 2004, with a view to
integrate it with its UK factory.
Gruma Corporation Ovis Bosque (Netherlands) Took over Europes biggest flour tortilla
manufacturer. Sales Euros20m, in 2004.
Kosa Hoechst Celaneses polyester fiber plants
(Germany)
Bought when the German company
decided to move to higher-value
synthetics. KoSa a U.S.-Mexican venture
managed by Mexicans, is now the worlds
leading polyester maker.

Source: Based on Goldstein (2007)
In fact, the results of the survey conducted by United Nations Economic Commission for
Latin America and the Caribbean (ECLAC) shows (ECLAC, 2006) that risk diversification is
one of the major benefits of outward foreign direct investment (OFDI) more than to be a major
motivation for internationalization (Tavares, 2007), although the largest Mexican MNE CEMEX
was not considered by the survey. However, because Mexican MNEs are averse to risk
- 472 -

investments overseas, they look for safer portfolio allocation of opportunities in the US market
than in Chinese market for example. CEMEX has had risk management as a major motivation
for internationalization of its operations.
The analysis of fifteen competitive Mexican largest economic groups conducted by
Grosse and Thomas (2007) found that their strategies focused on traditional competitive
advantages in production and distribution efficiency and high-quality and lower-costs relative to
home and foreign competitors, were more important than diversification. Regarding the effects
of the Tequila crisis of 1994-95 on MNEs found difference between those having greater
overseas diversification being more successful than the more domestically oriented firms. Risk
diversification has been a major motivation for internationalization of Mexican multinationals.
More diversified firms achieved better financial performance. Domestic capitals that survived
economic crisis learned to compete in the global market.
According to Grosse and Thomas (2007:255) Overall, the large Mexican groups appear
to be able to compete overseas not on the basis of technological superiority or economies of scale
but due to their ability to build distribution channels in Latin America, to follow existing
customers to other countries, and to sell high-quality products and services, often to the Hispanic
market, in the United States or in Latin America. This statement is truth for the geographical
area of the Americas but what about the Mexican MNEs doing business in Europe, Asia, Africa
and Oceania?
Performance of Mexican emerging multinational enterprises competitiveness
It is quite difficult to measure the performance and gauge the real impact of Mexican
emerging multinationals. Lack of opportunities and incentives for large Mexican companies in
the domestic market have pushed them going abroad to widen their business and benefit from
global markets. Deregulation of the market in Mexico occurred since the last years of the 80s but
the turning point was the entry to the North American Free Trade Agreement (NAFTA) in
January 1
st
, 1994, which had an impact on the more-diversified Mexican firms.
Between 1994 and 2000, the information technology (IT) manufacturing boomed, the
electronics sector and the value of exports grew by 500 percent (Zarsky and Gallagher, 2007).
However, the flagship MNEs shut down most operations during the industry shakeout of 2001-
03. The researchers found two factors as being the main cause of the failure: A shift in global
strategy towards outsourcing, and the lack of an active policy to support foreign investments.
According to the analysis of Grosse and Thomas (2007:262) the more-international
firms had superior performance than the more domestic group, which is leading to the
conclusion that greater internationalization correlates with higher performance.
Mexican MNEs have emerged as successful global companies in areas with intermediate
levels of technological innovation, after overcame the internal conditions and difficulties of two
financial crises. However, according to Grosse and Thomas (2007:257) the internationalization
of Mexican companies appears to be moderately positive in defusing the impact of the tequila
crisis in Mxico. Mexican companies that were doing business abroad were more successful in
surviving the tequila crisis because exports were more internationally competitive.
There is a rising group of large Mexican companies that have been increasing global
competitiveness pursued through diverse proactive business strategies to build up a position in
the global market and becoming multinationals (Garrido, 2006), although the statistical analysis
of Grosse and Thomas (2007:257) give a limited amount of insight into the strategies of large
Mexican groups in the turbulent 1990s. A puzzling phenomenon is the fact that there were more
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Mexican emerging multinational enterprises (MexEMEs) in the first years of the 1990s, then
diminished the last years and rose again in the early years of 2000s.
From 1999 to 2002, CEMEX was the only one Latin American nonfinancial MNEs
ranked by foreign assets that made it to the UNCTADs list of the top 100. However, Goldstein
(2007) has reported among the top 50 emerging multinationals ranked by 2003 foreign assets,
CEMEX in 5
th
place, America Movil in 6
th
and Bimbo in 47 while measured by 2002 foreign
assets, Gruma in 40
th
place, Savia 43th, Grupo Imsa 44
th
, and Cintra 49
th
. Among the top
emerging multinationals Mexico had 3 listed in 1993, 7 in 2002 but only 3 in 2003 (Goldstein,
2007). Sklair and Robbins (2002) identified a downward trend in multinationals of three Latin
American emerging economies, Argentina, Brazil and Mxico, listed in Fortune top 500:
Multinationals from these three countries represented 33 percent in 1965 and only 16 percent in
2001.
In 2005, among the Worlds 50 largest MNEs from emerging economies, ranked by
foreign assets, CEMEX, an industry in construction materials was number 5, Amrica Mvil in
Telecommunications, was number 6. Grupo Bimbo, S.A. de C.V. in the food industry was 46 and
Gruma in the industry of food and beverages was number 48 (UNCTAD, 2005: 270-71). In the
2006 UNCTADs list of nonfinancial transnational corporations of developing countries ranked
by foreign assets, the Mexican new MNEs listed are CEMEX, Telmex and America Movil and
Grupo Bimbo.
The top 2000 global enterprises recorded by Forbes (2005) lists about 20 Mexican
multinationals. Also Fortune 500 (Fortune, 2006, July 24) lists 5 Mexican global companies out
of 500 global companies. Mexican new multinationals have multiplied mergers and acquisitions
outside Mexico in the last ten years. The acquisitions in Latin America by Mexican companies
from 2000-2006, excluding internal market was 10, 217 US$ million (BBV Corporate Finance,
2006) the highest of Latin American countries. Mexican emerging multinational enterprises
(MexMNEs) are among the largest number of employees in United States. Goldstein (2007)
analyses the impact on employment at emerging Mexican multinationals affiliates in selected
OECD countries using different data bases for different years (See below table 5).

