economy society managing - uniwersytet warszawski

ECONOMY, SOCIETY AND MANAGING

EDITED BY:ALOJZY Z. NOWAK

BEATA GLINKAPRZEMYSŁAW HENSEL

WARSAW 2011

Reviewers: prof. dr. hab. Monika Kosteradr. hab. Jacek Pasieczny

Translation: Amelia Wydra

Cover design: Agnieszka Miłaszewicz

© Copyright by Wydawnictwo Naukowe Wydziału ZarządzaniaUniwersytetu Warszawskiego, Warszawa 2011

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, transmitted or utilized in any form or by any means, electronic, mechanical, photocopying or otherwise, without permission from the Publisher.

ISBN: 978-83-61276-57-9

Typesetting and printed by:Publishing House ELIPSA, ul. Inflancka 15/198, 00-189 Warszawatel./fax 22 635 03 01, 22 635 17 85, e-mail: [email protected]

Contents

Preface ..................................................................................................................... 5

Sławomir MagalaCulturally Manipulated Organizations, from the Pyramid to Network and Back ................................................................................................................. 7

Adam W. JelonekEast Asia in the global economic arena. Contribution to the discussion on cultural differences ......................................................................................... 12

Przemysław HenselManagement in high- and low-context cultures – Poland and Korea in the light of empirical research ........................................................................ 32

Halina Grzymała-MoszczyńskaIntercultural Trainings in Business ...................................................................... 40

Beata Glinka, Svetlana GudkovaThe Use of Grounded Theory in Entrepreneurship Research ...................... 50

Jerzy WierzbińskiIdentifying different types of religiosity with cluster based methodology .... 62

Agnieszka Kacprzak-ChoińskaApplication of factor analysis and cluster analysis in market segmentation ....................................................................................... 71

Tomasz JerzyńskiCompletion rate of the original sample and post-stratification weighing in analysis of survey data .................................................................................... 84

Bernard Arogyaswamy, Alojzy NowakSocietal and High Tech Innovation in India: Prospects and Strategies ........ 96

Aleksandra Wąsowska, Marcin PawłowskiPatent Applications of the Polish Listed Companies ....................................... 114

Dominika LatusekThe Role of the Intermediary in Trust Building Processes Between Entrepreneurs and Venture Capital Funds ........................................................ 131

Katarzyna OsmólskaPhotovoltaics as a disruptive technology .......................................................... 144

Marian Górski, Krzysztof Chrust Umbrella funds in Poland – effectiveness and risk of investment strategies ................................................................................................................ 159

Andrzej SopoćkoThe Impact of Economic Integration on the Direction of Capital Flow ..... 186

Renata KarkowskaHedge funds – identification of risks and investment opportunities ............. 200

4 Contents

Preface

Good management is all about using well-chosen, diversified sources of knowledge while making decisions that can make or break a business. Every crisis poses a challenge to both scholars and administrators responsible for developing curricula for students of business management as integration between the academia and the real business of managing is more important than ever. The main assumption of our book is that since economy, society and organizations are intertwined phenomena the managerial scholarship and education are going to be useful for practitioners only if they reflect this fact.

Both economy and society are determined, at least partially, by national culture. The fast development of the Far East economies as compared with the underdevelopment of some other regions in the world show the importance of this factor. Therefore we have included in this volume a number of articles about the phenomena of national and organizational cultures. These are followed by texts on quantitative dimensions of managing, namely, statistical methods which maybe used in managerial decision-making process. The present crisis had its origins in the financial sector, hence the remaining articles cover this dimension of managing, critical for survival.

We hope that these fifteen articles will show the variety of research in the most important areas of contemporary management. They can also be seen as a starting point or an inspiration for further research on the nexus of economy, society and organizations.

Beata GlinkaPrzemysław Hensel

Alojzy Z. Nowak

Sławomir Magala

Culturally Manipulated Organizations,From the Pyramid to Network and Back

It is not only the food that is being genetically manipulated, but also organizations, however the latter ones are culturally manipulated. The average annual temperature of cultural life on our planet has risen even more due to the increase of connections and agreements among ever more lively and independent units. This communication acceleration would not be possible without miniaturized and individualized telecommunication devices connected through satellite webs woven around our planet. These have had an impact on how we organize ourselves and what we imagined to be the best possible organizations.

We become more and more aware of the outcomes of the great transformation of the world order, which is basically capitalist and based on the market exchange of goods and services in general, but regionally eclectic and politically diverse.

Transformation (and to be more precise the initial phase of the great transformation) that took place in the last quarter of the 20th century and the first decade of the 21st century led to the following results:− rejecting Fordism as the dominant organization formula (in all types and kinds of

activity – from car factory assembly room to mortgage bank or lonely mother’s shelters) in developed countries,

− simultaneously dumping Fordism on developing countries; this is nicely illustrated by Indian call centers, Chinese, Vietnamese or Malayan shoe, computer, toy or dish factories,

− fall of state socialism in Central and Eastern Europe, Russia and China (there are still enclaves in the North Korea and Cuba, but their fate depends on their ailing dictators and none of them offers an attractive development pattern),

− simultaneous attempts to introduce control over the totality of the social life similar to centrally planned state socialist one in Central and Southern America (e.g. Chavez’s Venezuela or Bolivia’s Morales) and Africa (Mugabe’s Zimbabwe) and the de facto nationalization of some banks in the USA and Europe after the 2008 crash.From the point of view of the inhabitants of Central and Eastern Europe, the

last two outcomes are the most interesting, because we have experienced them personally, but from the point of view of organizational change processes that set up social stage and influence the drama of the social life – the first two are

8 SŁAWOMIR MAGALA

the most important. Why? Because they show that the elites and establishments of the capitalist West were the first to figure out the potential advantages of the liberating utopias of the New Left, symbolically referred to as “the contestants of 1968.” They rejected (at first it was the de facto rejection and later on the de iure one) formulas of bureaucratic and authoritarian control in industrial, administrative and commercial bureaucracies and transformed organizations and institutions so that their employees, as individuals, felt autonomous, independent and sovereign. These employees started to believe that they could fulfill themselves in work and establish deep human relations while working and thus be more dedicated and creative in their contribution to company’s or institution’s work – all of this for the glory and profit of the ruling classes (establishment, elites) in order to stabilize hegemonically manipulated development. The slogan coined after the World War II by the propagandists of the People’s Republic of Poland “Not formal exam but determined will shall advance you into officers’ranks” that was so laughingly sneered at by the anticommunist opposition and representatives of the pre-war social elites turned out to be prophetic. Education went out and down social hierarchies.

First, it effectively neutralized the opposition that was unable to demonstrate social imagination to pick up the gauntlet thrown down by “captive minds” (at first, for example Leszek Kołakowski and Tadeusz Borowski, fell for the communist propaganda) to independent minds (Herbert was an exception as well as the Ossowski couple – Maria and Stanislaw). Commotion created by propagandists, who pointed to the liquidation of illiteracy and social advancement of “workers and peasants” effectively covered up the expropriation of the entire leftish – including socialist and anarchist – legacy of the Polish left (Abramowski!) by pro-Russian usurpers, who gained power through political murders (committed by both the Polish Public Security UB and Soviet Secret Police NKVD) and fake elections. But it was not only propaganda – not just sheer ideological window dressing. Educational advancement was a real outcome, a local, regional manifestation of a global tendency related to the educational advancement of the poor all around the world – in the USA, thanks to the Servicemen’s Readjustment Act (popularly referred to as the GI-bill), in Poland, thanks to transformation of peasants and workers into educated intelligence (in order to replace pre-war middle class voicing its negative approach to communism).

Second, the slogan was used again, this time by the western elites and establishments, during the second educational acceleration after the World War II in the 1960s (more or less between launching the Sputnik in 1957 by the Soviets and American conquering the moon in 1969). Because ever broader and more numerous social groups educated higher percentage of their young at universities, the new types of organizational control could be shown as the great victory of sovereign and independent individuals who were creative in developing themselves and professionally transforming their working environments. Educational upward mobility was heralded as a victory over the world of the alienated industrial workers hunching over assembly lines or the world of alienated clerks in huge offices

Culturally Manipulated Organizations, From the Pyramid to Network and Back 9

in centralized corporations or government administration. You are free, you are autonomous, you are educated and creative, you can apply universal rules of rational analysis in every possible context and position. On the one hand, it led to putting equation mark between the Pentagon and the General Motors corporation by Robert McNamara and on the other hand, it resulted in the complete fall of trade unions, which failed to address the new individualists.

Trade unions (based on the collective loyalty of large trade groups against other employees in the same sector of the economy and thus able to represent them and protect their interests in institutionalized negotiations with elites managing corporations) stood by the supporters of the Vietnam War and collective agreements. The former alienated young people (who disliked being drafted), the second turned out to be a mistake in the face of globalization (it was convenient for corporate elites to close books i.e. honor collective agreements only to a certain generation and then close factories and offices and search for outsourcing partners in China or the Czech Republic, Malaysia or Hungary, India or Poland).

From this perspective, the triumphs of the Polish Solidarity – this very effective platform for social mobilization against communist dictatorship – can be seen as a swan song of the very idea of trade unions, which were able to lead to the system transformation (because the state was the proud owner of the majority of enterprises), but could not enforce the comeback of collective agreements in the denationalized economy (although in the shipbuilding and mining industry it only became obvious at the end of the first decade of the 21st century.)

The last paradox of this post-trade union reality on the job market is the strike of the French high school and university students. They protested against president Sarkozy’s plans to increase the chances of young people to find first jobs. To do this he proposed to liberate conditions for terminating employment contracts believing that if an employer is not afraid of obstacles in firing an employee he will hire them more readily. It turned out that young people who were looking for jobs were more interested in comfortable working conditions after being employed than more ease in finding a job. Sarkozy faced radical refusal and protests of those he wanted to help since each one of them had already seen themselves as an individual, mobile, developing and creative employee eagerly taking advantage of a modern equivalent to social guarantees promised to a trade union i.e. individually and personally negotiated contract.

The fall of trade unions and political parties and the growing role of mass media (television, the Internet, radio, mobile phones, newspapers and blogs) as the alternative to institutionalized reconstruction of political and social processes is often explained with the transfer from pyramids to networks i.e. to network society, under which individuals have a chance for mass individualization of everybody’s participation in mass self-communication self-expression, also in political elections and ideological debates.

The main ideologist of this networking of social processes is a Spanish (actually Catalan) sociologist from Brekley and Barcelona, Manuel Castells, the author of

10 SŁAWOMIR MAGALA

the Rise of the Network Society, whose view on the shift to individualized forms of participation in the communication process is clearly illustrated in the following excerpt:

The growing interest of corporate media for Internet-based forms of communication is in fact the reflection of the rise of a new form of socialized communication: mass self-communication. It is mass communication because it reaches potentially a global audience through the p2p1 networks and Internet connection. It is multimodal, as the digitization of content and advanced social software, often based on open source that can be downloaded free, allows the reformatting of almost any content in almost any form, increasingly distributed via wireless networks. And it is self-generated in content, self-directed in emission, and self-selected in reception by many that communicate with many. We are indeed in a new communication realm, and ultimately in a new medium, whose backbone is made of computer networks, whose language is digital, and whose senders are globally distributed and globally interactive. True, the medium, even a medium as revolutionary as this one, does not determine the content and effect of its messages. But it makes possible the unlimited diversity and the largely autonomous origin of most of the communication flows that construct, and reconstruct every second the global and local production of meaning in the public mind. (Castells 2007: 248).

Commenting on the influence of these new communication processes on our perception of the social order and desired organizational formulas, I concluded that populist explosions in politics are related to the transformation of “angry mobs” into alternative social networks (Magala 2009: 213–220). My interpretation was context based. I had been searching for useful ways to co-create interpretations of organizational realities with the use of today’s organizations such as universities, factories, museums, offices, symphonic orchestras or transport companies. The basic role of the management sciences (which are slowly escaping from the slums of the modern academia and would like to have a say in how the inequities in social distribution of work and creativity, pay and recognition can be used to build a better social order) is to understand what dreams can be already voiced and even implemented. It is about the everyday and multilevel construction of a better society. Such society that is characterized be less discrimination, coercion and exclusion from a fully civil and individual participation in social processes. A patient in a hospital, a student at a university, a citizen before elections, a client in a shop or an educated employee in a company or institution will neither have fond memories of the slogan “Leave democracy in front of the factory’s gate (or an office door)” nor will agree to be treated as a child in loco parentis.

Discussions over parity, namely guaranteeing women a proportionate share in taking decisions on growing number of daily negotiated and renegotiated cases is a perfect example of this type of challenges facing the future reorganizations. In this case, the “natural” biological division into men and women has been questioned in the name of culturally manipulated reality, where the main inequality i.e. male dominance has been exposed and underwent a systematic demolition.

1 Peer to Peer.

Culturally Manipulated Organizations, From the Pyramid to Network and Back 11

The parliament where the majority of members, especially the majority of those holding responsible functions are men - seems like a pathetic anachronism and a shameful reminder of a rejected cultural manipulation. What did this type of manipulation mean for women? Well, in the 3rd Reich for instance, it meant they had to bear children, raise them and run a household, possibly praying in church from time to time. Nobody likes to be compared with the 3rd Reich propagandists and their cultural manipulations, but nobody has ever envisioned such an escape from a bureaucratic house of slavery to the promised land of democratic network of fellow citizens that would make another crossing of the Red Sea – this time awkward, secret, and shameful crossing because it leads back to the warm bosom of trade bureaucratic structures – impossible. And this unfortunately is the shortest possible story of the dominant organizational formulas – enlightened absolutism of bureaucracy with the best and the wisest elites, correction of the unpredictable reality – an attempt to democratize, decentralize, network and empowerment, etc, and then a quiet return to reliable, hierarchical forms of holding people responsible for their actions.

What is the way out? This is the question to the professional organizers in the individualistically massed culture.

Information about the authorProf. Sławomir Magala – Rotterdam School of Management, Erasmus University. E-mail: [email protected].

Bibliography

Castells, M. 2007. Communication, Power and Counter-power in the Network Society. International Journal of Communication, no. 1, p. 238–266.

Magala, S. 2009. The Management of Meaning in Organizations, Basingstoke–New York: Palgrave Macmillan.

Published in “Problemy Zarządzania” 3/2009, pp. 98–103.

Adam W. Jelonek

East Asia in the global economic arena. Contribution to the discussion

on cultural differences

1. Introduction

At least, prior to the financial crisis of the late 1990s, East Asia had become a synonym for spectacular economic success. No surprise. If we travel back in time – to the 60-ties of the past century – and compare the then and current condition of Asian economies, we will be able to fully appreciate a full scale of this success. In 1960, Asia was producing only 4% of the global GNP (gross national product), at the beginning of the 90-ties – as much as 25%. Half a century ago, an income of an average inhabitant of Japan, at that time the richest country of the region, reached no more than 15% of an income earned by an USA inhabitant. South Korea was no wealthier than Sudan, whereas Taiwan was almost as poor as Zaire of that time. Back then, the countries of East Asia boasted an impressive rate of growth, reaching now and then 10% per annum. In the middle of the 90-ties, the one-third of the global currency reserves was located in Asia. It started to gradually dawn on Western population that the image of Asia as the world’s peripheries is a thing of the past (Rohwer 1995: 28).

As has been noted by the World Bank specialists, the dynamics of developmental pace in East Asia is unprecedented on the global scale. Within a quarter century, the average national income in the region’s countries rose by four times. The states of the region had quickly managed to integrate their local markets with the world economy, minimise the areas of social poverty and evidently improve their living standards. Following closely behind the success of the so-called Asian Tigers, another group appeared, broader in scope, consisting of rapidly-industrialising and dynamically-growing economies, which – like the Chinese economy – gradually begun to be seen as fostering global growth (Leipziger, Thomas 1993: 1).

For years, the attempts at explaining the reasons behind East Asian surprising dynamics of development have been subject to key-areas analysis, undertaken by economists, anthropologists, sociologists, as well as by economic insiders. Some specialist argued that a reason for Eastern Asian civilisational leap lies in the existence of the principal differences in the cultural and social systems of East Asia

East Asia in the global economic arena 13

and “the old world” countries, including the United States and Western Europe as the most dominant players on the global market.

After making a few remarks of theoretical nature, I shall focus on enlisting a basic catalogue of cultural and social differences, which is examined by scholars and discussed as part of the discourse on the occurrence of the so-called Asian values. While treating the above-mentioned differences as the factors with a potential impact on the dynamic growth of the region, I shall present the outcomes of a few empirical research studies, showing to what extent East Asian social systems are really different, and to what extent this difference is merely an intellectual artefact.

2. Culture as a factor stimulating growth

What is culture? Approaches taken to explain this notion may differ significantly, depending on the context in which we intend to use this term1. As regards the original understanding of this term as cultura agri, relating to the land cultivation, the notion was applicable to the qualitative dimensions of human existence. Initially, while discussing cultural phenomena, a strongly-evaluating language was used to contrast the “civilised” Western communities with the uncivilised, hence culture-deprived, rest of the world. Only towards the end of the 18th century, Johann Gottfried Herder, the German philosopher, was perhaps the first to suggest that culture is a phenomenon which cannot be subject to evaluation, and variety of cultural expressions is merely the effect of various historical experiences of respective societies (Berger 1995: 14–15).

The notion of culture has been evolving to take on more and more attributes. More than a century ago, Edward Tylor, in his classical work entitled, Primitive cultures, defined culture as being “the complex whole, which includes knowledge, beliefs, art, morals, law, customs and any other capabilities and habits acquired by virtue of the fact that one is a member of a particular society” (Alexander i Kumaran 1992: 11). In the middle of the last century, Alfred Kroeber, in his Anthropology, described culture as a phenomenon encompassing speech, knowledge, beliefs, customs, arts and technologies, ideals and rules inherited through intergenerational communication. Alfred Kroeber and Clyde Kluckhohn, in their already classic work, Culture: A Critical Review of Concepts and Definitions, supplemented the notion of culture with another essential statement. What they notice is that culture encompasses a set of rules and modes of behaviour acquired and passed on by means of symbols. They argue that the essence of culture is made up of traditional, i.e. history-based and carefully selected, groups of ideas and related value systems. The cultural system, specific to a given society, may be thus understood not only

1 A.L. Kroeber and C. Kluckhohn list 164, I. while Jamieson 160 most important definitions of cul-ture, as used by anthropologists or psychologists (Kroeber and Kluckhohn 1952: 41–79; Jamieson 1980: 9).

14 ADAM W. JELONEK

as being the sum of experiences acquired by man in a given society, but also – and more so – it may constitute a basis for determining his or her future behaviours and configurations (Kroeber i Kluckhohn 1952).

Such line of analysis is pursued by Douglass North, an economic historian and the Nobel Prize laureate. He states that “in all societies from the most primitive to the most advanced, people impose restrictions upon themselves to give a structure to their relations with others. (...) Where do these restrictions come from? They come from socially communicated information and are a part of the inhertiance that we call culture”. Culture may thus be defined as “the intergenerational transmission (...) of knowledge, values and other factors affecting behaviour” (North 1990: 36–37).

This type of definition, according to which culture is an isolated and shared set of rules shaping human behaviour, has been up to this day a useful tool for analysing the impact of value systems on the way the respective societies function. (Harrison 1997: 31). It is to this tool that Francis Fukuyama refers in his work entitled, Trust: The Social Virtues and the Creation of Prosperity, where he defines culture as “an inherited ethical norm” (Fukuyama 1995: 34). Samuel P. Huntington uses the same reference in his controversial article, The Clash of Civilizations?, when he lists eight major civilisations, constituting the most highly-organized cultural entities, towards which contemporary humanity has evolved (Huntington 1993).

The notion of culture understood as the functioning basis for different and divergent social systems is not an unfamiliar concept to the scholars descended from the civilisation other than Western. The Chinese scholar, Gao Xian, points out to the existence of close links between accumulated experiences of “a traditional culture” and “a holistic process of material and moral development”, the latter being a result of the traditional culture’s exposure to modernisation processes (Gao 1996: 143–144).

The views presented by Gao Xiana on the possible link between culture, its attached “ethical norms” or “value systems”, and the processes of social, political or ultimately economic modernisation are by no means new to the scientific discourse. Max Weber was, without a doubt, a forerunner in the consideration given to the interdependence of cultural system and development of particular societies. In his classical works entitled, The Protestant Ethic and the Spirit of Capitalism and the Religion of China: Taoism and Buddhism, he outlines the entire set of values, conditional upon religion and, thus, upon culture – such as a respect for hard work, rationality of conduct or frugality, showing them to be the basis for material progress of some societies and relative backwardness of others (Weber 1984: 69–87).

The similar, though less known, analogies, linking cultural systems with a development potential of some societies, have been explored by a series of sociologists, anthropologists or philosophers. For example, Joseph Schumpeter observed in his, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle, that the culturally-conditioned “human genius of creation, reflected in diverse conducts of entrepreneurs, constitutes a


key ingredient in the development strategy of particular societies” (Schumpeter 1961: 132).

In answering the question of what constitutes development, Gunnar Myrdal in his work, Asian Drama: An Inquiry into the Poverty of Nations, stresses the point that it is cultural factors, and especially religious systems, that are the main obstacle to modernisation processes. According to him, such factors not only hinder entrepreneurial freedom of activity, but, in special cases, may even “dominate the entire political, economic and social system, to the detriment of rationality and entrepreneurship” (Myrdal 1968: 7).

This argumentation parallels that of Arthur Lewis in, The Theory of Economic Growth. He puts forward the argument that cultural factors have a direct impact on the scale of entrepreneurship, and an indirect influence on the broader issue of a political climate for economic growth. “Economic growth depends on social attitudes towards work, wealth, thrift, possession of children, ingenuity, and all these attitudes flow from the deep wells of human mind” states Lewis (Lewis 1955: 14).

Some scholars tried to elaborate upon these general and increasingly obvious statements by making their own field observations. For instance, Edward Banfield, based on his observations in southern Italy, noted that oftentimes the occurrence of adequate technical and natural resources is deemed to be the foundation for economic development, whereas these factors should be treated, at the very most, as equal in importance to the cultural context and to society members’ authentic willingness, embedded in the binding value system, to take challenges offered by their environment (Banfield 1958: 8). Lawrence Harrison, who spent many years in Latin America as the USAID official, notes that it is “cultural factors that, in majority of cases, provide an explanation why some countries experience a more rapid and balanced growth than others” (Harrison 1985: 16). In one of his works, he performs a detailed analysis of different value systems of the societies “prone to progress” and “resistant to progress” (Harrison 1997: 32).

To sum up, one should undoubtedly agree with Edward T. Hall when he stated that culture – regardless of what definition is applied thereto – reflects, in many aspects, the condition of politics and economy. Likewise, culture per se constitutes a factor affecting economic performance in any society. Having acquiesced to this viewpoint, the next step is to consider the importance of cultural factors in today’s society.

3. Ideological offensive of Asian values

It happened in April, 1994. The Court of the Republic of Singapore was examining the case of an American teenager, Michael Peter Fay, who had been accused of vandalism. Fay, almost a year ago, together with a group of his colleagues, painted graffiti over the cars parked at Chatsworth Road. The judge, Yong Pung How, after hearing testimonies of the parties, made his decision. The American

16 ADAM W. JELONEK

was to be punished by inflicting six cane strokes on his buttocks. This incident of seemingly little importance gave rise to a genuine media event: “the clash of civilisations”. The Singapore authorities, despite of an explicit pressure exerted by the White House, refused to renounce the punishment. The case had taken on a symbolic meaning. Asia, through the words of the Singapore Prime Minister, Goh Chok Tong, defended its image, its Asian social order and values. Asia raised accusations against unmoral Western youth. The West was deeply indignant at the barbarity of Asian regimes. In the wake of this negligible, though dramatic, incident the essence of civilisational dispute over Asian values came to the fore of public attention.

The first symptoms of Asians’ growing awareness of their new place in geopolitics had been noted even prior to this incident within Asia itself. In 1989, a book by a Japanese politician and publisher, Shintaro Ishihara, entitled, The Japan That Can Say No (Ishihara 1992), turned out to be a great success. Ishihara, relinquishing all diplomatic conventions, put forward the argument that Japan ought to take its rightful place, equal to that of the United States, in the system of world geopolitics. In so arguing, he provided much evidence for the existence of a huge, in his opinion, though still unexploited, potential of Asia. Some of Ishihara’s comments were truly surprising. American strategists dropped the atomic bomb on Hiroshima, instead of some German city, solely because they were guided by purely racist premises. The Empire of Japan, in its conquest of particular Asian states, had brought civilisation and freedom to them; American colonisation resulted only in enslavement and backwardness. The book, selling in millions of copies in the United States, was acclaimed as “a racist manifest and a call for bloody confrontation”. Asian readers, though, received it in a more moderate way – as an attempt at recovering Japan’s national pride and reminder that not only Japan, but also the entire region, is now in the power to say “no”.

At the turn of the 80-ties and 90-ties, the economic success achieved by East and Southeast Asia countries triggered a fierce debate over the changes taking place in contemporary world. Asian countries were facing very serious historical dilemmas. The improvement of living standards generated fundamental discussions as to the nature of social, cultural and finally political changes on the continent. The questions were raised regarding the democratisation of political life, legitimisation of government, as well as – very often neglected by Western observers – the identity of people and nations inhabiting the East. For many people, the ongoing processes of globalisation meant the inevitability of gradual occidentalisation of the region – relinquishment of former points of reference, annihilation of traditional social organisation, and ensuing loss of their sense of identity.

Many ideological concepts, referred to as the Asian values programme, fit into this discourse. Any attempt at finding uniform cannon for this program is futile. The basic premise of the programme was to restore a traditional value system – to return to Asian roots of social identity. It was underpinned by the conviction that Asian social systems are not only different from, but also more valuable than


their Western equivalents, due to their reliance on community values, in which the society interests take priority over the individual interests, that is over American individualism. The concepts promoting Asian values, as proved by the form of political discourse in which they were analysed, may be found in many articles, speeches, interviews and books. This discourse was joined, relatively quickly, by prominent Asian politicians, and it was them who came to be regarded as the founding fathers of the new ideological current.

The Singapore Prime Minister, Lee Kuan Yew, recognised the concepts of Asian values as a new ideology of Asian rebirth. The concepts were further promoted, with great success, by the Malaysian leader, Mahathir bin Mohamad. A well-known Vietnam political scientist, Nguyen Gia King, observed with sarcasm that it did not escape his attention that both the Prime Minister Lee Kwan Yew and Mahathir Mohamad – the two forerunners of Asian values – were themselves descended from deeply westernised elites of their respective countries, and both of them, and particularly Mahathir, played essential roles in the process of westernisation of their countries. The Asian values programme was, nevertheless, too advantageous for those pragmatic Asian politicians to disregard it.

The peak of its popularity was in the period of the region’s highest economic prosperity. The fundamental theses underlining Asian values found their expression in the so-called Bangkok Declaration, signed in April, 1993 by a series of leaders from East and Southeast Asia countries, including China, Malaysia and Singapore. The Bangkok Declaration, which was meant to codify the essence of Asian values ideology, oscillated between a few interrelated issues, which are worth mentioning. Firstly, the declaration authors raised a simple cultural argument that any definition of an individual’s role in a society would not be complete without due consideration to his or her special historical, social, economic and political context, in short – it was to be civilisation-specific. Secondly, the declaration also listed arguments for a communitarian nature of Asian societies. According to this view, an individual’s duties towards his family and society constitute the core of social life, contrary to Western individualism and atomistic comprehension of Western society. If community interests override individual interests, then consequently any demonstration of an individual’s right would pose a threat to the order and harmonious functioning of a society. The declaration states further arguments to support a notion of citizens’ voluntary subjection to discipline on all dimensions of social life, including family and workplace relations, as well as politics. Self-discipline of Asian societies, according to the authors of the declaration, is a result of their culturally-conditioned need to achieve economic success. The conclusion that stems from such suppositions is a preferential treatment of social and economic rights over citizen and political rights – with a high value placed on “a right to develop”. Finally, an organic argument is propounded, according to which state and society constitute one integral body – with the government exerting its authority in the interest of common good. A simple consequence of this line of thinking is to admit that any criticism of government is in conflict with the interest of people at large.

18 ADAM W. JELONEK

The argumentation presented in the Bangkok Declaration was interpreted by the majority of observers as being in vein with Confucian tradition, as it glorified state and its structures. Confucianism, as the amalgamation of religious and philosophical thought, has a natural correspondence with Chinese tradition. Although, the large part of East Asia was directly affected by these teachings, it would be an exaggeration to say that Chinese political values were prevalent in Southeast Asia and, more so, Asia in general. Many enthusiasts of the Asian values ideology spread Confucianism throughout the entire region in a belief – by an analogy with Weber’s idea of protestant ethic – that their adherence to this philosophy would secure economic success for the region. Moreover, Confucianism called for acceptance of hierarchy, necessity to maintain social harmony, respect for and subjection to family and government, which was seen as a natural extension of the former2. This concept – one of the basic premises of the Asian values programme – demonstrated the inadequacy of Western democratic rule for Asian countries. The Asian concept of power is based on the supposition that there exists some special quality, attributable to specific individuals or social groups, rather than on the necessity to achieve special goals, important for a society. Consequently, for an individual to achieve success in the governmental structures, it is sufficient to live in accordance with his or her status. Any opposition to authority is regarded as an attack against the social system, and one cannot expect to be supported by society in his or her rebellion against the system, because society constitutes such system.

Religion is an integral element of Asian cultural values. In fact, it does not only accompany a life of each Asian, but also rules their existence from birth to death. It defines the value system at work and in social, economic and political life. This remains true, regardless of the obvious multiplicity of religions in East Asia (Buddhism, Islam or Christianity) and noticeable secularisation processes at work. Asian leaders claim that consistent separation of church and state that took place in the West – which restricted religion to private life – has resulted in a complete absence of moral values in public life and harmful growth of individualistic tendencies. In Asia, religion was attached to the sphere of politics. Under Asian tradition, both God and ruler are notions that are very closely linked, if not equivalent. In Confucian China, the emperor was the God; in Muslim countries of Southeast Asia the God is the ruler; in Hindu India or Buddhist Thailand the ruler is the God’s envoy.

The politicised nature of the debate on Asian values was not only motivated by differentiation of basic cultural elements. The essence of the matter was that “Asian values” were, and still frequently are, mistakenly contrasted with “Western values” – a different, not wholly defined concept. Some politicians, such as Mahathir bin Mohamad, used these contrasting strategies in the context of Asian values

2 Francis Fukuyama in the work, Confucianism and Democracy, regards Japan and South Korea as being influenced by Confucian tradition. Samuel P. Huntington also approaches this issue in a similar way (Huntington 1991: 300).


regeneration, by contrasting them, in a moral and economic sense, with the decadent West. The power of Asian values consisted in the fact that they were antagonistic to liberal, Christian and cosmopolitan values flooding in from the West. Asian values are frequently discussed in the context of East-West dichotomy, which increases a tendency of exaggeration and generalisation. Asian values – contrary to the intentions of their creators – with their commitment to community and family as the foundation of a society, respect for science and hard work, social obligations – were often shown in opposition to the West-specific breakdown of family, decadence, hedonism, exuberant individualism, moral degeneration and inevitable fall of Western civilisation.

This rhetoric was often resorted to in the absence of real arguments. The West was described as a hotbed of decadence and depravity. Asia was to triumph over the West because of its “superior” value system. Arrogance and imperialism demonstrated by Western civilisation, which was trying to impose its own rules over the world, were to come to an end. The future was to belong to Asians. A Singapore ambassador at ONZ, Kishore Mahbubani, was the master of rhetoric in Asian values. He exclaimed: “Go East, young people! We’ve reached the end of 500-year period of Western dominance. Mediterranean Sea was the ocean of the past, Atlantic is the ocean of today, Pacific will become the ocean of tomorrow”.

A slightly more moderate position in that regard was taken by a new generation of Thai politicians. One of the Thai ministers, Surin Pitsuwan, expressed this new stance in the following words: “I say to Americans: look at us, we are developing the same as you are. In many aspects, we are almost like your mirror reflection. But you should understand that we also have the right to differ from you in some respects”.

The economic crisis of the late 90-ties, brought about by a rapid decrease of export in the region, and subsequent breakdown of the currency system of East and Southeast Asia countries, contributed to the lowering of temperature of the debate on Asian values, and sharp-edged rhetoric figures gave way to much more moderate statements by Asian leaders and intellectuals.

4. Confucian values in the light of field research

The discourse, concerned with relations between traditional Confucian values and modernisation processes in East Asia, has gradually become the matter of interest for scholars and researchers. Apart from considering theoretical aspects of these interrelations3, some of them undertook to carry out complex field observations, which would verify the nature of interdependence between model and actual attitudes of respondents. One of the first scientists who raised the issue of

3 More extensive information on the contrasting social models can be obtained at (Tu 1994: 201–221; Gawlikowski 2001: 15–71).

20 ADAM W. JELONEK

Asian values in the context of their influence on the organisation of social relations and political life in contemporary East Asia countries was an American scholar, David I. Hitchcock4, from Washington Centre for Strategic and International Studies (Hitchcock 1994).

In his study on Asian values (Figure 1 and 2), he asked one hundred respondents from the United States and seven East Asia countries (China, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand) to rank what personal and social values or traits, from the two presented lists, they believed were particularly important to their countrymen. Two out of five most frequently indicated values or personal traits, and, correspondingly, two out of six most popular social values were on the priority list of both Asians and Americans. The answers supplied by Americans and Asians differed most significantly with respect to a relative importance that both sides attached to such issues as “social order and harmony”, “personal liberty” and “individual rights”. The first of the above-mentioned items was marked as “particularly important” by 11% of Americans and 71% of Asians, whereas the two remaining variables were indicated by 82% of Americans and 32% of Asians, and 78% of Americans and 29% of Asians, respectively.

In the further part of his study, Hitchcock once again interviewed one hundred respondents from East Asia and eighteen Americans, by asking them to carefully examine twelve different ruling practices. The respondents were to mark those

Figure 1. Social values as shown by Hitchcock’s research.

respec

t for g

overn

ment

making

decisi

ons b

y majo

rity

harm

ony

socia

l ord

er an

d harm

ony

socie

ty rig

hts

indivi

dual fr

eedom

innov

ative

ness

indivi

dual ri

ghts

cons

ensu

s

respon

sibilit

y of o

fficial

s

infor

mal co

nsult

ation

s

indep

enden

ce in

decisi

on-m

aking

freed

om of

spee

ch

public

debate

0102030405060708090

100

42

11

3748

58

7

71

11

27

7

32

82

4944

29

78

39

4

56 52

29

010

59

47

85

29

74

AmericansAsians

%

Social values in Hitchcock's research: Asians and Americans

Source: study on the basis of D.I. Hitchcock. 1994. Asian Values and the United States: How Much Conflict?, Washington: Center for Strategic and International Studies.

4 Extracts from the Hitchcock’s work can also be found at: (Jelonek 2004).


items on the list which, in their opinion, were the most important and those which were considered the least important. While compiling the list of practises, Hitchcock avoided using expressions, such as “right to sth” or “freedom of sth”, trying to formulate his questions in such a way as to obtain the highest possible level of objectivity.

Figure 2. Personal values as shown by Hitchcock’s research

indep

enden

ce

hard

wor

k

respec

t for s

cienc

e

hone

sty

respec

t and

obed

ience

helping

othe

rs

adhe

rence

to re

ligiou

s tea

ching

s

self-d

isciplin

e

self-r

ealis

ation

indivi

dual a

chiev

emen

ts

meetin

g one's

oblig

ation

s

succ

ess

AmericansAsians

%

0102030405060708090

100

46

8276

5969

15

5752

23

3

30

56

12 15

48

2230 33 33

59

39

1929

59

Personal values in Hitchcock's research: Asians and Americans

Source: study on the basis of D.I. Hitchcock. 1994. Asian Values and the United States: How Much Conflict?, Washington: Center for Strategic and International Studies.

Three out of twelve positions, i.e. “freedom of speech”, “choosing leaders in free elections” and “lack of discrimination due to race, religious faith, and complexion, gender, age or physical disability” were marked as the most important by 100% of Americans. As regards Asian respondents, the most frequently indicated items were: “free elections”, “honest work” (with reference to local conditions), “humanitarian terms and conditions of work and working hours”, and subsequently “lack of discrimination”. In comparison with Americans, Asians placed a higher value on social order and harmony, respect for authorities, status quo–maintaining harmony and respect for knowledge. At the same time, both Americans and Asians showed considerable appreciation for hard work, honesty, self-realisation, responsibility of public officials and innovativeness.

In summarising the results of his studies, Hitchcock arrived roughly at the same conclusion as the spokesmen for relativistic order, according to whom there is a fundamental difference in the hierarchy of values between Asian and American respondents. Apart from evident differences in the scope relating to “the ruling practises”, what emerges from Hitchcock’ questionnaires is a fundamental difference in the so-called “world of hidden convictions”, relating to personal and social values.

22 ADAM W. JELONEK

Hitchcock’s research studies had wide repercussions among the groups of scholars dealing with Asian values, and their results were used, more than once, to justify the legitimacy of different social systems in Western and East Asia civilisations, as well as to prove their possibly different evolutionary directions.

However, some serious methodological objections have been raised against the research made by Hitchcock, contesting a too-universal nature of the received results. The sample analysed by Hitchcock was too small to formulate such far-reaching conclusions. Hitchcock, an American, had conducted his research in person, the fact which undoubtedly affected the contents of the answers given. Furthermore, questionnaires (the fact which the American researcher was open about) were submitted for answers to the so-called opinion leaders – politicians, representatives of scientific and business circles. The opinion leaders of East Asia, with few exceptions, at the time of conducting the research, were in the middle of a great ideological, inter-civilisational debate, in which the universality of Western values was shown in opposition to the relativistic view presented by the East. These groups, by natural course of things, projected such an image of the value system as they would wish for their own communities. This programmatic subjectivism of the examined group was certainly not conducive to showing the actual condition and scope of the traditional Asian values embedment in contemporary societies of this region.

By means of comparable research instruments, a team of students from the Sociology Institute of Warsaw University, together with the Social Sciences Faculty of Hanoi University, took up in 2003, under my guidance, a research into the value system of Hanoi University students. In our studies, we tried to avoid making excessive generalisations on civilisations, as Hitchcock did, planning to make our project a small-scale endeavour. While conducting our research, we tried to provide maximum anonymity. What is more, the questionnaires in Vietnam were carried out by local co-workers, and each respondent was informed that the sole organiser of the research was the Social Sciences Faculty at Hanoi University, which allowed for a reduction of possible answer distortions (Jelonek 2004).

Having analysed our research, we notice the essential similarities, as well as no less important differences, in the respondents’ comprehension of values hierarchy, when compared with the published results of David Hitchcock’s questionnaires. These discrepancies, reaching now and then 30%, have bearing on the configuration of the values most-frequently declared as essential. Inasmuch as the most-frequently indicated personal values in Hitchcock research were: “hard work”, “respect for science”, “individual achievements”, “honesty” and “self-discipline”, a set of most frequently declared values, as revealed by our research, is as follows: “independence”, “achieving success in life” , “helping others” and “honesty”.

Basically, the traditional model of an individual beliefs and conduct is undermined only by a drastic fall in the number of people who consider “self-discipline” as an essential value (Tomala 2001: 149). At the same time, young Vietnamese respondents regard values promoting an exceptional role of community, such as


“helping others” and “respect for parents”, fundamental in Confucian tradition, with even more seriousness than the Asian elites examined by Hitchcock.

In the light of the above, we may ask ourselves if there is any essential change taking place in the way individuals define themselves and in the way they perceive social reality. It seems that the results of the research allow for the positive answer to this question – the proof is a high position assigned to the variable “being successful in life”. This value has been indicated by respondents almost as many times as “hard work”, “respect for knowledge” or “independence”. (The Asian elites examined by Hitchcock indicated “success” far less often than “hard work”: 26% and 76%, respectively). What can then be a meaning of such change?

Basic personal values, which attest to the vitality of tradition, including the Confucian tradition, seemingly have still many followers in contemporary Vietnam society. The same as before, a considerable number of our respondents set much store by such traits as” hard work”, “respect for knowledge”, “independence”, “honesty” or “obedience to and respect for parents”. Although, in comparison with the results obtained by Hitchcock, such values as “hard work”, “respect for knowledge” and “honesty” have received a little lower percentage of indications, still there are no grounds to say that this scope of values lost its social significance, to any larger degree. The more so if we assume that, in as much as the age and status of the people examined by Hitchcock created a bias towards conservative estimation of social significance attached to traditional values, young age of Vietnamese respondents inclined them towards more radical judgements.

From the point of view of the relations existing between traditional system of Confucian values and modernisation processes, the results of Vietnamese research, as compared with Hitchcock’s analysis, yield slightly different conclusions. We are dealing at this point with a process of supplementing traditional values with new values. In this way, a new cohesive and logical whole is formed, within the framework of which traditional values are, contrary to expectations, not being superseded by new Western-specific values, but are just becoming more entrenched, because of their connection with the goals set by new reality. Thus, obligations rooted in tradition become, in this model, interconnected with rights – in this case the right to achieve success. Success, in the eyes of young Vietnamese students, is not inevitably seen as stemming from individual achievements. The individualisation of goals, manifest in an individual’s striving for his or her own success and in an individual’s awareness of his or her rights, does not entail individualisation of actions, though, oftentimes, theoreticians of individualism interrelate an individual perspective of goals with individual model of action (self-steering response, self-reliance) (Berger 1995: 167–168). Under Vietnamese conditions, the most pragmatically convenient way to realize one’s goals is still, apparently, in a collective action – an attitude which is treated not so much as a value in itself, but as a convenient and effective method of action.

A considerable shift, in comparison with Hitchcock’s results, can also be noticed with respect to a set of social values, most-frequently declared as essential. The

24 ADAM W. JELONEK

most highly estimated values of Hitchcock research, such as “harmony” and “social order”, in the Hanoi results give way to such notions as: “community rights” and “individual freedom”. On the other hand, “respect for public officials” occupies third position in terms of the frequency of indications in both studies. A similarly high position is taken, in comparable results, by such variables as “respect for government” and “innovativeness”. A substantial, 20-percent difference between the respective indications for “individual freedom” leads to the conclusion that this value, in the opinion of Vietnamese students, should not be included in the catalogue of values considered as the most essential. In turn, 48% indications for “resolution of disputes by means of a public debate” means that this social value occupies the fifth position in terms of the number of indications.

As much as 65% of indications for “individual freedom” (in comparison with 31% from Hitchcock research) may be taken as a harbinger of a growing importance attached to ethic of rights; in the results from Vietnamese research, it is the most-frequently marked value as well. It is also important to note that the examined Vietnamese students passed over the values highly estimated by the respondents from Hitchcock research. Such omitted values include: “harmony” (28% against 58% in Hitchcock research), “social order” (28% against 71%) and “consensus” (12.3% against 39%). Special importance attached to these values, was, according to the American scholar, perhaps the most fundamental feature of the Asian view of the public sphere, in addition to being a key to understanding a role of an individual in East Asian society.

In the light of Vietnamese research, some new scientific hypotheses claim our attention. A simplistic version of “relativism” of political systems, emerging from Hitchcock research, does not seem to find confirmation in this case. Global transformations and their impact on Vietnamese youth, both seem to attest to the ongoing hybridisation process, by which traditional Confucian values are being supplemented with the selectively-treated values, borrowed from the liberal West.

5. Liberal and Confucian values in Poland and Taiwan

I have decided to additionally verify the hypothesis on deep divisions between the value systems of Western and Confucian tradition, by analysing durability of traditional Confucian value system at the example of an Asian country, undergoing the most advanced processes of social, political and economical modernisation, namely Taiwan. My point of reference for Taiwan research was the measurement applied to the value system of Polish society – as a representative of Western civilisation.