Table 5. Employment at emerging Mexican multinationals affiliates in selected OECD
countries
Selected OECD Country Employment at emerging Mexican
multinationals affiliates
Database
USA 49 100 Preliminary results for the 2002
benchmark survey. Foreign direct
investments in the United States:
Operations of U.S. affiliates of foreign
companies.
Japan 215 Geishiskey Kigyo (2003). Year-end 2002
figures.
Germany 400 Year-end 2003 figures.
France 200 Source: Insee (Lifi survey) - Diane. Year-
end 2002 figures: Agriculture and finance
excluded.
Italy 3 Mariotti and Mutinelli (2005)
Sweden 0 ITPS (2005)
Netherlands 0 Statistics Netherlands Analysis of Inwar
FATS Information (Business Register,
2005, and Data Collection, 2003, on
Enterprise Group financial statistics.
Austria 0 Figures for 2001, joint Oesterrichische
Nationalbank and Statistics Austria pilot
study of Inwar FATS.
Total 47 918
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Source: Own design based on Goldstein (2007: 23)
In 2005, Mexico is the second just after Brazil in outward foreign direct investment
(Santiso, 2007). Mexican companies included in the major 100 Latin American companies
(Amrica Economa, 2006) sold 46.7 as percentage of total sales were made in foreign markets,
mostly in United States
The main outward investors from Mexico are Grupo Mexico in mining, la Moderna-
Seminis in agribusiness, Techint (formely Hylsamex) in steel and other metals and metals
products, Cemex in cement, Grupo Vitro in Glass, Grupo Maseca and Grupo Bimbo in Food
Products, Femsa and Jugos del Valle in beverages, Dina and san Luis Rassini in Auto Parts and
Vehicles, Mabe in domestic appliances and parts, electronics, America Movil in
telecommunications, ICA in engineering and construction, Elektra in retail, Televisa in
television, CIE in entertainment and Grupo Posadas in hotels. (Tavares, 2007).
The 2009 BCG global challengers lists seven Mexican companies among them Amrica
Mvil, Cemex, Femsa, Gruma, Grupo Bimbo, Mexichem and Nemak. Mexichem is new to the
2009 BCG 100.
Analytical description of the New Mexican emerging MNEs
Alfa is a conglomerate operating in a wide range of industrial sectors although in the last
years the strategy is aimed to strengthening only the most profitable business, and thus selling
Hylsamex to Techint in 2005. Hylsamex has been the largest acquisition of Techint. This
strategy favored the expansion of Nemak operations to supply its products to automobile plants
in North America, South America, Europe, Australia and China. Other strategic business of Alfa
is Sigma in the food sector and the petrochemical industry. Alfa has partnerships and strategic
alliances with firms in Unites States, Europe, Japan and South America.
CEMEX is a global competitor well knows world-wide MNN, the third largest cement
company in the World, just after Lafarge (French) and Holcim (Swiss), and the largest of Latin
America (UNCTAD, 2005). Among the top 50 multinationals based in emerging economies,
measuring foreign assets CEMEX was ranked first in 1993, second in 2000, third in 2001, fourth
in 2002 and fifth in 2003 (Goldstein, 2007 with data CEMEX produces several products of
cement which have achieved the second and third largest producer depending on a specific
product. After a prominent rise from local-base company in Monterrey to the second largest
cement company in the world, CEMEX became one of the most prominent companies in a
capital-intensive business, operating in more than 50 countries.
In mid-1970s, CEMEX started to export to the Southern United States, Central American
and the Caribbean region. Because the antidumping regulations were rife, CEMEX oriented its
strategy towards foreign direct investment. The internationalization strategy of CEMEX had as a
major motivation the risk management. As a consequence of the 1982 crisis, the aggressive
strategy of CEMEX was to consolidate its position in the national market through acquisitions of
cement plants, finding innovative ways of paying using domestic capital markets.
The strategy of CEMEX centered on processes of innovation is leading to become one of
the stronger world/wide competitors in the cement industry. In 1992 Cemex invested on
Valenciana and Sanson, two Spanish cement plants. During the Mexicos 1995 economic crisis
CEMEX channeled offshore production into foreign markets as Florida and Puerto Rico and
scooping up cement mixers in Colombia, Dominican Republic, Panama, Trinidad, Venezuela.
During the Asian crisis in 1997 CEMEX took advantage and bought cement plants in Indonesia
and Philippines.
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CEMEX reinforced its international operations through the strategy of diversification
until becoming the second largest cement company in the world. However, the competitiveness
of CEMEX is higher in the emerging markets. CEMEX became a multinational corporation by
acquiring and absorbing companies all over the world: United States, Latin American countries,
England, Spain, Egypt, Indonesia, Philippines, etc. CEMEX Acquired Southdown, Inc. in United
States in 2000 and RMC in the United Kingdom in 2005 motivated by a strategy focused to
balance out markets with high risks and high profit margins with less profitable but more stable
markets operating in hard currency (Tavares, 2007:54).
After CEMEX took over Southdown, its main America competitor became the largest US
cement producer (Economist, 2004). With the acquisition of RMC by CEMEX, Europe became
its largest market amounting around 40 percent of total sales. CEMEX has also offered a bid to
the Australian building materials group Rinker.
Between 1990 and 2006, CEMEX completed more than 40 operations of overseas
acquisitions. Financial policies and expertise used by CEMEX had been accounted by Sarathy