Taiwan, one of the famous Asian Tigers, apart from achieving spectacular economic success over the recent years, has become the arena for fundamental transformations in political life. Rapidly advancing reforms of the main public life


institutions, began in 1996, were tantamount to the transformation of a political stage model – from the authoritarian state, through various intermediate stages (the so-called, limited democracy), to a fully democratic system, based entirely on the models derived from the West. Such a revolutionary change of the country system is considered by politologists to be a historically unprecedented event (Chao, Myers 1998).

In 1949, the activists from the Nationalist Party (Kuomintang – KMT), after having suffered defeat at the hands of communist forces and having escaped from the continental China, made an attempt to establish their strategic abutment in Taiwan. Few observers believed that they would ever succeed in establishing in Taiwan efficiently operating economy, civil administrative structures, let alone foundations of a democratic system. These fears, as it later turned out, proved unjustified, to a large extent.

The applied research procedure did not basically differ from the one adopted for research in 2003. It was also based on a questionnaire model, as was previously applied by Hitchcock, consisting in contrasting traditional Confucian values with idealised liberal values of the West. Taiwan research was performed over the period ranging from October to December 2007, and involved a quota sample of 418 students (215 women and 203 men). It covered three biggest academic centres in the city (two public ones: National Taiwan University and National Chengchi University and one private, Tamkang University). The second part of the research relied on questionnaires, which were carried out among the students of Warsaw universities. Within the period from March to May 2008, 463 persons were examined, including 240 women and 223 men. The studies covered the greatest public universities in the capital city of Warsaw, including Warsaw University, Warsaw University of Technology and Warsaw School of Economics, as well as the private school, B. Jański Higher-School.

Although, the conducted studies register only a state of facts at one moment in time, which does not provide grounds for making legitimate statements on the course of the processes of social change and political values modernisation, it would be reasonable to expect that, within two decades of a democratic rule, the interactions between a sphere of axiology and political praxis should take place.

The research results yield very interesting conclusions. As far as personal values are concerned (figure 3), almost all the answers given by Taiwan respondents reveal their tendency to indicate traditional Confucian values equally frequently or even more frequently as the respondents of both Hitchcock and Hanoi research. And thus, 74.3% of the examined subjects opted for “hard work”, i.e. a little fewer than in Hitchcock research, though far more than in Vietnam research. The indications of the typically Confucian values, such as “respect for education” (71.1%), “obedience to parents” (41.1%), “self-discipline” (33.2%) or “fulfilling one’s obligations towards others” (47.2%), are more frequent or noticeably more frequent among Taiwan respondents than it is the case with both Vietnamese research and research conducted by the American scholar. The values from within the

26 ADAM W. JELONEK

Figure 3. Personal values as shown by the research into the preferences of Taiwan and Polish students

Indep

enden

ce

Hard w

ork

Respec

t for s

cienc

e

Hones

ty

Obedien

ce to

parents

Helping

othe

rs

Adheren

ce to

relig

ious t

each

ings

Self-disc

ipline

Self-re

alisa

tion

Indivi

dual a

chiev

emen

ts

Meetin

g one's

oblig

ation

s tow

ards o

thers

Succe

ss in

life

0

10

20

30

40

50

60

70

80

90

49

7774

53

71

56

4238 41

32 3531

15 17

49

16

36

58

35 37

47

15

31

59

WarsawTaipei

%

Source: own work.

scope of Western liberal values, which were indicated as essential by Taiwan respondents, are similar to the answers indicated in the previous research carried out in the territory of East Asia. “Self-discipline” was indicated by 49.2% of the examined persons, “self-realisation” – 36.3%, “individual achievements” – 34.8%, and “success in life” – 31.7%.

It is necessary to note at this point that the value system chosen by the comparative group of Polish students, paradoxically, bears greater resemblance, in many respects, to the idealised model of traditional Confucian values, than to the model of liberal West. With regard to such issues as “independence” (77.3%), “meeting one’s obligations” (14.6%) or “individual success in life” (59.4%), Polish students are, in actual fact, catching up with American respondents. However, in the case of such values as “respect for education” (56.4%), “hard work” (52.8%) or “obedience to parents” (32%), Polish respondents appear to be, on the basis of their answers at least, very Confucian-like.

Coming back, however, to the analysed issue of influence of the democratisation process on a hypothetical transformation of the system, it seems that, within the observed time horizon, the system has remained largely unchanged. What is also worth highlighting at this point is that the respondents in both studies were students, that is to say, people who were born, or at least brought up, in a new democratic reality.

Even more interesting conclusions on the relations between Asian values and liberal democracy can be drawn from the second part of the questionnaire,


concerned with the analysis of social values. It is evident at first sight that the value system of Taiwan youth, on most dimensions, is not essentially different from the value systems held by the respondents from Hitchcock or Vietnamese research. For example, a relatively high number of indications of Confucian values among Taiwan respondents was noticed with reference to such variables as: “respect for authorities” (39.1%), “harmony” (44%), “consensus” (37.2%) or “society rights” (42.4%), as well as a relatively low position for “resolution of debates by means of a public debate” (31.6%) or “independent thinking” (25.4%) from the set of liberal values. At the same time, one can notice a considerable growth in the area of such variables of liberal values as: “making decisions by majority” (46.7%), “individual freedom” (73.3%) or “freedom of speech” (67.4%).

Figure 4. Social values as shown by the research into the preferences of Taiwan and Polish students

Respect fo

r auth

orities/g

overnment

Decision-m

aking by majorit

y

Harmony

Social o

rder

Society rig

hts

Individual freedom

Innovativeness

Individual rights

Consensu

s

Responsib

ility of o

fficials

Disputes: p

rivate se

ttlements

Independent thinking

Freedom of speech

Disputes: p

ublic debate

010

20304050

6070

8090

100

39

15

47

92

44

9

69

20

42

15

73

85

46

61

37

57

37

8

5965

23

3

2515

6773

32

58

WarsawTaipei

%

Source: own work.

In comparison with the values estimated highly by Polish youth, Taiwan students are still the adherents of the considerably different values of a traditional Confucian type. The most notable differences between the two could be observed within the scope of the meaning attributed to such variables as “social order” (49%), “harmony” (35%), “society rights” or “consensus” (each 29%). The probable reason is that the terminology used in the questionnaire could be partly incomprehensible for Polish respondents. Additionally, practical non-existence of such terms in the public discourse could lead to their meaning being distorted by subjective perspectives or interpreted differently, in accordance with distinct cultural context (for example, “resolution of disputes by means of private settlements). What really deserves to be highlighted in our analysis of the relations between traditional Confucian

28 ADAM W. JELONEK

values and procedural democracy is the fact that most of the values presented to respondents as belonging to a liberal sphere are considered, by both societies, as very important. With regard to the above, both societies differ only negligently (except for a variable “decisions made by majority”), taking into account that the two groups of students come from completely different cultural context and political traditions. The occurrence of such discrepancies may be a result of the deeply rooted Confucian tradition, but other explanations are also possible.

The results of the comparative studies carried out in both Taipei and Warsaw, as well as the conclusions from previous Hitchcock research and “Vietnam 2003” project, shed an interesting light on the changes occurring in East Asia. These results also reveal an interesting correlation of Confucianism and liberal democracy, or at least its constitutional procedures. On the basis of the collected scientific samples, it is hard to believe unreservedly in a vision of two completely different cultures, liberal West and Confucian East, as proposed by cultural relativists. Similarly, it is hard to convince oneself that the existence of the alleged internal obstacles to democracy development in traditional Asian value systems is a true fact.

The obtained results prove the applicability of a modernity model, according to which value systems are subject to slowly, though inevitably, advancing convergence processes. It is not advisable, however, to reach unambiguous conclusions on this point. An essentially-binary vision of communal, hierarchical reality of Eastern society, promoted first by cultural relativists and then by Hitchcock, contrasted with individualistic and liberal Western society, does not suffice to make an accurate analysis of the changes on axiology plane. In as much as the obtained statistical data provide grounds to observe that a traditional model of society, based on harmony and social consent, has partially lost its impact, the obtained data do not allow for stating unequivocally that the change in this case consisted in a noticeable shift in the subjects’ indications of Western value system. Due to multiplicity and variety of relations between different cultural and social-organisational aspects, it is insufficient to discuss them solely in terms of models’ take-over and adaptation to the context of a domestic culture.

6. Is there really any such thing as Asian values?

What are Asian values in essence? To what roots can East Asian societies, now at the crossroads, own up to? The fact that this issue is exploited for political ends both by Asians themselves and external critics often leads to very convenient generalisations. Prof. Krzysztof Gawlikowski, one of the leading Polish scholars specialising in Asian values, states in one of his works: “Distinctiveness of philosophical and religious traditions of Asia is basically indubitable”. There is a general consent on this point. Nevertheless, if we care to take a closer look at the phenomenon of Asian values, we will see that it is based on the whole series of premises which cannot be defended on methodological grounds. In fact, the


term “Asian values” is in itself suggestive of some uniform social, economic and political system; that we can determine and distinguish a set of values shared by inhabitants of Asian states, which reaches beyond the dividing lines of national states and of religious and ideological influences. Is this really so?

First and foremost, if we look at the issue of Asian values outside of their special context, we can notice that they are similar to a set of conservative values, which are absolutely commonplace and occurring not only in the analysed area, frequently attributed to societies in general or non-modernised societies – strong leadership, respect for government, law and order, communitarian orientation putting emphasis on the priority of community interests over individual interests, and stressing the importance of family values. In the light of the above, it is difficult to answer the question whether Asian values are merely a stage in the modernisation process in the “taking-shape” of Eastern societies.

Similar ambiguity accompanies the consideration of the second issue. Asian countries were founded on the basis of very distinct and mutually independent traditions. We can roughly assume that East Asia, with respect to culture, bears an unmistakable mark of Chinese influence and is imbued, to varying degrees, with elements of Confucian philosophy. Western Asia is a mixture of Hindi and Muslim culture. Southern countries, such as Indonesia and Malaysia, are Islamic to a considerable extent. On the other hand, Thailand and Burma cultures are shaped by Buddhist influences, whereas Philippine reality would be difficult to understand without a reference to Catholicism. In any case, Western culture put down its roots in every place on earth, especially from the beginning of 20th century. The respective countries know very little about each other. Even educated Japanese might find it hard to answer the question whether Iran and Iraq are located in Asia.

History meanders add more complexity to this situation. It is difficult to find any trace of Asian solidarity. Japanese still consider themselves the elite, superior to the rest of Asia nations. The inhabitants of Thailand regard any concept of “common values” with great distrust, perceiving it not so much as a sign of Western cultural invasion, but more so as an expression of Malaysian or Chinese imperialism. The Chinese, regardless of dramatic historical events of the last century, did not quite renounce their ancestors’ belief that Chinese people are the centre of all civilised world, surrounded by prevalently barbarian nations, deprived of any value system. Great Chinese Diaspora, which plays an essential role in the economy of almost all regional states, is seen by local populations as a natural enemy. The studies show that an average Malay, when asked about a potential threat to his or her own traditions, is certain to point to “excessive presence of Chinese culture”, rather than to occidentalisation (Wan 1983: 84). The idea of Asia, as one entity with uniform value system, raises serious doubts, even if confronted with these arguments only.

To summarise, Asia is too big in size and too diversified – considering its richness of cultural and historical traditions, multiplicity of colonial and modern

30 ADAM W. JELONEK

history experiences – to be reduced to a common denominator. What is more, culture itself is too dynamic and creative phenomenon to allow for very stereotypical constructions. It is so, because each culture covers independent, historically co-occurring traditions and interpretations, as well as competing values and constant intercultural exchanges with other systems. Such diversity does not only pertain to the entire geographical regions or civilisational areas, but also to states, nations or even local group themselves.

Information about the authorProf. Adam W. Jelonek – Director of the Institute of the Middle and Far East Studies at the Faculty of Political and International Studies at Jagiellonian University.

Bibliography

Alexander, K.C., Kumaran P.P. 1992. Culture and Development: Cultural Patterns in Areas of Uneven Development, New Delhi: Sage Publications.

Banfield, E. 1958. The Moral Basis of a Backward Society, New York: The Free Press.Berger, B.M. 1995. An Essay on Culture: Symbolic Structure and Social Structure, Berkeley: University

of California Press.Berger, P.L. 1995. Rewolucja kapitalistyczna, Warszawa: Oficyna Naukowa [Berger, P.L. 1987. The

Capitalist Revolution, New York, Basic Books]Chao, L., Myers R.H.. 1998. The First Chinese Democracy: Political Life in the Republic of China on

Taiwan, Baltimore: Johns Hopkins University Press.Fukuyama, F. 1995. Trust: The Social Virtues and the Creation of Prosperity, New York: Free Press.Gao, X. 1996. Culture and Development: Macro-cultural Reflections on Development in: Culturelink,

nr 20.Gawlikowski, K. 2001. Jednostka i władza w cywilizacji wschodnioazjatyckiej, in: Gawlikowski, K.,

Potocka E. (ed.) Korea, doświadczenia i perspektywy, Toruń: Marszałek.Hall, E.T., Reed H.M. 1990. Understanding Cultural Differences, Yarmouth: Intercultural Press, Inc.Harrison, L. 1985. Underdevelopment Is a State of Mind, Lanham: University Press of America.Harrison, L. 1997. The Pan-American Dream – Do Latin America’s Cultural Values Discourage True

Partnership with the United States and Canada, New York: Basic Books.Hitchcock, D.I. 1994. Asian Values and the United States: How Much Conflict?, Washington: Center for

Strategic and International Studies.Huntington, S.P. 1991. The Third Wave: Democratization in the Late Twentieth Century, Norman: University

of Oklahoma Press.Huntington, S.P. 1993. The Clash of Civilizations? in: Foreign Affairs, Summer.Ishihara, Sh. 1992. The Japan That Can Say No. Why Japan Will Be First Among Equals, New York:

Touchstone Books.Jamieson, I. 1980. Capitalism and Culture: A Comparative Analysis of British and American Manufacturing

Organizations, London: Gower.Jelonek, A.W. (ed.) 2004. Młodzież wietnamska. Systemy wartości. Stereotypy Zachodu, Warszawa:

Scholar.Kroeber, A.L., Kluckhohn C. 1952. Culture: A Critical Review of Concepts and Definitions, in: Papers

of the Peabody Museum of American Archeology and Ethnology, nr 1, Vol. XLVII.


Leipziger, D.M., Vinod T. 1993. The Lessons of East Asia: An Overview of Country Experience, Washington: World Bank.

Lewis, W.A. 1955. The Theory of Economic Growth, Homewood: Irwin.Myrdal, G. 1968. Asian Drama: An Inquiry into the Poverty of Nations, New York: Twentieth Century

Fund.North, D. 1990. Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge

University Press.Rohwer, J. 1995. Asia Rising, New York: Simon & Schuster.Schumpeter, J. 1961. The Theory of Economic Development, Cambridge: Harvard University Press.Tomala, K. 2001. Prawa człowieka w Chińskiej Republice Ludowej, in: Tomala, K. (ed.) Chiny. Przemiany

państwa i społeczeństwa w okresie reform 1978–2000, Warszawa: TRIO.Tu, W.-M. 1994. Humanizm konfucjański a demokracja, in: Michalski, K. (ed.) Europa i społeczeństwo

obywatelskie; rozmowy w Castel Gandolfo, Kraków: Znak.Wan, H. 1983. Race Relations in Malaysia, Kuala Lumpur: Heinemann Educational Books.Weber, M. 1984. Szkice z socjologii religii, Warszawa: KiW [Weber, M. 2002. The Protestant Ethic and

The Spirit of Capitalism, Harmondsworth, Penguin Books].


Przemysław Hensel

Management in high- and low-context cultures – Poland and Korea in the light of empirical research

1. Introduction

Korean business has been present in Poland since the mid-1990s and its significance for Polish economy – both with respect to the volume of direct investment and transfer of knowledge – cannot be underestimated. However, the Polish-Korean cooperation, though certainly rational from the point of view of economics (low labour cost, convenient localisation in the European Union), is not always smooth. It can be hypothesised that these conflicts are caused by cultural differences.

2. High- and low-context cultures

Each organisation’s modus operandi is determined not only by its internal culture, but also by the national culture, in which an enterprise operates (Hampden-Turner and Trompenaars 2002, 2003; Hofstede 2000).

In order to estimate cultural differences and similarities, a research, modelled on the study previously conducted among South Korean, Chinese and American respondents, has been performed again on a sample of Polish subjects (Kim, Pan and Park 1998).

The Polish study has been based on the concept of high- and low-context cultures (Hall 1976).

A characteristic feature of high-context cultures is that their members are connected by strong relationships, there is a strictly-observed social hierarchy, and within the framework of social communication the things said out aloud are as important as the things passed over in silence. A lot of information in the course of human interaction is derived simply from the situational context, i.e. from the former interactions between the agents, as well as from their convictions, principles and rules, which are understood and shared by everyone, without even being publicly expressed. For instance, when people brought up in the cultures of high context enter into negotiations, they are seldom explicit about their priorities, because their negotiating partner may, on the basis of the history of their mutual relations to date, independently draw conclusions as to the nature of these priorities (Adair and Brett 2005: p. 46). High-context cultures put

Management in high- and low-context cultures – Poland and Korea in the light of empirical… 33

great emphasis on maintaining harmony within a group, which practically means that individual emotions hardly ever find direct expression. In other words, each member of a society is very strongly obliged to conform to social norms, the observance of which is closely monitored by other members.

In low-context cultures an individual and his or her success are of fundamental importance, while the collective body, to which he or she belongs, is of little importance. The society has much less controlling power over the life of the individual, allowing him or her a larger margin of freedom, and it is less restrictive of the individual decisions of its members.

For the purpose of performing the previously mentioned research, Kim, Pan and Park used five dimensions (indicators), described below, to portray cultures.

Social orientation. In high-context cultures a high value is placed on conformism, the common good and deep relations between members of the group, reaching far beyond their family sphere and circle of closest friends. On the other hand, in low-context cultures individuals participate in group meetings on a voluntary basis, motivated to do so by rational calculation. If the membership in a given group does not bring them expected benefits, they are free to leave it.

Responsibility. In high-context cultures superiors willingly assume responsibility for the actions taken by their subordinates, while, in low-context cultures, each individual bears responsibility only for him- or herself, and very often responsibility is spread out within the entire organisation and it is difficult to find a person responsible for a given action.

Confrontation. In high-context cultures people try to avoid an open confrontation and expression of their views. The harmony within a group is maintained at all costs. Minor conflicts are resolved by pretending that they are non-existent, whereas more serious conflicts are first resolved amicably, outside of the main communication channels. Such avoidance of the open conflict, and even of the public expression of one’s opinion, is caused by the fear of losing face. The revealed conflict may, with time, become resolved to the advantage of either of the parties, meaning that another party would lose its face. For the representatives of high-context cultures, this would be a very degrading experience, which could even make them unable to function in a society (Yau-fai Ho 1976).

As regards low-context cultures, there is a far less tendency to avoid conflicts and a higher tendency to reveal conflicts on a public forum, as part of the formal communication channels.

Communication/sense of obligation. Theoretically speaking, in high-context cultures, in the majority of social and business situations, oral promises are sufficient and there is no need to support them by any formal documents. The communication within such cultures is often carried out without any words; the meaning is conveyed through the communicative context, one’s place in a social hierarchy and body language. In low-context cultures, obligations take form of extended documents, the provisions of which provide for and record all possible situational variants – despite the fact that each contract is, by definition, incomplete (March i Heath 1994).

34 PRZEMYSŁAW HENSEL

Dealing with new situations. People from high-context cultures perform very well within the framework of the established social structures and systems, yet they have great difficulties in dealing with new situations. People functioning in low-context cultures fare much better in the situations demanding a creative approach to the new, unknown problems.

3. Research method

As part of the original study, the values of the foregoing indicators were measured by means of a 16-item questionnaire, carried out in Southern Korea, China and the United States. For the purposes of Polish research project, the questionnaire was translated from English into Polish, and, subsequently, the American native speaker, who also knows Polish, performed a backward translation into English in order to verify whether the questions formulated in Polish convey the same meaning as the questions in English. Afterwards, the questionnaire was anonymously carried out among the group of 160 randomly chosen respondents1. The original set of questions was supplemented with the questions pertaining to one’s age, gender, working experience and position in an organisational hierarchy.

4. Korea and Poland – cultural similarities and differences

The results of the research and its comparison with the results obtained in Southern Korea are presented below. Whenever necessary, the similarities and differences, relative to the results of the previous Chinese and USA research studies, have been indicated as well.

Table 1. The values of indicators of the respective cultural dimensions

Indicator

Poland(N=160)

United States(N=96)

China(N=96)

Southern Korea(N=50)

average standard deviation average standard

deviation average standard deviation average standard

deviationSocial orientation 3.06 0.50 2.78 0.43 3.31 0.55 3.37 0.44Responsibility 2.93 0.84 2.90 0.65 2.98 0.93 3.26 0.77Confrontation 2.72 0.73 2.55 0.60 2.87 0.82 3.14 0.50Communication/sense of obligation 4.17 0.68 3.41 0.74 3.49 0.94 2.96 0.74

Dealing with new situations 2.57 0.69 2.19 0.49 2.78 0.64 3.72 0.64

Source: the author’s own study based on the research by D. Kim, Y. Pan and H.S. Park. 1998. High- Versus Low-Context Culture: A Comparison of Chinese, Korean, and American Cultures. Psychology & Marketing, nr 6 (15).

1 The sample was constituted by the students from the Management Faculty of Warsaw University. Women constituted 48.1% of the entire sample, men 51.9%. Age range: 19–49 years.


Tab. 2. The values of the t-Student test (two-sided)

IndicatorPoland–United States Poland–China Poland–Southern Korea

t t t

Social orientation 4.75* –3.65* –4.21*

Responsibility 0.37 –0.39 –2.55**

Confrontation 1.99** –1.51 –4.65*

Communication/sense of obligation 8.24* 6.21* 10.32*

Dealing with new situations 5.09* –2.52** –10.94*

* p<0.01** p<0.05

Source: own study.

4.1. Social orientation

The higher the value of this indicator, the greater the collectivism and the stronger the informal bonds with the group members.

The research conducted shows that the indicator value of the social orientation for Poland differs (p < 0.01), from the value of the comparable indicator for not only Korea, but also for the United States and China. With that regard, Poland is located halfway between the United States and Korea – the culture of our country is characterised by less individualism than American culture and, to the same extent, by higher individualism than Koran culture.

4.2. Responsibility

The higher the value of this indicator, the stronger the sense of responsibility for the actions of subordinates.

The value of the responsibility indicator for Poland does not differ, in a statistically significant way, from the values of comparable indicators for the United States and China (respectively: 2.90; 2.90; 2.98), nevertheless there is a difference with respect to this indicator’s value for Korea (3.26, p < 0.05). These results mean that Korean managers and workers perceive the superiors’ role and scope of responsibility for the mistakes made by their subordinates differently than their Polish equivalents.

4.3. Confrontation

The higher the value of this indicator, the stronger the tendency to avoid confrontation.

The inclination for confrontation is lower in Poland than in the United States (2.55; p < 0.05) and, at the same time, higher than in Korea (3.14; p < 0.01). In case of China, there is no statistically significant difference. Thus, Polish workers are more willing to make their conflicts public than their Korean counterparts.


4.4. Communication/sense of obligation

The greater the value of this indicator, the greater the reliance on informal communication.

The results obtained with that regard in the course of the original research (Kim, Pan i Park 1998) turned out to be inconsistent with those anticipated by theoretical considerations, since American respondents were, as it seems, to the same extent as the Chinese, attached to informal communication. Also the American and Chinese sample revealed a higher tendency for informal communication than the Korean sample. The research carried out in Poland yielded equally surprising results, as the indicator for Poland reached the highest value, higher even than that of Chinese (the differences between the average of Polish sample and averages of the remaining countries is statistically significant at 0.01 level). It may mean that either the theory of high- and low-cultures regarding communication is false, or – what is more probable – that the questions formed to estimate the value of the indicator for this cultural dimension, have been inappropriately selected.

4.5. Dealing with new situations

The higher the value of this indicator, the weaker the ability to deal with new situations.

Figure 1. The means for the respective countries and dimensions of cultural description

socialorientation

USA

PL

KRKR

KR

KR

KR

PL

PL

PL

PL

USA

USAChRL

ChRLChRL

ChRL

ChRL

USA

USA

responsiblity

confrontation

comunication

sense of obligation

dealing with

new situations

2.0

2.6

3.2

3.8

4.4

Source: own study.


The studies demonstrate that Poles declare their capacity to deal with new situation at the similar level to Chinese and, at the same time, higher than Koreans. Americans occupy the first position among these four populations, declaring that they have fewest problems in dealing with new situations.

4.6. The comparison of the answers to specific questions

While comparing the answers to specific questions given by the respondents from Polish and Korean group, it is necessary to highlight, first and foremost, the following issues.

There is a noticeable difference in respective groups’ inclination to learn new ways of thinking. Poles do it very willingly (but still less willingly than Americans), while Koreans show the lowest, from among the examined groups, willingness to acquire new ways of thinking. Likewise, the need to exert one’s thinking abilities in new and unknown situations is much more problematic for Koreans, judging from their declarations, than it is for Poles.

As has already been said, both the original research and its Polish version yielded contrary-to-expectations answers to the questions about the extent to which one’s oral promise makes him or her obliged to act in accordance with it. The questions read: “If a man gives somebody his word, he is from now on obliged to stay true to it, without having to be reminded of that fact”. Polish subjects agreed with this statement to the largest extent from among the four groups (4.16), the second position was taken by Chinese (3.18), the third by Americans (2.88), and the last by Koreans (2.45). These results correspond neither to practise nor theory of functioning in Polish and Korean society. This issue is worth further investigation in order to find the causes of this discrepancy.

For Polish respondents, the harmony within a group is of far less importance than the commendable performance of work. In reply to this question, Polish subjects obtained the value of indicator (2.96), which was not only statistically lower than that of Koreans (4.06), but also lower than that of Chinese (3.85) and Americans (3.14).

Koreans, to far greater degree than Poles, are apprehensive of the situations in which they might be forced to exert their thinking abilities to come up with new solutions, and, therefore, try to avoid them (average of 2.24 for Poland, 3.64 for Korea).

Surprisingly, both Poles and Koreans attach similar importance to their social status. However, everyday experience seems to contradict these findings. Perhaps, such discrepancy is caused by a different understanding of the term “social status” in both cultures. In Korea, the word signifies the status resulting from one’s personal traits such as age and gender, while in Poland the social status, as associated with individual achievements (education, earnings, professional success, etc.), is of key importance.


4.7. Variability of answers in the Polish sample

Within the scope of the Polish sample, no correlation between the answers given and the respondent’s employment status and his or her place in the organisation hierarchy has been observed. There is a week positive correlation between the respondent’s age and working experience and the respondent’ view that responsibility for the mistakes made by a worker is to be borne, first and foremost, by his or her superiors (0.26, p < 0,01).

As regards 12 out of 16 items from the questionnaire, no differences of statistical significance have been observed in the answers provided by women and men. The biggest difference was noticed in case of the question concerning one’s inclination to learn new ways of thinking (the value of this indicator for women exceed that of men by 0.55, p < 0.01). Women have also shown a higher tendency to regard understanding of one’s “true self” as more important than other life accomplishments, as compared with men (the difference of 0.5, p < 0.01). Women, to less extent than men, are ready to subordinate their interests to those of the organisation (the difference of 0.36; p < 0.05) and, similarly, they set much more store by living in harmony with other people than by commendable performance of a given task.

6. Conclusions from the research

The value of the global contextuality indicator2 of Polish culture, resulting from the research, amounts to 47.9. It gives our country a position above that of the United States (42.9), but definitely below Southern Korea (53.5). With regard to the four out of five examined cultural dimensions, Poland is located halfway between the United States and China, and at a much longer distance from Korea. These results justify the hypothesis made at the introduction that the cooperation between the representatives of these two countries may be hindered by cultural factors.

Polish workers are more likely to strive for individual success than their Korean counterparts, and value less the interest of the group than the individual interest. According to Polish respondents, an employee should be held responsible for his or her own mistakes, in that case, a Polish superior should not feel ashamed, as much as his or her Korean counterpart, of the mistakes made by subordinates. Whenever a conflict arises at a workplace, Poles (decidedly more eagerly than Koreans) will aim at confrontation and resolution of such conflict on the public forum. For the people brought up in Korean culture, such confrontation means the loss of face and, for that reason, they will try to avoid it.

2 The indicator was calculated by summing up the means for specific questions, provided that the results have been inversely re-scaled for some questions, so as to make all the variables proceed in the same direction.


At the same time, contrary to theoretical assumptions, Poles will be more willing than Koreans to use informal communication channels and enter into a cooperation based on oral promises. Finally, Polish employees fare better in new situations, as compared with their Korean colleagues.

Information about the authorDr hab. Przemysław Hensel – Chair for Management Systems, Faculty of Mana-gement University of Warsaw. E-mail: [email protected].

Bibliography

Adair, W.L. i J.M. Brett. 2005. The Negotiation Dance: Time, Culture, and Behavioral Sequences in Negotiation. Organization Science, nr 1 (16), s. 33–51.

Hall, E.T. 1976. Beyond Culture, New York: Anchor Press.Hampden-Turner, C. i A. Trompenaars. 2002. Siedem wymiarów kultury. Znaczenie różnic kulturowych

w działalności gospodarczej, Kraków: Oficyna Ekonomiczna.Hampden-Turner, C. i A. Trompenaars. 2003. Siedem kultur kapitalizmu. USA, Japonia, Niemcy, Francja,

Wielka Brytania, Szwecja, Holandia, Kraków: Oficyna Ekonomiczna.Hofstede, G. 2000. Kultury i organizacje. Zaprogramowanie umysłu, Warszawa: Polskie Wydawnictwo

Ekonomiczne.Kim, D., Pan, Y. i H.S. Park. 1998. High- Versus Low-Context Culture: A Comparison of Chinese,

Korean, and American Cultures. Psychology & Marketing, nr 6 (15).March, J.G. i C. Heath. 1994. A Primer on Decision Making: How Decisions Happen, New York: Free

Press.Yau-fai Ho, D. 1976. On the Concept of Face. The American Journal of Sociology, nr 4 (81), s. 867–884.


Halina Grzymała-Moszczyńska

Intercultural Trainings in Business

1. Introduction

Business people are currently one of the most numerous groups moving between various countries and cultural settings. The decision to cooperate with people coming from other cultures is either their own or their company’s, for which it is obvious that their professional skills, as demonstrated in their native country, will allow them to achieve a professional success in a new environment. The conviction is supported by a silent assumption that the goals of operating in a business environment are universal and that there are equally universal means to achieving these goals; that they are independent from the cultural context and everywhere work in exactly the same way.

As a result of such convictions, employees send to work abroad are almost completely unprepared for functioning in a new cultural setting. Companies sending employees abroad or establishing business relations with foreign entities operating on their own market do very little to equip employees with relevant skills that would help them achieve success in a culturally different environment. HR departments responsible for recruiting employees for such tasks often believe that being skilled in performing certain tasks in the native country, coupled with the ability to speak English, the universal language of business, is enough to expect that such people will successfully cooperate with foreign business partners. It is a widespread conviction in spite of numerous and very costly cases of failures of people delegated to work in an international setting. According to some evaluations such failures as seen as „accidental” and a result of adverse circumstances, and not as a result of a systemic error in preparing the employee to carry out given tasks.

Similar conviction is shared by companies which establish international cooperation and transform from homogenous into culturally heterogeneous environments. Caligiuri, Tarique i Jacobs (2009) in their review of research and analyses related to managerial staff demands in multicultural settings, note a rapid increase in the number of people who work now or will work in the future in such settings. They quote PricewaterhouseCoopers’ survey polls which demonstrated that, according to the surveyed managers, the necessity to fulfill managerial duties in varied multicultural environments is one of the sources of the biggest problems for future development of the business activity. Improving one’s abilities to perform

Intercultural Trainings in Business 41

such work becomes therefore increasingly important. Later on we will analyze the methods that can help reach the goal.

2. Getting ready to interact with other cultures

The first type of activities that will be discussed here is intercultural trainings, or training methods designed to help people, who move from one culture to another, to function in the new culture in a way similar to the level of effectiveness in their native culture1.

Paige and Martin (1996) presented a brief review of intercultural training development stages. The beginnings of the trainings are related to the opening of the Foreign Service Institute in the United States in 1946. Representatives of American economy and politics had to be sent to work abroad and it was necessary to prepare them for their new tasks. Anthropologists working for the Institute, such as Stanley Hall, were told to exceed the current standards of academic teaching which focused mainly on teaching history and politics. The training they designed aimed at providing the course participants with knowledge about unrealized, extralingual non-verbal aspects of intercultural communication such as time and space, and above all about various aspects of non-verbal communication. Hall’s books The Silent Language (1959) and The Hidden Dimension (1966) are examples of the type of information that was given to the participants of the courses.2

The second stage of the acculturation training development took place in the 1960s and it was related to the preparation of Peace Corps volunteers for foreign missions. The model was described as “academic”. During lectures participants learned about the cultures of the countries where they would start work. The model failed, but both teachers and students started to realize that in order to function effectively in a foreign country one needs not only historical and social information provided by lectures, but also specific abilities and a level of self-awareness unattainable by attending lectures only.

As result a new method, so-called total immersion, was developed. The method consisted of building on Hawai models of Asian villages similar to villages where the volunteers would work in the future. The villages were “inhabited” by people who originally came from the given culture and now were US citizens. They taught the volunteers how to behave properly and explained the rules of the given culture. In this way, before they would actually go to the real place, the volunteers could see what the job would require also in terms of relations with local people, and they could acquire necessary skills. Due to remarkable cost the method was discontinued.

1 Summary of the practical knowledge but also theory being the basis of organized trainings can be found in the following sources: (Handbook… 2004), chapter on acculturation trainings (Bhawuk, Landis and Lo 2006) as well us articles published in the International Journal of Intercultural Relations.

2 These books were translated into Polish: (Hall 1976, 1987.)

42 HALINA GRZYMAŁA-MOSZCZYŃSKA

In the 1970s another method of intercultural training appeared. It was a method based on sensitizing participants to the role played by prejudice, stereotypes, value systems and beliefs in human relations. The model was rejected relatively quickly. Being confronted with their negative beliefs turned out to be a very unpleasant experience for the participants. Additionally, not all trainers had sufficient abilities to carry out debriefing, that is, to talk with the participants about their feelings during the training, and to show them the relation of those feelings with situations they would face when they would perform their professional tasks in the new culture. As a result of such trainings participants were left on their own not with an educational experience but with very negative emotions.

The 1980s saw the implementation of an acculturation model of preparing employees to participate in the globalized labor market. The model is still in use. It provides participants with both knowledge and skills needed to function in an international environment of professionals. The aim of the trainings is to educate people who will not only know the language needed in the new environment, but who will also learn the attitude and psychological abilities necessary to live and work abroad. The knowledge of the political and historical context of the cultural environment where the employee is going to work is also important.

3. Theoretical models and types of methods used in intercultural trainings

The aim of intercultural trainings is to create cultural competence, or the ability to adapt to a new culture not in a passive way, but due to having the ability to negotiate meanings and objectives of behavior, which apply in this culture. The process of acquiring intercultural competence was described by Bennett (1993). The model of acquiring the competence was created on the basis of analysis of behavior of people who lived in an multicultural environment for a longer time. The description of their behavior were then analyzed on the basis of the grounded theory strategy and led to the creation of the developmental model of intercultural sensitivity (Bennett and Bennett 2004).

The model consists of 6 stages. The first three are the ethnocentric stages (denial, defense, minimization) and the next three are ethnorelative stages (acceptance, adaptation, integration).

The denial stage is characterized by disregarding the differences between cultures or by qualifying all people who represent other cultures as undifferentiated “strangers.”

The defense stage comprises a very distinct polarization of the world into “us” and “strangers”. Strangers are stereotypically perceived as a threat to the dominant culture and are thus denied representation in important institutions operating in a given society (such as the media or institutions of administration). Such attitude is e.g. expressed by a concern that allowing teaching other than dominating religious tradition in the system of education may lead to the erosion of moral norms in the accepting society.


The stage of minimization of cultural differences focuses on accepting superficial distinctions (skin color, language, culinary preferences) while denying deeper cultural differences in the name of stressing universal similarities resulting from belonging to the human species (“we all have the same blood in our veins”, “we all love our children” are typical arguments demonstrating that any consideration of cultural differences is irrelevant).

The first of the ethnorelative studies stages is acceptance. It is based on the belief that one’s own culture and resulting choices and conduct are one of many possible. Thus they lose the status of unique and “the only right” way of conduct.

The next stage – adaptation – is a state of cognitive and thus also behavioral acceptance of an evaluation of a given situation and of the chosen way of conduct from the point of view of another culture. In this stage the scope of permissible models of conduct and of understanding them includes also those which come from other cultures, not only from one’s own.

The last ethnorelative stage, integration, is a stage when one is able to move among different cultures and to choose, depending on context, the point of reference for one’s behavior in one of them.

The attempts at establishing a typology of acculturation trainings are related with the level of participants’ activity, the length of the course, and the stress that is put either on acquiring theoretical knowledge or practical skills. There is also a distinction between trainings for people who only prepare for their stay in a foreign country, and trainings for those who already are abroad but do not function there in a competent manner (Bhawuk, Landis and Lo 2006).

The last division in based on the distinction between an intercultural training and a training that prepares for interacting with diversity (Fowler 2006). The first one helps people who move from one culture to another, and the other is addressed to people from different cultures who have to cooperate with each other within one institution. This training type does not apply only to multinational companies, but also increasingly often to employees of such institutions as universities (due to a large number if international students), health services (with patients who are refugees or immigrants) and police (due to the cultural diversity of the society where police officers perform their duties). The construction of an acculturation program is always preceded by an initial evaluation of the group’s needs and of the group’s experience related to intercultural relations. Every training should be also evaluated from the point of view of effectiveness of its actions. These aspects, as well as the reasons for training failure and the competence required of a trainer were described in detail in Grzymała-Moszczyńska (2004).

The techniques used during an acculturation training can be divided accord-ing to:• Accepted approach (didactic versus experiential),• Content of the training (culture-general or culture-specific).

The didactic approach is based on the assumption that cognitive understanding of culture is necessary to function in it effectively. It is based on lectures and discussions


demonstrating differences and similarities between the course participants’ and foreign culture.

The experiential approach in turn is rooted in the conviction that the most effective method of learning a new culture is to learn by living through specific experiences, just as it takes place in simulation and role-play.

Culture-specific trainings are aimed at providing specific knowledge about a given culture (e.g. what is the appropriate way to show respect in this culture), while the culture-general training provides course participants with knowledge on general char-acteristics of different cultures (e.g. culture typology according to the attitude towards time or natural environment) and on their reactions towards cultural differences.

Taking into consideration the above mentioned aspects one can distinguish passive and active training strategies, where each can either apply to one particular culture or provide culture-general knowledge.

Passive strategies providing culture-general knowledge include lectures and discussions. Triandis, Brislin and Hui (1988) distinguished the features of collective and individual cultures, where the representatives must mutually know the characteristics of the other culture in order to be able to communicate effectively. The features of both cultures in respect of their effects in negotiation process can be presented in a similar way (Trompenaars and Hampden-Turner 2002; Lewis 2000).

Another didactic strategy type that belongs to the same group is presentation of movies depicting selected aspects of various cultures, e.g. about traps in the communication process that result from differences in negotiation styles, about “saving face” or about the level of directness in expressing one’s opinion among representatives of different cultures (Communicating Between Cultures 2002).

The same strategy type may apply to preparations for interacting with a particular culture. Lectures will in this case include lists of dos and don’ts which should be followed by foreigners during their stay abroad (e.g. when someone greets an elderly person in Korea, he or she should not only wait for the older person to extend her/his hand first, but also shake the hand with both hands while making a low bow). Bennett and Bennett (2004) point out that gaining knowledge as the only indication of how one should behave is dangerous without proper understanding of the scale of behaviors that is permissible within the rule (e.g. what is the appropriate depth of a bow while greeting people of a certain status). Many business conduct guidebooks offer such a “simple and effective” list of behaviors and ignore the significance of the context in which such behaviors are appropriate (Donaldson and Donaldson 1999).

Learning the language of the country where one is to perform a given task is a specific type of preparations for functioning in a new culture. Varied language courses can be taken, beginning with the popular crash courses that offer a chance to get familiar with the basic phrases used in everyday life, to courses providing general linguistic knowledge together with some knowledge about the country’s culture (e.g. standard English courses offered by the British Council), to specialized courses teaching vocabulary used in business negotiations (Business English). One should


remember, however, that the knowledge of a language without the knowledge of culture scripts typical for the culture can be a trap. It is expected that people who know the language can also behave in a culturally appropriate manner. When they lack such ability they are treated more critically than they would be if they had no knowledge of the country’s language at all.

Cultural assimilators can also provide useful information on appropriate functioning in a new culture. These are stories created for the purpose of either presenting situations which take place in one particular culture, or highlighting general aspects of some cultural contacts (the so-called critical incidents) among representatives of different cultures. They are short descriptions of situations where representatives of different cultures together perform an activity which ends in a failure. The participant of the training is given a series of interpretations of the failure’s reasons and his/her task is to choose the most probable one. The explanations of the failure allow the participants to learn about the importance of some behaviors from the perspective of a different culture. Cultural assimilators are also helpful in overcoming cultural stereotypes because the knowledge they offer facilitates the reevaluation of certain observed behaviors (e.g. a Japanese nodding in assent and smiling while disagreeing with his/her interlocutor is not insincere but cares about maintaining harmonious relation with the interlocutor).

Another example of the cultural-specific training strategy is using short fiction which depict life in a given country, or meetings between cultures, from the perspective of either the host culture or the culture of the guests (Fox 2003). The strategy may in a completely non-invasive manner cause a discordance in the current knowledge of the training participants and may stimulate the need to complete it or reevaluate it. The method is particularly important for people who have little experience in relations with other cultures or who have some experience but it is not supported with any afterthought. Literature excerpts may also help prepare participants of longer training programs for the difficulties in acculturation process in a foreign country by describing subsequent phases of cultural shock through the ups and downs of the novel’s characters (Lewis and Jungman 1986).