and Wesley (2003). At the same time, CEMEX entered to international markets through co-
ownership and exports. This strategy was modified because of the antidumping lawsuit against
the Mexican cement. Also CEMEX invest in Greenfield specifically in natural resources
exploration and production. CEMEX challenges the incorporation of local and isolated
operations into a global production and distribution system by taking advantage of the best
practices (CEMEX, 2001) based on a system of just in time delivery.
CEMEX has around half of its cash flow in Unites States and Europe and the remaining
half in countries as diverse as Egypt, Indonesia, Philippines and of course, Mxico (Expansin,
2004). CEMEX is considering a strategy to enter to China and Russia and Turkey markets,
where its products would compete with low-quality local cement, and where the acquisition of
cement assets owned by the state and individual investors may be smoother (Reforma, 2004b).
The strategy of CEMEX is to concentrate investments in developing countries where the
profits are higher because the small levels of purchase of bags for self-construction and small-
scale building. Also, the strategy of CEMEX relies heavily on a just in time delivery system of
distributing concrete. CEMEX is implementing the franchise Construrama, a strategy of low
prices for low quantities to cater and provide access to the lower economic segments by selling
inexpensive bags of cement for the self-construction market. In association with GE Capital
launched a Constructcard project. The design and development of a strategy based on a business
model to create value for the emerging consumers, requires alignment of other parties involved
such as suppliers, wholesalers and retailers.
Other strategy attracts remittances from immigrants for their families and ensures that
funds are properly and safely invested in building materials to build their dwellings. Through the
strategy of corralones, CEMEX grants credit and give advisory assistance to small suppliers of
building materials. Also as a strategy, CEMEX emphasize continuous innovation for sustainable
economic development with a strong commitment to environment and corporate social
responsibility supports environmental protection projects in cooperation with NGOs.
CEMEX has developed its own information system and set up a satellite network to
transmit data. CEMTEC is a subsidiary taking care of managerial development programs.
CEMEX has merged with other companies to create Neories, and IT consultancy now together
with Constructmix, a construction-industry marketplace and Latinexus, an e-procurement, are
part of CxNetwork an e-business company.
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Cydsa, a group of 18 companies specialized in textiles, chemicals and plastics which
were very successful during the eighties due to its strategies of diversification and strategic
alliances. The group went into financial difficulties during the 1994-95 Mexican crises, just to
the point of selling two thirds of its assets to be able to pay debts.
ESC is a supplier to auto companies on a competitiveness based on its high-quality auto
parts and low-cost capabilities for production.
Femsa owns the largest Coca-Cola bottling group in the world, a brewing company and a
convenience-store chain. The alliance FEMSA Coca Cola enables it to build the distribution
channels and manage the network in the Latin American market. Femsa is expanding towards
new markets of beer and beverages in Canada, United States and Latin American countries.
Gruma (Grupo Maseca) is the largest producer of tortillas, dominates the market of
several American countries and through the implementation of a strategy of international
expansion, it exports to more than 50 countries around the world. The tortilla and corn flour
market in the U.S. reports 60% of its total income and have plans to duplicate capacity. Gruma
ranked 40th among the top 50 multinationals based on emerging economies measured by 2002
foreign assets, according to the estimations of Godstein (2007). Gruma is investing in creating
new plants located in places where there is demand of the product, such as China, Russia,
Australia, Africa, etc. Gruma is heavily investing in the markets of Asia and Oceania to
concentrate in India, Indonesia, Malaysia, etc.
Grupo Bimbo is the second only to Yamazaki (Japan) producer of baked food products in
the world (Expansion, 2005). It is a packaged bread and baking company evolving to a
diversified operation of more than 5, 000 products, including sliced bread, sweets, chocolates
and salted snacks. Bimbo is among the largest in its respective market niche that relies heavily
on acquisitions to growth abroad. Bimbo started business operations in United States in 1984 and
in Guatemala in 1991, followed by other acquisitions in Chile and Colombia. Now, it has
factories in most of Latin-American, Asian and European countries and has been very successful
in the Hispanic market. Bimbo set up manufacturing plants in strategic alliance with McDonalds
and has bought Park Lane Confectionary of Germany and invested in Eastern Europe. The
successful strategy followed is to manage and have control over the whole logistics, physical
distribution and supply chain.
Grupo Bimbo operates in a multilevel environment having rivals at both domestic market
and in global markets. Bimbo has benefitted from the competitive advantages offered by the
agro-industry sector. The internal resources, competitive advantage, competition in the bread
business, the institutional environment, elements of corporate governance, competitive
conditions in foreign markets, etc., are some of the factors leading to the competitiveness of
Bimbo in home and foreign markets.