Active strategies provide the participants with a possibility to learn through experience. This learning type was described by Kolb (1984). He defined them as building new knowledge by transforming existing experience through observation, drawing conclusions and then making generalizations and changing one’s behavior accordingly. Intercultural communication workshops are an example of such training. They may include simulating situations resulting from intercultural meetings and playing the part of people participating in such interactions. Such simulations may relate to interactions in a fictitious culture; it gives participants the possibility to observe in an a-contextual form how cultural differences distort and even block effective communication. Some of the best known games suitable for this purpose are BaFa-BaFa developed by Shirts and Barnga created by Thiagarajan and Steinwachs (Kohls and Knight, 1994). Through such games participants can be demonstrated the extent to which one’s cultural baggage, or rules applying to one’s own cultural


tradition, define and also limit the scope of reaction towards various situations. A major problem with using learning through experience strategies lies in the strength of participants’ emotional reactions, requiring the coach of such trainings to have considerable psychological competence to cope with very emotional reactions of the group. Workshops may also deal with specific intercultural relations of people from a culture with which the participants are preparing to interact. Training that activates participants may take the form of questionnaires for participants to carry out a self-evaluation of features related to cultural competence. The aspects that can be measured include the level of anxiety caused by interacting with strangers, the level of one’s own communication efficiency or the level of understanding intentions of people of different cultures. Cross-Cultural Adaptability Inventory (Kelley and Meyers 1995) is an example of such a questionnaire. It allows the training participants to obtain information about their ways of reacting towards various aspects of relations with representatives of other cultures and evaluate their strengths and weaknesses related to moving to another culture. With the questionnaire four basic components of the ability to adapt to a new culture can be evaluated. These are emotional resistance, flexibility and openness towards new experiences, insight of perception, sense of autonomy and independence. The questionnaire may be useful not only to evaluate individual persons delegated to work abroad, but also to build teams comprising people who complement each other’s features that facilitate functioning in a foreign culture. A coherent structure of the culture training requires assuming a specific theoretical approach which will then translate into setting specific training objectives and selecting the means for achieving them. The above mentioned experiential learning theory by Kolb is an example of such theory. Ratiu’s theory is an interesting modification of Kolb’s theory. Ratiu compares the learning cycles of two types of people functioning in international environments: people who are well adjusted and those whose adjustment is worse. The basic difference is the tendency to ask questions about the meaning of observed behavior that differs from behavior seen in the native culture, not about the reason of such behavior. The question about the meaning results in the ability to modify one’s previous views, while the question on the reason of a behavior results with a selective choice of new information, so that it confirms one’s previous views. For example, an observation of the meaning of employee recruitment strategy based on family ties may lead to different conclusions than the question about the reason for such strategy. In the first case we may discover the weight of private relations for business contacts, and in the other, confirm our belief in widespread nepotism in the given culture.

While selecting theories we need to remember about two aspects: first, the consistence of theory with the training’s objective: “Training which aims at providing knowledge about effective communication in multicultural environment cannot be based on the cultural adjustment theory, but rather on theory of effective intergroup communication” (Gudykunst, Guzley and Hammer 1996: 77). It is also important that the theory used as the basis to design such training is not an ethnocentric


theory, applying only to representatives of the given culture. For example, a model of effective team work based on individualist culture models will not apply when we want to create a good team comprising people from a collectivist culture.

4. Acculturation trainings in Polish business environment

Let us now try to answer the question about motivation of organizers of such trainings.. Remarks presented below are the result of the author’s experience in having conducted such trainings for the past ten years. Such trainings were organized both in companies which were bought by international parties and became multinational companies, and in companies which started to operate as service or equipment providers on the international market. Participants comprised from both Polish employees and foreign employees delegated to work in Poland.

Among several dozen of conducted trainings there were none that had been organized as a preventive measure, preparing employees to interact with people of different cultures, in order to eliminate potential conflicts or facilitate effective intercultural communication when people of different cultures start cooperating. That was true for both Polish staff and for foreign employees sent to Poland to hold managerial posts in Polish companies purchased by foreign corporations. None of the groups had a training of such kind. In each case trainings were organized under the pressure of either an open conflict between Polish employees and foreign management, or a conflict between the Polish and foreign branches of the company, or a conflict with foreign partners. Spectacular failures in negotiating new trade contracts were another reason to organize the training: situations when a previously agreed contract was not signed and the behavior or a foreign trade partner was completely incomprehensible for the Polish part (e.g. a Chinese partner declined to sign a contract in the last moment, claiming … the table was the wrong shape).

Earlier attempts at offering such trainings to HR departments of companies acquired by foreign corporations, or Polish companies entering international markets, ended with a dismissal: “Thank you, our employees know English and they are able to communicate with foreign clients/partners.” It proved there was little awareness about differences between the cultural context, where business is conducted, and business activities as such. This lack of understanding was complemented with a conviction that business activities can be carried out in the same way in every context. Another reason for HR departments to dismiss such trainings was their belief that Polish culture was very similar to other European cultures, hence, trainings were justifiable only when they pertained to cooperating with culturally “adequately distant” African or Arab countries.

Organization of trainings was every time preceded with activities aiming at determining the customer’s needs. It took place either through a meeting organized in the seat of the company, and collecting relevant information about difficulties in cooperating with foreign partners during an open discussion with representatives


of all departments, or through a detailed survey, filled out by the future training participants and sent directly to the trainer. The information was then used to build a training schedule, most often consisting of four training sessions, and to plan additional individual consultation with the participants. The training program was every time tailored to meet unique needs of the given company. The basic units in the programm included such issues as location of Poland and partner countries on cultural dimensions, consequences of cultural differences for business operations, issues of mutual stereotypes affecting business relations, the problem of culture shock. The most common didactic forms included case studies, role playing, and critical incidents. Practical material used during the training was taken from the information gathered from the participants during the initial evaluation of training needs.

Individual consultations for participants provided by trainers turned out to be also an important part of the training program. They dealt with stress related to intercultural interactions and with the ways of solving intercultural problems and misunderstandings which the participants did not want to reveal during training sessions, in the presence of the whole training group. Every time the evaluation of the training proved that on one hand, the acquired knowledge was very useful, and on the other, that such trainings should be organized at the early stage of establishing international cooperation. Participants often expressed their regret that were informed about the culture of their business partners so late, and conviction that that the tensions and conflicts in the cooperation need not have happened, would they obtain necessary information earlier.

5. Summary

The analysis of the culture trainings in business organizations shows that they should be introduced as a routine element of building employee competence in organizations operating in an international environment. In a globalized world it is difficult to imagine companies which are not forced to cooperate (to different extent) with foreign partners so it becomes necessary to increase the level of cultural awareness of both people directly involved in the cooperation (e.g. export departments), and people who are indirectly responsible for the company’s international operations and for personnel selection (e.g. HR departments). Due to the changing business environment it might be beneficial for larger companies to employ permanently a specialist in culture trainings and to make him/her responsible for building intercultural skills of employees.

Information about the authorProf. dr hab. Halina Grzymała-Moszczyńska – professor of cultural psychology, business Rainer, Jagiellonian University and Warsaw School of Social Sciences and Humanities. E-mail: [email protected].


Bibliography

Bennett, J.M. 1993. Cultural marginality: Identity issues in intercultural training, w: Paige, R.M. (red). Education for the Intercultural Experience, s. 109–135. Yarmouth: Intercultural Press.

Bennett, J.M. i M.J. Bennet 2004. Developing Intercultural Sensitivity: An Integrative Approach to Global and Domestic Diversity, w: Landis, D. i Bhagat R.S. (red). Handbook of Intercultural Training, s. 151–165. Thousand Oaks, London, New Dehli: SAGE Publications.

Bhawuk, D.P.S, Landis, D. i K.D. Lo 2006. Intercultural training, w: Sam, D.L i J.W. Berry (red). The Cambridge Handbook of Acculturation Psychology, s. 504–524. New York: Cambridge University Press.

Caligiuri P., Tarique I. i R. Jacobs 2009. Selection for international assignments. Human Resource Management Review, nr 3 (19).

Communicating Between Cultures. 2006. Psychology on DVD & video, nr 3 (20), Insight Media.Donaldson, M.C. i M. Donaldson 1999. Negocjacje. Warszawa: Wydawnictwo RM [in Polish]Fowler, S.M. 2006. Training across cultures: What intercultural trainers bring to diversity training.

International Journal of Intercultural Relations, vol. 30, s. 401–411.Fox, F.F. 2003. Reducing intercultural friction through fiction: virtual cultural learning. International

Journal of Intercultural Relations, vol. 27, s. 99–123. Grzymała-Moszczyńska, H. 2004. Jak można się uczyć innej kultury – treningi akulturacyjne dla

studentów, w: Borowiak, A. i P. Szarota (red). Tolerancja i Wielokulturowość, s. 177–189. Warszawa: „Academica” Wydawnictwo SWPS. [in Polish]

Gudykunst, W.B., Guzley, R.M. i M.R. Hammer 1996. Designing Intercultural Training, w: Landis, D. i R.S. Bhagat (red). Handbook of Intercultural Training, s. 77–80. Thousand Oaks, London, New Dehli: Sage Publications.

Hall, E.T. 1976. Ukryty wymiar, Warszawa: PIW. [in Polish]Hall, E.T. 1987. Bezgłośny język, Warszawa: PIW. [in Polish]Kelley, C. i J. Meyers 1995. Cross-Cultural Adaptability Inventory, Minneapolis: NCS Pearson.Kohls, L.R. i J.M Knight 1994. Developing Intercultural Awareness: A Cross-Cultural Training Handbook,

Yarmouth: Intercultural Press.Kolb, D.A. 1984. Experiential learning. Experience as the source of learning and development, New York:

Prentice Hall.Landis, D., Bennett, J.M. i M.J. Bennet (red). 2004. Handbook of Intercultural Training, Thousand

Oaks, London, New Dehli: Sage Publications. Lewis, R.D. 2000. When Cultures Collide – Managing Successfully across Cultures, London: Nicholas

Brealey Publishing.Lewis, T.J. i R.E. Jungmann ( red). 1986. On Being Foreign: Culture Shock in Short Fiction – An

International Anthology, Yarmouth: Intercultural Press.Paige, R.M. i J.N. Martin 1996. Ethics in Intercultural Training, w: Landis, D. i R.S. Bhagat (red). Hand-

book of Intercultural Training, s. 86–91. Thousand Oaks, London, New Dehli: Sage Publications.Ratiu, I. 1983. Thinking internationally: A comparison of how international executives learn. International

Studies of Management and Organization, nr XIII (1–2), s. 139–150.Triandis, H.C., Brislin, R.W. i H. Hui 1988. Cross-cultural training across the individualism-collectivism

divide. International Journal of Intercultural Relations, nr 8, s. 269–289.Trompenaars, F. i Ch. Hampden-Turner 2002. Siedem wymiarów kultury. Znaczenie różnic kulturowych

w działalności gospodarczej, Kraków: Oficyna Ekonomiczna. [in Polish]


Beata GlinkaSvetlana Gudkova

The Use of Grounded Theory in Entrepreneurship Research

Introduction

As entrepreneurship is frequently perceived as a main source of economic and social development, it attracts interests of researchers representing many different scientific disciplines. They concentrate on the specific elements of the entrepreneurship phenomenon bringing to the field tools developed by their disciplines (eg. Schumpeter 2004/1934; Kirzner 2001/1973; McClelland 1961; Burt 2000/1993; Baron 2004). Entrepreneurship as a field of research lack of coherent conceptual framework and one of the main challenges is still elaboration of the widely accepted definition of entrepreneur and entrepreneurship. Both in popular culture and some academic textbooks entrepreneurship is often treated as a creation of new venture. This approach arose from numerous success stories of such entrepreneurs as Bill Gates, Richard Branson and Jędrzej Wittchen who according to the one of the most popular definitions “created something of value from practically nothing” (Timmons 1994). Other manifestations of entrepreneurship such as corporate venturing were (and still are) often ignored.

It must be remembered that it is the opportunity that lies at the heart of an entrepreneurial process and gives us a guideline to consider actions undertaken by individuals as entrepreneurial (Shane, Venkataraman 2000). Identification of the opportunities can be perceived as a creative process and depends on the capabilities of potential entrepreneurs to interpret the environmental changes. These capabilities are shaped in social interactions.

Existing theories arose in the field of entrepreneurship do not create a coherent conceptual framework and still leave much space for new findings that will contribute to the further development of the discipline. We strongly believe that it can be achieved by the application of those of qualitative methods that lead to discovery of new phenomena and interdependences. Grounded theory offers such possibilities.

The purpose of the paper is to address the problem of application of grounded theory procedures in entrepreneurship research and show some examples of that.

The Use of Grounded Theory in Entrepreneurship Research 51

Entrepreneurship

Along the history of the development of entrepreneurship as the discipline different theories have evolved. It is possible to distinguish main stages of the development of the field, which can be characterized by the distinct focus of the research interests. 1. Contribution of the economists to the early theories evolving in the field

of entrepreneurship (Schumpeter 1934; Evans 1942; Hoselitz 1957; Baumol 1968; Leibenstain 1968; Soltow 1968; Kirzner 1973). They concentrated mostly on the role of entrepreneur in the economy and analyses of the material factors (especially financial) of human action. The economists often treat entrepreneurship as a result of certain set of economic conditions and perceived profit maximization as a prime goal of an individual acting on the market. Such issues as risk taking, arbitrage and market equilibrium were addressed.

2. The search for the personality traits (“trait approach”), that allow to distinguish entrepreneurial personalities from non-entrepreneurial ones (Liles 1974; Brockhaus, Nord 1979; Brockhaus 1980; Hull, Bosley, Udell 1982). This approach neglected the role of situation specific factors; researchers focused on the entrepreneur and claimed that personal traits determined entrepreneurial action. Among these traits were: need of achievement, internal locus of control, risk propensity, need of independence. As result of research undertaken mostly by the psychologist in the field of entrepreneurship many personality tests were designed to predict entrepreneurial behavior1.

3. Concentration on the external factors (Berger 1991; Zimmerman, Zeitz 2002; Morrison 2006; Gompers, Lerner 2001; Glinka 2006). With the rejection of “trait approach” as useless to explain the nature of entrepreneurial activity researchers began to focus on external factors such as social values and norms, existence of legal and economic institutions, external sources of financing and support offered by governmental and nongovernmental agencies to new ventures.

4. Entrepreneurial competencies (Bird 1995; Cope 2005; Gudkova 2008). These competencies are build of motives, self-efficacy, knowledge (procedural and declarative) and personality characteristics. The role of cognitive mechanisms in the process of identification of market opportunities has been raised in recent years (Baron, 2004).Those perspectives coexist in contemporary entrepreneurial research. They

develop in parallel, but the two latter seem to be more popular and usually treated as offering potentially more promising results. The pure economic perspective is seen as too narrow - it evolved into a perspective underlying wider range of external factors. The traits perspective was rejected by most scientists (and replaced by competencies approach), but it still finds its place in scientific research.

1 General Enterprising Tendency Test (GET Test) created in the Durham University is one of the most popular examples.

52 BEATA GLINKA, SVETLANA GUDKOVA

Approaches described above are based on the assumption that an opportunity constitutes the essence of entrepreneurial process. It is necessary to emphasize that approach to entrepreneurship as a new business venture creation has been developed in parallel. Most of the textbooks were (and still are) devoted to the issues connected with business plan creation and it’s implementation (Kuratko, Hodgetts 1989-2000; Lambing, Kuehl 2002). The idea was to help people to pursue the career of famous entrepreneurs, whose tremendous successes motivate followers to start their own small businesses. However it is important to underline the differences between entrepreneurship and small business (Carland, Hoy, Boulton, Carland, 1984; Wickham, 2004). In Poland for example we still recognize the person who is running its own business as an entrepreneur2. Such an approach can be harmful because it distracts an attention from the role of opportunities, creativeness and innovativeness in entrepreneurial process which form development potential of venturing. It also causes that the whole phenomenon of corporate entrepreneurship had not been taken under consideration although some important signals emerged in middle eighties (Pinchot 1985). This problem found an appropriate place in research and publication quite recently (Morris, Kuratko 2002). In fact some of crucial problems described in this section were pointed out in Joseph Schumpeter seminal works. In the beginning of the twentieth century he claimed that an employee of an established organization can also become an entrepreneur, since the innovativeness and propensity to creative destruction are an essence of entrepreneurship (not the position of an enterprise). One should regret that these theories were not studied and exploited enough earlier.

Entrepreneurship research methods

Many researchers have pointed out the importance of reflection on the perspective and proper selection of the research methods underlying that the difficulties of such choices stem from the complexity of the phenomenon under investigation (Bygrave 1989; Smith, Gannon, Sapienza 1989; Bruyat, Julien 2000).

Researches on entrepreneurship usually are based on positivistic approach (functionalistic paradigm); Grant and Perren (2002) on the bases of analyses of the publications in leading journals on entrepreneurship concluded that 90% of them had been based on the functionalistic assumptions. The rest of the researchers employed interpretative paradigm, other paradigms were completely absent. Jennings, Perren and Carter (2005) underline the importance of utilization of different research paradigms:• they offer distinct points of view and stimulate the debate and discovering new

interpretations;• prevailing functionalistic approach discourages the researchers to take individual

aspects such as emotions and values into account;

2 According to Polish law entrepreneur is a person who establishes and runs his own enterprise.


• consciousness of the existence of different paradigms encourage the use of differentiated research methods.Functionalistic paradigm induces the application of classic research procedures

that begin with the formulation of formal hypothesis to be tested in subsequent stages - usually with the use of quantitative methods. In fact survey research has dominated the field of entrepreneurship.

Adoption of interpretative paradigm leaves more space for open research and discovery - grounded theory, ethnography and cultural analyses can be used. As many researchers suggest, the utilization of methods other than quantitative can lead to a better understanding of the phenomenon of entrepreneurship (Rae 2000; Warren 2004; Jennings, Perren, Carter 2005). Bruyat and Julien (2000) claim that interpretative paradigm fits the field of entrepreneurship better since it is not a stable, but highly dynamic, not deterministic, deeply rooted in culture and social interactions phenomenon.

Bygrave (1989) emphasizes that researchers too often forget that they practice a social science discipline and tend to employ methods typical for mathematics and physics. It may be dangerous because these methods usually based on deterministic assumptions, which are false in case of entrepreneurship as changing and unpredictable phenomenon. He postulates to turn to the field research and empirical models instead of surveys and theoretical models. We believe, that field, qualitative research methods such as grounded theory enrich our understanding of entrepreneurship and lead to the development of the discipline. Unfortunately Bygrave’s postulate still remained in a great extent unaddressed. There are just a few examples of research conducted in interpretative paradigm (Kwiatkowski, 2000; Konecki 2007; Gudkova 2008; Glinka 2008).

Application of grounded theory procedures to entrepreneurship research

Working in the field of entrepreneurship we decided to design researches based on grounded theory procedures. The goal was to answer the questions that were in our opinion not fully addressed by researches and described by the theoretical concepts available in the literature. Our two projects employed different perspectives on entrepreneurship. Grounded theory research procedures have helped us to discover new interdependences in entrepreneurial process and to deeper understand the essence of entrepreneurship both in individual and organizational context.

Overview of the research projects

First project was conducted in large organization in a public sector in Poland almost 10 years ago. The project lasted for over two years and was based on observations, interviews and analyses of available documentation. The issues of organizational change and corporate entrepreneurship were addressed. The research has shown that


under certain conditions creative individuals employed by organization are not willing to accept or promote change, take initiative and behave innovatively. Longitudinal study allowed for identification of those conditions and examination of interrelations between specific aspects of organizing. In the second part of the article we will concentrate on the research on individual entrepreneurship.

The second project was designed to examine entrepreneurship on an individual level. On the beginning we noticed that mostly quantitative criteria are employed to distinguish the microenterprises from the other types of companies. Our goals were to discover who are microenterpreneurs and what are the principles ruling their activity. During the first stage of the research we observed that many small enterprises operating in the same environment and starting their activity with the same initial financial resources had achieved different outcomes in terms of the level of profit, employment, stage of development, market position and impact. So the main research question emerged: “Why do some enterprises achieve the enormous results, when others are still engaged in the battle for survival?” Further stages of the field research brought us more closely to the explanation of this phenomenon.

The project lasted for almost five years and over 80 entrepreneurs took part in it3. We selected entrepreneurs from different parts of Poland such as Silesia, Pomerania, Little Poland, Lublin region, Mazovia etc. These companies represented different types of industries. Some of the enterprises under investigation had a long history, others were relatively young ventures. Most of them were microentreprises, i.e. companies employing less than 10 people.

To collect the information from the field we applied the following methods: • open-ended interviews – the interviews were conducted with entrepreneurs,

representatives of microfinancing institution (which delivered financing to their companies), their employees, business partners and customers. The length of the interview ranged from 40 to 210 minutes. After transcription we obtain more than 1500 pages of the text. 30% of the interviews were conducted by two researchers. It is worth to note that some of the entrepreneurs were very opened and willing to share their deep reflections on the process of developing of their businesses. The interviews were run in natural settings, usually it was the office or entrepreneur’s home especially in the cases of home based businesses. In these situations the whole families including spouses and children took part in the interviews. Sometimes the interviews turned in to family discussions on the nature of entrepreneurial activity – its benefits and drawbacks.

• observation and field notes – the observations were done before, during and after interviews and in some cases we decided to come back to the companies as a customer or just as an observer. Some entrepreneurs encouraged us to look closer at their companies, warehouses, shops and even homes. In rare cases we tested their products and tried to wake part in the production process. Through

3 The projected in the Chair of Entrepreneurship in Koźmiński University 2002-2006; Beata Glinka took part in the first stages of the research and part of the interviews were conducted only by Svetlana Gudkova.


observations we were to analyze the shape and quality of social ties within the firm. It should be noted that in cases of some entrepreneurs observation and interviews led us to the different conclusions.

• analysis of the available documents, webpages and articles about entrepreneurs published in local newspapers – we tried to collect also secondary data, i.e. articles and documents. Most of microentrepreneurs didn’t have any formal documentation except invoices (in which we were not particularly interested). Few entrepreneurs were proud of their certificates and diplomas and vigorously present it to us. Many entrepreneurs have their websites, which constitute a valuable source of date to us. Over 100 pages of text were analyzed (not including the content of websites).We also had made a photographic documentation of our visits, which helped us

a lot in the process of interpretation of the collected data. Plenty of interconnected categories emerged during the data analyses, some of them were completely unexpected, some contradicted many of the widespread myths and stereotypes about small and microentreprises.

Selected outcomes

1. The research allowed us to identify several key qualitative characteristics of microenterprises. • Close relationship between entrepreneur and his/her enterprise

– Strong interdependence between private and business life of entrepre-neur. In the case of microenterprises, private life strongly interferes with business. Entrepreneurs often run companies in their own houses, using private resources. Sometimes it means, that those people stay at work (physically and mentally) 24 hours a day, 7 days a week. This also means, that often an enterprise retires with, “goes on vacation” and dies with its owner. Keep running the business is an essence of the life of many company owners.

there is no such thing as private life when you are an entrepreneur (BTG)4

– Entrepreneurs know or willing to know everything about their enterprises. Lack of trust to the employees often constitutes a serious barrier in the development of the business. Entrepreneurs are not inclined to delegate power to their subordinates. Small business owners are reluctant to share knowledge of crucial importance with employees and partners. These two phenomena create a kind of vicious circle.

I keep my eyes on everything. There is no action without my approval (DPK)

4 All the quotations are taken from the transcripts of the interviews with entrepreneurs. To ensure anonymity of interviewees, three letter codes were ascribed to their statements.


– Existence of „one pocket” budget. Very often there is no distinction between personal money and enterprise one. It leads to the situations when household’s overspending may restrict investments.

• Cooperation with only a few key business partners– Mutual trust creates a base for business relations that are beneficial

for both sides. Entrepreneurs look for partners who are interested in enduring cooperation, not in maximizing profit from a single transaction, and build with them close relations.

– Having only a few key customers microenterprises are highly exposed to the risk of delayed payments. Small companies are usually one of the last links in the chain of payments.

• Weak diversification– As entrepreneurs often do not feel the need of diversification of their

activity, they highly exposed to the risk of industry slowdowns and cri-ses. Lack of diversification may arise from the scarcity of resources available.

– Unwillingness to enter uncharted territories may be caused by lack of knowledge and networks in these new areas and fears of entrepreneurs. These fears are often rooted in previous harmful experiences. It must be underlined that experience based learning is extremely expensive especially for microenterprise.

• Limited possibilities of observation of environmental changes– Microenterprises often do not have specialized knowledge, financial reso-

urces and time to observe and forecast market trends. It leads to the situations when entrepreneurs, are surprised by environmental changes (economic, market, legal). Moreover, sometimes microentrepreneurs are to busy with everyday operations to think about future plans, opportu-nities and threats.

– Intuition shaped on the bases of the previous experiences becomes the powerful forecasting tool in the hands of entrepreneurs. The important thing is to avoid the mistake of misinterpretation and application of ready-made solutions in inappropriate situations.

• Extensive use of family resources– Small business owners often heavily rely on their families. Having no

spare resources, they can compensate it, at least partially, with uncon-ditional help from the family members. Family offers trust, advice, and unconditional help (both financial and non-financial). It is important both in the early stage of the business and in mature businesses, when entrepreneur can rely on family members to help him/her in handling growing business. Family support is extremely important in times of crises, when it offers flexibility and emotional help.

– Members of the family often work harder then other employees; they also can work for less money. It creates high expectations towards the


employees from outside the family especially in terms of salaries, moti-vation and working time.

– Entrepreneurs are often eager to create multigenerational businesses and push their children to continue family traditions. It can take the form of gentle suggestions or open “career shaping” (e.g. influencing the choice of the type of education).

– There is a social pressure to employ family members even these without required competencies; sometimes family expects entrepreneur to give jobs to the family members first, regardless of their qualifications. It blocks places for other talented individuals, who could contribute much to the development of the business offering their knowledge and new insights.

2. Factors influencing the development of an enterprise. On the basis of the analysis of the collected data, the conclusion can be drawn, that intangible factors play crucial role in the process of the development of microenterprises (see also Glinka 2008, Gudkova 2008). Those factors can be divided into two, strongly interconnected, categories (described below in a more detailed way). External factors are connected with cultural context which influences the rest of intangible factors shaping the process of the development. Culture influences the way the entrepreneurs build their social networks, it also creates environment in which entrepreneurial competences are developed and the process of learning is taken place. • Internal factors.

– Entrepreneurial competences consist of the following interconnected elements traits, motivation, self-efficacy and knowledge. Motivation to establish the own business and entrepreneurial knowledge play the critical role in the development of the business. Our research has shown that lack of the successor is one of the main problems.

– Entrepreneurial learning is a process of shaping entrepreneurial compe-tences. The research has indicated that the crucial role can be attribu-ted to entrepreneurial socialization – process of learning, which starts early in the childhood and end with establishment of own business. The process of socialization can take place both in the family, and outside it. In Poland the socialization within the family is impeded because of historical reasons (socialism, which blocks private initiatives). For the last 20 years that situation has been changing rapidly. New generation of potential entrepreneurs is growing up in the entrepreneurial families acquiring entrepreneurial knowledge and attitudes.

• External factors.– Cultural context shapes the action of entrepreneurs: influences the deci-

sion to start own business and determines the way of managing it. The research has shown that values, beliefs, myths and stereotypes existing in the society are important to entrepreneurs. In the social context entre-


preneurs create and re-shape their identity; they must cope with social perception of entrepreneurship which is not always favorable. The atti-tudes of employees, business partners and neighbors are deeply rooted in the cultural context.

– Active participation in the social network offers a wide range of different benefits to the entrepreneurs. It helps to identify opportunities, secure financial, physical, human recourses and acquire knowledge, necessary to pursue business opportunities. Through the social ties small business owner can also obtain valuable information, references and emotional support. Skillful use of network significantly reduces the risk and costs of running the business.

Our research led to the conclusion that development of small enterprises is strongly influenced by the intangible factors such as culture, ability to build entrepreneurial network, entrepreneurial competences and learning modes of entrepreneurs.

Problems

On the bases of our experience we have identified several problems and challenges connected with working with entrepreneurs in the field. • Dealing with negative stereotypes. The most prominent example is the topic of

social ties, which entrepreneurs tried to avoid, because of negative connotations existing in a Polish culture and language. Many entrepreneurs connect using the social ties with corruption. In official declarations entrepreneurs deny the role of network in the development of the business, on the other hand during the interview they were quite eager to share information about the benefits of having a social ties naming it in different way like “friendly help” or “family support”. Among other negative stereotypes we found these connected with wealth, jealousy, capitalism and dishonest entrepreneurs.

• Gaining trust. This rather typical problem occurred during the most of the interviews. Entrepreneurs having a lot of confidential information (financial, strategic) are very sensitive to the uncomfortable topics. At the very beginning of the interview they often “tested the ground” and it took some time to gain their trust. Another problem was to differentiate between real and declared motives of action. The trust is essential to understand these motives and encourage entrepreneurs to reveal it.

• Internal attribution. Most of entrepreneurs want to see themselves as a source of power and success of an enterprise. However, in case of failure external factors are pointed out. Being aware of this danger we had decided to employ different triangulation methods, which helped us to gain different perspectives and multilateral picture of the phenomena under investigation.

• Getting access to the field. Many entrepreneurs as extremely busy people were not willing to dedicate their time to such a conversation. During the initial stage


of research we started to call entrepreneurs and for example in Wroclaw out of 30 small business owners nobody was willing to meet with a researcher. That’s why we decided to reach entrepreneurs through different clubs, associations and microfinancing institutions. It gave us not only the access to the wide range of entrepreneurs, but also initial trust. Research based grounded theory procedures is highly demanding: it is time-

consuming, requires a higher degree of involvement in the research process and may cause several problems like these described above. Probably those are the reasons, why quantitative methods such as surveys have such a large group of proponents in entrepreneurship field. However it is worth to note that grounded theory a concept with a long tradition offers also several ways to overcome those problems or mitigate their influence.

Conclusions

Procedures offered by the grounded theory can be beneficially used in entrepreneurship research both on individual and corporate level. The progress of the discipline requires the application of various methods and extensive use of the field research. Desk research of so complex, multilevel and highly dynamic phenomenon can not reveal any substantial new results such as formulating new theories, finding interdependencies and experiencing the unique moment of discovery.

Information about the authorsDr hab. Beata Glinka – Faculty of Management, University of Warsaw, [email protected] Svetlana Gudkova – Kozminski University, [email protected]

Bibliography

Baron, Robert A. (2004) “The cognitive perspective: a valuable tool for answering entrepreneurship’s basic “why” questions”. Journal of Business Venturing 19(2): 221–240.

Baumol, William J. (1968) “Entrepreneurship in Economic Theory”. The American Economic Review 58(2): 64–71.

Berger, Brigitte (1991) The Culture of Entrepreneurship, San Francisco: ICS Press.Bird, Barbara (1995) “Toward a Theory of Entrepreneurial Competency”. Pp. 51–72 in Advances in

Entrepreneurship, Firm Emergence, And Growth. vol. 2, edited by Katz, Jerome A., Brockhaus Robert H. JAI Press.

Brockhaus, Robert H. (1980). “Risk taking propensity of entrepreneurs”. Academy of Management Journal, 23(3): 509–520.

Brockhaus, Robert H., Nord, William R. (1979) “An exploration of factors affecting the entrepreneurial decision: Personal characteristics versus environmental conditions”. Proceedings of the Academy of Management 10: 509–20.


Bruyat, Chirstian and Julien, Pierre-Andre (2001) „Defining the Field of Research in Entrepreneurship”. Journal of Business Venturing 16(2): 165–180.

Burt, Ronald S. (1993) “The Network Entrepreneur”. Pp. 281-307 in Entrepreneurship. The social Science View, edited by R. Swedberg (2000). Oxford University Press.

Bygrave, William D. (1989) “The Entrepreneurship Paradigm (I): A Philosophical Look at Its Research Methodologies”. Entrepreneurship Theory and Practice 14(1): 7–26.

Carland, Joann W., Hoy, Frank, Boulton William R. and Carland, Jim A.C. (1984) “Differentiating Entrepreneurs from Small Business Owners: A Conceptualization”. The Academy of Management Review (pre-1986), vol. 9: 354–359.

Cope, Jason (2005) “Toward a Dynamic Learning Perspective of Entrepreneurship”. Entrepreneurship: Theory & Practice 29(4): 373–397.

Evans, G.H. Jr (1942) „A Theory of Entrepreneurship”. The journal of Economic History II. (The task of economic history) December, p. 142–146.

Glinka, Beata (2006) „Przedsiębiorczość i kultura w Polsce” in: Beata Glinka i Krzysztof Konecki (ed.) Współczesne problemy socjologii organizacji i zarządzania, p. 25–40, Wydawnictwo Naukowe Uniwersytetu Łódzkiego.

Glinka, Beata (2008) Kulturowe uwarunkowania przedsiębiorczości w Polsce. Warszawa: PWE.Gompers Paul A. and Lerner, Josh (2001) The Money of Invention: How Venture Capital Creates New

Wealth. Harvard Business School Press.Grant, Paul and Perren, Lew (2002) “Small business and entrepreneurial research: Meta-theories,

paradigms and prejudices”. International Small Business Journal 20(2): 185–209.Gudkova, Svetlana (2008) Niematerialne uwarunkowanie rozwoju małych przedsiębiorstw. Wiedza, sieci

osobistych powiązań, proces uczenia się. Warszawa: Wydawnictwa Akademickie i Profesjonalne.Hoselitz, Bert F. (1957) “Noneconomic Factors in Economic Development”. The American Economic

Review 47(2): 28–41.Hull, David L., Bosley, John J. and Udell, Gerald G. (1982) “Renewing the hunt for means of identifying

potential entrepreneurs by personality characteristics”. Journal of Small Business Management 20(2): 11–19.

Jennings, Peter L., Perren, Lew and Carter, Sara (2005) “Alternative perspectives on Entrepreneurship Research”. Entrepreneurship Theory and Practice 29(2): 145–152.

Kirzner, Israel M. (2001/1973) Competition and Entrepreneurship. Chicago and London: The University of Chicago Press.

Konecki, Krzysztof (2007) „Działanie przedsiębiorcze. Auto-praca nad tożsamością a społeczny proces konstruowania motywacji do działania przedsiębiorczego” in: Jacek Leoński i Urszula Kozłowska (ed.) W kręgu socjologii interpretatywnej. Badania jakościowe nad tożsamością, Economicus, Szczecin.

Kuratko, Donald F., Hodgetts Richard M. (1989) Entrepreneurship: A Contemporary Approach. International Thomson Publishing.

Kwiatkowski, Stefan (2000) Przedsiębiorczość intelektualna. Warszawa: PWN.Lambing, Peggy A. and Kuehl, Charles R. (2001) Entrepreneurship. The publisher, Prentice-Hall Career

& Technology.Leibenstein, Harvey (1968) “Entrepreneurship and Development”. The American Economic Review

58(2): 72–83.Liles, Patrick R. (1974) “Who Are the Entrepreneurs?”. MSU Business Topics 22(1): 5–14.McClelland, David C. (1961) The achieving society. Princeton: Van Nostrand.Morris Michael H. and Kuratko Donald F. (2002) Corporate Entrepreneurship: Entrepreneurial Development

within Organizations. South-Western College Pub.Morrison, A. (2006) “A contextualization of entrepreneurship”. International Journal of Entrepreneurial

Behaviour and Research 12(4): 192–209. Pinchot, Gifford (1985) Intrapreneuring. Nowy Jork: Haper and Row.Rae, David (2000) „Understanding Entrepreneurial Learning: A Question of How?”. International

Journal of Entrepreneurial Behaviour and Research 6(3): 145–159.


Schumpeter, Joseph A. (2004/1934) The Theory of Economic Development. New Brunswick, London: Transaction Publishers.

Shane, Scott and Venkataraman, S. (2000) “The Promise Of Entrepreneurship As A Field Of Research”. Academy of Management Review 25(1): 217–226.

Smith, Ken G., Gannon, Martin J. and Sapienza, Harry J. (1989) “Selecting Methodologies for Entrepreneurial Research: Trade-offs and Guidelines”. Entrepreneurship Theory and Practice 14(1): 39–49.

Soltow, James H. 1968. “The Entrepreneur in Economic History”. American Economic Review 58(2): 84–92.

Timmons, Jeffry A. (1994) New Venture Creation: A Guide to Small Business Development. Burr Ridge, Illinois: Irwin.

Warren, Lorraine (2004) “A Systemic Approach to Entrepreneurial Learning: An Exploration Using Storytelling”. Systems Research and Behavioral Science 21(1): 3–16.

Wickham, Philip A. (2004) Strategic Entrepreneurship, Third Edition, Prentice Hall.Zimmerman, Monica A. and Zeitz, Gerald J. (2002) “Beyond Survival: Achieving New Venture Growth

by Building. Legitimacy”. Academy of Management Review 27(3): 414–431.

Jerzy Wierzbiński

Identifying different types of religiosity with cluster based methodology

1. Cluster analysis by k-means method

The cluster analysis by the k-means method is commonly used in marketing research for the purpose of market segmentation (Kacprzak-Choińska 2009), in psychology for detecting individual differences (Lewicka 2004), and to categorise countries (Johnston 2005). The aim of this paper is to draw attention to the limitations of such analysis. We shall present a description of cluster analysis on the example of categorisation patterns of religiosity, though all described properties of this method are of a general character.

The variables describing objects are answers to 4 questions from the ISSP1

survey carried out in 1998-1999 of the representative samples in 32 countries (see table 1, p. 235):– rel1: “How often do you pray?” with a 11-point answering scale ranging from

<never> to <a few times a day>,– rel2 “How would you describe your religiosity?” with a 7-point answering scale

ranging from <very religious> to <very unreligious>,– rel3 “How often do you attend religious services?” with a 9-point answering

scale ranging from <never> to <a few times a week>,– rel4 “How much trust do you have in church institutions and religious

organisations?” with a 6-point answering scale ranging from <absolute trust> to <no trust at all>.The answers to these questions can be considered as the indicators of

a theoretical variable <religiosity> (compare: Wieczorkowska and Wierzbiński 2007). In the course of further analysis, the answers to the questions 2 and 4 have

1 International Social Survey Program (ISSP) is a continuing international program of annual com-parative studies. The aim of this program is to carry out annul research surveys on a specific topic, according to the same methodology and using identical set of questions. All member states participate in this program. The Institute of Social Studies of UW and Archive for Social Data are engaged in the distribution of ISSP data among research centres in Poland. This article makes use of the results from the study carried out in the period between 1998 and 1999 (covering more than 32 thousand respondents from 32 countries).

Identifying different types of religiosity with cluster based methodology 63

been recoded so that the higher values of variable attest to the higher intensity of the theoretical variable.

The indicators of the theoretical (hidden, latent) variable can be divided into:– simple indicators, which are e.g. numerically coded answers to questions– complex indexes, which are built from a few, several or even sometimes of

a few dozen simple indicators – to that end, the most frequently used are the arithmetical means (following the analysis of the homogenous scale by means of a Cronbach’s alpha) or the factor scores, obtained from factor analysis.

– In our example, we have been able to build a complex index, characterised by high reliability (Cronbach’s alpha = 0.71 for 35 186 respondents), consisting of 4 questions. The answers to those questions form one factor, explaining more than 61% variances of variables. However, the averaging-out of 4 simple indicators blurs their lines of diversification.If we do not wish to do that, we must resort to a more complex analysis, the

example of which will be discussed in the further part of this text. The second criterion for the division of indicators is a unit of analysis. An

indicator may describe a single object (e.g. a respondent) or a complex object (e.g. a group of respondents). We can refer to them respectively as individual vs. aggregate indicators. A lack of the specification of the indicator type implicitly means that simple individual indicators were used.

For our example, we shall use both simple aggregate indicators (average answers to 4 questions in 32 countries) and simple individual indicators (answers to 4 questions by more than 32 thousand respondents).

To make this methodological text more understandable, let us concentrate at first on the categorisation of countries, as based on simple indicators. In our case, entry data have a form of the matrix 32 (countries) x 4 (variables).

The cluster analysis by the k-means method is aimed at:– simultaneous comparison of the objects described on many dimensions,– reduction of a great number of objects to a few basic types, which can be

treated as the objects for further analysis. The terms: clusters, categories and types will be used interchangeably in this

paper. The cluster analysis by the k-means method (Aldenderfer and Blashfield

1984; Bailey 1994) groups objects – in our case, countries – into categories which should be diversified: minimally, inside the cluster, and maximally, between the clusters. Each country is presented as a point with 4 coordinates (average answers to 4 questions in 32 countries). Therefore, we can present these data in a four-dimensional space.

The purpose of this analysis is to discover the clusters of points in this space (that is, the objects which are close to one another). The similarity of countries is reflected in the proximity of the corresponding points in space, which can be estimated by measuring distances between them. This is usually done by means of the Euclidean distance, which equals square root of the sum of the squares of the

64 JERZY WIERZBIŃSKI

differences between coordinates on specific dimensions. The central point of the cluster is referred to as its centroid (centre of gravity). The aim of the analysis is to discover clusters of points and to describe them by indicating the gravity centre (centroid) of the objects belonging to the cluster and their respective distances to centroid. The shorter the distance of the point to the centroid, the greater the fit of the given country to the cluster.

In our example, entry data is a description of 32 countries on 4 dimensions. Exit data are centroid coordinates, information on the assignment of the analysed objects to clusters and distance between a given object and the centroid of the cluster, to which it has been classified. Additionally, the distances between centroids are computed.

The basic problem is to choose the number of clusters, because a researcher has to determine the number of categories he wishes to obtain. There is no single method for choosing the number of categories when using the k-means analysis. Our aim is to find:– the smallest number of clusters, where the configuration of clusters matches

data in the best possible way (criterion of statistical significance),– such a configuration that would be the easiest to interpret and significant on

its own (criterion of theoretical validity).The bigger the number of the clusters, the easier it is to meet the requirement

of the sufficient compatibility of the obtained exit configuration with the entry data. As I have already proven in my previous work (Wierzbiński 2009), decision-making on the number of clusters may be facilitated by an analysis of the distribution of the objects’ distances from centroids, for different numbers of categories. Based on the analysis of the distance distribution to centroids, it is possible to draw a scree plot, analogous with the one performed in the factor analysis (Wieczorkowska and Wierz biński 2007), in order to make a decision as to the number of factors. However, we should remember that the most important criterion for a choice of the optimal number of clusters (categories) is the interpretability of various solutions. The substantive meaning of various categories is as equally important a factor, which should be taken into account while determining the optimal number of dimensions, as the various statistical tests of the solution. I entirely agree with Torgerson (1958), who said that in multi-dimensional scaling, which, similarly to cluster analysis, is based on iteration programs, the interpretability and stability of the solution should be the fundamental criterion for choosing optimal scaling dimensionality – in case of the cluster analysis it refers to the optimal number of categories.

To better illustrate the next problem, let us focus in our further analysis on the solutions relying on three clusters. The performed exploratory analysis has divided 32 countries into 3 clusters with the number of objects 5, 17 and 10, respectively.

Should we regard this solution, which meets statistical criteria, as satisfactory? Before we start to interpret the results, we have to consider whether the obtained


solution is determined unequivocally, or maybe, if we repeat the analyses, we will get completely different results.

To understand the essence of the obtained solution, we have to take a closer look at the procedure applied. The program looks for a solution by means of subsequent iterations. It selects initial (starting) centroids and checks whether they match the objects, and then it changes the centroids in such a way as to make them more compatible, and does it until no subsequent change improves the indicator of similarity (SES), which is the sum of all objects’ distances from the centroid of the cluster, to which the object has been classified.

One of the threats facing the researcher is an issue of local minimum (compare, e.g. Wieczorkowska 1987). The program uses the minimising methods of SES function, which may result in the obtainment of only, the so-called, local minimum, instead of the expected global minimum. We can imagine the program performance as walking in the area in search of the lowest point of the terrain. What we consider the minimum point is the point which looks as located at the lowest level – regardless of what direction we take in our walk the misfit will increase. In terms of iteration programs, it means that each subsequent step (subsequent iteration) increases the fit indicator – the value of SES function. It may happen, however, that this seemingly lowest point (local minimum) is a shallow valley, while nearby, there is a depression ( the global minimum) that we have no chance of discovering, as we have already end our search in the valley. To make sure that we are not dealing with any of this, it is necessary to start the program several times, each time with different entry configuration. If the solutions turn out to be identical, then we are entitled to think that we have finally obtained the global minimum.

Another reason for interrupting an iteration process – other than meeting the criterion of the SES function value – is exceeding the number of intended iterations.

In order to verify the stability of the obtained solution, the sorting of the entry set has been changed, and it turned out that this change of the set ordering (sorting 1. vs. sorting 2.), of apparently no substantive significance, has caused a change in the countries’ assignment to specific clusters. Why? Now, the key step in all iteration programs is a choice of starting centroids. An algorithm used by the popular statistical packet SPSS (Hartigan 1975) begins its search by determining starting centroids by selecting first three objects in a set (hence, sorting of a the data set has an influence on results) – these are the initial centroids C1, .., C3. Then, for the fourth country, let us call it X, the program computes the distance from C1, .., C3. If the distance between X and the centroid nearest to X exceeds the distance between the two nearest centroids, then X replaces C1 or C2, depending on which one of the two is nearer. If X does not meet this criterion, the program checks whether X is located at a greater distance from C2 than C2 is located from any other centroid. If this is the case, then the nearest centroid shall be replaced


by X. This procedure is repeated once for all the objects in the set. When this procedure is over, the starting centroids have already been established.

In sorting 1., the following countries have been chosen as starting centroids: Philippines, East Germany and Chile. In sorting 2. of the entry set, Japan has been replaced with Cyprus on the list of the countries chosen by the program as starting centroids. Given such a change of starting centroids, the analysis shall be concluded by a division into clusters, including respectively 8, 14 and 10 objects. The entry data were the same, but the different sorting of the set resulted in the obtainment of a different classification. The values of final centroids are showed in figure 1. For both solutions, the profiles of the indicators are similar, but as many as 10 out of 32 countries have changed their clusters in both analyses. It does not occur often, but it might happen.

It is worth emphasising at this point that the impact of sorting (which can influence the choice of starting configuration) lessens as the number of the categorised objects grows and increases as the number of the intended clusters grows.

Figure 1. The values of fi nal centroids for three clusters, with two (s1 vs. s2) different sortings of the entry set

10

s1_L s1_M s1_H s2_M s2_Hs2_L

rel2 rel3rel1 rel4

8

6

4

2

0

Note: The clusters with high, medium and low indicator values have been labelled with the symbols: H, M, and L. respectively.

Source: own study.

Another problematic issue is the fact that the obtained solution reveals discrepancies, depending on whether entry variables are standardised or not. Where the variances of variables are not significantly different, the standardisation should not influence the final configuration. Otherwise, we will obtain different solutions and have to ask ourselves the question which solution reflects “reality” in a more accurate way.

Summarising, it is worth remembering that the analysis of clusters by the k-means method may be a source of hypotheses, but cannot be treated as a proof for the existence of a categorisation, unless the researcher proves that the solution


obtained is robust to the change of starting configuration and choice of the number of clusters. The latter means that the “movement” of countries between clusters in the solutions, which are different in terms of the number of categories, can be subject to a reasonable interpretation.

2. Testing hypotheses by means of cluster analysis

Some beginners in scholar work think that real scientific work should consist solely in testing hypotheses. The effect of such approach is a great proliferation of hypotheses with regard to any scientific activity. To illustrate the point, you can find in doctoral theses the hypothesis: “It is possible to order a set of objects”. Thus, Mendelejew should have written that his work on the periodic table consisted in testing the hypothesis that such ordering of chemical elements is possible. This is a ridiculous idea, since his failure to do so – as occurred to his predecessors – wouldn’t mean that it cannot be done. Similarly, some scholars, applying the cluster analysis by the k-means method, are known to make hypotheses of the following kind: “The market of a young consumer is heterogeneous with regard to the four selected social and cultural variables, and on such market there are internally-homogenous segments”.

Let us be reminded that empirical hypothesis is defined as being a statement which can be falsified as a result of data analysis. As regards the cited above hypothesis, it is hard to imagine what empirical results could falsify it. By means of a cluster analysis, we will obtain the desired number of categories, even if classifying variables have identical means and variances or are fully correlated. Thus, we could confirm the lack of market diversity only if entry variables had zero variance, that is they were constants, and not variables.

I would definitely encourage researchers, who intend to analyse their data of “unknown structure”, to first familiarise themselves with the solutions offered by the statistical packet for made-up data, such as those described above (strongly correlated variables, very small variance, no differences with respect to averages and standard deviations).

Due to the foregoing problems, a cluster analysis could serve the purpose of testing hypotheses if the starting centroids were chosen by the researcher and if the option <CLASSIFY> in the SPSS program was chosen. Although, the final centroids may also, in this case, differ from the set by the researcher centroids, this option has such an advantage that the solution obtained does not depend on the sorting of entry set.

Let us assume that, based on the results obtained from exploratory analysis and theoretical considerations (Giddens 2005; Marody and Mandel 2007), we wish to select the countries that could be described by the following pattern of religiosity:1) high (high values of all variables),2) low (low values of all variables),


3) moderate, indicative of progressive secularisation, which shows in the fall of ritual religiosity (low level of participation in religious ceremonies and low trust in religious institutions) rather than in the fall of spiritual religiosity (average values of the indicators rel1 and rel2).We encounter problems when selecting starting centroids. We can either choose

particular countries or write in the values of theoretical centroids, not accurately represented by any country (Wierzbiński 2009). With the purpose of translating these high, low and medium values of entry variables into specific actions, we can write in, e.g., the numbers corresponding to the results equal to z = 1, z = –1, z = 0, respectively (where z stands for standardised values of entry variables). It is crucial, however, to watch carefully the distribution of variables, as the proposed solution is acceptable in our example for aggregate indicators, whose distribution was quite symmetrical, but not for simple indicators, because, for instance, the distribution of the participation indicator in the sample of more than 32 thousand respondents is remarkably skewed (as much as 57% of the respondents stated that they never go to church).

In table 1, columns A, B, C, D, there are displayed the average values of the specific countries’ indicators, and in column E – a symbol of the cluster, to which a given country has been classified. The categories with high, low and medium level of religiosity have been respectively labelled with the symbols H, L and M.

The categorisation of countries could form national stereotypes (over gene-ralisations ) Therefore, we should verify the diversity of religious profiles across particular countries. For that purpose, a confirmatory cluster analysis has been performed, covering more than 32 thousand respondents with the starting centroids of selected values, according to the same principles as with the countries (specific values were, nonetheless, different, because the distribution of aggregate indicators differs from the distribution of individual indicators).

As a result of this analysis, three clusters were isolated, dividing the respondents into almost equal parts. Almost 38% of respondents has been classified to the high-religiosity cluster, while 31% to the two remaining clusters.

The columns F, G and H in table 1 show what percentage of the respondents from a given country belongs to the category with the high (H), low (L) or medium (M) level of religiosity. In the example of Philippines alone, almost 91% of respondents has been classified into the same category. In many countries, the division of respondents into three categories leads to the obtainment of almost equal proportions, which might indicate that this country should be difficult to classify on the basis of an aggregate indicator.

The presented analyses are only a fraction of what should be done if we intended to create a classification of countries with respect to religiosity. Other necessary steps include, e.g., an analysis of the solution with a higher number of clusters, consideration of arguments for and against the standardisation of entry variables, verification of the impact of the outstanding country (Philippines) on the categorisation of the remaining countries.


Table 1. The list of countries taking part in the ISSP survey

No. Country A B C D E F G Hrel1 rel2 rel3 rel4 cluster H L M

1 Norway 4.0 4.1 2.2 2.9 L 21.8 40.1 38.1 2 Sweden 3.3 3.5 2.2 2.6 L 16.3 51.5 32.1 3 Denmark 3.3 3.8 2.2 3.0 L 18.8 55.6 25.6 4 Spain 5.4 4.2 1.8 2.9 M 36.3 30.5 33.2 5 Portugal 6.8 4.8 2.1 3.3 H 54.7 14.5 30.7 6 Cyprus 5.9 5.1 1.8 3.2 M 37.6 12.0 50.4 7 Slovenia 4.4 3.9 1.9 2.6 M 26.7 37.8 35.5 8 Hungary 5.5 4.1 1.6 3.1 M 38.4 32.6 28.9 9 Czech Republic 3.6 3.6 1.9 2.4 L 21.0 52.2 26.810 Slovakia 5.7 4.4 3.0 3.1 M 48.2 25.1 26.711 Poland 7.9 5.0 2.6 3.3 H 66.8 5.8 27.412 Latvia 4.5 4.0 1.6 3.1 M 25.8 33.8 40.413 Bulgaria 3.9 4.1 2.6 2.6 L 23.8 38.7 37.514 Russia 3.4 3.9 1.1 3.0 L 19.7 53.9 26.415 East Germany 2.4 2.3 1.7 9 9 L 12.7 72.1 15.216 West Germany 4.8 3.8 2.8 2.7 M 34.43 34.4 33.317 Austria 5.7 4.4 2.7 2.7 M 40.6 22.1 37.318 Italy 6.7 4.4 2.9 3.0 H 53.9 16.6 29.619 Holland 4.8 4.2 2.0 2.7 M 35.6 39.5 24.920 France 4.1 3.5 2.0 2.4 L 23.3 47.0 29.621 Switzerland 6.0 3.7 2.6 2.9 M 39.2 22.6 38.222 Great Britain 4.6 4.0 2.2 2.7 M 28.8 33.2 38.023 Ireland 7.4 4.7 2.6 3.0 H 60.9 6.4 32.724 Northern Ireland 6.8 4.3 2.9 3.1 H 55.0 18.2 26.825 USA 7.8 4.8 3.4 3.3 H 66.8 11.1 22.026 Canada 5.4 4.1 2.5 2.8 M 35.8 28.8 35.427 Australia 4.6 4.0 2.4 2.9 M 33.8 38.9 27.228 New Zealand 4.9 4.1 2.7 2.8 M 33.0 33.6 33.429 Philippines 9.4 5.1 4.0 3.9 H 90.6 0.3 9.130 Japan 5.3 3.5 1.9 2.1 M 25.6 24.3 50.031 Chile 7.3 4.1 3.2 3.6 H 61.2 14.9 23.932 Israel 4.7 3.7 2.5 2.6 M 30.8 43.3 25.9

Note: descriptions of the columns A–H are to be found in the text.

Source: own study.

The speed with which one can perform a classification by means of an appropriate computer program (the categorisation of more than 32 thousand objects takes less than a minute) does not translate into the effortlessness of obtaining theoretically valid results. We should remember that, with the same data, we may get, by means of a cluster analysis, very different categorisations, meeting the statistical criteria.


To create a theoretically valid classification, it is necessary to spend many days, if not weeks, testing various variants of solutions, and having in mind that theoretical validity is more important than statistical significance.

Information on the authorDr hab. Jerzy Wierzbiński, Prof. UW – Director for the Institute of Mathematical and Statistical Methods of Management, Vice-dean of the Management Faculty at Warsaw University. E-mail: [email protected].

Bibliography

Aldenderfer, M.S. and R.K. Blashfield. 1984. Cluster analysis, Thousand Oaks-London-New Delphi: Sage Publications.

Bailey, K.D. 1994. Typologies and Taxonomies. An Introduction to Classification Techniques, Thousand Oaks-London-New Delphi: Sage Publications.

Giddens, A. 2005. Socjologia, Warszawa: Wydawnictwo Naukowe PWN.Hartigan, J.A. 1975. Clustering Algorithms, New York: John Wiley & Sons.Johnston, M. 2005. Syndromes of Corruption: Wealth, Power, and Democracy, Cambridge: Cambridge

University Press.Kacprzak-Choińska, A. 2009. Społeczno-kulturowe determinanty segmentacji rynku mło dzieżowego,

Warszawa: Wydział Zarządzania, Uniwersytet Warszawski, unpublished doctoral thesis.Lewicka, M. 2004. Gdybym miał milion... Marzenia Polaków u progu XXI wieku. Kolo kwia Psychologiczne,

nr 12, s. 218-237.Marody, M. i S. Mandes. 2007. Religijność a tożsamość narodowa Polaków, w: Marody, M. (red.) Wymiary

życia społecznego. Polska na przełomie XX i XXI wieku. Wydanie nowe, Warszawa: Wydawnictwo Naukowe Scholar.

Torgerson, W.S. 1958. Theory and Methods of Scaling, New York: John Wiley & Sons.Wieczorkowska, G. 1987. Skalowanie wielowymiarowe jako metoda badania percepcji, Warszawa:

Wydawnictwa Uniwersytetu Warszawskiego.Wieczorkowska, G. i J. Wierzbiński. 2007. Statystyka. Analiza badań społecznych, War szawa: Wydawnictwo

Naukowe Scholar.Wierzbiński, J. 2009. Badanie zaufania do organizacji: problemy metodologiczne, Warszawa: Wydawnictwa

Naukowe Wydziału Zarządzania Uniwersytetu Warszawskiego.


Agnieszka Kacprzak-Choińska

Application of factor analysis and cluster analysis in market segmentation

1. Introduction

Market segmentation is the first element in planning of market strategy by an enterprise. In view of the growing complexity of the surrounding in which consumers function, standard geographical or demographic criteria usually prove insufficient. Therefore, a trend has appeared to apply psychographic criteria as a base for better understanding of motives underlying consumer behaviour as well as the values, convictions and attitudes that govern their actions. The objective of the survey performed on a group of 309 secondary school students from nine cities in Poland was to segment the youth market in accordance with social and cultural criteria, making up the post-modern consumption model (Kacprzak-Choińska 2009). As a result of an analysis of applicable literature, four trends were identified that make up post-modern consumption: consumerism, greening, virtualisation and tribalism (Kac przak-Choińska 2007: 14–21). A questionnaire was used as a measuring tool with questions concerning consumer likings and behaviour. Table 1 presents 36 questions, selected out of 80 questions with factor analysis.

The questionnaire was composed of four thematic sections, investigating the presence of the above trends in respondents’ shopping behaviour. The particulars contained questions concerning such demographic variables as gender, place of residence, type of school and financial status of the respondents’ family. Each section contained 20 questions. In case of psychographic surveys, it is recommended to commence with a large group of statements – several dozen or even several hundred. To all items Likert type intensity scales have been assigned which are bipolar orderly scales, usually with five or seven steps. Balanced scaling is recommended – that is an odd number of answers since this reduces measurement error and facilities the application of statistical methods at the stage of data analysis (Kaczmarczyk 2003: 116). Seven-step scales have somewhat better statistical properties while five-step scales are preferred by respondents (Carifio and Perla 2007: 106–116). Therefore, a five-step scale was applied in the survey tool (from “completely agree” to “completely disagree”).

72 AGNIESZKA KACPRZAK-CHOIŃSKA

Table 1. Survey questionnaire – fi nal versionConsumerism

1. I like to own things that make a good impression on others. 2. I pay great attention to material things owned by other people. 3. The brand of clothes I buy is very important to me. 4. I pay attention to the brands of clothing and footwear worn by others. 5. Possessing large amounts of material goods is one of the most important achievements in life. 6. I like luxury. 7. I buy myself things just to feel better. 8. I am used to buying something “as a reward” after a hard day at school. 9. It sometimes happens that I buy something with money that I should have spent on

something else. 10. My parents do not realize how much I spend. 11. My feeling is that others would be scared if they learned how much and how I shop. 12. Going shopping gives me pleasure.

Greening 13. It is important to me that any cosmetic I buy was not tested on animals. 14. I pay attention to make sure the packaging of any product I buy is not harmful to the

environment. 15. I am interested in the conditions under which the goods I buy are produced. 16. I avoid buying products from companies which I know abuse their employees. 17. I would willingly engage in consumer movements in favour of rational and aware

consumption. 18. I am happy to buy things whose income supports social campaigns, even if they are a bit

more expensive than other similar goods.Virtualisation

19. I spend my free time at the computer. 20. My parents believe that I spend too much time at the computer. 21. I cannot imagine life without the Internet. 22. When I go on vacation, I feel that I’m missing Internet access. 23. I often forget about the passage of time when I use the Internet. 24. Before I consider a major purchase, I review and compare deals on the Internet.

Tribalism 25. The Internet has enabled me to get to know people like me who come from different parts of

Poland and the world. 26. I have a hobby that I share with a group of friends I met online. 27. I feel that the people I know in real life do not understand me as well as my friends online. 28. I have my favourite online message boards. 29. I use the Internet more for making new friends than gaining information. 30. There are certain topics that I can only talk about with people I have met online. 31. When buying new clothes, the most important thing for me is my friends’ opinions.32. I often advise other people which product to choose. 33. I often go shopping with friends. 34. Belonging to a group is very important to me. 35. I try to dress like my peers. 36. The youth group I identify with can be identified from my appearance.

Source: Author’s study.

Application of factor analysis and cluster analysis in market segmentation 73

2. Factor analysis

In order to reduce the number of questions and construct possibly homogeneous indicators for the four identified dimensions, factor analysis was applied that helps transform a set of observable variables (answers to questions) into a smaller set of concealed (non-observable in reality) factors. As a standard, social sciences resort to a variant of factor analysis called principal component analysis with orthogonal rotation VARIMAX, considered to be most effective in case of empirical research (Rószkiewicz 2002a: 104; Mitchell 1994: 4–17).

2.1. Procedure

Relationships between factors (F1, ..., Fk) and observable data (X1, ..., Xp) are presented in the following equations (Rószkiewicz 2002b: 100):

X1 = λ11F1 + λ12F2 + λ13F3 + … +λ1kFk + ε1, 1) Xi = λi1F1 + λi2F2 + λi3F3 + … +λikFk + εi, Xp = λp1F1 + λp2F2 + λp3F3 + … +λpmFk + εm,

where: Xi – observable variable (answer to question), for i = 1, ..., p; Fj – factor, for j = 1, ..., k; λij – linear combination coefficient, specifying the relationship between observable variable Xi and factor Fj, called factor loading; εi – random component, for i = 1, ...,p.

For the presented model, the following assumptions are made (Stanisz 2007: 215):– common factors Fj are non-correlated which means that their co-variance is

equal to zero: cov(Fi, Fj) = 0, for i ≠ j; – random factors εi are not correlated so their co-variance: cov (εi, εj) = 0, for

i ≠ j; – common factors Fi are not correlated with random factors εi, so:

cov(Fi, εi) = 0.

In order to evaluate the justification to apply factor analysis for a specific data set, Bartlett’s spherical test is applied. It verifies the zero hypothesis stating that the correlation matrix is a unitary matrix. The decision is taken on the basis of the value of statistics χ2 presented in the formula (Rószkiewicz 2002a: 101):

2) lognp

R1 62 52 =- - -

-| c m ,

where: n – sample size,


p – number of observable variables, R – matrix of correlation coefficients of observable variables.

If the value of statistics χ2 is higher than the value read from distribution χ2with

a = 0.05 and df = p (p – 1)/2, which means that the related value of p is lower than 0.05, we consider that the correlation extent of observable variables reduces the number and thus identify factors explaining the correlation among the data. As table 2 with test results shows, the condition is satisfied for all the four scales which is proof of significant correlation of questions in each scale.

Table 2. Bartlett’s spherical test and KMO statistics

Scale t Degrees of freedom P KMO

Consumerism 809.550 66 0.0001 0.816

Greening 352.340 15 0.0001 0.794

Virtualisation 656.342 15 0.0001 0.828

Tribalism 1065.511 66 0.0001 0.819


Information similar to results of Bartlett’s spherical test is provided by Kaiser-Mayer-Olkin coefficient (KMO). It has the following formula:

(3) KMOr a

r

i j j i ij i j j i ij

i j j i ij

2 2

2

=+R R R R

R R

! ! !

! !

! ,

where: rij – element of matrix correlation R; aij – partial correlation coefficient among variables i and j, with the impact of other variables eliminated.

The higher the values of Kaiser-Mayer-Olkin coefficient (KMO), the higher degree of variable correlation. KMO has value within the range of <0.1>, where 1 means full variable correlation while 0 means no correlation. It should be noted that correlations among variables may be both positive and negative. It is recommended (Rószkiewicz 2002a: 101; Mitchell 1994: 4–17) that the KMO coefficient is above 0.5. As table 2 presents, for the four scales used in the survey, the KMO coefficients are between 0.794 for greening and 0.828 for virtualisation which justifies the application of factor analysis.

Among the number of factors obtained as a result of factor analysis depends on three criteria (Stanisz 2007: 175):1. Variance percentage explained with component variables - the components are

to be identified so long as the sum of their variants exceeds 75%.2. Kaiser criterion – saying that only those factors are applied for further analysis

whose eigenvalue is in excess of 1.0 since this guarantees that the received


factors are responsible for a part of variance that is not smaller than the original variables (Wieczorkowska and Wierzbiński 2007: 323).

3. An analysis of Cattell scree plot consists in finding in the chart of eigenvalues the spot from which a gentle decrease of eigenvalues occurs rightwards – from where increase of information provided by additional factors becomes insignificant.Threshold values described in those criteria are of heuristic nature. The first

criterion is very seldom satisfied; most often Kaiser criterion is applied. It should also be remembered that the most important objective of factor analysis is to find an interpretable solution (Stanisz 2007: 176). The analysis presented in the article meets criteria number 2 and 3 (Kaiser criterion and rubble chart). Table 3 presents results obtained for Kaiser criterion (column: eigenvalue after rotation).

2.1. Results of factor analysis

With respect to the scales measuring consumerism and tribalism, during the analysis two explaining factors each were obtained, 45.1% and 50.0% variance respectively. The scales measuring greening and virtualisation were made to one factor for which the cumulated variance was 44.2% and 55.0% respectively. Table 3 presents eigenvalues and percentage of the explained variance after orthogonal rotation VARIMAX.

Table 3. Variance explained with identifi ed factors

Scale Identified factors Eigenvalue after rotation

Percentage of explained variance

Cumulative explained variance (%)

Consumerism factor 1 factor 2 2.821 2.587 23.5 21.6 18.0 45.1Greening factor 1 2.652 44.2 44.2Virtualisation factor 1 3.300 55.0 55.0Tribalism factor 1 factor 2 3.528 2.432 29.5 21.5 29.5 50.0


Interpretation of the generated factors is supported with an analysis of factor loadings which in this model may be interpreted as correlations between the observable variable (answer to a question) and the specific factor. The higher the factor loading, the more intensive impact of a statement on interpretation of the factor. Hidden variables received as a result of the factor analysis for the scale measuring consumerism is materialism (statements 1–6) and impulsive consumption (statements 7–12). For the scale measuring greening, one factor was identified containing statements 13–18. The scale measuring virtualisation was composed of statements contained in table 1 on page 214 under numbers 19–24. The scale measuring tribalism was made up of two factors: Virtual tribalism (statements 25–30) and tribalism in real space (statements 31–16). The statements are put in an order in table 1 by their factor loadings.


With the factor analysis we have obtained new variables (factors) that may be recorded with three available methods – by using mean indices, substitute variables or factor results. Mitchell (1994: 4–17) recommends that with respect to scales with verified reliability is it better to use factor scores; with respect to non-verified scales – surrogate variables that is interpretation should be applied solely to statements with the highest factor load. Wieczorkowska and Wierzbiński (2007: 330) are of the opinion that the decision on selecting a method to develop indices depends on the purpose of development. Orthogonal rotation causes that factor scores are not correlated. This is an advantage if we want to use them as predictors in regression analysis. It should be remembered, however, that no correlation between e.g. materialism and tribalism is forced by the applied analysis. In fact, new variables – factors – may present correlated constructs of what we could detect by using oblique rotation. Therefore, the use of mean indices is fully justified when we do not need non-correlated indices. It is worth adding that both construction methods of new variable indices lead to highly correlated indices. Since cluster analysis does not require the use of non-correlated factor results, mean indices will be applied.

3. Cluster analysis

3.1. Custer analysis against other market segmentation methods

The procedures of market segmentation may be divided in two ways. The first traditional division is into a priori and post hoc segmentation (Green: 1977: 61–73; Wind 1978: 317-337). A priori segmentation exists when the type and number of segments is predetermined by the surveyor while post hoc segmentation exists when the type and number of segments is determined on the basis of data analysis.

The other division criterion, added by Wedel and Kamakura (2003: 17) refers to the use of either descriptive or predictive statistical methods. Descriptive statistical methods analyse relationships between one set of segmentation bases. They can be used to analyse mutual location of variables or objects in multi-dimensional space. This includes such techniques as cluster analysis, contingency tables and log-linear analysis. Predictive methods analyse relationships between two sets of variables where one is composed on dependent variables while the other of independent (explanatory) variables. Selection of one or several variables depends on the remaining set. Most often, also an analysis is performed on the impact of independent variables on dependent variables. This approach contains such techniques as: cross tables, discriminant analysis, logistics regression analysis and AID, CART and ANN models (Wedel i Kamakura 2003: 17, Chrząszcz 2006: 23–28).

Cluster analysis is a descriptive post hoc method. With post hoc approach, segmentation criteria are not pre-determined but arise during the reduction process


of multidimensionality of a large number of variables. Respondents are grouped by similarity of their multi-factor profiles, based most often on psychographic features and anticipated benefits resulting from the use of the products. A large number of variables describing psychographic features makes it necessary to provide a large number of questions in the questionnaire. Most often factor analysis is used first followed by identification of latent features and structures in order to identify segmentation criteria. In this approach, we do not know the number of segments or the volume thereof until an analysis is performed (Green 1977: 61–73; Wind 1978: 317–337; Rószkiewicz 2002a: 99; Chrząszcz 2006: 23–28).

Two variations of cluster analysis are: hierarchical analysis and non-hierarchical analysis. With the hierarchical approach, we start with single objects that are subsequently combined into segments. With respect to non-hierarchical methods, we start from a random group of objects belonging to a pre-determined number of segments that are allocated thereto until the specific criterion is optimised. The most often used non-hierarchical technique of cluster analysis is k-means clustering (Wedel and Kamakura 2003: 19). A clear advantage of the approach is the high utility of segmentation obtained with it, numerous computer programs supporting the method and a large number of known implementations (Wedel and Kamakura 2003: 29). It should also be noted that cluster analysis is the most often used segmentation method. Dibb, Stern and Wensley (2002: 113–119) asked marketing theoreticians in their study about a best market segmentation method from the viewpoint of understanding consumers and improved efficiency of enterprises. The respondents most often mentioned cluster analysis as first. However, it should be remembered that cluster analysis applied iteration procedure and thus it is subject to related hazards, for instance a problem of “local minimum” (Wierzbiński 2009).

3.2. Procedure of cluster analysis

The problem that is solved by cluster analysis is presented as follows. With a set on elements each of which is described with a set of k variables, we make a split into segments that are internally homogeneous and externally heterogeneous. In market segmentation those elements are consumers or enterprises and segmentation bases are the variables (Wedel and Kamakura 2003: 40).

From the statistical viewpoint, segmentation is a procedure to split a population into sub-groups in accordance with an approved set of criteria. The set of observations includes n individual each of which is described with a set of features (Xy..., Xp). Additionally, each individual is described with a set of features (Y1,., Yp), which are profile variables. The segmentation procedure is based only on a set of segmentation criteria that is variables (X1..., Xp). When numerous sets of individuals are grouped, the k-means method is best recommended. Grouping with the k-means method is performed as follows (Rószkiewicz 2002b: 236):1. A priori determination of the number of k segments.


2. Selection of k individuals for which the values of grouping variables create germs of centres of gravity of k clusters.

3. Calculation of the distance of each individual from the identified centres of gravity.

4. Allocation of individuals to k groups. Individuals are allocated to those segments they are closest to basing on the distances calculated in the previous step.

5. Identification of centres of gravity for created clusters. They are mean values of the variables on which segmentation is based.Subsequent iterations (steps 3, 4, 5) are repeated until there is no base to

further transfer individuals that is until the value of the error function of allocation of individuals to specific clusters stop showing major changes or when the pre-determined number of iterations is exhausted (usually 10 iterations are sufficient). The function is described with the following formula:

(4) SES djSij

m

i

k2

11

===

// ,

where: SES – allocation error function to specific clusters, djSi2 – distance of j-th individual from the centre of gravity for i-th

cluster.

However, there is no subjective selection method of the number of segments when k-means analysis is applied. Two contradictory tendencies clash here. On the one hand, in order to achieve benefits of scale, efforts are made to reduce the number of segments; on the other hand, willingness to split the buyers into most homogeneous groups results in a large number of segments (Rószkiewicz 2002b: 230).

3.1. Results of cluster analysis: market segmentation

With respect to the analysed data, as a result of the k-means procedure five market segments were identified the numerical strength of which is presented in table 4.

Table 4. Numerical strength of segments

Segment N %1 66 212 71 233 78 254 55 185 39 13

Total 309 100Source: Author’s study.


As it is clear, respondents were not evenly divided among segments. The strongest was segment 3, grouping 25% of respondents, followed by segments 2 and 1 (23 and 21% respectively) with the smallest segments 4 (18%) and 5 (13%). Final centres of gravity of the identified five segments are presented in table 5.

Table 5. Final centres of gravity of segments

Factor Segment

1 2 3 4 5Consumerism – materialism 3.60 2.60 3.65 2.70 3.01Consumerism – impulsive consumption 3.32 2.45 3.42 2.16 2.35Greening 2.72 3.58 3.39 2.31 2.28Virtualisation 2.97 2.46 3.99 2.58 4.00Virtual tribalism 1.77 1.84 3.05 1.70 3.47Tribalism in real space 3.06 2.87 3.63 2.74 2.50


As it can be seen, representatives of segment 1 reach high results in the scales measuring consumerism and tribalism in real space and mean results in the other scales – therefore they may be termed as “materialists”. Segment 2 groups persons with the highest level of greening, lowest level of materialism and virtualisation, low level of impulsive consumption and virtual tribalism – “ecologists”. The next segment (3) contains persons with high results in all the six scales measuring postmodern consumption – they may be referred to as “postmodern”. Segment 4 contains persons who are just opposite that is respondents with low results for all the six indices – “modern” consumers. Finally, representatives of the last segment are characterised with the highest level of virtualisation and virtual tribalism indices and low results in the other scales – they may be termed “netizens”. Thus, in the obtained solution we have a segment of persons who are real postmodern consumers (“postmodern”), a segment of persons presenting more traditional consumption behaviour (“modern”) and three segments grouping respondents with high results only for four of the surveyed trends: consumerism (“materialist”), greening (“ecologists”) and virtualisation (“netizens”).

3.2. Evaluation of the proposed solution

In order to evaluate if the proposed solution can be applied in practice it is necessary to look at the distribution of answers to questions concerning the variables that profile the other segments – frequencies of specific shopping behaviour and demographic features. If there is no relationship between belonging to a segment and profiled variables, the proposed solution could not be applied in practice. Table 6 presents statistics of chi square and one-factor variance analysis for each shopping behaviour and demographic features.


All the surveyed shopping behaviours with the exception of frequency of joining consumer boycotts are significantly related to belonging to a segment. No relationship in this case was most probably due to incorrect understanding of the question by respondents. The question was: “How many brands have you boycotted (purposefully avoid buying them to manifest protest) due to unethical behaviour of the manufacturer?”. The respondents marked probably also those instances of boycott that were not due to the company’s general policies but also personal experience such as impolite service or inappropriate review of complaints.

With respect to demographic variables, a significant relationship occurs with respect to all four variables. As presented in table 7, the segments of “materialists” and “ecologists” are dominated by women while the segments of “modern” and

Table 6. Test chi square and one-factor variance analysis for profi led variables

Profile variable Chi square test ANOVA

c2 P F PBuying on impulse 36.862 0.002 9.000 0.0001Visits to shopping centres 33.277 0.031 4.471 0.002Joining consumer boycotts 17.803 0.122 1.694 0.151Visiting fast food bars 40.917 0.017 7.432 0.0001Buying products promoted with CRM 25.300 0.013 4.325 0.002Buying via Internet 42.086 0.003 9.068 0.0001Buying of products related to belonging to postmodern tribes 72.366 0.0001 12.177 0.0001Gender 25.402 0.0001 – –Place of residence 11.150 0.025 – –Type of school 9.955 0.041 – –Financial status 19.789 0.011 – –

Source: Author’s study for p = 0.05.

Table 7. Demographic characteristics of each segment

Characteristics Materialists (%)

Ecologists(%)

Post-modern (%)

Modern (%)

Netizens (%)

Whole sample (%)

Gender female male

6436

6535

5842

4060

2377

5347

Place of residence city town

7030

6337

6139

6436

9010

5842

Type of school Grammar school Technical secondary school or vocational school

56

44

38

62

47

53

55

45

67

33

51

49Financial condition Very good Good Medium and poor

233938

75142

155827

64253

84944

124939



“netizens” are dominated by men. With respect to the place of residence, repre-sentatives of the “netizen” segment in 90% live in cities and in the other segments the distribution is similar to the distribution characteristic for the whole sample where 68% respondents come from cities and 32% from towns. A majority of “ecologists” study at technical secondary schools and vocational schools while the “netizen” segment has a majority of grammar school students. Finally, with respect to their financial status, the “postmodern” consumer segment contains the best off persons (27% persons in medium and poor condition in relation to 40% in the entire sample) while the “modern” segment – persons coming from poorest families (53% persons in medium and poor condition).

When on the basis of variance analysis we reject the zero hypothesis on no differences among segments, we have to continue our analysis by performing Turkey’s test. The test, based on studentised range distribution verifies which mean values differ in statistically significant manner.

The question concerning buying on impulse was: “How often do you buy on impulse?” (available answers: “always”, “often”, “sometimes”, “seldom”: “never”). Statistically significant differences in this case exist between the segments of “materialists” and “ecologists”, “netizens” and “postmodern” consumers and between the segment of “postmodern” consumers and the segments of “ecologists” and “modern”. Representatives of both segments much more often shop on impulse than the other respondents.

With respect to visiting shopping centres, the question was: “How often have you visited shopping centre last year?” (available answers: “every day”, “2–3 times a week”, “once a week”, “2–3 times a month”, “once a month”, “less than once a month”). As seen in figure 1, representatives of the “postmodern” and “materialist” segment visit shopping centres more often than persons from the other segments.

The situation is similar with respect to the frequency of visits to fast food bars. The question asked of respondents was: “How often in the last year did you eat at fast food bars?” (available answers: “never”, “less than once a month”, “once a month”, “2–3 times a month”, “once a week”, “2–3 times a week” “almost daily”). Major differences occur here between the “postmodern” segment and the “ecologist”, “netizenes” and “modern” consumer segments.

Products promoted with cause-related marketing are more often bought by “ecologists” than representatives of the “modern” and “netizens” segments. In this case the question was: “how many times last month did you buy a product a part of income from which was assigned to support a social or charity campaign?” (available answers: “4 times or more”, “2–3 times”, “once”, “never”).

A majority of material differences between segments occur when buying over the Internet and with tribal shopping behaviour. The questions surveying that issue were: “How often to you happen to buy over the Internet?” (available answers: “once a week or more often”, “several times a month”, “once a month”, “several times a year”, “just once”, “never”) and: “Do you happen to buy products related to


belonging to virtual groups?” (available answers: “very often”, “often”, “sometimes”, “seldom”, “never”). Representatives of the “ecologist”, “materialist” and “modern” segments buy over the Internet less frequently than persons from the “netizen” segment and “postmodern” consumers. With respect to tribal shopping behaviour, there is a material difference between members of the “postmodern” and “netizen” segments and representatives of the other segments who rarely declare buying products related to their belonging to virtual groups.

Figure 1. Belonging to segments and frequency of specifi c shopping behaviour

Impulse buying

0.5

2.7

3.53.2

2.6 2.9

3.03.6 3.7

3.0 2.9

2.63.2

3.8

3.0 2.9

1.41.6

2.4

1.8

2.5

1.62.0

2.52.0

2.7

2.42.0 2.0 1.8 1.8

0.0

1.01.52.02.53.0

0.50.0

1.01.52.02.53.0

0.5

0.0

1.0

1.5

2.0

2.5

3.0

0.5

0.0

1.0

1.5

2.0

2.5

3.0

3.54.0

0.50.0

1.01.52.02.53.03.54.0

0.50.0

Materialist

s

Ecologists

Moderns

Postmoderns

Netizens

Materialist

s

Ecologists

Moderns

Postmoderns

Netizens

Materialist

s

Ecologists

Moderns

Postmoderns

Netizens

Materialist

s

Ecologists

Moderns

Postmoderns

Netizens

Materialist

s

Ecologists

Moderns

Postmoderns

Netizens

Materialist

s

Ecologists

Moderns

Postmoderns

Netizens

1.01.52.02.53.03.54.0

Visiting shopping centres

Visiting fast-food bars

Buying of products promoted with CRM

Buying over the Internet

Tribal shopping behaviour


4. Summary

As a result of factor analysis, the original set of questions was reduced from 80 to 36 and thus the survey tool was easier to be applied in practice. Subsequently, with a cluster analysis with k-means method it was manifested how can surveyed


respondents be segmentised. The usability of the received solution was confirmed by results of variance analysis, chi square test and Turkey’s test, showing differences among consumers assigned to separate segments with respect to shopping behaviour and demographic features. However, it should be remembered that although it is most common, the cluster analysis with k-means method is only one of multiple segmentation procedures and thus it would be interesting to compare the results obtained with other statistical methods.

Information of the author Dr. Agnieszka Kacprzak-Choińska – associate professor in the Organisation Socio-logy Institute, Management Faculty of the University of Warsaw.E-mail: [email protected].

Bibliography

Carifio, J. i R. Perla. 2007. Ten common misunderstandings, misconceptions, persistent myths and urban legends about Likert scales and Likert response formats and their antidotes. Journal of Social Sciences, Vol. 3, nr 3, s. 106–116.

Chrząszcz, M. 2006. Segmentacja rynku jako podstawowe badanie marketingowe. Mar keting i Rynek, nr 4, s. 23–28.

Dibb, S., Stern, P. i R. Wensley. 2002. Marketing knowledge and the value of segmenta-tion. Marketing Intelligence & Planning, Vol. 20, nr 2, s. 113–119.

Green, P. 1977. A new approach to market segmentation. Business Horizon, s. 61–73.Kacprzak-Choińska A. 2007. Konsument ponowoczesny. Nowe trendy w zachowaniach nabywczych

i ich konsekwencje dla marketingu. Problemy zarządzania, nr 6, s. 14–21.Kacprzak-Choińska A. 2009. Społeczno-kulturowe determinanty segmentacji rynku mło dzieżowego, niepu-

blikowana rozprawa doktorska, Warszawa: Wydział Zarządzania Uniwersytetu Warszawskiego.Kaczmarczyk, S. 2003. Badania marketingowe. Metody i techniki, Warszawa: Polskie Wydawnictwo

Ekonomiczne.Mitchell, V. 1994. How to identify psychographic segments. Marketing Intelligence & Planning, Vol. 12,

nr 7, s. 4–17.Rószkiewicz, M. 2002a. Metody ilościowe w badaniach marketingowych, Warszawa: Wydaw nictwo

Na ukowe PWN.Rószkiewicz, M. 2002b. Narzędzia statystyczne w analizach marketingowych, Warszawa: CH Beck.Stanisz, A. 2007. Przystępny kurs statystyki. Analizy wielowymiarowe, Kraków: Statsoft.Wedel, M. i W. Kamakura. 2003. Market Segmentation. Conceptual and Methodological Foundations,

Boston: Kluwer Academic Publishers.Wieczorkowska, G. i J. Wierzbiński. 2007. Statystyka. Analiza badań społecznych, War szawa: Wydawnictwo

Naukowe Scholar.Wierzbiński, J. 2009. Wybrane problemy metodologiczne badań zaufania do organizacji, Warszawa:

Wydawnictwo Naukowe Wydziału Zarządzania UW.Wind, Y. 1978. Issues and advances in segmentation research. Journal of Marketing Research, Vol. 15,

s. 317–337.


Tomasz Jerzyński

Completion rate of the original sample and post-stratification weighing in analysis

of survey data

1. Introduction

Statistical methods of handling incomplete data are usually subject to the type and nature of missing data. The main division of missing data is a division into missing survey units and answers to questions. Missing survey units (persons, households, addresses, etc.) are due inter alia to incorrect sampling frames, errors during sampling, refusal to participate by sampled respondents. Those gaps are the non- realized sample part. Missing single responses result from refusal to answer questions, providing answers that are not subject to interpretation (“I do not know”, “hard to say”), errors by the surveyor, errors in downloading, processing, filtering, etc. Those gaps are the realized sample part.

Little and Rubin (2002) propose to apply two properties to describe missing data – formula and mechanism of gap development. Missing-Data Patterns indicates which values of the data matrix are the gaps. This is a binary matrix (map) of its occurrence in a data set. Mechanisms That Lead to Missing Data describes the relations between missing values and the values of variables within a data set. The key role of the mechanism developing missing data in analysis of incomplete data had been completely ignored until Rubin (1976) developed a theory concerning the mechanism. The theory treated the indicators of the number of missing data as random variables.

There are three types of mechanisms developing missing data, identified for their relationship to information within the data set and outside of it. The general types of mechanisms developing missing data may be defined as follows:– MCAR (missing completely at random) – the distribution of missing data is

not statistically subject to the variables in the data set – in other words the distribution is completely random,

– MAR (missing at random) – the distribution of missing data is statistically subject only to what we know that is to the observed values,

– NMAR (not missing at random) – the distribution of missing data is statistically subject to what we do not know that is unobserved values “concealed” by the missing data.

Completion rate of the original sample and post-stratification weighing in analysis… 85

It should be noted that a data distribution missing completely at random is a theoretical construct which does not exist in real life. Obviously, one can imagine that we have a complete set of data which however as a result of an event has been randomly “perforated”. However, even in such a theoretical case, it is impossible to prove the random character.

A majority of multi-variable statistical analyses (for instance regression analysis, factor and discriminant analysis) are based on an initial data reduction to a vector of mean values in the sample and a matrix of variable co-variation. In case of incomplete data, correct calculation of the values becomes a problem. Various techniques are applied to correct potential distortions resulting from missing information (see e.g. AM and Elashoff 1966; Hartley and Hocking 1971; Orchard and Woodbury 1972; Dempster, Laird and Rubin 1977; Little and Rubin 1983; Little and Schenker 1994; Little 1997). There may be various ways to substitute data (imputation), application of post-stratification weights, estimation of confidence ratios allowing for the part of the sample which is not subject to survey, etc.

The various approaches to the problem may be reduced to several basic types. The most elementary type are methods based on statistical analyses concerning complete data sets. When some variables are incomplete (that is not all units hold relevant valid values), the simplest method consists in rejecting answers without content from the analysis and analyzing solely the remaining units. The method is simple to use since no additional statistical procedures need to be applied in the analysis. However, its application requires adherence to strict assumptions. The strategy is correct when the mechanism responsible for missing data is random (MCAR type) that is when complete observations are a random sub-sample of all units in the sample. Otherwise, the values of estimators achieved during the analysis will be erroneous. Additionally, the method may not be applied when too much data is missing in a data set. Then – even if the mechanism of developing missing data were not random and the estimator value were not distorted – the precision of inferences would be much weaker, especially when analyzing relationships inside specific population sub-groups.

In each population there is a group of individuals who would not participate in the survey. There will always be persons who would not answer questions, who cannot answer questions or simply do not exist (errors in sampling frame). Such individuals are termed as inaccessible individuals. At random sampling, an appropriate proportion of such individuals will be included in the sample. Therefore, always a part of the sample will remain unperformed. The existence of inaccessible individuals is a permanent feature of each survey. Additionally, the proportion is hardly affected by efforts of surveyors.

A decreased size of the sample is a commonly perceived effect of the occurrence of inaccessible individuals. As a result, the sample size may be reduced to below a minimum threshold that would guarantee that requirements concerning accuracy, reliability and correctness of inferences are satisfied. However, it is not that effect of the occurrence of inaccessible individuals that is most harmful. If the problem

86 TOMASZ JERZYŃSKI

was solely in the size of the sample, it would be easy to randomly select the missing portion of the sample. However, that would lead to serious distortion in results of the survey since the split of the sample into accessible and inaccessible portions is not random. Results of many surveys show that accessibility of individuals is often closely related to their other features that are being surveyed (an early systematic approach to the subject is presented by Hilgard and Payne 1944; Kiser 1934; Harding 1947). This means that the features are differently structured among accessible persons and inaccessible persons. Basing on information solely on one of those groups, we may not generalise a structure of those features for the entire population. Such generalisation would be subject to a serious systematic error.