Bimbo takes advantage of its strengths in the distribution networks and hiring managers
and entrepreneurs from the lower economic segments. These competitive conditions of Bimbo in
the domestic market are quite different to the competitive conditions of rivals in their home
country, which gives Bimbo and advantage over its competence in the Latin American markets.
Bimbo ranked 47th among the top 50 multinationals based on emerging economies measured by
2003 foreign assets, according to the estimations of Goldstein (2007).
Grupo Carson is a sister company of Carson Telecom and the largest Mexican
conglomerate that has businesses in different manufacturing and retailing sectors operating in
several countries of America, Asia and Europe. In 1996, the telephone holdings were spun off
into separate firms. It has main six subsidiaries and more than 200 small subsidiaries. Group
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Carson owns industrial, consumer and retail holdings. Commercial enterprises report to the
Carso Holding Company. Also in finances and banking, it holds Grupo Financiero Inbursa
including a commercial bank, an insurance company, and a stockbroker.
Telmex, the Mexican telephone company, after privatization in 1990, it was acquired in a
joint venture with Southwestern Bell and has become one of the biggest competitors in America.
Modernization of Telmex occurred in 1995-96 after the new regulatory framework. Telmex
controls more than 90% of all fixed phone lines in Mexico. In 2006 Telmex bought 3.5 percent
stake at Portugal Telecom.
America Movil is a spinoff of the holding company Carso Global Telecom since 2000
and together with Telmex, they have multiply acquisitions. America Movil offers the operation
of the cellular phone services and has control of more than 80% of the Mexican market
(Financial Times, 2006). America Movil is the largest or second largest wireless communications
business in most Latin-American countries and tenth of the world. From 2001 to 2005, America
Movil invested in Latin American markets to build a strong presence through the strategy of
replication of its own business model. America Movil was transformed in only two years to
become the largest telecommunications company in the Latin America in 2005. America Movil
ranked sixth among the top 50 multinationals based on emerging economies measured by 2003
foreign assets, according to the estimations of Goldstein (2007). Multinational expansion of
America Movil has been based on the strategies to keep low-costs and to market prepaid
telephone cards.
In 2005, America Movil in partnership with Bell Canada, Inc. and SBC International set
up Telecom Americas. Some strategies that Telecom Americas implement are to develop
economies of regional scale on technical and managerial services, to lower costs by pooling
human resources, its ability to deal and negotiate with governments, and to diversify to get into
new and more dynamic areas of telecommunications. Telecom Americas has subsidiaries and
joint ventures in several Latin American countries, United States, Spain, etc.
Carso has as a self declared strategy to keep costs down, to get close to customers, and to
be leaders in every segment it enters. The competitive strengths of Grupo Carso include
knowledge of the market and distribution for telephone service. Carso moves in and out of the
business as competitive advantages and conditions change following a diversification portfolios
strategy, although the degree of diversification remains unchanged in unrelated businesses.
Grupo Modelo was the third was the third-largest brewery world-wide. It has developed
an aggressive business model targeting high- price segments needs and achieving leading
positions in more than 140 overseas markets of beers, such as the case of Corona Beer. Corona
beer has a selective distribution in international markets where its brand is associated to the
image of attractive and colorful vacations.
Grupo Televisa is one of leading in the business of media production in the world,
broadcasting and advertising, cable TV radio and disc production operating in Latin America,
United States and Spain. The soap opera has been successful in Asian countries.
Mabe was a domestic appliance industry until it formed a strategic alliance with a global firm
and had access to better technological competences. Mabe fill orders of domestic appliances for
General Electric since 1993 when there was a shortage in supply for the regional markets
(Bonaglia, et al., 2006). In 2005, Mabe had 69 percent of international sales out of total sales.
IMSA is a producer of steel and metal products has invested in the Latin American region
and concentrating operations on IMSA Acero, relocation and enlargement of stations in order to
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innovate and diversify. IMSA has distribution and manufacturing operations in countries in
America, Africa, Asia, Australia and Europe.
Ingenieros Civiles Asociados (ICA) is engaged on the business of civil engineering
services targeting large infrastructure building projects and industrial park complexes. It has
been operating in most of Latin American countries and Unites States.
Mexichem is a chemical company that has vertically integrated its vinylchlorine (PVC)
and fluorite chain business, building the position as the worlds largest fluorite mine for PVC.
Newak benefits of its increased integration of previously acquired firms. The
international sales represented 82 percent of total sales in 2005, according to data from Amrica
Economa (2005)
Vitro, a glass company, has concentrated in a divestment, building strategic alliances and
acquisition strategies to concentrate core and competitive production in strategic business of flat