Therefore, it is not a reduced size of the sample – and as a result an extension of confidence intervals for the parameters of the surveyed features – that is the most serious effect of the existence of inaccessible individuals. More harmful is distortion of the structure of the surveyed features resulting in false inferences. It should be noted that such distortion may not be corrected by increasing the size of the sample since that is achieved by additional random selection from among accessible individuals. The distortion extent of results of analysis is inversely proportional to the level of sample realization – the lower it is, the more distorted results of analysis are to be expected.

2. Completion rate of the original sample in surveys by PGSS and ISSP

An example of significance of inaccessible individuals is the specification presented below of sample realization in surveys by Polish General Social Surveys (PGSS) (Cichomski, Jerzyński and Zieliński 2009) in specific editions (table 1) and in International Social Survey Programme (ISSP) in 1995 (table 2) and 2001 (table 3) for each specific country. The information applies solely to those countries where the surveys were performed on randomly selected representative samples.

Table 1. Number of interviews realized by PGSS in 1992–2008PGSS edition Number of realized

interviews Number of unrealized

interviews Proportion of unrealized

interviews (%) 1992 1647 353 17.71993 1649 351 17.61994 1609 391 19.61995 1603 397 19.91997 2402 798 24.91999 2282 1124 33.02002 2473 1535 38.32005 1277 829 39.42008 1293 1202 48.2

X 16235 6980 30.1Source: Author’s study.


Table 2. Completion rate of the original sample in ISSP surveys in 1995Country Sample size Realized sample size Completion rate level (%)

Austria 1548 1007 65Bulgaria 1200 1104 92Canada 3002 1557 52Czech Republic 1700 1111 65Germany 3582 1894 53United Kingdom 2000 1058 53Japan 1800 1256 70Latvia 1901 1044 55Netherlands 3034 2089 69New Zealand 1810 1043 58Norway 2300 1527 66Poland 2000 1598 80Russia 2830 1585 56Slovenia 2729 1036 38Sweden 2000 1296 65USA 4559 1367 30


Table 3. Completion rate of the original sample in ISSP surveys in 2001Country Sample size Realized sample size Completion rate level (%)

Australia 2981 1352 45Austria 1606 1011 63Czech Republic 1841 1200 65Hungary 2677 1524 57Japan 1800 1321 73Norway 2500 1560 62Poland 2004 1221 61

Source: Author’s study

The data analysis shows that the completion rate was decreasing each year. The proportion of unperformed interviews grew from under 18% in 1992 to almost 50% in 2008. This is unfortunately a common trend. The survey poll market is becoming increasingly saturated. People are tired with surveyors who keep pestering them. Additionally, commercialisation of polls has additionally impaired their social image. Public opinion polls that are to report on transformations, show development directions and places to intervene, have become a tool to support sales and exert public influence. As a result of political transformation and market orientation of the economy, the saturation process has been much faster than in stable countries. The ISSP surveys also show varied completion rates between countries. In 1995 Poland could boast the highest completion rate of ISSP surveys among all countries


at 80%. In the same year, the ISSP completion rate in the USA was only 30%. Such completion rate practically excludes a possibility to use the data that would make sense.

3. Post-stratification weights

Missing data – particularly missing people – are coped with by researchers by weighing data sets. The method consists in adjusting the structure of the performed sample to the structure of the studied population (or – generally – to the structure of the assumed template population) with a view to several socio-demographic features (or – generally – any other). Adjusting the proportions of those features in the performed sample to the actual proportions in the entire population, values of weights are calculated for each individual in the data set. As a result, there is an increased weight of variables for individuals coming from under-represented segments of the sample, and conversely – reduced weight of variables for individuals coming from over-represented segments. Strictly speaking, the process of random sample selection usually introduces structural weights for individuals resulting from the procedure of sample selection; each of them is inversely proportionate to the probability of an individual to be found in the sample.

The structure of the stratification weight in PGSS is a good example of applying the technique. It was aimed at adjusting the structure of the performed sample to the structure of the studied population due to the following socio-demographic features: region of residence, size of locality, gender and age. The specific nature of survey polls causes that the structure of performed samples is different from the structure of the studied population. This is due to the procedure itself that is applied by a field surveyor when selecting a sample (e.g. errors in sampling frames) as well as due to incomplete realization of field surveys (inaccessible part of the sample). In all PGSS editions, the stratification weighing method of the results was applied, on the basis of statistics disclosed by GUS for 1991, 1992, 1993, 1994, 1995, 1997, 1999, 2001, 2004 and 2007.

The value of post-stratification weight in PGSS was calculated on the basis of the total distribution frequency of the selected features in the sample and in the population. In 1992–1999 the structure of stratification weight included the following features: gender, age, type of locality. Three age categories were considered: 18–29 years, 30–49 years, 50 and more. The type of locality included 15 categories (seven for inhabitants of towns and cities and eight for inhabitants of rural areas). With those three features, totally 90 groups were formed (2 x 3 x 15). In 2002 the structure of stratification weight was based on gender, age in five categories, size of locality of residence in seven categories. Such approach produced jointly 70 groups. The change to the number of groups was due to a change introduced to presentation of demographic data by GUS. For each group, the stratification weight component was calculated, reconstructing the quotient of


the proportion of persons in the population and the proportion of persons in the surveyed sample. Subsequently, the values were assigned to individuals with the specific demographic features. Such weight does not change the population size. (Formally, if pabc means a proportion of respondents in the PGSS group belonging to a-th group with respect to gender, b-th age group and c-th group with respect to size of the locality of residence, and Pabc means the same proportion for the population, the value of post-stratification weight is equal to Wabc = Pabc/pabc).

Weight-based procedures is the simplest method to overcome the problem of inaccessible individuals in surveys. Appropriate weights for data sets are usually calculated by the producer of the data sets. The consideration of incomplete sample realization by the surveyor who analyses a data set with a post-stratification weight is limited solely to allowing for it during the application of standard statistical procedures. Most statistical packets allow such procedure. However, it should be stressed that the application of weights is combined with an unforeseeable change of variance of variables. Therefore, all correlation analyses using the parameter, made on weighted data, produce a result whose interpretation is doubtful (Mandell 1974).

4. Impact of various types of incomplete data on results of statistical inferences – simulation

What are the relationships between mechanisms of data gap origination and statistical inferences? On the basis of standard estimation of mean values, results will be shown of a standard method statistical analysis that does not allow for incomplete data. The simulation will consist in a synthesis of random variable and the vector of missing data indicators whose distribution will correspond to the relevant origination mechanism.

4.1. Random mechanism of missing data origination

An assumption was made that we have a data set with one variable Y = (yi) with all n values observable (i ∈ [1:n]). An additional variable was created M = (mi) which had values of either 0 or 1. The M variable was assigned a random value distribution. The random value distribution for the variable M (in accordance with the MCAR mechanism) was based on independent assignment of value 1 to each instance with probability equal to 0.5:

(1) ( , ) ,P m y1 0 5yi i i= =6 z .

Subsequently, variable X was created with a sub-sample of values of variable Y. The variable X for a given instance had the value equal to variable Y only when the M vector value was zero. Otherwise, the X variable had no value. That is:


(2) x m

y m

1

0

[ : ]i n i

i i

1 = ==

6 Ud

).

With such assumptions and decreasing during the analysis of the sample size from n to r observable individuals for which the M vector assumes 0 values, it was possible to estimate without distortions the population value of the mean Y on the basis of the mean values from such reduced sample.

An assumption was made that the Y variable was n = 1500 instances and will have normal distribution with mean y = 180 and standard deviation of s = 10. In reality similar parameters would be characteristic for instance for a variable describing the height of population members in centimetres.

Vector M contained 762 indications of missing data. Thus variable X had 762 missing data. The other 738 values were identical like the values of variable Y. Student’s test for independent samples manifested that there is no reason to reject the hypothesis that mean values of vectors X and Y are equal (t = 0.15; df = 1478.47; p = 0.88; a = 0.05).

Figure 1 presents simulation results of the random mechanism of missing data generation and the application effect of a standard method of mean value estimation. The round markers show the values of mean values estimated from Y and X variables. The grey rectangles designate confidence intervals for those

Figure 1. Mean and confi dence intervals for complete variable Y and incomplete variable X for a random mechanism of missing data generation type MCAR (the rectangles mean confi dence intervals for a = 0.05)

Complete variable Incomplete variable

179.

318

0.5

180.01180.05

Ave

rage

val

ues



estimators with their horizontal borders. It is clear that the value difference of the estimators is negligible. In an ideal situation when n → ∞, the difference would be close to zero. However, in reality there may always be an error in sampling and therefore the estimator values were not identical. Figure 1 also shows the significantly enlarged confidence interval along with a decrease of the sample size (variable X).

The simulation shows that standard estimation method of variable parameters may be applied to variables charged with missing data if the mechanism of missing data generation was random (MCAR). The resultant reduction in sample size does not affect the estimator value. Only its lack of accuracy is increased thus expanding the range to which a parameter of a specific feature in the population may be included with high probability.

4.2. Non-random mechanism of missing data origination

An assumption was made that we have a data set with one variable Y = (yi) with all n values observable (i ∈ [1:n]). An additional variable was created M = (mi) which had values of either 0 or 1. The M variable was assigned a non-random value distribution, subject to the value of Y variable. Such distribution of the value for variable M was compliant with the NMAR mechanism.

Subsequently – similarly to the previous example – X variable was created that contained a sub-sample of the value of variable Y. The variable X for a given instance had the value equal to variable Y only when the M vector value was zero. Otherwise, the X variable had no value.

An example of the mechanism is allocation of value 1 to those elements of vector M for which the values of variable Y are positive. The other elements of M remain zero. That is:

(3) ( , )P M y y

y

1 0 1

1 0

i i i

i

= =

2

#z*

.

Another example of the mechanism is the dependence of the probability that the value of an element of vector M will be equal to 1 on changes in the value of elements yb, for instance:

(4) P(Mi = 1⏐yi,f = Φ(–2,05yi),

where O describes cumulated standard normal distribution. Then the probability that the value of an element of vector M is equal to 1 is proportional to the value of elements yi.

With such assumptions and decreasing during the analysis of the sample size from n to r observable individuals for which the M vector assumes 0 values, it


was possible to estimate without distortions the population value of the mean Y on the basis of the mean values from such reduced sample.

Similarly to the previous example an assumption was made that variable Y will be n = 1500 instances and will have normal distribution with mean y = 180 and standard deviation s = 10.

Vector M contained 300 indications of missing data. It applied to higher values of variable Y when they were higher than its ninth decile (yi > q10[9]). Thus variable X had 300 missing data. The other 1200 values were identical like the values of variable Y. Student’s test for independent samples manifested that it is necessary to reject the hypothesis that mean values of vectors X and Y are equal (t = 10.11; df = 2695.73; p ~ 0; a = 0.05).

Figure 2. Mean and confi dence intervals for complete variable Y and incomplete variable X for a non-random mechanism of missing data generation type MCAR (the rectangles mean confi dence intervals for a = 0.05)

Complete variable Incomplete variable

176

176.

817

9.4

180.

4

179.92

176.39

Ave

rage

val

ues


Figure 2 presents simulation results of the non-random mechanism of missing data generation and the application effect of a standard method of mean value estimation. The round markers show the values of mean values estimated from Y and X variables. The grey rectangles designate confidence intervals for those estimators with their horizontal borders. The value difference of estimators is statistically significant.

Simulation of non-random mechanism of missing data generation showed that standard estimation methods of parameters of variables may not be applied to variables charged with such generated missing data. The resultant reduction of sample size affects the estimator value since it results in over-representation of the other values.


5. Differences in results of analyses taking into account incomplete realization of sample and not taking it into account on the basis of PGSS data

Official statistics inform that the mean age of the adult population in Poland at the end of 2001 was 44.53 years. The PGSS survey was performed in April 2002. An assumption was made that the difference of three months between official information and the PGSS survey is negligible.

Applying the standard statistical method (not taking into account that the data is incomplete), the mean age in the PGSS sample in April 2002 was 47.88 years. Generalising the result one can say that the mean age of adult population in Poland at that time – with confidence of 95% – fell within the range from 47.20 years to 48.55 years.

One may suppose that the actual mean age of adult population in Poland at that time did not fall within the estimated range. Such reasoning resulted in false conclusions (comp. Figure 3).

Figure 3. Comparison of results of parameter estimation without taking incomplete data into account and with taking incomplete data into account with the real value of the parameter in the population (the rectangles mean confi dence intervals for a = 0.05)

Standard method Method with weights

43.9

45.3

47.2

48.5

47.88

44.6

44.53

Populacja

Aver

age

valu

es


When a post-stratification weight was applied, the calculated value of mean age in the PGSS sample in April 2002 was 44.60 years. Generalising the result one can say that the mean value of adult population in Poland at that time – with confidence of 95% – was in the range from 43.92 to 45.28 years.


In this case, the actual value of mean age of adult population in Poland at that time was within the estimated range and was very close to the calculated estimator. The generalisation could be applied to estimate the parameter in a reliable manner. Such statistical reasoning was not biased and the results were close to reality (Figure 3).

6. Conclusions

Despite numerous efforts to minimise the potential to generate gaps in data bases, complete elimination thereof is not possible. In practice, there are no survey results from fully performed samples. Almost always they contain answers that are not interpretable. In each survey there are inaccessible persons – either due to imperfections of the sampling frame or due to unwillingness to provide answers – or such that are not able to make a choice due to indecision or lack of knowledge (Dillman, Eltinge, Groves and Little 2002). Then simple statistical reasoning, assuming full sample realization and formulation of opinions by respondents – fails. Missing information in the analysed data distort estimator values, their variance and thus reduce the precision of inferences. Statistical reasoning techniques – not allowing for such distortions – result in narrower confidence intervals and higher statistics values which may result in errors.

Information about the author Tomasz Jerzyński, PhD – Sociological Research Centre, social Studies Institute, University of Warsaw. Since 1999 member of the Polish General Social Surveys and International Social Survey Programme.Co-founder of the Polish Social Data Archive.E-mail: [email protected].

Bibliography

Afifi, A.A. i R.M. Elashoff. 1966. Missing observations in multivariate statistics: Review of the literature. Journal of the American Statistical Association, Vol. 61, s. 595–604.

Cichomski, B., Jerzyński, T. i M. Zieliński. 2009. Polskie Generalne Sondaże Społeczne: struktura skumulowanych wyników badań 1992-2008, Warszawa: Instytut Studiów Społecznych UW.

Dempster, A.P., Laird, N.M. i D.B. Rubin. 1977. Maximum likelihood from incomplete data via the EM algorithm (with discussion). Journal of the Royal Statistical Society. Series B, Vol. 39, s. 1–38.

Dillman, D.A., Eltinge, J.L., Groves, R.M. i R.J.A. Little. 2002. Survey Nonresponse in Design, Data Collection, and Analysis, w: Dillman, D.A., Eltinge, J.L., Groves, R.M. i R.J.A. Little (red.) Survey Nonresponse, New York: Wiley – Interscience Publica-tion.

Harding, J. 1947. Refusals as a Source of Bias, w: Cantril, H. (red.) Gauging Public Opinion, s. 119–123. Princeton: Princeton University Press.

Hartley, H.O. i R.R. Hocking. 1971. The analysis of incomplete data. Biometrics, Vol. 27, s. 783–808.


Hilgard, E.R. i S.L. Payne. 1944. Those not at home: Riddle for pollsters. Public Opin ion Quarterly, Vol. 8, nr 2, s. 254–261.

Kiser, C.V. 1934. Pitfalls in sampling for population study. Journal of the American Statistical Association, Vol. XXIX, s. 250–256.

Lissowski, G. 1971. Problem jednostek niedostępnych w reprezentacyjnych badaniach socjologicznych, w: Szaniawski, K. (red.) Metody matematyczne w socjologii, Warszawa: PWN.

Little, R.J.A. 1997. Biostatistical Analysis With Missing Data, w: Armitage, P. i T. Colton (red.) Encyclopedia of Biostatistics, London: Wiley.

Little, R.J.A. i D.B. Rubin. 1983. Incomplete data. Encyclopedia of the Statistical Sciences, nr 4, s. 46–53. Little, R.J.A. i D.B. Rubin. 2002. Statistical Analysis with Missing Data, New Jersey: A Wiley-Interscience Publication.

Little, R.J.A. i N. Schenker. 1994. Missing Data, w: Arminger, G., Clogg, C.C. i M.E. Sobel (red.) Handbook for Social Modeling in the Social and Behavioral Sciences, s. 39–75. New York: Plenum.

Mandell, L. 1974. When to weight: Determining nonresponse bias in survey data. Pub lic Opinion Quarterly, Vol. 38, s. 247–252.

Orchard, T. i M.A. Woodbury. 1972. A Missing Information Principle: Theory and Applications, w: Proceedings of the Sixth Berkeley Symposium on Mathematical Statistics and Probability. Vol. 1: Theory of Statistics, s. 697–715. Berkeley: University of California Press.

Rubin, D.B. 1976. Inference and missing data (with discussion). Biometrika, Vol. 63, s. 581–592.


Bernard ArogyaswamyAlojzy Nowak

Societal and High Tech Innovation in India:Prospects and Strategies

Innovation: the basis of corporate and national success

The process of globalization has made innovation a top priority for both national policy-professionals as well as for chief executives of businesses. Firms innovate, according to Christensen (2003), by enhancing the performance features of a product, reducing its cost by eliminating non-essential features, or serving entirely new markets. A similar point is made by Kim and Mauborgne (2005), whose “strategy canvas” helps firms identify value gaps and surpluses as a way to transform the product/service concept. Rochlin (2006) asserts that technology stacking(the availability of complementary assets), and the development of the market and other functional dimensions, in addition to that of technology, is a key driver of competitive advantage. The amalgam of strategy, marketing, operations, technical expertise, human development, and so on, which contributes to innovation, has acquired greater importance in today’s knowledge economy. Put differently, innovation, as the OECD (2007) notes, is the development of new ideas and their successful application to market needs, resulting in the creation of wealth.

Just as innovation has become progressively more critical to the success of firms all over the world, the economic growth of nations is also intimately linked to the innovativeness of its organizations, and how effectively new ideas are developed, nurtured, and brought to fruition in society at large. Recognizing that innovation, in small and medium enterprises (SME’s) and in large corporations generates sustainable growth is, however only part of the story. Acting to enable and unleash entrepreneurial energies is far more complicated. Countries like Finland, Ireland, Singapore, and South Korea have implemented apparently successful strategies to enhance their innovative capabilities, while others like China and India have embarked on ambitious programs of their own to foster indigenous capabilities in developing new products with market acceptance. Though China’s prowess in production and India’s in services have not been matched as yet by their technological skills, both nations plan on redressing the imbalance. Starting with education systems and investment in R&D by transnational corporations (TNCs) and domestic firms, a high rate of growth is expected in innovation-related efforts over the next few years (Economist, 2007). The perception that sustained

Societal and High Tech Innovation in India: Prospects and Strategies 97

growth can only be attained through a relentless focus on absorbing, adapting, and developing new technologies, has gained widespread currency both in developed and emerging nations. Countries attempting to sustain or jump start innovation are faced with the question of how best they could do so, given their past history and track record, the nature and quality of their institutions, the existing knowledge in diverse areas, and so on.

It would be no exaggeration to assert that, rather than being a race to the bottom in costs, globalization is fast turning into a race to the top in innovation.

Innovation and India

Since the economy was liberalized in the early 1990s, India’s economic growth has been rapid and has often matched the rise of China. Growth is likely to continue despite recessionary trends worldwide (Businessweek, 2008). In particular, the IT industry has late great strides and is, in a way a standard-bearer for, and the face of, the country abroad. Much of the considerable success of the IT industry has been in export markets and in the delivery of progressively higher value-added services (Arogyaswamy, 2007). However, India’s performance in manufacturing has lagged China’s by a wide margin and, in spite of recent gains, the gap remains large. In the knowledge economy, as new ideas in products/services, markets, processes, and management serve as the basis the for the competitive advantage of firms and nations, the ability to innovate is the key to continued high performance (Cooke, 2002; OECD, 2007). We investigate India’s position and potential in innovation, an aspect critical to future economic growth.

National Innovation Systems

Over the course of the past few decades nations in the developing world have come, at various points in time, to the realization that in the absence of an ersatz technological capability, they would forever be engaged in a futile game of “catch-up” in which the gap between themselves and developed nations would keep growing. For developed nations, on the other hand, it is imperative that they renew their efforts and abilities in advancing the frontiers of knowledge, both theoretical and applied, in order to sustain economic growth and social well-being. One option is to adopt a strategy of developing technology through centralized guidance and implementation, a form of National Innovation System (NIS). An NIS is comprised of institutions, and the dynamic interactions among them and other elements of society. This serves as a framework for government innovation strategy and actions, aimed at enhancing the development, diffusion, and marketability of new ideas (Lundvall, 1992; Nelson, 1993). An NIS encompasses a vision of where the country should head technologically, area(s) of expertise/competence envisioned, and a will

98 BERNARD AROGYASWAMY, ALOJZY NOWAK

to allocate resources as needed for implementation (Lall, 2002) The ability to foster greater private initiative in R&D, facilitate the establishment of industry associations and standards, and to nurture appropriate institutions (intellectual property, judicial, science, technology, and entrepreneurial education, sources of finance, etc.) are central to a viable and ongoing NIS for the absorption as much as for the development of innovation. Variants of an NIS have been pursued in Japan (and other Asian countries that sought to emulate it, such as South Korea), and some European nations as well. Though the Japanese NIS was relatively interventionist and directive during the 1970s and 1980s (Johnson, 1993; Okimoto, 1989), the focus later shifted to facilitation(through the establishment of technopolises, university-industry collaboration, etc.), and hence not dissimilar to the system in vogue in Europe (Nishizawa, 2007 ) In the United States, the approach, historically, has been for the state to avoid excessive involvement in so-called market forces. However, governmental policies and institutions have typically evolved in a direction favorable to innovation. Governmental funding of basic science at universities, incentives to firms in the form of tax relief on R&D expenditures, and to researchers in regard to the income resulting from their work, protection of physical and intellectual property rights, the establishment of regional development agencies, science and technology parks, and so on, have contributed to the evolution of a technology development regime (Young, 2007; Hughes, 2005; Jaunotte and Pain, 2005) intended to buttress and sustain the country’s lead in innovation.

In Finland, after an era of interventionist policies, the government switched to an approach emphasizing facilitation and support through cluster formation. The National Technology Agency directed the implementation of the national strategy (Nauwelaers and Reid, 2002). The focus was on shifting from an economy driven by large resource investments to one based on knowledge and innovation. Strengthening of the higher educational system to create the conditions for cutting edge scientific and applied research bolstered the efforts of domestic firms and attracted foreign companies to Finland as a technology development center. Catalyzing the efforts of government, industry, academia, employees led to an innovation system that has made Finland among the most technologically competitive nations in the world (Hertog and Remoe, 2001). Ireland, which has recorded dramatic economic growth since its induction into the European Union (EU), has also implemented its version of a National Innovation System. Singapore adopted an even more organized strategy for technology and innovation, based, like Ireland, on FDI, but with the state playing an even more intensively facilitative role. Colleges and universities, research institutes, government departments, transportation, and telecommunication and information infrastructure were upgraded to be aligned with the overall strategy (Mackendrick, Doner, and Haggard, 2000). Countries like Ireland, Finland, and Singapore concentrated on institution-building as well as on, initially, absorbing technology. They realized early on that the quality and magnitude of a nation’s absorptive capacity significantly influences its ability to innovate both by building on existing technologies as well as by “leapfrogging” them.


Local Innovation systems: Clusters

At the other end of the geographic spectrum are localized agglomerations known as clusters, which have been viewed by scholars and policy makers alike as being among the most powerful forces for innovation. Clusters may evolve over time, as did the agglomerations for furniture in North Carolina, automobiles in Detroit, semiconductors, software and biotechnology in Silicon Valley, heavy industry in the Ruhr Valley, and footwear in regions of Italy, to name just a few. (Cooke, 2002; National Governors Association, 2002.) However, the majority of clusters functioning today, especially those in more advanced nations, are designed. Numerous technology parks have been established in the in the United States, South Korea, Taiwan, China, Sweden, India, and other countries, by a range of interested constituents. The initiation and fostering of clusters is done by governments at various levels (local, county, district, state, federal, etc.) development agencies, universities, multinational firms, domestic firms of all sizes, research institutes, venture capitalists, and so on. The term “cluster” is typically applied to a grouping of organizations within a limited geographic area (one that is small enough to permit personal interaction among the participants) in a specific industry or a shared specialization. The exchange of knowledge, particularly of the tacit sort, is critical to the functioning of clusters, indicating that the members of a cluster must be willing to trust one another with sensitive information. That is, cluster members must be willing to provide resources to others, first, without any fear that it will be used to their detriment, and, second, that it will, in fact, prove to be mutually beneficial. The creation and flow of social capital, which may be defined as a trust based sharing of knowledge, is a hallmark of clusters, one that makes true clusters a relative rarity. Silicon Valley, Oresmund (pharmaceuticals in Sweden), North Carolina’s Research Triangle, Finland’s telecom agglomeration, and Italy’s footwear and tile clusters are instances of clusters rich in social capital. They have also operated rather successfully in terms of durability, value added, robust market linkages, and technology development. (Lundequist and Power, 2002; National Governor’s Association, 2002; Arogyaswamy and Nowak, 2005). Paradoxically, in an era of accelerating globalization, considerable advantage appears to accrue to mutually dependent organizations that are located near, and interact frequently and intensively with, one another.

Regional Innovation Systems (RISs)

Regions are spatially more extensive than clusters, have porous boundaries so as to possibly incorporate areas that would otherwise not belong to any collective entity, and may link up with other regions, within the same country or anywhere else in the world. Ohmae (2005) contends that the “region-state” is fast becoming a distinct, viable entity.


RISs are integral to technology policy in Europe, where they are being actively pursued, though not always with consistent or favorable results. Hilpert (2003) refers to the regional concentrations of technological capability, supportive governments, facilitative institutions, market knowledge, and labor competence as Islands of Innovation. These focused centers of competence expand their market horizons to encompass entire countries or continents, or become global in their vision, freely adapting their management practices to their particular needs (Hilpert, 2003). Hilpert identifies 29 Islands, and makes the point that all but three are located in areas that have traditionally been leaders in their field. In a sense, therefore, regional imbalances have either persisted or been exacerbated. One of the outcomes desired by the Lisbon agenda of the EU (Europa, 2006; Bruijn and Lagendijk, 2006) is that the EU as a whole would be the global benchmark for technology development, particularly in regard to the technologies of today by 2010. The European Regional Development Funds (ERDF) may help in moving in this direction. Through the ERDF, the EU hopes that innovation will be fostered not only in regions that are already strong in this regard, but that new Islands of Innovation will be created. The “stickiness” (Markusen, 1996) of technology is likely to be an impediment to technological catch-up, resulting in the strengthening of already robustly innovative areas. (The disparity between northern and southern Italy, for instance, though slightly diminished remains almost as wide as it was fifty years ago(Governa and Salone, 2005).

Enterprise Innovation Systems

A society may deploy an NIS, RISs, and clusters, or a combination of these, to sustain a high level of innovative capability. However, business firms are the vehicle, so to speak, by which new ideas reach the market, benefit society at large, and create wealth. How effectively corporations create and harness the capabilities that will enable them to be innovative on a sustainable basis could, therefore, be pivotal to the success of any system of innovation (Christensen, 2003). All enterprises, whether for-profit or not, may innovate in any of three areas (or a combination of them): product/service, process, and management (incidentally, the relentless “creative destruction” posited by Schumpeter ( ) applies not only to small firms, but also to large corporations and, increasingly, to not-for-profits, educational institutions, and the government (Schramm, 2007) ). The familiar S-shaped curve posits that technologies evolve. Initial market approval could spawn alternative forms of the product/service, ultimately coalescing around a dominant design. Competitive pressures lead to a period of ferment helping achieve rapid performance enhancements which, after a period of time, start tailing off (Tushman, Anderson, and O’Reilly, 1997). As the authors observe, S-curves may be extended or truncated by competence-enhancing or competence-destroying innovations. Competence-enhancement occurs with the development of complementary ideas,


much in the way Kuhn (1970) envisioned by way of contributions to “normal” science. Competence-destroying innovations, on the other hand, may be based on entirely different scientific or technological principles, and are analogous to the scientific revolutions that are the focus of Kuhn’s (1970) eponymous work. Process innovation, though characteristic of mature products/services, can prove effective in achieving cost reductions, but also in shortened delivery times, greater variety of offerings, and enhanced quality. A company often cited as a glittering example of how to achieve a sustainable advantage through process improvements is Toyota whose lean manufacturing and quality management techniques have helped propel it to a leadership position in its industry. General Electric’s deployment of Six Sigma has brought it worldwide success as well, and in the software business firms such as Infosys and Wipro have attained the quality certifications, thus helping their clients raise productivity and deliver even better service. Interestingly, companies do not have to make a choice between product and process innovation. They can do both. In fact, it now appears as though they must do both. Toyota, GE, Nokia, Samsung, Infosys, and numerous other successful firms have demonstrated the ability to consolidate and enhance the edge enjoyed by existing products while working on new ones. Such firms cultivate a tolerance for ambiguity, a willingness to adopt unconventional approaches to deal with unstructured problems. Kanter (2006), Tushman and O’Reilly (1997) and Hamel (2006), among others, have argued that, in addition to product and process, managerial innovation is often crucial to a firm’s success. Hamel (2007) asserts that managerial innovation should be accorded the highest priority in any firm, since it determines the philosophy of strategic, product, and operational (that is, competence-enhancing, continuous, or process) that characterizes, and is sanctioned by the organization. Hamel’s contention that innovation has to be an organization-wide responsibility may apply with greater force to certain industries (e.g. consumer products, retailing). However, even in high tech industries such as biotechnology and nanotechnology, without the involvement of a wider cross-section employees than those in the scientific and engineering disciplines, sustained product improvement, market success, and so on, are likely to be jeopardized. Hamel recommends that management innovation be nourished through the devolution of freedom and responsibility to small teams, the cultivation of diversity not merely in physical attributes but in perspectives and interests, and a reliance on free markets for knowledge, both internal and external. Top management also needs to design a critical, flexible balance among, and a flow of, the activities involved in innovation – marketing, operations, design, research, etc. – and in learning. The creation of so called “innovation spaces” or forums and mechanisms, by which the various players involved can come together, and engage in conversations, is central to achieve a harmony in innovation – between continuity and discontinuity, product and process change, and among internal and external players (Lester and Piore, 2004). As the authors emphasize, such innovation spaces are critical to the interfaces within organizations, as well as across industries. For instance, collaboration between radio and telephone was central to


the rise of the cell phone business, while interactions between jeans manufacturers such as Levis and laundry equipment firms was instrumental in the development of stone-washing to meet the challenge posed by European fashions. Lester and Piore contend that the analytical, problem-solving approach to innovation needs to be combined with an interpretive system, one in which interaction and mutual adjustment play a central role.

A balance needs to be struck as well between external and internal efforts (Hamel, 2007; Kanter, 2006). Where the knowledge sought involves scientific research – with spillover benefits to other firms – partnering with universities, being embedded in clusters, or regional innovation systems might be the most viable strategy. For technologies that are beyond the capabilities and resources of any single firm (e.g. IBM and Toshiba) to pursue (or the risk is too high) alliances with other firms with similar ends would seem the best option (Doz and Hamel, 1998). Some firms depend on vendors for innovation in their respective product/service areas, often sharing knowledge to gain even more knowledge, in an increasingly positive-sum relationship. Just as an outside-inside balance in innovation, fine-tuned as needed, has to be articulated, the extent to which employees are involved has to be consciously formulated and managed. In certain firms, particularly those involved in everyday, consumer products (e.g. Rubbermaid, 3M), there are continuing efforts at innovation dispersed across the firm. In fact, employees are encouraged to take the lead if they see an opportunity worth pursuing. Firms such as IDEO, by enlisting, and serving as catalysts to the efforts of, their clients’ teams, assist in the development of offerings finely tuned to the needs of the selected market segments (Kelley, 2004). Best Buy’s new approach to segmentation and its ability to enlist the employees’ support have given it a strong competitive position in retail services (Silva, 2005). Procter and Gamble’s drive to garner innovations, some of them market-ready, from outside sources, is a noteworthy development in the evolution of corporate innovation.

In industries in which knowledge development and innovation occur in select, specialist groups. (e.g. biotechnology or information technology), firms working near the frontiers of science (with little immediate market application in sight) are likely to be located geographically near a research university/institute and other firms in the same knowledge area, establish alliances, attract funding from the state, and so on (Ackers, 2003; Cooke, 2004; Bastian, 2006). However, even for such organizations, connections to customers (industrial or otherwise) are vital to their continued existence and/or success. The task for management, then, is not so much to determine whether innovation is driven by multiple stakeholders but to constantly adjust and achieve a balance among stakeholder contributions, and by creating the conditions under which they might enter into interactive exchanges with one another e. g. in clusters (Wolfe and Meric, 2004).

Innovation at the corporate level is, therefore, a process of integrating diverse possibilities for change (product, process, managerial), ranging all the way from marginal to radical, with an internal or/and external focus, implemented across


an array of activities and a diversity of stakeholders. Innovation in firms may be properly viewed as a system, an Enterprise Innovation System (EIS), consisting of the options and combinations adopted by the firm. Embedded as a business firm often is in various societies, how effectively it adapts to other systems of innovation (National, Regional, Local) could, therefore, in large part relate to how successfully it manages its own EIS. Conversely, the strength of any of the systems articulated in the preceding sections (Local, Regional, National) depends greatly on the innovative capabilities of its business firms.

India’s performance in high tech innovation

Given the “multiplier” effect that high tech industries, Information and Communication Technologies (ICT) in particular, have on innovation, it might be instructive to look at India’s standing in high tech innovation (inclusive of ICT), and for this we turn to the Science and Engineering Indicators (2007) published by the National Science Foundation. (Later, we will review the Global Innovation Scoreboard (2006) to assess the state of innovation in a society-wide sense.) The Science and Engineering Indicators (2007) identify four variables deemed to be critical to exporting high technology products, which is an indicator, so to speak, of the ability to win international acceptance for the country’s high tech. The variables are National Orientation, Socioeconomic infrastructure, Technological infrastructure, and Productive capacity.

National Orientation reflects the strategies, policies, institutions, and public attitudes that influence the achievement of technical competence. The dimension encompasses the vision for innovation as well as opportunities for entrepreneurship. The U.S. is the leader on this front, with Israel, Ireland, and the Czech Republic not far behind. India is positioned quite favorably, and has generally shown steady improvement over the past decade.

Socioeconomic infrastructure encompasses the human and financial resources needed for high tech development. Educational facilities, capital mobility, and policies toward foreign investment are included in this dimension. India’s standing is somewhat ahead of Brazil’s, but lags behind the U.S., Israel, Ireland, China, and even Malaysia(the latter presumably due to the high foreign investment in high tech in that country.)

Technological infrastructure is measured along five dimensions-the number of scientists in R&D, purchases of data processing equipment, and the ability to (a) provide training in Science and Engineering (S&E), (b) absorb and extend technical knowledge, and (c) bring R&D outputs to the marketplace. India’s score here is extremely low, well below not only the high-achievers such as the U.S., Japan, China, and Germany, and Russia.

Productive capacity is a composite of the supply of skilled labor, the number of indigenous firms in high tech, the competence of management, and the current


level of electronic goods being produced. On this count, India’s performance is fair, being in the middle of the fifteen countries studied, though it still fares poorly compared to the U.S., Japan, Germany, and China. China’s strength in electronics production more than compensated for its deficiency in the other areas. Conversely, India’s relatively low output of electronic goods appears partly moderate the positive impact of the country’s unquestionably high IT capabilities.

When the four elements of high tech export potential are combined, India’s standing(in 2007) places it well ahead of Brazil, and almost on par with Russia. However, it clearly trails China. The ability to manufacture and export high tech products is reflective both of a country’s knowledge base in a particular field, as well as the acceptance of the fruits of this knowledge in the form of products and services by discerning customers with numerous choices. India’s improving performance and its favorable ranking suggest that the potential for high tech innovation is encouraging.

One of the deficiencies identified by the SEI is that the linkages among major institutions (corporations, the state and its agencies, universities, research centers, and so on)are weak. The willingness and ability to conduct R&D and the skills to bring acceptable outcomes to the market are, in part, driven by the intensity and number of such institutional linkages. Risk-propensity, a market system where trust-based transactions are encouraged and enforced, and the availability of capital for high risk, high return ventures also contribute to the flow and stock of innovation. The SEI suggest that a managerial style based on top-down, inflexible approaches need to be moderated as well. Theoretical skills are, no doubt, valuable, but need to be matched by the savvy required to create outputs that will gain market acceptance. Whether the outputs are in the form of products or services is immaterial. What matters is that they be market-tested. Using China as a benchmark, India needs to address shortfalls in technological infrastructure, productive capacity, and socioeconomic factors. In regard to technological infrastructure, scientific and engineering education, a focus on R&D, corporate training, and the ability to link institutions such as universities, firms, research institutes, and public scientific bodies are among the actions indicated. Enhancing productive capacity would entail manufacturing more electronic and IT products as well as undertaking R&D in these areas. Upgrading managerial capabilities in these and other industries seems imperative. Socioeco nomic infrastructure improvements may be achieved by reducing regulation, fostering competition, providing greater support-and legitimacy- for entrepreneurial ventures.

Steps to upgrade all three areas would support and enhance the strategies suggested earlier for improving technological infrastructure. Strategies to help enhance performance on the three dimensions might include:– support for educational institutions in targeted areas of high tech– fostering institutional linkages(as above)– offering greater incentives to businesses(domestic and foreign) to invest in R&D– facilitating a reliable IPR regimen– underwriting the growth of a venture capital community.


India’s Societal Innovation: Performance and Potential

Innovation is, at its core, a social process involving absorption, learning, communication, sharing, and sharing of knowledge. The development and acceptance of new ideas in any field is, therefore, at least in part, driven by interactions within that area, with other fields, and the climate for innovation in the society at large.

By the same token, the overall level of innovativeness in any country will have considerable impact on high tech industries including ICT. One of the worldwide comparators of innovativeness is the Global Innovation Scoreboard (GIS), which provides a ranking based on data collected on a variety of criteria, of a range of nations from across the world

The GIS is comprised of five major dimensions: innovation drivers, knowledge creation, diffusion, application, and intellectual property. Broadly, these dimensions may be encapsulated as below:1. Innovation drivers – human resources in terms of science and engineering

(S&E) graduates, proportion of labor with tertiary education, and number of researchers per million population.

2. Knowledge creation – expenditures directed toward innovation (Public and business R&D, and scientific articles)

3. Diffusion – expenditure on ICT4. Application – exports of high tech products, and share of high/medium tech

in manufacturing value-added.5. Intellectual property – new knowledge patented and trademarked.

The scores on each of these dimensions is combined into an overall “Global Summary Innovation Index” or GSII to provide a consolidated indicator of a nation’s innovation performance. The method of computation of the score on each dimension moderates the impact of outliers, while the GSII is the average of the five scores, except that business R&D is assigned double the weight of public R&D and scientific articles.

Results

On the GIS scoreboard, four categories of nations have been identified. These are:1. Global innovation leaders comprising countries such as Finland, Sweden, the

U.S., Israel2. Second tier performers such as Germany, South Korea, the U.K., France3. Followers which include Russia, Italy, Spain, and Hungary, and4. Lagging countries- Greece, China, Brazil, Poland, and India are in this

group.


Though both China and India are in the lowest performing group, there is a wide separation between them in total score, China being near the top of the bunch (0.27) and India near the bottom (0.17). More specifically, India’s low GSII stems from receiving the lowest score on the entire sample on two of the five dimensions- innovation drivers, and intellectual property. In regard to knowledge creation (20th percentile), diffusion (36th percentile), and applications (40th percentile), the country’s innovation record is relatively more favorable. Taking a closer look at Innovation drivers, we note that gross enrollment in higher education stands at about 12% in India, compared to 90% in Korea and nearly 70% in Russia. In regard to technical education, though India graduates over a million engineers a year, in relationship to the population and therefore, its impact on the country as a whole, is minimal. Moreover, the quality of engineering colleges is uneven with no more than 100 out of around 1200 institutions being of acceptable quality. Considering that numerous graduates who are not from the elite colleges find jobs, one would expect that their employers would provide them with suitable training to compensate for their educational deficit. Undoubtedly, some of the more conscientious firms, such as Infosys, do so. However, in the aggregate, only about 15% of Indian firms in manufacturing offer training, compared to over 95% in China. In regard to R&D researchers per million population (in 2004), India had 119, whereas Brazil had 344, China 708 and even Mexico had a score of over twice India’s average. Enrolments in service and engineering degree programs, though low in per capita terms, is sufficient to meet the demand in the foreseeable future. The quality of graduates leaves much to be desired, however, and support from governments (particularly regional), public institutions (such as the Council for Scientific and Industrial Research, or CSIR), and private firms (as firms such as Infosys are doing) would go toward addressing the issue. Some method needs to be adopted to induce firms to undertake more in-house remedial and reinforcing training.

The shortage of educated people at various levels is clearly a major barrier for any country that seeks to be a high performer in innovation. As the World Bank (2007) points out observes, in addition to needing high levels of technical and scientific education, a strategy to improve the quality of engineers and the number of Ph.Ds in science and engineering, and more widespread employee-provided training, educational institutions need to foster entrepreneurship and innovative thinking among students. For instance, rather than encouraging rote learning, more play should be given to students’ creativity and initiative, small business advisory boards could be set up and shared among institutions, access to successful entrepreneurs be made available, financing sources linked to innovation centers at educational institutions, and so on.

Switching to knowledge creation, we find that India’s R&D intensity (R&D expenditure as a proportion of GDP) was less that 0.9% in 2003-4, at which point, China’s investment in R&D was about 1.5% of GDP. China plans to increase R&D


intensity to 2% in 2010. India’s intention of raising the R&D effort to 2% of GDP in 2007 fell short by nearly 50%. Even worse than the faltering investment in R&D was the fact that over 75% of R&D spending was undertaken (till 2003) by public organization, about 20% in the private sector, and only 3% in universities. The respective figures for OECD nations, on average, are 20, 70, and 10 percent. In China, private enterprise contributes 65% of the R&D effort. Of late, however, with the advent of more R&D by MNCs, the private share of R&D in India has risen and is estimated to be closer to the OECD norm. It may be notes that the jump in private R&D is due to foreign investors keen on making fuller use of India’s lower-priced knowledge resources. Scientific articles per million population are another surrogate measure of knowledge creation potential and, in this area, India comes in at about half China’s rate, one third of Mexico, one fourth of Brazil, and even lower fractions of the Russian and Korean publication productivities.