glass and glass containers with emphasis on the food and automobile industrial sectors oriented
toward increasing exports. Vitro has already sold some companies involved in household
appliances, like Cydsa and Crisa, the development of fibers, such as Vifisa and plastics and
chemicals like Vancan, Bosco and Qmica M. and had ended some strategic alliances in non-
strategic sectors. The growing Hispanic market remains as a challenge to Vitro. Vitrocrisa is a
joint venture between Vitro and Libbey is supplying Sunbeam already producing in China and
Mexican beverage producers already exporting to China (Reforma, 2004a).
Other Mexican emerging multinationals enterprises (MexEMNEs) doing operations
overseas at small scale are: Condumex produces automobile cables. Grupo Industrial Saltillo
(GIS) produces engines blocks and heads. San Luis is one of the Worlds biggest producers of
light-vehicle suspension springs.
Other important Mexican retailers operating abroad are three chains of drugs and
pharmaceutical products, Farmacias Similares, Farmacias Benavides y Farmacias Del Ahorro, all
of them are already expanding to other Latin American countries. Grupo Elektra, a retailer in
electronics and furniture, has more than 1,000 points of sail in Latin America, covers the whole
chain from marketing to customer credit supported by other sisters: TV Azteca and Banco
Azteca.
Scenarios for Mexican emerging MNEs
The economic globalization processes and operations of Mexican emerging MNEs have
small impact and contribution to national economic growth and development because the low-
level of intra firm trade.
The development and innovation of high technology companies require the strategic
support from the State, research and high learning institutions, financial programs, and so forth,
in order to absorb uncertainty and reduce risk and failures.
Mexican emerging MNEs will continue strategically seeking enlargement of international
market operations by boosting investments and positioning in other countries. The strategy of
MNEs of grow abroad will move from organic growth to be more oriented toward the
implementation of strategic business models based on mergers and acquisitions, partnerships and
joint ventures.
More South-South flows of outward investments, joint ventures, partnerships and
strategic alliances will be on the rise among Mexican emerging MNEs and other firms of
emerging economies to target overseas markets. The increasing South-South flow of
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investments, resources and technology is a major change underway in the economic
globalization processes which is erasing the divide between the center and the periphery.
Emerging Mexican MNEs will take advantage and benefit from understanding the role of
local economic, legal and cultural dimensions on their practices in different national
environments. Mexican MNEs are recognizing the strong influence that national cultures are
exerted on the outcomes. Therefore, Mexican MNEs will be relying increasingly on leveraging
worldwide talent.
Conclusions
There is a trend showing and signaling the emergence of new economic phenomena
under the economic process of globalization represented by the rise of Mexican emerging
multinationals enterprises (MexMNEs). Among the forces driving this trend are the economic
processes of globalization, macroeconomic structural reforms, the fast moving systems of
transportation and low-cost information and communication technologies, lower costs of capital
and more favorable global financial system.
This new global economic environment is becoming more competitive and pressing
business around the world to continue growing, sustain competitiveness and create value beyond
their national borders, as new competitors appear in the markets. Mexican MNEs strategy of
grow abroad at overseas markets is mainly through organic growth and in less proportion
through mergers and acquisitions
The overseas operations of Mexican emerging MNEs are entering into a new phase of
international expansion in global markets, looking for direct presence related to the increasing
sales. Mexican emerging MNEs are entering into a more globalized scale of activities through
outward investments in new ventures, acquisition of assets, forming partnerships, strategic
alliances and joint ventures. Emerging Mexican multinationals had invested overseas based on
their ability to manage uncertain, complex and competitive environments as the result of severe
economic crises, economic liberalization, structural reforms and steady economic globalization
processes. This condition shows that Mexican firms present one of the highest rates of trade-
openness among the emerging economies.
Mexican emerging MNEs attempt to enter and expand to emerging and mature markets
equipped with business models combining low-cost, high-quality products and services and
efficient systems of logistics and distribution channels to reach the overseas target markets.
All the Mexican emerging MNEs have very similar elements in common: They have the
origins from very large domestic firms, low-cost resources including labor, a week institutional
legal system and economic and financial environment leading to a critical and cyclical periods of
crises (1982, 1987, 1994-95, 2008-2010) followed by negative or low economic growth. The
survivor Mexican firms of this process of creative destruction have transformed into capable
and innovative MNEs in order to look and move ahead and take advantage of the challenging
new opportunities.
Mexican Emerging MNEs are averse to implement the strategy of risk diversification to
create a portfolio of outward investments allocation in assets and natural resources. Also risk
diversification through a portfolio allocation prevents exchange rate and commodity prices
fluctuations.

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valley Americas Policy Program Policy Brief. October, 12.

Conference Participants

- 483 -

Yusuf Ayturk
Istanbul University
Center Campus, Beyazit/Fatih
Istanbul 34452
Email: yayturk@istanbul.edu.tr
Phone: 302124400000/12312

Khosro Azizi
Iran - Tehran - Firoozkuh
Islamic Azad University
Email: Khosro.azizi@yahoo.com
Phone: 00989122801129

Allen Barclay
TILT-1052 Campus Delivery
Fort Collins, CO 80523-1052
Email: allen.barclay@colostate.edu
Phone: 970-797-2889

Brad Beauvais
United State Army Baylor Program in Health and
Business Administration
3151 Scott Road, Building 2841
Fort Sam Houston, TX 78234-6135
Email: bradley.beauvais@us.army.mil
Phone: 210 627 1078

Andy Bertsch
Minot State University
500 West University
Minot, ND 58707
Email: andy.bertsch@minotstateu.edu
Phone: 701-858-4486

Mike Birgen
1200 South Jay Street
Aberdeen, SD 57401
Email: mike.birgen@northern.edu
Phone:

JoAnn Bondhus
111 B Gardner Hall
Wayne State College
Wayne, NE 68787
Email: jobondh1@wsc.edu
Phone: 402 375 7412

Matthew Brooks
United State Army Baylor Program in Health and
Business Administration
3151 Scott Road, Building 2841
Fort Sam Houston, TX 78234-6135
Email: matthew.brooks@amedd.army.mil
Phone: 210 386 3875


- 484 -

Bill Broucek
Aberdeen, SD 57401
Email: broucekw@northern.edu
Phone:

Agung Buchdadi
Universitas Negeri Jakarta
Jalan Rawamangun Muka
Jakarta Timur 13220
Email: agungdharmawan@yahoo.com
Phone: +6221-4706285

Emrah Cengiz
Istanbul Universitesi Siyasal Bilgiler
34117 Ustabbyk.Tyrjuke
Email: ecengiz@istanbul.edu.tr
Phone: 90 212 440 0245
Dennis Clayson
University of Northern Iowa
Cedar Falls, Iowa 50614-0126
Email: dennis.clayson@uni.edu
Phone: 319-273-6015

Mantiaba Coulibaly
Sup de Co-Amiens School of Management
18 place Saint Michel
80038 Amiens cedex 1, France
Email: mantiaba.coulibaly@supco-amiens.fr
Phone: +33 6 62 95 95 67

Dwight Denman
Aberdeen, SD 57404
Email: dedenman@northern.edu
Phone: 605-626-3003

Becky Desens
Aberdeen, SD 57401
Email: becky.desens@northern.edu
Phone: 605-626-2637
Abdoukhadre Diao
Yeungnam University
214-1 Dae-dong, Gyeongsan-si
Gyeongbuk, 712-749, Korea
Email: diaofara15@ynu.ac.kr
Phone:


- 485 -

Murat Erdal
Email: mmerdal@istanbul.edu.tr
Phone: 90 212 440 0245

V.G Girish
The Catholic University of Korea
43-1Yeokgok 2-Dong, Wonmi-gu,
Bucheon-si, Gyeonggi-do, 420-743
Email: vggirish@gmail.com
Phone: 82-2-2164-4467

Rakesh Gupta
Central Queensland University
Bruce Highway
Rockhampton QLD 4702 Australia
Email: r.gupta@cqu.edu.au
Phone: 61 7 4930 9158

Hammad Hassan Mirza
Department of Business Administration
University of Sargodha
Sargodha, 40100, Pakistan
Email: al_hammd@hotmail.com
Phone: 0092-334-7550550

Chris Hauck
Aberdeen, SD 57401
Email: ckhauck@northern.edu
Phone: 605-626-7725

Tom Hawley
Aberdeen, SD 57401
Email: thawley@northern.edu
Phone:

Thomas Head
Roosevelt University
1400 N. Roosevelt Blvd
Schaumburg, IL 60173
Email: thead@roosevelt.edu
Phone: 847-619-4866

Irene Houle
Assumption College, Business Studies
Department
500 Salisbury Street
Worcester, MA 01609
Email: ihoule@assumption.edu
Phone: 508 767-7250


- 486 -

Larry Janssen
103 Scobey Hall
South Dakota State University
Brookings, SD 57007
Email: larry.janssen@sdstate.edu
Phone: 605-668-4871

Todd Jordre
Aberdeen, SD 57401
Email: todd.jordre@northern.edu
Phone:

Keun Lee
Aberdeen, SD 57401
Email: keunlee@northern.edu
Phone: 605-626-2576
Diane May
Winona State University
Somsen Hall 409, P.O. Box 5838
Winona, MN 55987-5838
Email: dmay@winona.edu
Phone: 507 457-2572

Mitch McGhee
California State University, Stanislaus
2105 Mariposa Dr
Hughson, CA 95326-9199
Email: mitchmcghee@gmail.com
Phone: 209-277-5980

Celestino Mendez
Aberdeen, SD 57401
Email: tino.mendez@northern.edu
Phone:

John Meyer
Aberdeen, SD 57403
Email: meyerj@northern.edu
Phone:

Louella Moore
Arkansas State University
P.O. Box 550
State University, AR 72467-0550
Email: lmoore@astate.edu
Phone: 870-972-3038