India’s scores on Diffusion, and Applications, are relatively higher. Diffusion is measured by a single indicator, ICT expenditure in proportion to GDP. It is worth noting that the calculation of ICT expenditure includes the investment made by the IT sector, not all of which facilitates technology diffusion in India, being in part, directed toward the export market. However, insofar as firms like Infosys, system, and others absorb technology from abroad and are increasingly deploying some of it domestically, ICT expenditure may be viewed as a diffusion indicator. If Indian firms were to invest more heavily in ICT, the rate of diffusion would, obviously accelerate. India’s score on Applications is near median and the highest out of the five dimensions. This measure combines two ratios, (a) high tech exports/manufacturing exports and (b) Medium-high and high-tech activities relative to manufacturing value added. One reason for the relatively high score is that manufacturing’s share of the GDP is of the order of 25%, which is rather low for a developing nation. Burgeoning exports in high tech (mainly IT) combined with modest manufacturing outputs (and value added) contribute to a relatively high score in Applications. Finally, in regard to Intellectual Property (patents filed in Europe, the U.S., and the U.S./Europe/Japan combined), India’s score is at the bottom of the sample. However, the picture is not as bleak as it might appear at first glance. More recent data suggests that the number of patent applications filed has been steadily rising since 1999. For instance, India’s share of patents filed in the U.S. was about 0.40% of the total, still miniscule, but almost 10 times the percentage in 1995. India ranked 24th in this category with mainly OECD countries ahead of it. However, China, Taiwan, and Korea placed ahead of India as well. It may be noted that within India, of the top 50 applicants for patents, 44 were MNCs from abroad, four were public institutions (e.g. CSIR), and only two were in the private sector- both in pharmaceuticals. Though innovativeness might appear to be lacking insofar as patenting is concerned, the National Knowledge Commission, or NKC (2007) has found in a survey that Indian firms are not quite so deficient in Innovative Intensity (share a revenue from products introduced


in the past 3 years). Moreover, 17% of SMEs and over 40% of large firms are “Highly Innovative”, that is, have implemented ideas which are new to the industry, domestic and worldwide. The findings for Innovation Intensity indicate that more than 60% of SMEs but only 25% of large firms have an Innovation Intensity of 20%. Most of the companies surveyed, particularly the larger ones, view innovations as a strategic priority. They are unanimous in their conviction that investment in innovation is critical to their survival and growth.

Are the GIS data on patents, then, merely an aberration? Not quite. For one, innovations in Indian firms are predominantly in the area of operations. For instance, products developed elsewhere may be modified and produced in more efficient ways. More suitable marketing approaches, strategies to manage the supply chain, etc, may be a part of the new-to-market or new-to-world innovation. Though such actions may be construed as a continuation of the import- substitution strategies of the pre-liberalization era, they are, by and large, worthwhile stepping stones to subsequent innovations which may be more radical and profitable. The ability to absorb and diffuse technology is critical to succeed with the predominantly incremental- innovation strategies in place today. “Absorption capacity” refers to the ability to acquire, assimilate, transform (where necessary) and apply/exploit knowledge (Todorowa and Durisin, 2007), and the concept may be applies to firms as well as to regions. In the Indian Corporate context, the NKC’s (2007) survey indicates that still shortages are a critical external barrier, as is the lack of collaboration with universities and research institutes. Internally, a poor understanding of customers’ needs, inadequate in-house training, traditional hierarchies, and a lack of emphasis on innovation (large firms), and a lack of vision and pressure for short-term results (SMEs) are still impediments to innovation.

Findings

We summarize below some of our findings from the three sets of data examined, organized by level (NIS, RIS, LIS, CIS) of innovation system involved. We have also indicated the level at which remedial action would be most effective. Action on multiple levels is, of course, often needed to address most issues, a point reinforced in Figure 1. It may be noted that the OECD data and the EIS identify specific areas that need addressing, while the SEI are more broad-based in their assessment. We, therefore, start with the SEI and then proceed to analyze findings from OECD and the EIS.

The earlier discussion pertaining to the SEI applies to points 1 and 4. In regard to the number of scientists in R&D, this can be addressed better by acting on some of the elements that emerge from the EIS. For instance, by providing more incentives for conducting R&D e.g. tax breaks for business, fewer restrictions on scientists profiting from their ideas, etc.), the level of business R&D might


be enhanced at the NIS level. However, regional and local authorities may also act to establish regional centers and clusters in areas such as ICT to serve as centers of excellence, and to develop “toolboxes” for other industries such as nanotechnology.

Figure 1. Findings from the data setsNIS RIS LIS EIS

1. S&E graduates X X2. Scientists in R&D X X X3. Absorb and extend technical knowledge X X4. Tertiary degrees X5. Linking institutions X X X X6. Corporate training X X7. Government R&D X8. Business R&D X X X X9. Manufacturing in high tech X X X

10. Regulation, exit/entry X X11. Strategy/structure X

The ability to recognize and acquire valuable knowledge is a dimension of absorptive capacity and, as Uotila, Harmaakorpi, Melkas (2006) have shown regional and national authorities have a leading role to play in building absorptive capacity. National policy on stimulating the transfer of developments from universities and research institutes, as well as enabling indigenous firms to learn from multinationals are areas in which national actions would help. At the regional level, the ability to identify unique opportunities and to leverage existing capabilities to act on them help spur greater absorptive capacity. Such actions would also enhance the effectiveness of domestic firms, while possibly drawing more innovative firms into the industry. An equally fruitful angle to pursue would be for regions to benchmark themselves against competitive regions with a similar specialization within and outside India, as is the case in the EU. The Innovating Regions in Europe (IRE) network, created by the European Commission (EC), has, since the mid-1990s, has attempted to facilitate the exchange of ideas and best practice among regions in Europe. The intent is to foster the development of effective and competitive regional strategies. The IRE secretariat helps in coordinated learning. Strategy projects are undertaken with the assistance of the EC, and outcome assessment is conducted to determine achievement of benchmarks (IRE, 2007). Techniques such as the Regional Development Platform Method (RDPM) could prove valuable insights in identifying areas of expertise that would result in the greatest potential benefit to a region (Harmaakorpi, 2006). The RDPM provides guidance and support in developing a portfolio of core capabilities and aligning them with the broad trends and resultant market opportunities. Applied to the Lahti region of Finland, where educational levels and research efforts fell far short


of the national average, the RDPM was instrumental in identifying an array of fields (plastics, environment, furniture, media, etc.) from which informed choices, employing criteria specified in the RDPM, were made.

Linking the diverse institutions involved in innovation is a complex task and calls for a mix of strategies. Incentives to universities and research institutes to share ideas need to be considered.. For instance, budgets at research institutes and top technical universities may be gradually leveraged to being on an applied basis geared toward to market-acceptance of ideas. Products developed with government financing should become the property of the innovator, rather than reverting to the funder, agencies at the regional and national levels could be established to monitor the active connections as they operate at various stages of the innovation process.

Reducing the level of government expenditure on R&D would send a signal to firms and regional authorities that they need to act, while freeing up some funds for investing in clusters and coordinating the strategies of SMEs. The establishment of a high tech manufacturing capacity to match the country’s IT expertise will require coordinated effort from the state and corporations, the former providing incentives and focused support in cluster formation, licensing, and so on. The willingness of firms to decentralize, to accept that knowledge and ideas often originate at lower levels of the organization, that the ability to garner ideas from outside the firm has to be cultivated, and so on, are critical in an innovation-driven race to the top.

Conclusion

Strategic thinkers and decision-makers at corporations, policy makers in many countries, and opinion leaders at influential organizations such as the OECD, EU, and the Council for Competitiveness have asserted in various forums that innovation is the key to the more rapid rise of emerging nations and the continued prosperity of developed countries. At the national level (and where applicable, by extension, at the regional and local levels), innovation is a top priority for governments across the world. We have attempted to lay out a model for innovation and apply it to explicating how India might leverage its capabilities and address its deficiencies in innovation at different levels in order to sustain its pace of economic growth. While countries all over the world are convinced that their future is linked to their innovative ability, many appear to emphasize national policy, corporate strategy, or regional development, often focusing on one approach to the exclusion of the others. We have argued here that innovation occurs on multiple levels, within a System of systems, so to speak, and we offer a framework to better understand and implement the process in all it complexity.


Information about the authorsProf. Bernard Arogyaswamy – Le Moyne College, Syracuse. E-mail – [email protected]. Alojzy Z. Nowak – Dean, Faculty of Management, University of Warsaw. E-mail: [email protected]

Bibliography

Bastian, D. (2006) Modes of Knowledge Migration: Regional Assimilation of Knowledge and the Politics of Bringing Knowledge into the Region. European Planning Studies Vol. 14, No. 5.

Christensen, C.M. 2003. The Innovation’s Solution. Boston: Harvard Business School Press.Cooke, P. Knowledge Economies: Clusters, Learning and Cooperative Advantage. London: Routledge,

2002.Cooke, P. (2004), Regional Knowledge Capabilities, Embeddedness of Firms and Industry Organisation:

Bioscience Megacentres and Economic Geography, European Planning Studies, 12(5), July.De Bruijn, P., amd Lagendijk, A. (2005) Regional Innovation Systems in the Lisbon Strategy. European

Planning Studies, Vol. 13, No. 8.Doz, Y. and Hamel, G. (1998), Alliance Advantage: The Are of Creating Value through Partnering.

Cambridge, MA: Harvard Business School Press.Dwivedi, M., Varman, R., and Saxena, K. Nature of trust in small firm clusters. The International

Journal of Organizational Analysis. Vol. II, No. 2, 2003, pp. 93–104.Europa (2004), Innovation in a knowledge-driven economy. http://www.europa.eu.int/scadplus/leg/

enieub/n26009.htm.Global Innovation Scoreboard (2006), Trendchart. Cordis. lu/Scoreboards/scoreboard 2006/pdf.Gordon, J.S. 2001. The Business of America. New York: Walker.Governa, F. and Salone, C. (2005), “Italy and European Spatial Policies: Polycentrism, Urban Networks

and Local Innovation Practices”, European Planning Studies, 13(2), March.Gruenz, L. (2005), “Intra- and Inter-regional Knowledge Spillovers: Evidence from European Regions”,

European Planning Studies, 13(3), April.Hamel, G. (2006), The Why, What and How of Management Innovation. Harvard Business Review,

Feb.Hamel, G. (2007), The Future of Management. Boston, Mass.: Harvard Business School Press.Harmaakorpi, V. (2006) Regional Development Platform Method (RDPM) as a Tool for Regional

Innovation Policy European Planning Studies, Vol. 14, No.8 Harmaakorpi, V. and Meldas, H. (2005), “Knowledge Management in Regional Innovation Networks:

The Case of Lahti, Finland”, European Planning Studies, 13(5), July.Hertog, P. and Remoe, S. (2001), Innovative Clusters: drivers of national innovation systems. Paris:

OECD.Hilpert, U. (2003), Regionalisation of Globalised Innovation. New York, NY: Routledge.Hughes, K. (2005), Building the Next American Century: the past and future of American competitiveness.

Washington, D.C.: Woodrow Wilson Center Press.Innovate America (2005), http://innovateamerica.org.IRE (2007), www.innovating-regions.org.Jaunotte, F. and Pain, N. (2005), Innovation in the Business Sector. Economics Department Working

Paper. Paris: OECD.St. John, C., Pouder, R. (2006) Technology Clusters versus Industry Clusters: Resources, Networks,

and Regional Advantages. Growth and Change Vol. 37, No. 2, pp. 141–171.


Johnson, C. (1993), Comparative Capitalism: The Japanese Difference, California Management Review, Summer, pp. 51–67.

Kanter, R. (2006), Innovation: The Classic Traps. Harvard Business Review, Nov.Kelley, T. (2004), The Art of Innovation. London: Profile Books.Kim, W.C., and Maubergne, R. 2005. Blue Ocean Strategy. Boston: Harvard Business School Press. Kiso, T. (2007), Cutting the cost of innovation R&D through business partnering in Japan.In Taplin, R. (Ed.) Innovation and Business Partnering in Japan, Europe, and the United States.

Routledge.Kitagawa, F. (2005), “Regionalization of Innovation Policies: The Case of Japan”, European Planning

Studies, 13(4), June.Kuhn, T. (1970), The Structure of Scientific Revolutions. Chicago: The University of Chicago Press.Lall, S. (2002), Linking FDI and technology development for capacity building and strategic

competitiveness. Transnational Corporations; 11:3.Lester, K. and Piore, M. (2004), Innovation: the missing dimension. Cambridge, MA: Harvard University

Press.Lundequist, P., and Power, D. (2002). Putting Porter into practice? Practices of regional cluster building:

evidence from Sweden. European Planning Studies, Vol. 10, No. 6, pp. 685–704.Lundvall, B.A. (Ed.) (1992). National Systems of Innovation: Towards a Theory of Innovation and

Interactive Learning (London: Pinter Publishers). Markusen, A. (1996), “Sticky Places in Slippery Space: A Typology of Industrial Districts”, Economic

Geography, 72(3), July.McKendrick, D., Doner, R. and Haggard, S. (2000), From Silicon Valley to Singapore. Stanford, CA:

Stanford University Press.Maskell, P., Bathelt, H., Malmberg, A. (2006) Building Global Knowledge Pipelines: The Role of

Temporary Clusters. European Planning Studies, Vol. 14, No. 8.Mc Craw, T.K. 1997. American Capitalism. In Mc Craw, T.K. (Ed.) Creating Modern Capitalism. New

York McGraw-Hill.Milliken, F. 1987. Three types of perceived uncertainty about the environment: State, effect, and

response uncertainty. Academy of Management Review. 12, 133–143.Morris, M., Kuratko, D., and Covin, J. (2008), Corporate Entrepreneurship and Innovation. Mason,

Ohio: Thompson.National Governors Association (2002), A Governor’s Guide to Cluster-Based Economic Development,

www.nga.org.National Knowledge Commission. (2007). Innovation in India. New Delhi: National Knowledge

Commission.Nauwalers, C. and Reid, A. (2002), Learning innovation policy in a market-based contest: process,

issues,a nd challenges for EU candidate countries, J Int Rel Dev.Organization for Economic Cooperation and Development (2005) www.OECD.org.OECD (2007), Innovation and Growth: Rationale for an Innovation Strategy. www.OECD.org.Ohmae, K. (2005), The Next Global Stage. Delhi, India: Pearson Education (Singapore).Okimoto, D. (1989), Between MITI and the Market. Stanford, CA: Stanford University Press.Pekkarinen, S., and Harmaakorpi, V. (2006). Building regional innovation networks: The definition of an

age business core process in a regional innovation system. Regional Studies, 40 (4), pp. 401–413.Perry, M. Business Clusters: An International Perspective, London: Routledge, 2005.Piatkowski, M. (2006). Can Information and Communication Technologies Make a Difference in the

Development of Transition Economies? Information Technologies and International Development, Volume 3, No. 1, 39–53.

Rochlin, D. 2006. Hunter or Hunted? Technology, Innovation, and Competitive Strategy. Mason, Ohio: Thompson Science and Engineering Indicators. (2007) http://www/nsf.gov/statistics/seind06.

Silva, R. (2005), Best Buy’s new customer profile strategy. http://hometheater.about.com.


St. John, C. and Pouder, R. (2006), Technology Clusters versus Industry Clusters: Resources, Networks, and Regional Advantages.

Storper, M. (2005), “Society, community, and economic development”, Studies in Comparative Economic Development, 39(4), Winter, 30–57.

Susanj, Z. (2000) Innovative climate and culture in manufacturing organizations: Differences between some European countries, Social Science Information sur les Sciences Sociales, 39 (2), pp. 349–361.

Todorova, G., and Durisin, B. (2007) Absorptive Capacity: Valuing A Reconceptualization. Academy of Management Review, Vol. 32, No. 3, 774-786.

Tuchman, M. and O’Reilley, C. (1997), Winning through Innovation. Boston: Harvard Business School Press.

Uotila, T., Harmaakorpi, V., Melkas, H. (2006). A method for assessing absorptive capacity of a regional innovation system. Fennia 184: 1, pp. 49–58.

Varblane, U., Dyker, D., and Tamm, D. (2007) How To Improve The National Innovation Systems Of Catching-Up Economies? Trames, 11 (61–56), 2, 106–123.

World Bank. (2007). Unleashing India’s Innovation. Washington, D.C.: The World Bank.Young, T. (2007), Innovation as the essential ingredient in American economic growth and future

survival. In Taplin, R. (Ed.) Innovation and Business Partnering in Japan, Europe, and the United States. Routledge.

Aleksandra WąsowskaMarcin Pawłowski

Patent Applications of the Polish Listed Companies

1. Introduction – Definitions

Inventiveness is one of the most important manifestations of innovative activity. The Oslo Manual published by OECD and Eurostat defines innovation as “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations” (OECD 2005).

Innovations can be: – technological, i.e. product (introduction of a significantly improved product

or service) or process (implementation of a new or significantly improved production or delivery method),

– marketing (e.g. changes in the product design/construction not leading to changes in functional features, new distribution channels, new promotion methods and new price shaping methods),

– organizational. In the understanding proposed by the Oslo Manual the invention itself – defined

as a novelty beyond the scope of the existing technological knowledge (Dz. U. 2003, no. 119, item 1117) - is not yet an innovation. An innovation is the implementation of the invention, because the invention itself as a not yet realized proposal brings only potential effects (Bogdanienko 2008). The patent is the property right of an invention that gives its owner the exclusive right to use it for a specified period of time (in Poland it is 20 years), after which the invention becomes the common good.

2. Innovativeness of the Polish Economy

The research suggest that the Polish economy is not generally innovative (e.g. Jasiński 2000: 66; Klincewicz 2008; Jasiński 2007: 15–17). The innovativeness of the Polish economy in the macro scale has been measured using, for example: gross domestic expenditure on research and development, value of expenditure on research and development with reference to GDP, participation of companies that

Patent Applications of the Polish Listed Companies 115

in the period under review applied at least one technological or organizational innovation (Baruk 2004) that was a novelty for a given company (Baruk 2002).

The topic of innovativeness in Poland became important after 1989, when changes of the economic system triggered changes in the economy. In 1990, Kwiatkowski published his work titled Uciekający świat (The Escaping World) where he showed the Polish economy against the economies of the developed countries. In this work, the author concluded that the technological gap between Poland and the developed countries was still widening. He pointed to the need to change the development paradigm from mechanistic to informative, to use science and technology and for the state to influence innovative processes. The work also touched upon the topic of transnational corporations and their influence on innovative processes. In the author’s opinion, such corporations might be of great importance to the technological development of Poland (Kwiatkowski 1990).

The summary of the trends in innovation in the 1990s is presented by Jasiński (2000). In his work, the author describes the trends of the Polish innovation using such factors as: domestic patent applications, granted patents, Polish inventions patented abroad, the share of new and modernized products in the industry sales and the share of technologically advanced products in export in general. Jasiński underlines the gradual decline of the innovativeness of the Polish economy. The reasons for this can be ascribed among others to savings on science, small diversity in forms of conducting research and their methods, outdated science-push model” and its aftereffect, namely low level of cooperation of science and industry and a narrow scope of international science and technological cooperation. The science-push model seems especially problematic. Drop in the financing of R&D works in science centers results in virtually no transfer of innovation to the industry, hence making the national innovation system ineffective. It does not mean, however, that supply-push model of innovation transfer is totally wrong given the Polish reality. According to Bogdanienko (Bogdanienko, Haffer and Popławski 2004) the supply-push model offers a greater chance for achieving a leap in technological development.

An attempt to thoroughly evaluate the innovation level of particular EU countries and Croatia, Turkey, Island, Norway and Switzerland is given in the European Innovation Scoreboard (EIS) prepared annually for the European Commission (EIS 2008). The study is based on the Summary Innovation Index covering seven areas divided into three categories: a) enablers, capturing the main drivers of innovation that are external to the

firm:– financial resources and support for innovation (among others public expen-

diture on R&D, access to the wideband Internet connection), – human resources (among others participation of the population with the

tertiary education),b) firm activities:

– firm investments (among others in R&D, in IT),

116 ALEKSANDRA WĄSOWSKA, MARCIN PAWŁOWSKI

– linkages and entrepreneurship (innovative small and medium companies, cooperating with other companies, cooperation of the public and private sector measured by the number of joint publications),

– throuputs (among others number of applications to the European Patent Organization (EPO) per million population),

c) outputs:– innovators (among others, percentage of small and medium companies

implementing innovations),– economic effects (among others, employment level in the services based on

knowledge, export of technologically advanced products).In the EIS report, Poland was qualified as the “catching up” country together

with Bulgaria, Croatia, Hungary, Latvia, Lithuania, Malta and Turkey. In the case of Poland, human resources (results above the average for the researched countries) and firm investments and economic results were evaluated as relatively strong aspects of innovation. Polish weaknesses comprise expenditure on and support for innovation financing and productivity, including patent applications per million population.

Figure 1. Number of patent applications to EPO in the selected European countries per million population in 2008

0

100

200

300

400

500

600

700

800

900

CH NL SE FI DE FR IE GB IT ES LV HU CZ GR MC HR EE SK PL LT RO

Source: Own work based on the Eurostat data.

In 2008, the estimated number of Polish patent applications per one million inhabitants reached 4.4, whereas in the case of the European leaders such as Switzerland and Holland this figure was 790.5 and 444.0 respectively.

The gap (Fig. 1) between the former Eastern Bloc countries and the developed European countries is literally yawning. The cause for such a state of affairs might be the legacy of the planned economy, where the research works were conducted by specialized institutes financed by the state and companies as such very rarely engaged in R&D. During the transformation, the state significantly cut down on expenditures on research institutes and the companies did not undertake such activity being convinced about its limited usefulness due to lack of experience


(Klincewicz 2008). Despite the 20-year lapse, this factor might still be of importance. Other explanation might be the fact that in the developed European countries the share of companies competing on the international markets is higher and thus the need for patent protection outside one’s country is greater. And finally, the cost of patent application to the European Patent Organization might be relatively higher for the entrepreneurs from the former Eastern Bloc. At present, the entire procedure and granting patent in all EU member countries amounts to EUR 3,900.

3. Inventiveness of Companies – Conditions and Consequences

One of the most frequently analyzed in literature conditions for inventiveness of companies is company’s size. As stated by Schumpeter, monopolist position is conducive to inventiveness as it gives the company financial means to be invested in the research and development work (Schumpeter 1995). Basing on his argumentation, many researchers believe that small companies are less inclined to seek patent protection (Scherer 1965). Due to the high perceived costs of patent application they recur to alternative ways of innovation protection, such as keeping the industrial secret (Scellato 2007). The research has shown that large companies are more frequent seekers of patent protection than smaller ones and they do it both with respect to product and process innovations (Arundel and Kabla 1998). The latter relationship was backed up with the fact that in the case of large companies development costs are distributed across a larger production scale (Cohen and Klepper 1996). Simultaneously, it was pointed out that large companies implement process inventions on their own production lines, while small companies often license or sell their own inventions to cover investment costs (Arundel and Kabla 1998). Arundel and Kabla (1998) argument that it could also mean that large companies will be less willing to apply for patents since the patents make the information about patents available to their competitors.

Contradictory conclusions from similar research might result from the fact that the size of the company alone is vital, but not the only variable conditioning company’s willingness to apply for patents. There might be other factors whose influence might invert the relation between the company’s size and inclination to seek patent protection.

A significant factor determining the inventiveness of companies is the way of financing innovative activity. Difficulties in financing research and development works are mainly caused by a limited access to credits for this type of activity. The research shows that finance limitations are present mainly in the initial phases of innovative activity (Bond, Harhoff and Van Reenen 2003). Hence, small and medium companies postpone the moment of commencing their own R&D activity until they have accumulated enough fixed assets to serve as credit collateral. The research on a sample of Italian companies revealed that small and medium


companies that finance innovative activity with their own capital, start research and development works with the most risky projects that potentially have the greatest chance of generating the highest return (Scellato 2007).

A solution to overcome capital shortage preventing the commencement of the research and development works might be the cooperation with partners that have a better financial position. Many companies from the emerging markets started their activity as subcontractors of companies from the developed markets (Arruñada and Vazquez 2006). Thanks to relations with foreign partners, companies such as Indian Infosys, Taiwan BenQ, Turkish Arçelik or Mexican Mabe gained knowledge and financial means to start their own research and development works.

Theoreticians of organizational strategy underline the fact that innovativeness is one of the most important sources of competitive advantage in the global economy (Bettis and Hitt 1995). The relation between the innovativeness and ability to compete on foreign markets was also foreshadowed by technological models of foreign trade such as technological gap model (Posner 1961) or product life cycle (Vernon 1966). Technological resources are one of the most important types of ownership advantages analyzed by the eclectic theory of internationalization (Dunning 1980). The impact of innovation on foreign direct investments was corroborated by the research on the sector level (Caves 1974) and the company level (Trevino and Grosse 2002) as well. In the same manner, the works on internationalization in the form of export showed that technological resources are useful in the process of expansion to foreign markets (Lopez-Rodriguez and Garcia-Rodriguez 2005).

4. The Research Problem and Hypotheses

The hitherto research has showed that the inventiveness depends on the company size (Arundel and Kabla 1998; Scellato 2007) and the method of financing the innovative activity. In addition, the inventiveness is related to company’s results and its inclination to internationalize its activity. This research will analyze the difference between the companies submitting patent applications and those that do not. The aim of this analysis will be to find the answer to the question whether these two groups differ with respect to size, leverage ratio, results and the level of internationalization.

Taking into account the classical argumentation of Schumpeter who claims that the inventive activity requires financial resources we expect that the companies that seek patent protection are bigger than those that do not (hypothesis 1).

Highly innovative companies whose balance sheets show the preponderance of intangible assets (Lev 2001) have limited possibilities of debt financing. Access to credits is limited as intangible assets are rarely accepted as collateral. The scrap value in the case of intangible assets is clearly lower than their potential value (appreciated using the net discounted cash flow method). Empirical works


prove that with respect to hi-tech companies this limitation has a significant impact on the possibility to obtain external financing. The research of Opler and Titman showed that during the recession, the American companies doing intensive research and development works experienced greater financial difficulties due to the limited ability of debt financing (Opler and Titman 1994). This leads the following hypothesis: the companies that seek patent protection are less frequent users of financial leverage than those that do not (hypothesis 2).

The aim of patent protection is to stimulate technological progress by, first, forcing the inventor to reveal the effects of his work on the early stage of development, second, granting him a temporary right for its exclusive use. In the language of the strategy theory, patents that are the source of a “natural” competitive advantage should facilitate above-average results (Obłój 2007). Thus, we expect that the companies that seek patent applications have higher financial results than the companies that do not (H3 hypothesis).

The inventivess might be treated as one of the ownership advantages leading to effective internationalization of company’s activity. Thus we may expect that the companies that seek patent protection have a higher internationalization level than those that do not (H4 hypothesis).

5. Sample characteristics

In December 2007, 319 domestic companies were listed on the Warsaw Stock Exchange (WSE 2008). The research used the division into 25 sectors as applied by the WSE (as of 4 March 2009). The analysis neither covers banks, insurance companies and the companies form the “finance – other” due to the specific character of the research, nor the companies that in the period of the database creation (July 2008 – January 2009) did not make their financial reports public as they were no longer listed on the WSE. The structure of the analyzed group and the total number of patent applications in a given sector is presented in Table 1.

The researchers stress that the inclination for seeking patent protection highly depends on the sector. Differences are driven by the relation between the production cost and imitation cost. If the imitation cost is low, as for example in the pharmaceutical sector, companies have strong motivation to seek patent protection (Kleinknecht, Van Monfort and Brouwer 2002). An opinion poll conducted in 1993 on a sample of 604 large European industrial firms (Arundel and Kabla 1998) endorses the inter-sector differences in the propensity to patent innovations. In food and tobacco products sector and car and metal production the majority of inventions were not patented. The highest propensity rates were found in pharmaceutical, chemical and machine sectors.

It is worth to pointing out that the above differences in patent propensity in relation to sector might be conditioned externally. In the case presented, legal


Table 1. The structure of the analyzed group divided into sectors and number of patent applications in the years 1987–2007 according to sectors

Sector Number of companies Number of patent applications

Construction 30 84Chemicals 4 97Developers 11 2Wood and wood products 7 0Electronics 21 331Power engineering 3 17Pharmaceuticals 6 47Retail sale trade 24 5Wholesale trade 25 0Hotels and restaurants 5 3IT 29 20Light industry 9 11Construction materials 13 43Media 10 3Metals 19 211Automotive industry 3 8Fuels 5 108Manufacturing – other 2 15Food 18 7Telecommunications 8 11Plastics 6 33Other services 13 9Total 271 1065

Source: own work.

conditions are an important limitation. According to European (including Polish) law it is no possible to patent a computer program. Thus, it may result in a situ-ation in which the IT and telecommunications sectors compared with other sectors might display a small number of patent application not related to a low level of inventiveness in these areas.

Among the companies listed on the WSE, the highest percentage of companies seeking patent protection was in the following sectors: industry – other (Irena Glass Works, Krosno), motorization, electronics, metals and chemical products (Figure 2).

To increase sector integrity of the studied sample, the quantitative analysis includes only industrial companies excluding the following: wholesale trade, retail sale, developers, IT science, hotels and restaurant, media, telecommunications, services other and construction. The quantitative study ultimately covered 116 firms.


Figure 2. Share of the companies submitting patent applications in the years 1987–2007 in the complete number of companies in a given sector (in %)

0 20 40 60 80 100 120 %

wood and wood products

developers

food

hotels and restaurants

services – other

light industry

fuels

power engeneering

plastics

metals

automotive industrymanufacturing– other

electronics

chemicals

pharmaceuticals

construction materials

construction

telecommunications

media

IT

retail trade

wholesale trade

Source: own work based on the database of the Polish Patent Office.

6. Operationalization of Variables

In literature, the most frequently used measure of innovativeness is the intensity of research and development expressing the availability of resources (human, financial and physical) used in the innovation process. The research and development intensity is usually operationalized using the relation between the expenditure on research and development and the total sales (Parthasarthy and Hammond 2002) or the number of employees on research and development positions against the total number of employees (Adams, Bessant and Phelps 2006). The listed measures have a number of limitations, the most important of which is that they focus only on the research and development disregarding other elements influencing the innovation process. Additionally, these indicators are not useful in analyzing small and medium companies, which frequently do not have a formalized research and development function and service companies, which due to sector specificity have small research and development intensity (Adams, Bessant and Phelps 2006).

The research and development intensity is a measure describing only resources used in the research and development process and does not take into account the effects of the process (Kochhar and David 1996). A more direct measure of innovativeness is the number of products launched by the company identified for example on the basis of an analysis of press materials (from the PTS New Product Announcements base) (Kochhar and David 1996). A very popular indicator of innovation is also the relation between new products sales to total sales.


The basic problem with the operationalization of product innovation is the fuzziness of “the new product” concept and subjectivism of classification following it. The changes of the product might refer to such various aspects as functionality, composition, production process or packaging. What is more, the application the new products sales to total sales ratio as a measure of innovativeness requires specifying a time framework, namely agreeing on how long a given product will be seen as new. Depending on the lifecycle of a given product in a given sector it might be a year (in electronics) or four years (chemical products) (Shapiro 2006). Equally important problem is the range of the feature of product novelty. One of the solutions found in the management literature is to treat a product as new if it is produced for the first time by the company (Van de Ven 1986). However, one may argue that a new product is the product that has been previously unknown on a given market (in geographical terms) i.e. in a given country, region or finally in the world.

The research and development effectiveness might also be measured with the number of achievements such as award of a research grant, award for research and development works, participation in a project realized in cooperation with a university or a research center (Yiu, Lau and Bruton 2007 ) and also a number of patents that according to some research (Kleinknecht, Van Monfort and Brouwer 2002) is a value connected with the level of expenditure on research and development. A more complex measure of innovativeness, incorporating the evaluation of the importance of a given patent, is the number of patents weighted with the number of times an invention has been cited in subsequent patend documentation (Harchoff, Narin, Scherer and Vopel 1999). The most complex technique allowing the analysis of the data on the number of times an invention has been cited and the context of patent citation is tech mining (Porter and Cunningham 2005) – a technique for bibliometric analysis of information on technological innovations traced back to content analysis. Possible application of bibliometric analysis in the research on innovativeness in Poland is available in Klincewicz (2008).

The complex research on the innovativeness of Polish firms conducted by Central Statistical Office (GUS) under the international research program Community Innovation Survey with the use of the Oslo methodology is based on questionnaire method and enables collection of data such as: total expenditure on innovative activity (divided into research and development, purchase of readymade technology, software, investment outlays, trainings) or the fact of innovation implementation (product, process, marketing and organizational innovation). Obtaining such detailed data on innovative activity of the Polish listed companies from annual reports is not possible. Polish companies do not have to reveal information on new product sales, implemented process, organizational and marketing innovations. Information on innovative activity might appear in presidents’ letters to shareholders (Klincewicz 2008), corporate news, declarations on introducing new products on the market or obtaining EU funds for a specific purpose connected with innovation. However, this


information is not systematically reported and thus does not guarantee comparability and construction of qualitative indicators.

The commonly used measure of company’s inventiveness resulting from the research and development work (Kleinknecht, Van Monfort and Brouwer 2002) is the number of patent applications. It is necessary at this point to differentiate between a patent application that starts the patent award procedure and the very registration of the patent. A patent application is not unanimous with its registration. In the Polish reality, the patent might be registered almost four or five years after application. The indicator of the number of patent registrations is not perfect though. First, not all patent applications result in the patent registration. Second, different market sectors have different possibilities with respect to legal protection of an invention in the patent form. Third, registered patents have different value (Scherer 1965), i.e. not every patent brings the same or similar advantages.

An additional problem connected with using the number of patent applications as the indicator inventiveness is the fact that the propensity to apply for patents might be linked with company’s internal incentive scheme (Greliches 1990). An incentive schemes that strongly reward inventiveness may incline employees to submit patent application that do not have a clear economic value for the company. It might thus be inferred that there are companies whose incentive schemes make the number of patent application indicator less useful.

Figure 3. Companies with the greatest number of patent application (in 1987-2007) among all the listed companies

0

20

40

60

80

100

120

KGHM

ZELMER

PUŁAWY

APATOR

ELBUDOWA

PGNIG

FAMUR

PKNORLE

N

MENNICA

LOTO

S


Despite the limitations listed above the advantage of using patent applications as a measure of inventiveness is its common availability and a greater objectivism than in the case of measurements construed based on opinion polls among entrepreneurs. In this work, the division into the companies applying and not applying for patent protection was made in line with the information available in the database of the Polish Patent Office. This database has decisively more applications for Polish firms than the EPO’s database and thus the research sample is greater. The spectrum


Figu

re 4

. Num

ber

of p

aten

t app

licat

ions

for

a co

mpa

ny a

ccor

ding

to y

ears

– th

e 10

mos

t act

ive

com

pani

es

02468101214161820Ye

ar

KGH

M

ZELM

ER

PUŁA

WY

APAT

OR

PGN

IG

ELBU

DOW

A FA

MUR

PK

N O

RLEN

M

ENN

ICA

LOTO

S

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sour

ce:

own

wor

k ba

sed

on t

he d

atab

ase

of t

he P

olis

h Pa

tent

Off

ice.


of patent applications is wide and covers practically all aspects of life. Among them, there are very specialist processes e.g. production method of ceftazidime pentahydrate (Bioton’s application) and relatively simple, for example graphic presentation of street addresses on city maps (PPWK’s application).

For each company, we obtained the information about patent application in the years 1987–2007. A 20-year analysis period relates to the patent protection period defined in Polish law. To be counted as the company submitting patent application, a company had to have at least one patent application in the analyzed period. It must underlined here that the time lapse between patent application and application publication is 18 moths, however, after 12 months the applicant has the right to ask for publication acceleration. In practice, the decision on patent approval or application rejection is taken after about 4 years after application submission. Since the data was collected at the beginning of 2009, not all applications submitted in 2007 had been published. Therefore, the analyzed period is three months shorter.

This method of collecting data has many limitations. First of all, in such a long period of time the companies underwent ownership and other types of transformations that were to certain extent beyond our control. Nonetheless, we found a way to reduce the problem of ownership transformations and other related to the change of the company’s name. Based on the analysis of the company’s history published on (in the majority of cases) its official web page it was stated that enquiries to the database of the Polish Patent Office contained both words connected with the old and new name. The words were used alternatively (the enquiry used the “or” search).

Second, such a long analysis period might cover more and less intense inventive efforts. This situation is clearly seen in the case of Apator, Zelmer and Elektrobudowa (Figure 4), whose patent application peaks were in 1994 – Apator,

Figure 5. Percentage distribution of patent applications for the 10 most active companies from the researched populations and the remaining population according to years

0123456789

%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

10 most active companies The remaining companies of the researched population



1995 and 2001 – Zelmer and 2004 – Elekrobudowa. Surely this extended period is scattered with events and situations beyond control i.e. it might be the availability of EU funds only for particular sectors, changes in law, turbulences in the environ-ment of just one industry, etc. Due to the lack of visible systematic disturbances (Drawings 3, 4, 5), on the initial stage of the research the decision was made to analyze data burdened with such a large number of limitations.

Company’s size is usually measured with logarithmic ratios: logarithm of total assets, number of employees or total sales. In this work, we will use the latter one. The financial leverage will be measured with debt-equity ratio.

The measures of the company’s performance used commonly in the literature are the following: return on assets, ROA (Gomes and Ramaswamy 1999), return on sales, ROS (Tallman and Li 1996), return on equity, ROE (Grant 1987), sales increase (Geringer, Tallman and Olsen 2000), Tobin’s q and earnings per share. Some researchers criticize the use of accounting ratios. However, the view uphold by the majority of the available literature is that ROA, ROS and ROE commonly used in the management accounting are an appropriate operationalization of the company’s performance. These three measures will be used in this work.

The literature offers many measures of internationalization, such as the relation between foreign sales to total sales (Grant 1987), the relation between foreign assets to total assets (Geringer, Beamish and da Costa 1989; Daniels and Bracker 1989), the number of foreign subsidiaries (Tallman and Li 1996), the relation between foreign employment to total employment (Kim, Hwang and Burgers 1989), the number of countries the firm is financially involved. Each of the above measures describes a different aspect of internationalization (Gomes and Ramaswamy 1999). The foreign sales to total sales ratio shows to what extent the given firm is dependable on the sales on foreign markets. The foreign assets to total assets ratio and the foreign employment to total employment ratio specify the structural aspects, i.e. the level of internationalization of production. The number of countries the firm is financially involved shows a geographical range of internationalization. The foreign sales to total sales ratio, describing the result aspect of internationalization, was used in this research.

The data on asset value, leverage ratio and financial results – from the consolidated financial reports for 2007 – was taken from the Notoria electronic database. The data on the internationalization level comes from the consolidated financial reports available in GPW Infostrefa database.

7. Data Analysis

The verification of hypotheses on difference between the population of companies submitting patent applications (group 1) and the population of companies refraining from patent applications (group 2) was done with the use of t-Student tests. The results are summarized in Table 2.


Table 2Group 1

mean Group 2

mean T Df p N1 N2

Log (sales) 12,29 12,59 1,020117 114 0,309833 45 71Debt level 1,038108 0,853520 1,585097 114 0,115714 45 71Internationalization level 0,260204 0,382423 –2,74714 113 0,006998 44 71ROA 0,037228 0,078525 –2,36147 114 0,019899 45 71ROE 0,089989 0,122258 –1,03894 114 0,301032 45 71ROS 0,036299 0,083480 –1,91419 114 0,058103 45 71

Source: own work

In the group of companies applying for patents the average size and the average ROE value turned out to be higher than in the group of companies not applying for patents. The average debt level was higher in group 1 than in group 2. Differences in company’s size, ROE value and debt level proved to be statistically insignificant . Among the tested mean differences, the statistically significant differences (at the α = 0,05 level) are the differences in the level of internationalization (significance level α = 0,01) and in the ROA value (significance level α = 0,05). The difference in the ROS value is statistically significant at the α = 0,10 level.

The research has not proved the statistical difference in the size and the level of debt of the companies submitting patent applications and companies refraining from it. The analysis of conditions for the inventiveness of the Polish listed companies requires construction of a regression model that, apart from company’s size and debt level, would take into account such variables as sector, market share and presence of an incentive scheme promoting inventive activity.

The research has showed that the firms seeking patent protection have a higher return on assets and a higher level of internationalization. It might mean that patent protection gives them a competitive advantage on the domestic market and ownership advantage on foreign markets. Nonetheless, it has to be underlined that the analytical technique used in the research allows only to notice differences between the researched groups and does not substantiate conclusions about the causality of the relationships .

8. Summary

The number of patent applications, describing one of the aspects of companies’ innovation, is an indicator commonly used in the literature. Since the data is easily accessible from patent databases, the analysis and appropriate interpretation of this data category might have a great value for developing quantitative research on innovation.

This research describing differences between firms applying for patents and firms not looking for patent protection is the first attempt at furnishing quantitative


analysis of innovation of the Polish listed companies. The research has corroborated some of the hypotheses formulated on the basis of the wide body of literature giving rise to the assumption that applying for patent protection in Poland is connected with firm’s size, level of internationalization and its financial results.

This research is only a prelude to a wider analysis of the relationships between resources, strategic activities and results of the Polish listed companies. Due to its rather rudimentary character, the research has a number of limitations resulting from the data operationalization method as well as from the specificity of the used statistical tools. Expanding the database, increasing the number of variables, extending the analysis period up to several years and applying a more advanced statistical procedure would enable a more complex explanation of conditions for and consequences of innovation. This type of research might lead to the formulation of significant practical recommendations. For example the analysis of relation between technological resources, internalization strategy and firm’s results could give clues to stock market investors and managers planning their foreign market expansion.

Information about the authorsAleksandra Wąsowska, MA – Strategic Management Institute, Faculty of Mana-gement, University of Warsaw. E-mail: [email protected]. Marcin Pawłowski, MA – Strategic Management Institute, Faculty of Management, University of Warsaw. E-mail: [email protected].

Bibliography

Adams, R., Bessant, J. and R. Phelps. 2006. Innovation management measurement: a review. International Journal of Management Reviews, Vol. 8, no. 1, pp. 21–47.

Arruñada, B. and X. Vazquez. 2006. When your contract manufacturer becomes your competitor. Harvard Business Review, Vol. 84, no. 9, pp. 135–144.

Arundel, A. and I. Kabla. 1998. What percentage of innovations are patented? Empirical estimates for European firms. Research Policy, Vol. 27, no. 2, pp. 127–141.

Baruk, J. 2002. Zarządzanie inowacjami a zarządzanie wiedzą – podejście integracyjne. Organizacja i Kierowanie, no. 2 (108), pp. 21–34.

Baruk, J. 2004. Charakterystyka działalności badawczo-rozwojowej. Problemy Zarządzania, no. 1 (3), pp. 32–52.

Bettis, R. and M. Hitt. 1995. The new competitive landscape. Strategic Management Journal, Vol. 16, pp. 7–19.

Bogdanienko, J. 2008. W pogoni za nowoczesnością. Wybrane aspekty tworzenia i wprowadzania zmiany, Toruń: Wydawnictwo Dom Organizatora.

Bogdanienko, J., Haffer, M. and W. Popławski. 2004. Innowacyjność przedsiębiorstw, Toruń: Wydawnictwo Uniwersytetu Mikołaja Kopernika.

Bond, S., Harhoff, D. and J. Van Reenen. 2003. Investment, R&D and financial constraints in Britain and Germany, Institute for Fiscal Studies, http://cep.lse.ac.uk/pubs/download/dp0595.pdf.


Caves, R. 1974. Causes of direct investment: foreign firms’ shares in Canadian and United Kingdom manufacturing industries. The Review of Economics and Statistics, Vol. 56, no. 3, pp. 272–293.

Cohen, W. and S. Klepper. 1996. Firm size and the nature of innovations within industries: The case of process and product R&D. The Review of Economics and Statistics, Vol. 78, no. 2, pp. 232–243.

Daniels, J. and J. Bracker. 1989. Profit performance: do foreign operations make a difference. Management International Review, Vol. 29, no. 1, pp. 46–56.

Dunning, J. 1980. Towards an eclectic theory of international production: Some empirical tests . Journal of International Business Studies, Vol. 11, no. 1, pp. 461–491.