- 487 -

Frank Moseley
Minot State University
500 West University
Minot, ND 58707
Email: frank.moseley@minotstateu.edu
Phone: 701 858 3315

Muhammad Shahbaz Shabbir
COMSATS Institute of Information Technology
Lahore, Pakistan
Email: shahbazgill@gmail.com
Phone:

Bijayananda Naik
The University of South Dakota
Beacom School of Business, 414 E Clark Street
Vermillion, SD 57069
Email: bijay.naik@usd.edu
Phone: 605-677-5290

Klaus Oestreicher
University of Worcester
Henwick Grove
Worcester WR2 6AJ, United Kingdom
Email: k.oestreicher@worc.ac.uk
Phone: 44-1905-542172

Doug Ohmer
Aberdeen, SD 57401
Email: doug.ohmer@northern.edu
Phone: 605-626-2981

Sharon Paranto
Aberdeen, SD 57401
Email: parantos@northern.edu
Phone:

Dong Soo Park
Yeungnam University
214-1 Dae-dong, Gyeongsan-si
Gyeongbuk, 712-749, Korea
Email: dspark@ynu.ac.kr
Phone:

Gordon Patzer
Roosevelt University
430 S. Michigan Ave
Chicago, IL 60605
Email: gpatzer@roosevelt.edu
Phone: 312-281-3254


- 488 -

Vladimir Petkovski
SS. Cyril and Methodius, Faculty of
Economics, Bur. KPSTE
Misirkov BB 1000
Skopje, Macedonia
Email: vpetkovski@eccf.ukim.edu.mk;
svetlanagj@gmail.com;
vkpetkoski@yahoo.com
Phone: 33970246756

Todd Quinn
Aberdeen, SD 57402
Email: todd.quinn@northern.edu
Phone:

Risto Rasku
Jamk University of Applied Sciences
Rajakatu 35
Fin 40100 Finland
Email: risto.rasku@jamk.fi
Phone: 35 840 700 4920

Kacie Richard
Aberdeen, SD 57401
Email: kkrichard@wolves.northern.edu
Phone:

Connie Ruhl-Smith
Aberdeen, SD 57401
Email: connie.smith@northern.edu
Phone: 605-626-7789

Jaclyn Rundle
Central College Econ-Accot-Mgmt Dept
812 University Street
Pella, IA 50219
Email: rundlej@central.edu
Phone: 641-628-5118

Hans Schwarz
Hochschule Magdeburg-Stendal
Breitscheidstr. 2
39114 Magdeburg, Germany
Email: hans.schwarz@hs-magdeburg.de
Phone: 49 1717868206

Han Kil Shin
Aberdeen, SD 57401
Email: han.shin@northern.edu
Phone: 605-626-7731


- 489 -

James Smith
Aberdeen, SD 57401
Email: james.smith@northern.edu
Phone:

Deb Tech
Dakota State University
820 N Washington
Madison, SD 57042
Email: deb.tech@dsu.edu
Phone: 605 256 5165

Stephen Thomas
Political Science Box 190
P.O. Box 173364
Denver, Co 80217-3364
Email: stephen.thomas@ucdenver.edu
Phone: 303 556-5259

Muhammad Shariat Ullah
Ritsumeikan University
Biwako-Kusatsu Campus, 1-1-1 Nojihigashi
Kusatsu 525-8577, Japan
Email: gr0045sv@ed.ritsumei.ac.jp
Phone: 0081 77 561 4823

Jose Vargas-Hernandez
Econmico Administrativas Universitario de G.
Perifrico Norte 799 Edificio G-306
Zapopan, Jalisco C.P. 45100 Mexico
Email: josevargas@cucea.udg.mx;
jgvh0811@yahoo.com;
jvargas2006@gmail.com
Phone: +52(33) 3770 3343 ext. 5607

Jack Walters
Dakota State University
820 N Washington Avenue
Madison, SD 57042
Email: jack.walters@dsu.edu
Phone: 605-270-9580

Thomas Wedel
California State University, Northridge
SOM Department
18111 Nordhoff, Northridge, California 91330
Email: thomas.wedel@csun.edu
Phone: 818-677-2407

Jennifer Wegleitner
Aberdeen, SD 57401
Email: jmwegleitner@northern.edu
Phone: 605-626-7721


- 490 -

Gokhan Yolac
Email: gyolac@istanbul.edu.tr
Phone: 90 (212) 440 00 00 / 12279

Student Participants

- 491 -

Garrett Boe
USA

Email: Garrett.Boe@wolves.northern.edu
Vanessa Breske
USA

Email: Vanessa.Breske@wolves.northern.edu
Kayla Brockel
USA

Email: Kayla.Brockel@wolves.northern.edu
Daniel Carvalho
USA

Email: Daniel.Carvalho@wolves.northern.edu
Taejin Chun
USA

Email: Taejin.Chun@wolves.northern.edu
Jade Cowan
USA

Email: jtcowan@wolves.northern.edu
Deng Deng
USA

Email: wkdeng@wolves.northern.edu
Grace Hannasch
USA

Email: Grace.Hannasch@wolves.northern.edu

- 492 -

Bojana Ilic
USA

Email: Bojana.Ilic@wolves.northern.edu
Karla Jager
USA

Email: kjjager@wolves.northern.edu
Suim Jeong
USA

Email: Suim.Jeong@wolves.northern.edu
Sam Johnson
USA

Email: Sam.Johnson@wolves.northern.edu
Pancras Katto
USA

Email: pancras.katto@wolves.northern.edu
Jooli Kil
USA

Email: jooli.kil@wolves.northern.edu
Jeenchurl Kim
USA

Email: jeenchurl.kim@wolves.northern.edu
Yosevu KimuyuKilonzo
USA

Email:
yosevu.kimuyukilonzo@wolves.northern.edu

- 493 -

Christa Mielke
USA

Email: cemielke@wolves.northern.edu
Helio Oliveira
USA

Email: hmoliveira@wolves.northern.edu
Kristin O'Toole
USA

Email: klotoole@wolves.northern.edu
Rachel Schipper
USA

Email: rnschipper@wolves.northern.edu
Lei Tao
USA

Email: Lei.Tao@wolves.northern.edu
Silviya Topchiyska
USA

Email: Silviya.Topchiyska@wolves.northern.edu
Sanghyun Choi
Pukyong National University
SOUTH KOREA

Email: Sang.Choi@wolves.northern.edu
Junghee Hwang
SOUTH KOREA

Email: Junghee.Hwang@wolves.northern.edu

- 494 -

Yoojin Jeong
SOUTH KOREA

Email: Yoojin.Jeong@wolves.northern.edu
Eunsu Jo
SOUTH KOREA

Email: Eunsu.Jo@wolves.northern.edu
Jongyeol Kim
SOUTH KOREA

Email: Jongyeol.Kim@wolves.northern.edu
Dongju Kim
SOUTH KOREA

Email: Dongju.Kim@wolves.northern.edu
Hyunseok Lim
SOUTH KOREA

Email: Hyunseok.Lim@wolves.northern.edu
Yeong-Ung Noh
SOUTH KOREA

Email: yeong-ung.noh@wolves.northern.edu
Sunghyun Seo
SOUTH KOREA

Email: sunghyun.seo@wolves.northern.edu
Jae-Hyeong Yong
Kwandong University
SOUTH KOREA

Email: Jae-Hyeong.Yong@wolves.northern.edu

- 495 -

Xiao Han
Capital University of Economics and Business
CHINA

Email: Xiao.Han@wolves.northern.edu
Dongdi Jia
CHINA

Email: Dongdi.Jia@wolves.northern.edu
Siyan Ren
Shanghai Institute of Foreign Trade
CHINA

Email: Siyan.Ren@wolves.northern.edu
Pu Yang
CHINA

Email: Pu.Yang@wolves.northern.edu

2010 Proceedings

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2010 Proceedings

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- 1 -

Proceedings of the 17th Annual South Dakota

Focus on: InterdisciplinaryTopics

Best Practices In Terminology Work

Found in translation: A Library Outreach Program for International

Developing Sport Business with Sport Management Studies The Finnish

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Potlatch And Postmodern Consumption: Can A Synthesis Lead To A New

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Internationalizing The Business School Curriculum: One University's

A Comparative Study of Learning Styles of Business Students in the United

AACSB/ACBSP/IACBE: The race to create an ISO for collegiate business

Obstacles on the Path to Global Accounting Standards

Tax Revenue Variation in Different Countries

Corporate Governance and Stock Returns in Istanbul Stock Exchange

Impact of Single Stock Futures on the Volatility of Underlying Indian Stocks

Consumer Attitudes Towards Experiential Marketing: A Qualitative Study

Store Image and the Effects on Consumers Purchase Intention: A Study

Developing Culturally-Targeted Marketing Strategies by Exploring

Lateral Marketing in Retailing and a Study From Turkish Gas Station

Relationship In A Fair Trade Market: How To Create And Manage Value

Impact of RTA and PTA on Bangladesh Export: Application of Gravity

The Greenspan/Taylor Debate: The Estimated Importance of Saving and

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Twin Themes of Dr. Theodore W. Schultz: Relevance for 21

Gazing through the Looking Glass...Analysis of the Impact of The US Health

Managing Up: Fight or Flight, the Power of Winning at Upward Cultural

Product And Business Innovation Of The Double Helix Model: Its

AngosturaRoom Multimedia Presentations Completed by Northern State University Students

Environment & Marketing: A Study of Ethical Response Behavior in

Product Launch in a Declining Environment: The Blu-ray Disc -

Energy Issues and Policy In Turkey

Energy Issues and Policy In Switzerland

Blasphemy: A Hammer on Consumer Purchase Intentions and Brand

A Model Measuring Influential Factors and Employee Response toward

Strategies And Performance Of New Mexican Emerging Multinational

Institutional Ownership, Growth Opportunities and Corporate Dividend;

Digital Television Adoption: An analysis of influencing factors in South

refers to skewness coefficient of the asset.

is the cross section specific effect; X represent a vector of time-varying

stand for the vector of coefficients to be estimated that are assumed to

is the error term.

is country is specific individual effect; adjj is adjacency dummy for common

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