Dz. U. no. 119, item. 1117. Announcement of the Marshall of the Seym of Poland of 13 June 2003 on the announcement of the unified text of the Law on Industrial Owenrship.

EIS. 2009. European innovation scoreboard 2008. Comparative analysis of innovation performance, http://www.proinno-europe.eu/EIS2008/website/docs/EIS_2008_Final_report.pdf.Geringer, J., Beamish, P. and R. da Costa. 1989. Diversification strategy and internationalization:

Implications for MNE performance. Strategic Management Journal, Vol. 10, no. 2, pp. 109–119.Gomes, L. and K. Ramaswamy. 1999. An empirical examination of the form of the relationship between

multinationality and performance. Journal of International Business Studies, Vol. 30, no. 1, pp. 173–187.

Grant, R. 1987. Multinationality and performance among British manufacturing companies. Journal of International Business Studies, Vol. 22, pp. 249–263.

Greliches, Z. 1990. Patents statistics as economic indicators: A survey. Journal of Economic Literature, Vol. 28, no. 4, pp. 1667–1707.

Harchoff, D., Narin, F., Scherer, F. and K. Vopel. 1999. Citation frequency and the value of patented inventions. Review of Economics and Statistics, Vol. 81, pp. 511–515.

Jasiński, A.H. 2000. Innowacje i transfer techniki w gospodarce polskiej, Białystok: Wydawnictwo Uniwersytetu w Białymstoku.

Jasiński, A.H. 2007. Narodowy system innowacji w Polsce wobec wyzwań integracyjnych, w: Bogadnienko, J., Kuzel, M. and I. Sobczak (ed.) Działalność innowacyjna przedsiębiorstw w warunkach globalnych, Toruń: Wydawnictwo Adam Marszałek.

Jasiński, A.H. and E. Okoń-Horodyńska. 2002. Innovation in transition. The case of Poland, Warszawa: Wydawnictwo Naukowe Wydziału Zarządzania Uniwersytetu Warszawskiego.

Kim, C., Hwang, P. and W. Burgers. 1989. Global diversification strategy and corporate profit performance. Strategic Management Journal, Vol. 10, pp. 45–57.

Kleinknecht, A., Van Monfort, K. and E. Brouwer. 2002. The non-trivial choice between innovation indicators. Economics of Innovation and New Technology, Vol. 11, no. 2, pp. 109–121.

Klincewicz, K. 2008. Polska innowacyjność. Analiza bibliometryczna. Warszawa: Wydawnictwo Naukowe Wydziału Zarządzania Uniwersytetu Warszawskiego.

Kochhar, R. and P. David. 1996. Institutional investors and firm innovation: A test of competing hypotheses. Strategic Management Journal, Vol. 17, pp. 73–84.

Kwiatkowski, S. 1990. Uciekający świat. Warszawa: Wydawnictwo Spółdzielcze.Lev, B. 2001. Intangibles: Managing, Measuring and Reporting. Washington: Brookings Institution

Papers.Lopez-Rodriguez, J. and L. Garcia-Rodriguez. 2005. Technology and export behavior: A resource-based

view approach. International Business Review, Vol. 14, pp. 539–557.Obłój, K. 2007. Strategia organizacji. Warszawa: Polskie Wydawnictwo Ekonomiczne.OECD. 2005. Podręcznik Oslo. OECD, Eurostat, http://www.nauka.gov.pl/mn/_

gAllery/43/46/43464/20081117_OSLO.pdf. Opler, T. and S. Titman. 1994. Financial distress and corporate performance. Journal of Finance, Vol.

49, pp. 297–306. Parthasarthy, R. and J. Hammond. 2002. Product innovation input and outcome: Moderating effects of

the innovation process. Journal of Engineering and Technology Management, Vol. 19, pp. 75–91.


Porter, A.L. and S.W. Cunningham. 2005. Tech Mining: Exploiting New Technologies for Competitive Advantage, Hoboken: John Wiley & Sons.

Posner, M. 1961. International trade and technical change. Oxford Economic Papers, Vol. 13, pp. 323–341.

Scellato, G. 2007. Patents, firm size and financial constraints: an empirical analysis for a panel of Italian manufacturing firms. Cambridge Journal of Economics, Vol. 31, pp. 55–76.

Scherer, F. 1965. Firm size, market structure, opportunity, and the output of patented inventions. American Economic Review, Vol. 55, pp. 1097–1125.

Schumpeter, J. 1995. Kapitalizm, socjalizm, demokracja. Warszawa: Wydawnictwo Naukowe PWN.Shapiro, A. 2006. Measuring innovation: beyond revenue from new products. Research Technology

Management, Vol. 49, no. 6, pp. 42–51.Tallman, S. and J. Li. 1996. Effects of international diversity and product diversity on the performance

of multinational firms. Academy of Management Journal, Vol. 39, no. 1, pp. 179–196.Trevino, L. and R. Grosse. 2002. An analysis of firm-specific resouces and foreign direct investment

in the United States. International Business Review, Vol. 11, pp. 431–452.Van de Ven, H. 1986. Central Problems in the Management of Innovation. Management Science, Vol.

32, no. 5, pp. 590–607.Vernon, R. 1966. International investment and international trade in the product life cycle. Quarterly

Journal of Economics, Vol. 80, no. 2, pp. 190–207.WSE (GWP). 2008. Rocznik giełdowy. http://gpw.pl/gpw.asp?cel=informacje_gieldowe&k=9&i=/rocznik_

gield/rocznik2008.Yiu, D., Lau, C., and G. Bruton. 2007. International venturing by emerging economy firms. Journal

of International Business Studies, Vol. 38, no. 4, pp. 519–540.


Dominika Latusek

The Role of the Intermediary in Trust Building Processes Between Entrepreneurs

and Venture Capital Funds

I am just an intermediary– I help small companies get started.

Tim, main character of the presented case study

1. Introduction

Entrepreneurs’ success mainly depends on the skill to obtain funds for company’s development. A large percentage of new ventures fails and many companies that manage to survive the most difficult years rarely establish such patterns of behavior that result in the change of the scale of the business or its functioning style (Glinka and Gudkova 2008).

Although the authors dealing with the topic of entrepreneurship point to the fact that money and access to resources are not decisive for entrepreneur’s success, without doubt, lack of means for developing new projects is one of the most serious obstacles in the path of entrepreneurs and one of the most frequent reasons of failures of new undertakings.

The issue of acquiring resources is widely discussed in the available literature on the subject of entrepreneurship (Glinka 2008; Kwiatkowski 2000). On the one hand, entrepreneurship is believed to consist in “creating something valuable out of practically nothing” Timmons 1994, cited in: Kwiatkowski 2000: 88). On the other hand, however, it is a fact that the lack of resources frequently hampers firm’s development or leads to its failure (Cieślik 2006). As Kwiatkowski points out (Kwiatkowski 2000: 89) “entrepreneurship is an approach to management that always boils down to having resources at one’s disposal. If I do not have resources at my disposal I cannot be entrepreneurial.” Although entrepreneurship “is about orienting oneself toward identification and operationalization of chances irrespective of disposable material resources” (Kwiatkowski 2000: 90) it is impossible to disregard these resources while analyzing entrepreneurial behavior. An entrepreneur is a person who does not see limitations in her access to material resources, but nonetheless she does not neglect and underestimate the resources.

132 DOMINIKA LATUSEK

In the start-up phase of the activity – apart from using their own means – entrepreneurs rely heavily on the so called informal investors i.e. family and friends (Bygrave and Hunt 2005). While in the USA, obtaining external financing is the ambition of almost all newly created companies and a natural way of development, in Poland, entrepreneurs resent this type of financing and prefer using their own means and getting support from informal sources (Kornasiewicz 2004).

Successful entrepreneurs are faced with the necessity to look for external financing such as bank loans, loan funds, financing from the European Union or help of venture capital or business angels types of investors. Here, I will mainly deal with the last two types of mentioned investor types. The article presents the issue of obtaining resources for developing start-ups in the high-tech sector from a trust concept perspective on the basis of a single case study (Yin 1994; Czarniawska-Joerges 1992). First, I provide a description of the issue of venture capital and business angles and some chosen theoretical perspectives expounded in the studies on trust. Next, I give a brief description of the conducted empirical1 research together with a thorough depiction and interpretation the presented case study. In closing, I present project conclusions and point to project limitations and possible future research into the subject.

2. Venture capital and business angles

The research into venture capital (VC) and business angles has occupied an important place in the study of organization and management since the mid 1980s in the USA and since the 1990s in Europe as well (Harrison, Dibben, Mason 1997). Venture capital, called risk capital, constitutes an important source of financing novel undertakings, which although entail a higher risk than other capital investments, offer bigger than average return on the invested capital. VC is a source of money for non-listed companies that gives them a chance to finance their development (Brealey, Myers 1991). VC funds are also highly instrumental in inducing economic growth and increasing economic innovation. (Kornasiewicz 2004). Seen from the perspective of a company, venture capital is not only about capitalizing the company, but also about providing consulting on company’s functioning and thus entails active influence on decisions.

Business angles – high risk individual investors – become an option when an undertaking is too small to attract classical VC funds. For the purpose of this article, I treat these two types of financing (venture capital and business angles) as one type of a financing source, since in the empirical material they become one of the sides of the relation. So from the perspective of both of the entrepreneur and the advisor the need to distinguish between them becomes secondary.

1 The author of the article would like to thank the Fulbright Foundation, Stanford University and Kozminski University for financing and organizing the research.

The Role of the Intermediary in Trust Building Processes Between Entrepreneurs… 133

The existing research by other authors demonstrates that a substantial percent (from 93% to 97%) of business proposals presented by entrepreneurs for VC financing is rejected (Mason and Harrison 1994). Obtaining financing is very difficult – as a result of a complicated system for short listing projects less than 5% of presented ventures make it to the realization phase (Cieślik 2006). Most decisions to discard a project are made very early in the process of application analysis (Landstrom 1993; Riding 1993). Frequently, the basis for rejecting an application is the belief concerning entrepreneur’s or team’s poor managing skills and a small perceived market potential of the product or service (Mason and Harrison 1994, 1996; Mason and Rogers 1996).

The key to success and passing through the first, the most severe, phase of selection seems to be the skill to present oneself i.e. to show uniqueness and perspectives of one’s idea and to prove one’s professionalism and skills in making the undertaking successful.

It is the first contact of the entrepreneur with the potential financing source that is one of the decisive moments in achieving success and obtaining support. The ability to present one’s idea in an attractive manner and build trust for the company is essential in this context. (Martens, Jennings and Jennings 2007). Building relations based on trust between the entrepreneur and the investor is a priority in trying to induce the investor to get engaged in the project (Dibben 2000).

In the case of high tech companies usually established by engineers and computer specialists convincing VC funds to invest might be additionally impaired by a specific professional culture of this professional group (Czarkowska 2006; Jemielniak 2008). The group is frequently said to be quite hermetic, have a specific work culture, rituals and professional language that make other people perceive it as difficult in communication. In such situations, the skill to obtain help of specialists who will prepare an appropriate presentation or will help to fill in the missing knowledge becomes quite important. The presented case study shows the work of a person who helps beginner entrepreneurs from the high-tech sector to establish contacts with venture capital and teach them how to best present themselves and their projects.

3. Building Trust in Entrepreneurial Activity

The issue of trust has been chosen as the theoretical basis for the sketched research problem for two reasons. First, as it stems from the presented analysis, without building a certain form of trust relation between the entrepreneur and the investor the success in obtaining VC support is quite impossible. Interpersonal trust plays an especially important role in the development of new business (Dibben 2000), because it enables cooperation under conditions of high uncertainty, risk and gaps in knowledge between partners in a relationship. Second, theories of cooperation and social exchange, where the issue of trust has a noteworthy position,


have become important in the research on entrepreneurship and management and, what is more, the cooperation between people is frequently believed to be one the basic sources of economic activity (Huemer 1998; Cook and Gerbasi 2009). In addition, in recent years there has been a turn into the direct research on how interpersonal relations influence markets and companies (Lazaric, Lorenz 1999).

Trust in the field of organization and management studies is defined as “psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another” (Rousseau, Sitkin, Burt and Camerer 1998: 395). Trust means that “we do not expect a partner to harm us, although he has both the means and motives to act opportunistically” (Nooteboom 1999: 203). The definitions of trust found in literature usually contain three main elements:– trust is a state of positive expectations (Das and Teng 2001);– the partner and his/her particular behavior is the object of trust (Inkpen and

Currall 2004);– trust is about the necessity to make a choice, take a risk, accept uncertainty

and vulnerability in the face of other people’s behavior (Das and Teng 2001, Mayer, Davis and Schoorman 1995). Dibben (2000) presented a theoretical typology of trust in the area of

entrepreneurial activity. In his opinion, a start-up situation has very specific features compared with other business relations. First of all, it is about quick formation of a small group of people chosen for their special expert knowledge. These people might come from different organizations and environments and at the same time they are usually members of other organizations. On the first stage of activity, these people frequently work on their own. This time is ripe with uncertainty, risk and high expectations from all involved parties, hence the issue of trust become so essential.

Dibben studied the process of trust creation between people in the process of setting up new ventures, paying the greatest attention to the relationship between the possible investor and entrepreneur. The study brings forth two basic conclusions that are crucial from the point of view of the issue analyzed here. First, investor’s trust depends on the entrepreneur’s ability to show entrepreneur’s abilities, competences and skills as well as the potential value of investment opportunities and the risk level. Second, the decision to invest funds on the part of the investor depends on their trust in the entrepreneur and the belief in his skills as well as the belief in the future profitability of the investment.

In a traditional view of trust, it is a resource that is build over time. Meanwhile, the start-up situation concerns people who often meet for the first time, requires quick decisions and engagement in cooperation where trust cannot be build on the basis of common experience and history. The situation might be compared to the idea of “swift trust” found in the literature that is characteristic of cooperation in the so called temporary groups (Meyerson, Weick and Kramer 1996). In her book,


Debra Meyerson together with her co-partners describes the work of film crews, where, similarly as in the start-up situation, working conditions and quick realization pace make it impossible to create trust based on experience and knowledge of one another. This situation gives rise to a special type of trust (swift trust) that is based first and foremost on trusting one’s own competences and the competences of effectively chosen partners, and indirectly, on trusting the competences of a person (intermediary) that has completed the team.

“Swift trust” is not just a traditional trust in a micro scale. It is a special kind of common perception and relation, which makes it possible to deal with problems connected with interdependency, uncertainty, risk and expectations that materialize immediately once the temporary team is set up (see: Meyerson, Weick and Kramer 1996: 167). Once a long term cooperation is set up (in the case here, it is after the VC has been engaged in the project) other forms of trust rooted more in knowledge and experience can develop.

Figure 1. Types of trust

Identification-basedtrust

Knowledge-based trust

Calculus-based trust

Source: own work based on R. Lewicki and B. Bunker. 1995. Trust in relationships: a model of trust development and decline, In: B. Bunker and J. Rubin (ed.) Conflict, Cooperation and Justice, p. 133–173. San Francisco: Jossey-Bass; R. Lewicki and B. Bunker. 1996. Developing and maintaining trust in work relationships, In: R. Kramer and T. Tyler (ed.) Trust in Organizations: Frontiers of Theory and Research, p. 114–139. Thousand Oaks: Sage.

In professional relations developing over time, there are three types of trust (Figure 1). According to the conception of the authors (Lewicki and Bunker 1995, 1996) these types function in a pyramid climbing up over time i.e. the emergence of a new type of trust might take place only when there is a basis in the form of a former type of trust. This model is quite interesting since – as one of few in the literature on organization and management – points to the processual dimension of trust and its time dynamics (Lewicki and Bunker 1996; Ross and LaCroix 1996).


4. Description of the Method

The empirical basis for the article is the study on characteristics of intra-company and inter-company cooperation in the high technology sector conducted in 2007 and 2008 in the Silicon Valley in the United States. It was a qualitative research where the data was collected using interviews, non-participating observations and shadowing2 (Konecki 2000; Kostera 2003). The research method was chosen due to the characteristic feature of trust i.e. its processuality (Nooteboom 2002). It means that the trust is shaped both by the shadow of the past and shadow of the future (see Poppo, Zheng Zou and Ryu 2008) and qualitative methods are frequently seen as especially appropriate in studying trust (Moellering 2006) as they allow to take a look at processes and actions over time (Kostera 2008).

The case study presented herein is an individual case study (Yin 1994) or window study (Czarniawska-Joerges 1992). The hero of the case study is Tim Polson (names of all the people mentioned in the text were changed, as stipulated in the NDAs). Under this case study, I conducted four interviews with Tim (lasting from 45 min. to 2.5 hrs, in total 6.5 hrs of material recorded during interviews) and two entire day observations of Tim’s meetings with the entrepreneurs he helps and their potential investors. Due to their confidential content, the meetings were documented with notes in the research log. In addition, I had two informal conversations (documented with notes) with one of Tim’s long term associates, who at present is a professor in a business school in the Silicon Valley (they lasted 1.5 hrs and 2.5 hrs).

The finally analyzed material comprised: interview transcripts, observation notes, notes from informal conversations and materials on organizations and people who Tim cooperates with that were collected online. Once transcribed and ordered, the material was analyzed using the procedures of the grounded theory methodology (Glaser, Strauss 1967; Konecki 2000). For the purpose of this article, the material was once again analyzed from the point of view of the research problem presented in the first part of the article.

5. The Intermediary in Building Trust Between Entrepreneurs and Financing Sources – the Results of the Empirical Research

As the existing results of the available empirical research indirectly show (Harrison, Dibben and Mason 1997; Mason and Rogers 1996) trusting the third party has a decisive influence on the decision on cooperation between two previously unacquainted parties. Dibben (2000) checked this hypothesis with respect to cooperation between business angles and entrepreneurs looking for financing for

2 Shadowing – a kind of non-participating observation, during which a researcher for some time accompanies the studied person in his/her every day activities.


their projects and corroborated it empirically. The role of the intermediary in contacts becomes important especially from the entrepreneur’s perspective. This is pinpointed by Tim, our hero, while he talks about a high, although difficult to initially define value of his services. The special role of the intermediary (coordinator or advisor) in establishing and building contact between an entrepreneur and financing source is seen for example in high (in his own opinion) remuneration for the intermediary.

I know from my own practice that small companies have great product and market knowledge, but they lack it with respect to mechanisms of setting up a company, building strategy, attracting investors, acquiring money for development… Well, I’m here to help them with that and I am paid a lot for my services, but nevertheless it’s of great value to them because otherwise they had to employ at least four people to do my work.

It is worth taking a look at a professional career of an agent to become familiar with the resources he must have to be good in his work. In Tim’s opinion it is not a profession for very young people who do not have experience in business, since knowledge he shares with entrepreneurs is based mainly on his long routine and network of contacts he has built so far.

Tim, as many people in the Silicon Valley, studied to bean IT engineer. At the beginning of his professional career, he became affiliated with one of the greatest IT corporations as a member of one of many software teams, however, after a year he was promoted to a manager position and since then has not come back to programming. He says about himself:

I’m an IT engineer by education and manager by experience.

After 22 years of climbing the corporate ladder, he decided to set up his own company that succeeded – several years ago he sold it and became – as he calls it – an “independent consultant.” At present, he advises four start-ups and in his own opinion it is the topmost limit of his abilities and willingness, since he cannot imagine himself working with more than 3 to 4 companies simultaneously.

Thanks to his many years of experience on different corporate positions coupled with experience in running his own company and thanks to contracts established across many different sectors in the past, Tim has knowledge and network of contacts in fact inaccessible for an average entrepreneur in the start-up and initial growth phases of company’s development. A large portion of this knowledge is quite intangible, but is quite valuable for entrepreneurs.

For me, this type of work is pretty easy, because I have huge experience. But they do everything for the first time and for them my help is invaluable. You know, sometimes they tell me “We wouldn’t have come up with this idea without you, Tim.” And then I know that my work is worth a lot.

The value of the offered services is proven by the fact that in principle Tim does not advertise himself and selects his customers from the companies that seek


his services. He may afford to be independent and to choose projects that are really interesting for him.

Usually, I’m recommended. It’s all word of mouth. I don’t advertise myself. There’s no need for that (…). The companies I’m working with right now – it was them who contacted me. I wasn’t looking for them. Two of these wanted me to be the CEO, but I wasn’t interested.

However, when the decision about supporting a particular undertaking is made, entrepreneurs may count on his help and support almost in every aspect of running the business. They may be sure that they will receive as much time and focus from the consultant as they need.

From this point of view, observations and shadowing of Tim during his meetings with entrepreneurs under his wing and potential investors (with whom Tim met on informal basis without entrepreneurs themselves in order to try to present projects and the companies as promising and worth of their attention) were especially interesting. Due to limitations of this article I will only present a shortened version of one of the meetings. It was one of a series of meetings between Tim and Sylco (an Iranian woman starting up a business in the Silicon Valley) devoted to preparing a presentation for a VC investor).

Once the meeting started, it turned out that Sylco had brought along a person responsible for finances in the company and a marketing specialist she wanted to employ. The meeting lasted almost 6 hours and only 30% of the time was devoted to analyzing the presentation. Sylco consulted with Tim current company’s matters: from new contracts to potential localization of the company’s premises. In fact, Time agreed to go and see all possible venues, to help her decide on one. The conversation with the invited marketing specialist took over an hour – on the surface it seemed to be poorly structured and informal (not once were employment conditions mentioned, it focused mainly on his experience and perception of the market situation). Just as the specialist left, however, Sylco explicitly make her decision about potentially employing him dependent on Tim’s opinion.

This meeting shows that entrepreneurs fully trust Tim and look for his advice and count on his opinion in almost every aspect of running business. The impression was that Sylco wanted to use her time with Tim to the fullest. What was also obvious was Tim’s great informal authority.

Despite the fact that – as Tim reiterates – the main part of his work is to contact potential investors and entrepreneurs, in everyday work he works more as an almost “intimate” consultant and infrequently as company’s confidant.

I’m totally and fully for the companies – 100% of my attention goes to them. What do I exactly do? I help them to write financial plans. Sometimes, the boss prepares a list of questions and then we do them one by one. I arrange contacts with investors. I evaluate their ideas. Sometimes, I help them to write e-mails to investors and the CEO asks me how such a message should look like and what to stress and what to delete. I always take their calls. I do it 24/7. Of course, I do help them to obtain money using my contacts.


The role of the intermediary, as stems for the previously cited research (Dibben 2000), is central to entrepreneurs who have an ambition to win external financing for development, because – using his own contact network – the intermediary connects people, here entrepreneurs and potential sources of financing. In social sciences, the issue of network is closely related to the issue of trust – Creed and Miles (1996) point out that trust is necessary to effectively use network’s resources. The intermediary may facilitate trust between parties that have not known each other. The intermediary usually knows all the people engaged in an undertaking and even before the decision to join them under one project is made, he has already built each and every of these relations on certain type of trust.

As it follows from the earlier research (Powell 1990), usually individual decisions to engage in an undertaking in such situations result from parties’ earlier relations with the intermediary. Using the language of social exchange and trust, we might say that it is based on the evaluation of intermediary’s trustworthiness i.e. to what extent we can trust the intermediary that the team he assembles will be a credible partner. It is clearly corroborated by the conducted interviews and observations. Many times, Tim underlined that his reputation and contracts in the Silicon Valley are the core resource in the work he does. Good network of contacts must be carefully chosen and well tended for and thus it is not surprising that a recurrent theme in the interviews happens to be the wise choice of clients.

I’m very careful in choosing the companies I advise, because on a certain level of our cooperation I always want to show them to the VC people. And I can only present these companies that have a reliable business model, only these companies that I believe in myself. Otherwise, it would be devastating to my reputation.

Tim’s words reflect the trust aspect of the earlier discussed theory. This makes the method of choosing undertakings he wants to be engaged in even the more interesting. Since once the coordinator begins to advise the entrepreneur he lays his reputation on the line, the choice process is thoroughly considered.

What way do I decide about engaging in the project? I apply the same test that later is used by the VC funds. Four aspects: great team, big market, unique product and reliable business model. Not many companies fulfill all these four conditions. It’s a question of intuition – I do it myself and I do it fast.

So at first, Tim applies the same methods that will later on be used by the VC investor while evaluating the proposal.

Summing up, the presented case study fragment will be analyzed against the existing literature and theoretical concepts presented in the first part of the text.


6. Summary

According to Cieślik (2006: 139), while choosing projects, VC funds apply specific selection criteria. These are:– high rate of return on investment possible to reach within several years,– strong management,– competitive product/technology.

In addition, the sector the company is active in should have a high development pace and the company should have a higher growth dynamics than an average for a given sector. Therefore, formal criteria used by the VC to screen the most promising undertakings are convergent with an informal analysis made by the intermediary-advisor. This proves the point that the most important goal of the intermediary is to lead to obtaining financing by a newly company and even before establishing the cooperation a good coordinator tries to assess the chances of a given undertaking.

The case study also illustrates the process of trust creation and the key position occupied by the “third party” that is a guarantor of trustworthiness between the previously unacquainted parties. It also demonstrates the process of swift trust creation described in the first part of the article, in which the key role is played by a person assembling the team. Furthermore, it indirectly corroborates theses presented by other theoreticians that trust is transitive i.e. it might be created through a third person that both parties see as credible.

The question arises here to what extent getting the VC financing is a process of trust creation and to what extent it is a process of communication and impression management. Low and Srivatsan (1995: 73–74) write that to build trust, the entrepreneur must appropriately specify the utility function for a potential investor (i.e. values related to different types of material and non-material benefits from the investment project), specify the level of safety in the relation that is needed to ensure investor’s support and build a feeling of safety and display one’s trust to the fund and unshakable faith in one’s own competences.

Hence, the entrepreneur should manage his relations with the investor in such a way as to create the impression of great chances for the success of his business. The authors further say that for the investor to believe the entrepreneur they do not have to believe in his full authenticity, because the entrepreneur cannot be fully authentic with all the parties he cooperates with. What is important for the investor is to believe in the effectiveness of entrepreneur’s work and his ability in developing relations with all the engaged parties that is advantageous to them.

In this context, it would be highly interesting to conduct research into trust and impression of trustworthiness. Although empirical data is lacking, first theoretical tests of applying, for example, signaling theory to the process of trust creation are present in the literature (Bacharach and Gambetta 1997; Six 2005).

The presented empirical material does not directly corroborate the thesis about the lack of communication and presentation skills among computer engineers.


Nonetheless, materials from observations and parts of interviews show that this group is often characterized by uncertainty in communication with potential investors. The work of the coordinator is among others valued that high because he frequently furnishes conversation and self-presentation skills that are lacking in the company.

The collected empirical data neither can be the basis for identifying types of trust distinguished by Lewicki and Bunker (1995, 1996). The analysis of the content of the interviews reveals that it is possible to find characteristic features of each type of trust in the model, however, the pattern of clear processuality and change of trust over time is virtually non-existent. The same is true for the pyramid structure of the model - it is not clear that the calculus-based trust supports the knowledge-based trust or that the knowledge-based trust supports the identification based trust. It seems that these differentiated types of trust not only exist in the empirical data collected but co-exist (but are not harmoniously and gradually created) from the very beginning of the relation in a more complicated way that a pyramid can show. In addition, extending the unit of analysis to a network of relations with the central role of the intermediary (instead of a bilateral professional relation that the model was based on) may point to the need of creating a theoretical idea that is more reflective of the reality.

An interesting direction for further study would be projects with a wider research field. On the one hand, the presented case study covered only one, little start-up company, while VC funds might also finance greater stock market companies. In such a case, the process of trust creation might be different and it is not sure whether the role of this one-man intermediary would be as important in the company-fund relations. On the other hand, an interesting extension of the presented project would be to study the second party of the relation i.e. the venture capital funds and business angles. Sometimes, funds on their own search for promising companies and the opportunity to finance them – in such a case these are the funds that initiate the process of trust creation. Moreover, the research presented herein does not focus in any way on issues related to the organization itself, but analyzes only the role of the intermediary and the relation between the company and the fund. And the presence of the external financing in the company significantly changes the relation within the company – research concentrating in this area would certainly bring valuable knowledge about soft management skills.

From the point of view of the Polish leader, an attractive research direction would be to prepare case studies rooted in our culture. Although the existing research shows that entrepreneurial thinking is universal for entrepreneurs from different cultural contexts, nonetheless the phenomenon of entrepreneurship is conditioned culturally (Kwiatkowski 2000; Glinka 2008). Culture is the soil of entrepreneurial spirit and different norms and values may advance or discourage it. While the American culture is generally seen as promoting entrepreneurship, the Polish culture escapes straightforward characteristics and “cultural conditions of entrepreneurship in Poland are difficult to define, are frequently incoherent and


full of paradoxes” (Glinka 2008: 81). Researching the process of trust creation and the role of the intermediary in this process in a different cultural context could furnish interesting knowledge on the impact the cultural context has on behavior and preferences of entrepreneurs.

Information about the authorDominika Latusek, PhD – Kozminski University in Warsaw. E-mail: [email protected].

Bibliography

Bacharach, M. and D. Gambetta. 1997. Trust in signs, in: Cook, K. (ed.) Trust in Society, p. 148–184. New York: Russell Sage Foundation.

Brealey, R. and P. Myers. 1991. Principle of corporate finance, New York: McGraw Hill.Bygrave, W. and P. Hunt. 2005. Global Entrepreneurship Monitor – 2004 Financing Report, Babson Park:

Babson College and London Business School.Cieślik, J. 2006. Przedsiębiorczość dla ambitnych, Warszawa: Wydawnictwa Akademickie i Profesjo-

nalne.Cook, K. and A. Gerbasi. 2009. Trust: explanations of social action and implications for social structure,

in: Bearman, P. and P. Hedstrom (ed.) The Oxford Handbook of Analytical Sociology, paper in press. Oxford: Oxford University Press.

Creed, W. and R. Milep. 1996. Trust in organizations, a conceptual framework, in: Kramer, R., and T. Tyler (ed.) Trust in Organizations: Frontiers of Theory and Research, p. 16–39. London: Sage.

Czarkowska, L. 2006. Nowa profesja: informatycy. Problemy Zarządzania, no. 1 (11), p. 177–193.Czarniawska-Joerges, B. 1992. Exploring Complex Organizations: A Cultural Perspective, Newbury Park:

Sage Publicationp.Das, T.K. and B.P. Teng. 2001. Trust, control, and risk in strategic alliances: an integrated framework.

Organization Studies, no. 22 (2), p. 251–283.Dibben, M. 2000. Exploring Interpersonal Trust in the Entrepreneurial Venture, London: Macmillian

Buisnesp.Glaser, B. and A. Strausp. 1967. The Discovery of Grounded Theory: Strategies for Qualitative Research,

Chicago: Aldine Pub. Glinka, B. 2008. Kulturowe uwarunkowania przedsiębiorczości w Polsce, Warszawa: Polskie Wydawnictwo

Ekonomiczne.Glinka, B. and P. Gudkova. 2008. Sukces w działaniu przedsiębiorców: percepcja, wymiary, implikacje.

Problemy Zarządzania, no. 2 (21), p. 101–114.Harrison, R., Dibben, M. and C. Mason. 1997. The role of trust in the informal investor’s investment

decision: an exploratory analysis. Entrepreneurship Theory and Practice, no. 22 (2), p. 63–81.Huemer, L. 1998. Trust in Business Relations: Economic Logic or Social Interaction, Umeĺ: Boréa.Inkpen, A.C. and P.C. Currall. 2004. The coevolution of trust, control, and learning in joint ventures.

Organization Science, no. 15 (5), p. 586–599.Jemielniak, D. 2008. Praca oparta na wiedzy, Warszawa: Wydawnictwa Akademickie i Profesjonalne.Konecki, K. 2000. Studia z metodologii badań jakościowych: Teoria ugruntowana, Warszawa: Wydawnictwo

Naukowe PWN.Kornasiewicz, A. 2004. Venture capital w krajach rozwiniętych i w Polsce, Warszawa: CeDeWu.


Kostera, M. 2008. Wprowadzenie, in: Kostera, M. (ed.) Nowe kierunki w zarządzaniu, p. 17–29. Warszawa: Wydawnictwa Akademickie i Profesjonalne.

Kwiatkowski, P. 2000. Przedsiębiorczość intelektualna, Warszawa: Wydawnictwo Naukowe PWN.Landstrom, H. 1993. Agency theory and its applications to small firms: evidence from the Swedish

venture capital market. Journal of Small Business Finance, no. 2 (3), p. 203–218.Lazaric, N. and E. Lorenz. 1999. Trust and Economic Learning, London: Edward Elgar.Lewicki R. and B. Bunker. 1995. Trust in relationships: a model of trust development and decline, in:

Bunker, B. and J. Rubin (ed.) Conflict, Cooperation and Justice. San Francisco: Jossey-Basp.Lewicki R. and B. Bunker. 1996. Developing and maintaining trust in work relationships, in: Kramer, R.

and T. Tyler (ed.) Trust in Organizations: Frontiers of Theory and Research, Thousand Oaks: Sage.Low, M. and V. Srivatsan, 1995. What does it mean to trust an entrepreneur, in: Birley, P., and

I. MacMillan (ed.) International Entrepreneurship, p. 59–78. London: Routledge.Martens, M.L., Jennings J.E. and P.D. Jenningp. 2007. Do the stories they tell get them the money they

need? The role of entrepreneurial narratives in resource acquisition. The Academy of Management Journal, no. 50 (5), p. 1107–1132.

Mason, C. and A. Rogers. 1996. Understanding the business angels investment decision. Working Paper 11, University of Southampton.

Mason, C. and R. Harrison. 1994. The informal venture capital market in the UK, in: Hughes, A. and D. Storey (ed.) Financing Small Firms, p. 64–111. London: Routledge.

Mason, C. and R. Harrison. 1996. Why business angels say no, a case study of opportunities rejected by an informal investment syndicate. International Small Business Research, no. 14 (2), p. 35–51.

Mayer, R.C., Davis, J.H. and F.D. Schoorman. 1995. An integrative model of organizational trust. Academy of Management Review, no. 20 (3), p. 709–734.

Meyerson, D., Weick, K. and R. Kramer. 1996. Swift trust in temporary groups, in: Kramer, R., and T. Tyler (ed.) Trust in Organizations: Frontiers of Theory and Research, p. 166–195. Thousand Oaks: Sage.

Moellering, G. 2006. Trust: Reason, Routine, Reflexivity, Oxford: Elsevier. Nooteboom, B. 1999. Inter-firm Alliances: Analysis And Design, London: Routledge.Nooteboom, B. 2002. Trust: Forms, Foundations, Functions, Failures and Figures, Cheltenham: Edward

Elgar.Poppo, L., Zheng Zou, K. and P. Ryu. 2008. Alternative origins to interorganizational trust: an

interdependence perspective on the shadow of the past and the shadow of the future. Organization Science, no. 19 (1), p. 39–55.

Powell, W. 1990. Neither markets nor hierarchy: network forms of organization. Research in Organizational Behaviour, no. 12, p. 295–336.

Riding, A. 1993. Informal Investors in Canada: The Identification of Salient Characteristics, Ottawa: Carlton University.

Ross, W. and J. LaCroix.1996. Multiple meanings of trust in negotiation theory and research: a literature review and integrative model. International Journal of Conflict Management, no. 7 (4), p. 44.

Rousseau, D., Sitkin, P., Burt, R. and C. Camerer. 1998. Not so different after all: a crossdiscipline view of trust. Academy of Management Review, no. 23 (3), p. 391–404.

Six, F. 2005. The Trouble with Trust – The Dynamics of Interpersonal Trust Building, Cheltenham: Edward Elgar.

Yin, R. 1994. Case study research, Thousand Oaks: Sage.


Katarzyna Osmólska

Photovoltaics as a disruptive technology

1. Introduction

PV – photovoltaics is based on an idea to convert solar light into electrical energy. A photovoltaic system is composed of combined modules of cells based on semi-conductor technology and a set of devices required to connect, install, store energy and correct functioning of the entire system. A photovoltaic module does not have any movable parts and is one of the simplest and most reliable available alternative sources of energy. Since solar light is the only fuel required to produce energy, the technology can be used anywhere there is access to solar light. Photovoltaics just like any other renewable energy source is able to fill in those segments of the power market that have not yet been fully covered by traditional sources (Shaw 2003) or any other non-renewable sources, and with its development – reduce costs or improve efficiency, even to a level represented by traditional sources. Therefore, it is justified to classify it as a disrupting technology (Bower and Christensen 1995). On a basis of a review of literature, the article presents a basic concept of disruptive technology and presents three levels that may be disrupted by each innovation on its development – the market dominated by developed and traditional technology, the market area with flourishing other competitive innovative companies and the market area concerning solely competition inside the sector.

2. Disruptive innovations

Disruptive innovations are marketed when they present no economic competitive edge since usually the price is much higher and the efficiency much lower in relation to traditional developed solutions.

Despite the anticipated quality improvements and use of the effects of scale resulting in lowered prices along with expending production, at the beginning of their market existence disruptive technologies do not offer values inducing investments by companies already operating in the relevant sector (figure 1). Focus on the demand at hand makes the companies ignore potential future return on investment and often overlook an opportunity to enter the market with a modern

Photovoltaics as a disruptive technology 145

product (Bower and Christensen 1995). It often turns out that the companies that decide to risk an investment become leaders in the sector thus preventing future followers from achieving commercial success; however, the diffusion process is slow and requires large financial outlays as well as an wise choice of the diffusion path.

Figure 1. Productivity paths for traditional and disruptive technologies

Productivity

Actual capacity for potentialdisturbing innovation

Anticipated direction of productivity growth

Market demand for increasedproductivity

Time

Source: J.L. Bower & C.M. Christensen. 1995. Disruptive Technologies: Catching the Wave. Harvard Business Review, Vol. 73, nr 1, s. 49.

3. Three levels of competition

It is worth noting that most innovations do not compete solely against the solutions that have been developed in the market. It may turn out that just like in the power sector, numerous modern competing technological solutions are introduced to the market. Through a joint increased share in the market and cost reduction they stand a chance of completely changing the image of a given sector and creating new efficiency standards that are not achievable for technologies that dominate at the moment. Such solution will obviously result in dividing the market among modern technologies which will result in competition among them and probably will create a new market leader determining new efficiency standards.

The success scenario of a disruptive innovation presented by Bower and Christensen (1995) seems encouraging, particularly for those companies that are the first to start production of an innovative product. Those who decide to run the investment risk in now unprofitable and little efficient innovations often turn out to be pioneers of a subsequent very profitable market. It is worth noting that commercial success attracts the attention of potential competitors and therefore many companies protect access to their technologies with patent rights closing the

146 KATARZYNA OSMÓLSKA

specific development path to competitors – however, they are not able to eliminate the competition completely. Changes to manufacturing methods or use of other new raw materials by companies within the sector helps overcome legal barriers and often improves technologies with better performance or reduced costs.

Figure 2. Three levels of disruption

Market dominated by a traditional technology

Area of innovative technologies

Industry of an innovativetechnology


An innovation that enters the market with a large number of new technologies apart from a dominating technology stands a chance to disrupt three areas of competition (Figure 2). The first is a market dominated by a traditional best developed technology, the second – is the market area with well functioning competing innovative companies and the third is created by the industry sector. The article presents the three levels of disruption on the example of an innovative photovoltaic technology.

4. Photovoltaics as a disruptive technology

The photovoltaic technology was introduced to the power market as expensive and unfortunately insufficiently efficient (about 2% of efficiency with production price of one module of almost 100 USD/W – per power unit Watt; for comparison sake, in 2006 the production price of a module was 3.84 USD/W) (Earth Policy Institute 2007). Additionally, the lack of knowledge of the technology and its complexity discouraged potential investors and users and – in compliance with the definition of a disruptive innovation (Christensen, Craig and Hart 2001), photovoltaics was not able to compete with traditional energy – mainly because the market did not manifest nay demand for expensive, unknown and complicated power resources.

Nevertheless, according to market research conducted by the Lawrence Berkeley National Laboratory, the number of photovoltaic system installations worldwide has been growing fast recently. In 2007 there were 3400 MW installed globally – in 2006 it was only 2200 MW (Wiser, Barbose and Paterman 2009). Along with growth of production and with intensive R&D efforts, subsidies and government programs, the costs of modules were substantially reduced (Earth Policy Institute 2007) and


additionally a major improvement of efficiency was recorded – as reported by the virtual magazine Photonics (2008) – up to 25%.

Despite very clear imperfections at the beginning of the life cycle of the technology, photovoltaics found application wherever traditional power industry, including alternative energy sources such as wind or geothermal technologies, were not able to cover the existing demand for energy. The long diffusion process of photovoltaics was mainly due to no interest among investors; however, the growing care for natural environment as well as the fashion of ecological products made the technology slowly leave the niche and it is expected to grow on a mass scale in the near future.

In case of photovoltaics, the disruption occurs at three levels.The first is the power market, dominated by traditional technology. At present

renewable energy sources are not able to compete with non-renewable sources or the price or efficiency, therefore all ecological technologies start diffusion wherever the high price seems relatively low due to the terrain, population density or atmospheric conditions. As specified in the OECD/IEA report (Wene 2000), it is gas and oil that are the dominating sources in the power market worldwide; however, with the growing concern for the environment, market opening to other power resources becomes increasingly required. Since many countries have launched pro-ecology policies and a number of assistance programs, environment-friendly technologies have already begun to play an important role in power relations and have a chance of completely disrupting the relations with the planned growth of investments.

The second level to be looked at is the market of renewable energy sources, competing internally both on a global and local scale. Also here, by focusing on selected segments of the power market, photovoltaics may develop wherever other solutions do prove equally efficient (table 1).

The third very important level of photovoltaics development is embedded in the sector and internal competition. Investments by many companies in research on new semi-conductors, connection technologies and applications result in continuous improved efficiency of the technology with simultaneous cost reduction. Patents to the innovations close those specific development paths, forcing new companies to look for other innovations that obviously also become patented. Each such innovation is able to disrupt all the three levels and in effect commercialise photovoltaic technologies as clean, inexpensive and first and foremost efficient.

Obviously, not each innovation always proves to be more efficient than existing tested variants. Each innovation must face many problems with the real test being transfer from the adaptation phase where it is driven solely by vision to the early maturity phase where such elements as quality and infrastructure begin to matter (Moore 1999). Many innovative companies are not able to effectively commercialise their products and therefore many of them are not able to compete among well known products. Similarly to ecological energy solutions, it is government and institutional assistance as well as government supporting programs that are of major


importance. Such programs are mainly focused on the energy system as a whole and on alternative energy sources as potential energy suppliers at each possible place. However, it is worth noting that the power sector in most countries is centralised and very strongly connected to the political system which makes it difficult to introduce ecological technologies on a large scale; therefore, each alternative energy source should be used as a solution to a specific energy problem which obviously supports multi-directional technological development while ensuring fast and inexpensive adaptation of the technology by potential users (Tsoutsos and Stamboulis 2005).

Following a path of small successes, the photovoltaic technology has already created niches in which it will continue to develop. Historic experience of photovoltaics shows that it is often the only solution to the problem of energy unavailability.

Before 2000, China which is now one of the fast growing PV producers in the world, had no production capacities to satisfy the demand at that time (Hong et al. 2003). Despite ideal conditions – three thousand solar light a year (photovoltaic modules operate efficiently even with about 1000–1200 hours) (Flasolar 2009) – and a low population density, the technology required too high investments and was not able to develop since 1985 when the first trial production was made. Additionally, no state incentives and ecological policies were other barriers to diffusion.

However, development of ecological awareness was the first supporting stimulus and after the UN conference in 1992 China almost immediately identified objectives of national ecological development in the document titled Agenda of China 21st Century (Hong et al. 2003). As a result of modified government policies and with the assistance of the Solar Energy Institute in Shanghai, in 2000 a first solar cell production line was set up in China. Despite high costs, the photovoltaic technologies was very well received in China, mainly as an energy source in locations where installation of power lines would be much more expensive or even unfeasible due to low population density. Such application of photovoltaics improved technological awareness, encouraging to invest in previously theoretically inefficient energy source and creating in China a best and fastest developing photovoltaic market.

Relying on little successes in case of photovoltaics resulted in diffusion and commercialisation as well as – as shown in the USA – helped the technology promote itself. In 1992 during the Andrew hurricane, the energy distribution system in Florida was completely destroyed and fast reconstruction proved impossible. Efficient installation of photovoltaic systems proved in the situation the only available and relatively inexpensive solution to the problem of energy supplies. Additionally, the simplicity of the solution as well as sufficient efficiency generated increased interest and understanding for the technology (Kaplan 1999) which is required for subsequent diffusion. Photovoltaics has been very fast applied as a clean and economical source of energy in American schools and other public buildings which helped “tame” the technology and arise interest among other potential private users. As a result and due to strong supporting programs, in 2007


the USA proved to be fourth country in the world with respect to the number of installed PV systems. In 1998–2007 the costs of small (under 5 kW) and medium-sized (10–100 kW) photovoltaic systems dropped by about USD 3.5 /W (Wiser, Barbose and Paterman 2009). However, that would not have been possible without support enjoyed by the photovoltaic sector from special programs, such as rebates for purchases of renewable technologies, production support program, implementation of an obligation to purchase renewable energy by energy suppliers and tax exemptions. All those programs strongly influenced development of the technology not only in the USA (IEA 2002).

In most highly developed countries with increasing concern for the environment, alternative energy sources have a growing share in their energy balance. As many European countries show, in case of photovoltaics most effective was introduction of a subsidy system feed-in-tariff1, guaranteeing renewable energy suppliers a high sale price. As a result, users of photovoltaic systems connected to power distribution lines were selling their energy at rates that were several times higher than the price of non-renewable energy (IEA 2002) which helped them recuperate their investment outlays in a short time. The application of the feed-in-tariff and other supporting programs (rebates, tax exemptions) resulted in the world photovoltaic market being dominated by Germany. In 2007 the power installed in Germany was 1.328 MW which accounted for 47% of all PV installations in the world (Solarbuzz 2008).

It is worth noting that Germany’s geographic location is similar to Poland’s and its potential resources of solar radiation resources are similar (about 1000 kWh/m2 – 1 kWh is equivalent to the quantity of energy used in an hour by an appliance with 1 kW power) (IMiGW 2009), however photovoltaics in Poland has been developing with many more problems than in the neighbouring country. The main reason is no financial incentives to invest in alternative energy sources. Despite dropping prices, photovoltaic modules in Poland are among the most expensive power solutions. The production costs of 1 kWh in 2003 was about PLN 9 – for comparison, for a small water power plant the cost was PLN 0.23; those values have not changed until today (Kamrat 2003). Such high prices of PV systems is the key barrier to the technology diffusion in Poland. An additional problem are administrative barriers and non-existing specific tax regulations concerning VAT rates for photovoltaic systems.

The unwillingness to invest in expensive and unknown power resources also produces problems with financing of what usually are small technology producers.

1 Feed in tariff being a preferential energy tariff may be applied to renewable energy resources in a country. The first country to introduce the tariff was the United States (1978) followed by: Germany (1990), Switzerland (1991), Italy (1992), Denmark and India (1993), Spain and Greece (1994), Sweden (1998), Portugal, Norway and Slovenia (1999). (Word Future Council 2007). Now the feed in tariff for renewable energy sources is also applied by: Bulgaria, Estonia, Hungary, Lithuania, Latvia, Slovakia and Ukraine. Unfortunately, no preferential energy tariffs have been introduced in Poland yet. (Austrian Energy Agency 2009).


Financial institutions are not interested in financing small projects with long recovery periods, in particular in Poland with no government guarantees. If a company producing a photovoltaic technology manages to obtain a bank loan, the low capitalisation level makes it disappear from the market. Now in Poland there are several institutions supporting the development of ecological energy sources (e.g. Ekofundusz). There are increasing possibilities to use international supporting programs, including special EU programs. The growing financing opportunities, international legal regulations forcing Poland to achieve specific shares of renewable energy in the energy balance and the growing popular concern about the natural environment create a change for photovoltaics diffusion also in our country.

5. Technological disruption at level I – competition with traditional technologies

Supported with growing interest in environment protection as well as major government financing, renewable energy has already passed the Schumpeter invention phase (Schumpeter 1994) that is origination of an idea, and became an innovation product which by way of diffusion will probably completely change the system of energy relations in the world. Since it is still difficult to allow for external effects in energy prices that is the additional costs related to environment pollution, it is almost impossible to identify the competitiveness of renewable energy sources in relation to traditional energy.

However, the learning curves developed for companies related to photovoltaic technologies (Nemet 2005; Harmon 2000) indicate that in over 30 years (1975–2006) the technology recorded a price reduction of photovoltaic modules by over 20 times (Earth Policy Institute 2007) and with maintaining the level of investment will probably become competitive for oil or gas. Just like all innovations, the photovoltaic technology is evolving and for its development it is best to gradually benefit from the scale – when production growth causes cost reductions and ultimately price reductions (Abernathy and Utterback 1995). Obviously, price reductions and the related product development and consolidation of competitive edge require time and patience.

Photovoltaic innovation systems are related to a large number of product and process improvements. Technology development is obviously required for future modernisation; however, this is not solely subject to intensive R&D work. For many innovations, unit costs decrease with time along with growing market experience, creating possibilities for dependence analysis between time and accumulated technological experience, presented as a learning curve and calculation of a learning rate. All companies involved in production of new energy technologies are manifested by a very high learning rate: for EU wind power generation achieved 18% in 1980– 995, biomass 15% in the same period, photovoltaic modules as much as 21% in 1976–1996 (McDonald and Schrattenholzer 2001).


Obviously, each new technology develops faster at the beginning of its life cycle and – as evidenced by IEA – many innovations are not able to maintain a fast development rate later on; however, learning curves clearly show a very large potential and explain why alternative energy sources stand a chance of disrupting and dominating the existing market.

Now renewable energy sources are not yet able to compete with traditional energy and that is why their share in 2001 was only 5.7% of total energy supplied in OECD countries (Fisher and Newell 2004). However, since they are relatively new, it is hard to clearly foresee their development potential. Along with a growing market and technology development and with government financial support, photovoltaics – just like other renewable technologies – will probably demonstrate improved efficiency and lower prices. It will be additionally characterised by ecological features (used silicon photovoltaic cells will not generate any hazardous waste) which will soon become a major element in decisions on selection of energy sources, both large scale and for individual needs.

Table 1. Examples of renewable energy sources

Item Wind power Photovoltaics Biomass Geothermal energy Water power

Assu

mpt

ion

Application of wind turbines to generate electri-cal energy

Application of cells based on semi-con-ductor technology (mostly silicon) to transform solar energy into electri-cal energy

Biomass incinera-tion or fermenta-tion employed to generate heat that can be converted into electrical energy

Use of natu-ral hot water resources to generate elec-trical energy

Use of water power to generate electrical energy

Adva

ntag

es Clean renewable

energy source Clean renewable energy source

Photovoltaic systems do not require mainte-nance

Clean renewable energy source

Clean renew-able energy source

Clean renew-able energy source

Dis

adva

ntag

es

High construction costs

Need of regular control of instal-lations

Noise

Interference with natural environ-ment

High price Hazardous substances are generated at incin-eration

High installa-tion costs

Technical prob-lems related to water salinity

Costs related to flooding

Microclimatic changes

Req

uire

-m

ents

Dependence on wind

Dependence of light intensity

Need to locate close to raw mate-rial sources

Restricted use solely to areas with seismic activity

Dependence on precipita-tion



6. Technological disruption at level II – competition with alternative energy sources

Large-scale photovoltaics, as renewable energy used in power plants, competes with wind, geothermal or water energy (table 1) while – offering also possibilities to be applied by individual users – it can also develop in niches to which other alternative technologies do not have access. High costs of photovoltaic systems and installations become relatively low in locations where solar light is the only available energy source and it is by developing in niches, the technology has a potential for cost reduction and an overall change of the energy market.

Modern and complex technologies manifest a close relationship between development and quality – the more a technology is diffused, the more experience it accumulates and thus manifests better efficiency (Arthur 1989: 16). It is possible that initial conditions favour development of only one specific technologies creating entry barriers for others. If with a specific use of a technology, its potential is noticed, market participants are more prone to use it and invest in it, thus supporting its diffusion.

All renewable technologies have recorded slowed-down development in time (Nemet 2005; Harmon 2000). That was primarily related to limited possibilities to accumulate experience and exhausted potential of economies of scale. In many instances selection of one specific technology with one solution – at locations where there is an insufficient number of solar hours with a large number of windy hours, wind technology is an obvious solution. Since each ecological energy solution has inherent restrictions, it will be difficult for just one of them to become a monopolist (Arthur 1989) and that is why a scenario of the energy market divided among a large number of renewable energy sources seems most probable.

7. Technological disruptions at level III – competition among variants of photovoltaic technologies

Each company investing in modern technologies must compete with others in terms of product architecture before one clearly dominating form of technology is developed and accepted by market players (Henderson and Clark 1995). When introduced to a competitive market, the innovation is characterised by technological discontinuities (figure 3). Those may be related to the production process which is completely different than applied so far or to the product itself characterised with a different quality, price or application than the alternative used until then. Each technological discontinuity is a beginning to an innovation technological cycle which opens an era of ferment (Anderson and Tushman 1990). Marketing of a product with a competitive edge increases the interest in the technology, manifested both by organisations that may profit from its commercialisation and by those who may lose. Therefore, the era of ferment is characterised by two competitive streams


– competition between the old and new product (substitution) and competition inside the sector related to the new product. As a result, a dominant form of technology is developed which subsequently goes through a series of improvements in an era of gradual change.

Figure 3. Stages of technology development

Era of Ferment– Design Competition– Substitution

TechnologicalDiscontinuity 1

DominantDesign 1

TechnologicalDiscontinuity 2

Era of Incremental Change– Elaboration of Dominant Design

TIME

Source: P. Anderson and M.L. Tushman. 1990. Technological Discontinuities and Dominant Designs: A Cyclical Model of Technological Change. Administrative Science Quarterly, Vol. 35, nr 4, s. 604–634.

The PV technology is now in the era of ferment. This period in innovation development requires very profound knowledge on the product and its components. Photovoltaics is at the stage of developing a model architecture – now it is based on various types of silicon as semi-conductors; however, many companies are already involved on developing completely new methods within the technology, characterised with both higher efficiency and lower costs. Each innovation in semi-conductor technology arises controversies and stimulates the market to look for more efficient solutions; however, those companies that have decided that silicon is the best available semi-conductor keep investing in testing other components of photovoltaic systems and on the basis of the results try to reduce costs and improve efficiency. By patenting the technologies, all companies irrespective of the selected production method, will contribute to reaching technological maturity by photovoltaics.

8. Strategy examples of companies relating to the three levels of disruption

Nanosolar Inc., established in 2002, is one of the most innovative companies in the sector manufacturing elements of photovoltaic systems. Its industrial property is protected by 14 patents (USPTO 2009) and access to details on the product is afforded solely to those clients who have signed a confidentiality agreement with company.

The technology used by the company is based on an innovation of the semi-conductor used in photovoltaic technology. CIGS (semi-conductor based on copper,


indium, gallium and selenium) has very high efficiency (in laboratory conditions 19.5%), similar to a standard and so far most efficient monocrystal silicon (20.3%) (Miles 2006) while its production is much less expensive than of silicon.

Another innovation introduced by Nanosolar is the distribution method of the semi-conductor – by printing CIGS on a metal substrate (instead of glass or plastic like with silicon semi-conductors). Such application method clearly simplified the technology since the substrate in this case is used to transfer voltage without a need to install other conducting elements that exist in silicon panels. Another advantage of overprinting is also a reduction in the quantity of semi-conductor required to convert solar light into electrical energy.

However, the most important modification introduced by Nanosolar is the possibility to overprint CIGS anywhere energy is required – it does not require any special surrounding and perfectly functions in clean air.

After years of extensive R&D work (Nanosolar 2009), the company reach production costs of USD 0.3 /Wp (Wp – Watt peak characterises energy production in ideal conditions of 1000 Watt of light intensity per square metre at 25°C) and sale costs of about USD 0.9/W (Mackintosh 2007) which – once the technology is commercialised will be a great step ahead in competing with non-renewable sources. The company still has a long way ahead of it to commercialise and consolidate its product in the market. Mass production of the technology may obviously reduce the achieved efficiency (Kanellos 2008). Additionally, reports on shrinking resources of gallium and indium (Cohen 2007) make companies look for innovations (semi-conductors) characterised by similar or greater efficiency than Nanosolar products.

Replacement of silicon semi-conductors with CIGS shows a clear trend of the company to focus on the third level of disruption. By achieving high efficiency and cost reduction, the company will revolutionise the photovoltaic sector, setting new standards for companies that are already successful in the market and for new entrants. However, it is worth noting that by commercialising the products Nanosolar has a chance not only to beat competitors in the sector but also to revolutionise the entire energy market. If the promises offered by the company prove true, solar photovoltaics for the first time will turn to be competitive to coal (current coal price is about USD 2 /W without allowing for the CO2 emission costs) (Markoff 2007), and the Nanosolar product will disrupt all three levels of competition.

1366 Technologies has followed a different path to Nanosolar. The company manufacturing elements of photovoltaic systems based its product on silicon as a reliable and available materials to produce photovoltaic cells. Since silicon is characterised with the highest efficiency (Miles 2006), the company has been focusing its investments on developing and improving the semi-conductor .

In accordance with press reports (Gatineau 2008; Bullis 2008; LaMonica 2008), the company – with a special connection between multicrystal, porous silicon cells has achieved major improvement of silicon modules (up to 19.5%) which is


comparable to monocrystal silicon used so far, however more expensive (Gatineau 2008). The innovation of 1366 Technologies, with its grooved structure of solar cells, bends the light inside the sells, preventing it from reflecting outside and thus absorbing more of it and producing more energy. Additionally, 1366 Technologies instead of wires powered from the cell and blocking light access to that part, applied flat mirrors reflecting light which also improved efficiency.

In October 2008 the company opened a pilot power plant (1366 Technologies) which is expected to show real potential to apply the technology on a mass scale. In accordance with the assumptions made by 1366 Technologies, if the power plant reaches the promised efficiency, the price of solar energy will drop to USD 1 /W and will become competitive to non-renewable energy (Bullis 2008).

The path elected by 1366 Technologies may produce a great success to the company since with almost inexhaustible resources of silicon (silicon is the main element of silicates and quartz sand), investments in R&D will only improve the efficiency. Similarly to Nanosolar, 1366 Technologies has been focusing on the third level of disruption. By improving the dominant silicon-based product architecture, the company may disrupt the PV sector. Additionally, also with cost reduction to a level at which photovoltaics proves cheaper than non-renewable energy sources, 1366 Technologies may become a leader setting standards of efficiency for the entire energy sector.

The main barrier to diffusion to the photovoltaic technology is its high cost but – as examples show – many companies have been trying to reduce the cost while maintaining or even increasing the efficiency. Competition within the photovoltaic sector forces companies like 1366 Technologies and Nanosolar to look for innovative and efficient solutions that will not only improve technologies and reduce prices but will also force increased innovation in the entire energy sector.

There are many companies that have been trying to revolutionise the energy market and the two described above show only two development ways of the same idea. Since the dominant photovoltaic architecture keeps being developed, no doubt other companies will soon launch new innovations and again the photovoltaic market will be disrupted at the level of efficiency, price or both at the same time. It is worth noting a growing number of innovations in the entire energy sector. A reduced number of wind mills with their unchanged efficiency, modification of their operation from horizontal to vertical, implementation of modern methods to construct water dams and application of new semi-conductors in photovoltaic technologies – all those changes in the future will intensify the competitiveness of the entire sector of renewable energy and will revolutionise the market now dominated by gas and oil.


9. Summary

Each disrupting innovation has to face several levels of competition before it is commercialised. With a skilful selection of the development path and formation of competitive edge it may become a leader in the sector. Just like in case of the energy market, it may turn out that the technology does not compete solely against a solution developed in the traditional market but also against innovations based on a completely different technology with only similar properties – perceiving the situation is very important for a company entering the market since this helps understand the functioning of the market as a whole.

It is very important to know that technologies never exist in the market on their own with the environment around them being composed of many inter-related sub-systems. As noted by Arthur (1996), commercial success of a company largely depends on understanding all signals and relations among market players and even if the company fails with entering the market with an innovative product at a specific moment, a full understanding of market relationships provides the company with a possibility to commercialise an improved product in a subsequent cycle. Allowing for the three disruption levels in developing a company’s strategy provides it with full understanding of the market and facilitates efficient functioning in the future.

During its over 30 years of existence in the energy market, photovoltaic technology has proven its innovative character in solving the problem of clean energy supplies. A very high development rate and major cost reductions increasingly affect potential investors. A growing number of specialist government programs supporting the specific energy solution supports that the technology is right. However, in many countries photovoltaics continues to be considered a niche technology and too complex for commercial application.

Obviously, diffusion of photovoltaics will be a lengthy and difficult process and the results of the commercialisation will largely affect future generations; however, pessimistic information on environment pollution (Kovats and Haines 2005) as well as depletion of traditional energy sources (Kunstler 2005; Global Wind Energy Council 2006; Swartz 2008) already motivate to ecological investments. All new energy technologies continue to be characterised with very high costs and therefore a strong support on the part of government institutions is required for future commercialisation. The learning curves developed by producers of renewable energy sources show that they have a chance to change the energy system in the world. Disruption of all the three levels by photovoltaic technology may lead to development of a profitable energy sector and also help solve the problem of clean and safe energy in the future.

Irrespective of the fact if photovoltaics will share the market with wind energy, biomass or water energy, if it is going to be based on silicon or another more efficient semi-conductor, its commercialisation in the future may contribute to changing the entire energy market.


Information about the author Katarzyna Osmólska, MA – graduate from the Management Faculty of the Uni-versity of Warsaw. E-mail: [email protected].

Bibliography

1366 Technologies. 2009. 1366 Technologies Overview, http://1366tech.com.Abernathy, J. W and M.J. Utterback. 1995. Patterns of industrial innovation, w: Burgelman, A.R.,

Maidique, A.M. and C.S. Wheelwright (red.) Strategic Management of Technology and Innovation, s. 154–160. Chicago: Irwin Professional Publishing.

Anderson, P. and M.L. Tushman. 1990. Technological discontinuities and dominant designs: A cyclical model of technological change. Administrative Science Quarterly, Vol. 35, nr 4, s. 604–634.

Arthur, W.B. 1989. Competing technologies: increasing returns and lock-in by historical events. The Economic Journal, nr 99 (394), s. 116–131.

Arthur, W.B. 1996. Increasing returns and the new world of business. Harvard Business Review, Vol. 74, nr 4, s. 100–109

Austrian Energy Agency. 2009. http://www.energyagency.at/enercee/el_res.htm.Bower, J.L. and C.M. Christensen. 1995. Disruptive technologies: catching the wave. Harvard Business

Review, Vol. 73, nr 1, s. 172–172.Bullis, K. 2008. More-powerful solar cells A new solar cell is 27 percent more efficient without

being more expensive to make. Technology Review, March 27th, http://www.technologyreview.com/Energy/20476.

Christensen, C., Craig, T. and S. Hart. 2001. The great disruption. Foreign Affairs, Vol. 80, nr 2, s. 80–96.

Cohen, D. 2007. Earth’s natural wealth: an audit. NewScientist.com, May 23rd, http://www.science.org.au/nova/newscientist/027ns_005.htm.

Earth Policy Institute. 2007. http://www.earth-policy.org.EIA. 2008. Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2008).pdf.Fischer, C. and R. Newell. 2004. Environmental and technology policies for climate change and renewable

energy. Resources for the future, discussion paper, nr 04–05, http://www.rff.org/rff/Documents/RFF-DP-04-05.pdf.

Flasolar. 2009. http://www.flasolar.com.Gatineau, M.G.R. 2008. 1366 Technologies is bringing solar power closer to $1/Watt. Treehugger,

z dn. 27.03.08, http://www.treehugger.com/files/2008/03/1366-technologies-solar-power-energy-panels.php.

Global Wind Energy Council. 2006. Plugging The Gap: A Survey of World Fuel Resources and Its Impact on the Development of Wind Energy, September, http://www.gwec.net/uploads/media/RESGWEC-_Plugging_the_Gap_report_01.09.06.

Harmon, C. 2000. Experience Curves of Photovoltaic Technology. Interim Report, Laxenburg: International Institute for Applied Systems Analysis.

Henderson, M.R. and B.K. Clark. 1995. Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms, w: Burgelman, A.R, Maidique, A.M. and C.S. Wheelwright (red.) Strategic Management of Technology and Innovation, s. 401–415. Chicago: Irwin Professional Publishing.

Hong, Y., He, W., Huacong, Y., Jianping, X., Rongqiang, C. and C. Guangde. 2003. Status of photovoltaic industry in China. Energy Policy, Vol. 31, nr 8, s. 703–707.

IEA. 2002. Market deployment strategies for PV systems in the built environment – An evaluation of Incentives, Support Programmes and Marketing Activities, http://www.iea-pvps.org/products/download/rep7_06.pdf.


IMiGW. 2009. http://www.imgw.pl/index.php.Kamrat, W. 2003. Energetyka odnawialna w bilansie energetycznym Polski, Rynek Energii, nr 2 (45),

s. 25–30.Kanellos, M. 2008. CIGS cell makers battle it out for efficiency crown. CNET News, January, http://www.

news.com/CIGS-cell-makers-battle-it-out-for-efficiency-crown/2100-13840_3-6227812.html.Kaplan, W.A. 1999. Generating interest, generating power: commercializing photovoltaics in the utility

sector. Energy Policy, Vol. 27, nr 6, s. 317–329.Kovats, R.S. and Haines A. 2005. Global Climate change and health: recent findings and future steps.

Canadian Medical Association Journal, Vol. 172, nr 4, s. 501–502.Kunstler, J.H. 2005. The long emergency. Rolling Stone, http://www.rollingstone.com/news/story/7203633/

the_long_emergency.LaMonica, M. 2008. MIT spinoff shoots for solar power at $1 per watt. CNET News, March, http://news.

cnet.com/8301-11128_3-9903728-54.html?part=rss&subj=news&tag=2547-1_3-0-20.Mackintosh, C. 2007. Nanosolar update – first panels now shipping. Celsias, http://www.celsias.com/

article/nanosolar-update-first-panels-now-shipping.Markoff, J. 2007. Start-up sells solar panels at lower-than-usual cost. The New York Times, http://www.

nytimes.com/2007/12/18/technology/18solar.html?_r=1&ref=technology.McDonald, A. and L. Schrattenholzer. 2001. Learning rates for energy Technologies. Energy Policy,

Vol. 29, nr 2, s. 255–261. Miles, R.W. 2006. Photovoltaic solar cells: choice of materials and production methods. Vacuum, Vol. 80,

nr 10, s. 1090–1097.Moore, A.G. 1999. Crossing the Chasm, Marketing and Selling High-Tech Products to Mainstream Customer,

New York: HarperCollins Publishers.Nanosolar. 2009. http://www.nanosolar.com.Nemet, F.G. 2005. Beyond the learning curve: factors influencing cost reductions in photovoltaics.

Energy Policy, Vol. 34, nr 17, s. 3218–3232.Photonics.com. 2008. PV Efficiency Hits 25%, http://www.photonics.com/Content/ReadArticle.

aspx?ArticleID=35469.Schumpeter, A.J. 1994. Capitalism, Socialism and Democracy, London: Routledge.Shaw, W.R., Jr. 2003. Microgeneration technology: Shaping Energy Markets. The Bridge, Vol. 33, nr 2.

National Academy of Engineering Publication.Solarbuzz. 2008, Marketbuzz™ 2008: Annual World Solar Photovoltaic Industry Report, http://www.

solarbuzz.com/Marketbuzz2008-intro.htm.Swartz, M. 2008. The Gospel According to Matthew. Texas Monthly, February, http://www.texasmonthly.

com/preview/2008-02-01/feature2.Tsoutsos, D.T. and A.Y. Stamboulis. 2005. The sustainable diffusion of renewable energy technologies

as an example of an innovation-focused policy. Technovation, nr 25, s. 753–761.United States Patent and Trademark Office. 2009. USPTO Patent Full-Text and Image Database, http://

patft.uspto.gov/netahtml/PTO/search-bool.html.Wene, C.O. 2000. Experience Curves for Energy Technology Policy 2000, OECD/IEA, http://www.iea.

org/textbase/nppdf/free/2000/curve2000.pdf.Wene, C.O. 2000. Stimulating Learning Investments for Renewable Energy Technology, IEA, http://www.

iiasa.ac.at/Research/ECS/june99/papers/wene.pdf.Wiser, R., Barbose, G. and C. Peterman. 2009. Tracking the sun, the installed cost of photovoltaics

in the US from 1998–2007, Lawrence Berkeley National Laboratory, http://eetd.lbl.gov/EA/EMP/reports/lbnl-1516e.pdf.

World Future Council. 2007. Feed in tariffs – boosting energy for our future, http://www.worldfuturecouncil.org/fileadmin/user_upload/Rob/press/publications/Feed-inGuidePrint.pdf.


Marian GórskiKrzysztof Chrust

Umbrella funds in Poland – effectiveness and risk of investment strategies

1. Introduction

Within the last two decades, placements in investment funds have become a key method to make savings by small investors worldwide. At the beginning of 21st century, the number of such investment funds in the USA exceeded the number of companies at the New York Stock Exchange.1 Now investment funds have also become a key element of our own domestic financial market. As compared to securities such as bonds and stocks, investment funds offer an advantage of investment liquidity and diversification at a relatively low cost.

Additionally – acting as financial intermediaries, issuers or institutional investors in capital markets – funds represent both demand for and supply of cash capital (Gabryelczyk 2006: 13). Their operation via elastic transfer of savings from natural persons and periodical surplus liquidity to economic entities requiring capital, positively affects the effectiveness of capital allocation and contributes to national economic growth.

Although there have been many publications on investment funds, few of them were devoted to the subject of profitability and effectiveness of umbrella funds operating in Poland. The idea behind the funds which was mainly to provide a shield against the tax on capital gains introduced in 2004 was introduced for the first time in the first quarter 2005. Earlier there had been no such need or even legal regulations since a provision on a possibility to create funds with separate sub-funds was incorporated in the last Act on investment funds of 27 May 2004. As a result of the modification, umbrella funds started to be set up. That was achieved in two ways:by establishing completely new umbrella funds or by transformation of existing

traditional funds into sub-funds of one umbrella fund.The objective of this article is to evaluate the effectiveness and quality of

investment decisions within specific umbrella funds in Poland. The effectiveness

1 In accordance with the report of Investment Company Institute Mutual Funds Factbook of 2002, in the USA there were over 8000 investment funds as compared to 2800 companies listed at the New York Stock Exchange.

160 MARIAN GÓRSKI, KRZYSZTOF CHRUST

of investments is measured with a simple rate of return generated by participation units. The quality of investment decisions will be evaluated in two aspects: – risk premium that each sub-fund was achieving in their respective segments of

financial markets. In this aspect, it is the investment company (asset management company) that is responsible for the quality of investment decisions.

– premium for active management of client’s individual investment portfolio reflected in the frequency and correctness of sub-fund change within one umbrella fund. In this aspect it is the investor who is responsible for the quality of investment decisions. The evaluation of the effectiveness and quality of investment decisions was

made on the basis of daily quotations of rates of return of sub-fund participation units for the period from 1 January 2001 until the end of March 2008. As stressed earlier, umbrella funds started operation only after 2004 and therefore the earlier period of the analysis applies to traditional funds transformed into umbrella funds (e.g. Skarbiec FIO, SEB FIO, UniFundusze FIO).

2. The structure or umbrella funds and legal regulations in the Polish market

The structure of umbrella funds was introduced to the Polish financial market with the Act on investment funds of 27 May 2004. However, the development of such funds was slowed down until the entry into force in October 2005 of the Act on financial instrument trading which regulated various legal and tax issues by amending e.g. the Act on personal income tax (art. 17.1c).

Fig. 1. Umbrella fund and its sub-funds

Umbrellafund

Sub-fund Sub-fund II Sub-fund III Sub-fund IV

Source: Authors’ study.

Umbrella fund is a combination of various sub-funds into one legal entity within one Investment Fund Company. Within one investment fund, the Investment Fund Company may set up any number of sub-funds following various investment policies, such as sub-funds specialised in aggressive stock investments, sub-funds aimed at protecting the entrusted capital or sub-funds specialised in investments in selected sectors or countries. During its life, funds may adjust to the changing

Umbrella funds in Poland – effectiveness and risk of investment strategies 161

market by creating new sub-funds without being required to follow the lengthy procedure with the Polish Financial Supervision Authority (KNF) it is possible to (as long as such sub-funds are specified in the fund’s by-laws, such set up of new sub-funds does not even require an amendment to the by-laws2) and by closing the exiting sub-funds in a simplified manner (if provided for in the fund’s by-laws which should specify the reasons as well as detailed manner, rules and conditions of sub-fund closing3).

An advantage of such structure for fund participants is a possibility to postpone – until final exit from the fund – of the need to pay the tax on capital gains at 19% while there is a possibility to get adjusted to the changing market situation by active allocation in sub-funds following different investment strategies. The investor’s rate of return and tax shield become higher in relation to a rate of return realisable with investments into standard funds with the time of investments kept in one umbrella fund and the frequency of changes of sub-funds.

An additional tax shield is provided to investors by a possibility to set-off gains and losses. This is specified in art. 17.1c of the Act on personal income tax providing that in case of a change of sub-fund units into units of another sub-fund within the same fund, no income on redemption of such sub-fund units is assessed. The term of exchange of units, pursuant to art. 162.3 of the Act on investment funds4, is understood as simultaneous redemption of participation units in a sub-fund of an investment fund with separated sub-funds and purchase with the redemption proceeds of participation units in another sub-fund of the same umbrella fund. This aspect of the umbrella fund structure is very favourable to investors who actively manage their investment portfolios, frequently transferring monies among various sub-funds.

For long-term investors within the same category of sub-funds, the difference between ordinary funds and umbrella funds will be of minor importance. On the other hand, such structure is a means for TFI to retain clients who will not be forced to change the fund to change their investment strategy.

Apart from the faster procedure of launching and liquidating an umbrella fund as related to a traditional fund, another major advantage is a much lower capital requirement. Pursuant to art. 15.2 of the Act on investment funds, setting up of a new fund requires a seed capital of minimum PLN 4,000,000. Art. 159.2 of the Act further specifies that the same principle is applied to an entire umbrella fund. Since an umbrella fund may have more than one sub-fund, the capital requirement per one sub-fund is much lower. The provision has a positive effect on the financing costs incurred by shareholders of TFI which is translated e.g. into lower fund management fees charged to investors.

A weakness of Polish investment funds with separate sub-funds is the provision stating that sub-fund participation units may not differ with respect to the method

2 Pursuant to art. 165.1 of the Act on investment funds of 27 May 2004.3 Pursuant to art. 165.1 of the Act on investment funds of 27 May 2004.4 Art. 162.3 was added by the Act on financial instrument trading of 8 July 2005.


of collecting fees to the debit of fund assets5. A possibility to offer units with varied management fees, as in ordinary funds, provides for flexibility of adjusting the offer of funds to various client groups while on the other hands it prevents general transformation of existing funds into umbrella funds.

The situation would have been resolved with an amendment to the Act on investment funds whose draft was accepted by the Government on 20 March 2007. Unfortunately, the Parliament did not manage to approve it before accelerated elections and the work on the bill was much delayed.

It was only at the beginning of January 2008 that the amendment bill was forwarded by the Parliament to the public finance commission and it is now pending. Apart from repealing the provision that prohibited umbrella funds to sell participation units with different methods and amounts of fund management fees, the amendment modifies the provisions of art. 240 – 245 of the Act that regulate the transformation method of open-end funds in sub-funds of umbrella funds. The procedures applicable to transformation of funds and making entries to the register of investment funds have been simplified and shortened.

The period for the effectiveness of amendments to the by-laws of umbrella funds concerning the setting up of a new sub-fund has been shortened from three months to the date when the new by-laws are published. The period has been shortened to one month with respect to issue permits for: performing operations by investment fund companies, portfolio management and investment advisory services. In justified instances, KNF will be able to extend the period up to two months.

3. Development and current status of umbrella funds in Poland

Unregulated legal issues originally did not stimulate investment fund companies to establish funds with separate sub-funds. Only three such funds had been launched before the amendment to the tax legislation. The first to function was Fortis FIO (with 2 sub-funds) which was set up in January 2005 that is six months after the effective date of the Act on investment funds. Almost parallel other funds started to operate in the market: Millenium SFIO Funduszy Zagranicznych (originally with 5 sub-funds and ultimately, after 4 months, with 10 sub-funds) and Lukas FIO (with 2 sub-funds) which had been transformed from Lukas Stabilnego Wzrostu.

At the end of 2005 more funds were set up with separate sub-funds: Superfund SFIO (with 3 sub-funds) and PKO/Credit Suisse Światowy Fundusz Walutowy SFIO (with 5 sub-funds). Afterwards, the process of launching new funds was slowed down for a while due to a very long review process by the Polish Financial Supervision Authority.

It was only in the second quarter 2006 when there was acceleration and expansion of the offer of umbrella funds. Three new funds were set at that time: KBC

5 Pursuant to art. 162.4 of the Act on investment funds of 27 May 2004.


Portfel VIP SFIO (with 3 sub-funds), Pioneer Funduszy Globalnych SFIO (with 3 sub-funds), ING Parasol SFIO (as twin sub-funds to the existing funds). More funds were entered in the register of investment funds in November: Commercial Union SFIO (CU TFI was the first investment fund company which obtained the consent of KNF to transfer five operating open-end funds into umbrella funds), PZU SFIO Funduszy Zagranicznych (with 4 sub-funds) and Noble Funds FIO (with 3 sub-funds).

At about the same time PKO TFI extended the offer of its PKO/CS Światowy Fundusz Walutowy with 3 more sub-funds and Lukas FIO was extended by 2 sub-funds. At the beginning of 2007, the offer of umbrella funds was extended by Opera FIO (with 2 sub-funds) and AIG SFIO Parasol Podatkowy (12 sub-funds investing in units of AIG open-end funds).

In May the protective structure was awarded to SEB FIO (composed of SEB1, SEB2, SEB3, SEB4 and SEB5 that had been functioning in the Polish market for a long time). More umbrella funds were set up in the second half of the year.

The following were transformed from existing open-end funds: UniFundusze FIO (10 sub-funds), Allianz FIO (6 sub-funds) and Skarbiec FIO (8 sub-funds). In November SEB launched a specialist open-end fund composed of six sub-funds investing in foreign markets.

Apart from open-end umbrella funds, there were also two closed-end umbrella funds operating in the market: FIZ Partycypacyjny (composed of 6 sub-funds), managed by Skarbiec FIO and FIZ Meritum (2 sub-funds of non-public assets) managed by Hexagon TFI. At the end of 2007 the market was composed of 20 open-end umbrella funds comprising 136 sub-funds and 2 closed-end umbrella funds, offering jointly 8 funds.

In the first three months of 2008, three new open-end umbrella funds were launched: DWS Parasol SFIO (with 6 sub-funds), KBC Parasol FIO (with 5 sub-funds) and Pioneer FIO (with 4 sub-funds); and 2 closed-end umbrella funds: MCI.PrivateVentures FIZ (with 2 sub-funds), managed by MCI Capital TFI and Allianz FIZ (1 sub-fund). At the same time, the number of sub-funds functioning within the existing umbrella funds was increased by four: Subfundusz Akcji Europy Wschodniej was an addition to the offer of the specialist fund Pioneer Fundusz Globalny and three new sub-funds (Rynków Surowcowych, Akcji Nowej Europy and Sektora Finansowego Nowej Europy) were added to Skarbiec FIO.

At the end of the first quarter 2008 in Poland there were 23 umbrella funds, jointly offering 149 sub-funds. An average umbrella fund was offering its clients a selection of 6.77 sub-funds. The broadest offer of 18 sub-funds was held by UniFundusze FIO.

164 MARIAN GÓRSKI, KRZYSZTOF CHRUSTTa

ble

1: U

mbr

ella

fund

s wi

th th

e nu

mbe

r of

sub

-fund

s (a

s at

the

end

of M

arch

200

8)

No.

U

mbr

ella

fun

ds

Com

men

cem

ent

date

*N

umbe

r of

sub

-fu

nds*

*

Aver

age

daily

ra

te o

f re

turn

(a

rith

m.)*

**

Stan

dard

de

viat

ion

WS**

**W

G**

**

23

45

67

8

1Su

perf

und

SFIO

05.1

2.20

053

0,07

542,

4666

0,01

130,

0113

2O

pera

SFI

O28

.02.

2007

20,

0730

0,11

010,

3874

0,39

15

3Al

lianz

FIO

28.0

1.20

04

(07.

2007

)9(

6)0,

0600

0,79

180,

0565

0,05

80

4PK

O/C

S Pa

raso

lowy

SFI

O30

.05.

2007

40,

0504

0,90

960,

0389

0,03

90

5Fo

rtis

FIO

19.0

1.20

052(

2)0,

0497

0,86

240,

0365

0,03

66

6C

omm

erci

al U

nion

SFI

O

05.0

4.20

02

(11.

2006

)6(

5)0,

0384

0,43

460,

0752

0,07

90

7Lu

kas

FIO

05.0

5.20

03

(07.

2005

)4(

1)0,

0343

0,62

32-0

,006

3-0

,010

2

8SE

B FI

O

01.0

6.19

98

(05.

2007

)5

0,03

320,

4261

0,05

300,

0592

9K

BC

Par

asol

FIO

20.1

2.20

02

(01.

2008

)5

0,02

000,

5197

0,04

390,

0462

10Sk

arbi

ec F

IO09

.10.

1997

(0

7.20

07)

12(9

)0,

0150

0,36

660,

0244

0,03

81

11Pi

onee

r FI

O01

.08.

2005

(0

1.20

08)

40,

0121

0,42

920,

0066

0,00

68

12U

niFu

ndus

ze F

IO09

.08.

1995

(0

7.20

07)

18(1

0)0,

0021

0,71

72-0

,005

6-0

,000

9

13N

oble

Fun

ds21

.11.

2006

5(4)

-0,0

082

0,92

00-0

,033

2-0

,033

6


Mill

enni

um S

FIO

Fun

dusz

y Za

gran

iczn

ych

28.0

2.20

0510

(5)

-0,0

261

0,58

45-0

,073

7-0

,073

8

15Pi

onee

r Fu

ndus

zy G

loba

lnyc

h SF

IO05

.05.

2006

8(1)

-0,0

295

0,98

21-0

,048

1-0

,048

1

16IN

G P

aras

ol S

FIO

21.0

6.20

069(

6)-0

,031

20,

8584

-0,0

269

-0,0

268

17

Allia

nz G

loba

lny

SFIO

13

.07.

2007

8(5)

-0,0

325

0,84

96-0

,000

6-0

,000

5

18K

BC

Por

tfel

VIP

SFIO

03.0

4.20

064(

3)-0

,036

10,

7662

-0,0

104

-0,0

089

19

AIG

SFI

O P

aras

ol P

odat

kowy

10.0

1.20

0712

-0,0

524

0,74

25-0

,075

9-0

,075

8

PR

ZEC

IĘTN

Y FU

ND

USZ

xx

-0,0

152

0,70

33-0

,018

1-0

,016

1

20PZ

U S

FIO

Fun

dusz

y Za

gran

iczn

ych

20.1

1.20

064

-0,0

578

0,40

38-0

,180

5-0

,181

3

21PK

O/C

S Św

iato

wy F

undu

sz W

alut

owy

SFIO

03.1

1.20

059(

5)-0

,058

70,

8332

-0,1

536

-0,1

577

22SE

B SF

IO02

.11.

2007

6-0

,192

61,

4125

-0,1

553

-0,1

554

∑

149

*

the

date

ref

ers

to t

he e

stab

lishm

ent

of t

he f

irst

sub

-fun

d, i

n th

e pa

rent

hese

s th

ere

is t

he t

rans

form

atio

n da

te i

nto

an u

mbr

ella

fun

d**

as

at

31.0

3.20

08, i

n th

e pa

rent

hese

s th

ere

is t

he e

stab

lishm

ent

date

of

an u

mbr

ella

fun

d **

*

cove

rs t

he p

erio

d fr

om 0

1.01

.200

1 or

the

est

ablis

hmen

t of

the

fir

st s

ub-f

und,

unt

il 31

.03.

2008

**

** W

S an

d W

G in

dice

s ar

e de

fined

and

ana

lyse

s on

p. 6

0 an

d 61

. T

he t

able

doe

s no

t in

clud

e D

WS

Para

sol

SFIO

set

up

as a

com

plet

ely

new

um

brel

la f

und

on 2

8.01

.200

8.

Sour

ce:

Aut

hors

’ stu

dy.


4. Simple and risk-weighted rates of return of umbrella funds in Poland 2001 – Q1 2008

In compliance with a verified financial paradigm, investment funds as funds with a variable structure of financial instruments from various investment categories, are characterised with variable income and inherent risk.

Income is measured with rate of return. A simple rate of return on funds is a quotient of the difference of the difference of the unit value on the last working day of a period (e.g. month, quarter, year) and the unit value from the preceding day.

Simple rate of return =WRJt – WRJt-1

WRJt-1

where: WRJt – market value of a participation unit at the end of period t (year, quarter,

month, day),WRJt-1 – market value of a participation unit at the end of a corresponding preceding period.

The analysis was based on daily rates of return to enable comparison of rates of return of sub-funds operating in various periods.

The moment of commenced operation of each umbrella fund was specified in column 2 of table 2. The oldest funds were set up in 1995 (UniFundusze) and 1998 (SEB). As at 01.01.2001 there were 15 funds, subsequently transformed into sub-funds by three fund management companies: Skarbiec (6), SEB (4), UniFundusze (5).

In our opinion, that was a sufficient number to commence the research.Unfortunately, a general evaluation of effectiveness of investments in umbrella

funds on the basis of simply daily rates on return on participation units is not positive. An average sub-fund was generating a daily loss of 1.52 bp6. Rates of return generated by specific funds largely vary which is confirmed with the high standard deviation of 70.33 bp. The largest daily rates of return were generated by three sub-funds from the Superfund group (7.54 bp) and two sub-funds from the Opera group (7.3 bp). In the period under research, 12 umbrella funds generated profit and 10 generated losses. The largest daily loss (-19.26 bp) was specified for 6 specialist sub-funds set up in December 2007 by SEB.

Table 2 presents daily rates of return of umbrella funds split by type. Among 149 analysed funds, the most numerous group comprises stock (59) and mixed (55)

6 1 percentage point (pp) = 100 basis points (bp).

Umbrella funds in Poland – effectiveness and risk of investment strategies 167Ta

ble

2. D

aily

rat

es o

f ret

urn

of u

mbr

ella

sub

-fund

s by

type

No.

Ty

pe o

f fu

nd

Com

men

cem

ent

date

of

the

fir

st s

ub-

fund

*

Num

ber

of

sub-

fund

s**

Aver

age

daily

ra

te o

f re

turn

(a

rith

m.)

Stan

dard

de

viat

ion

WS*

**W

G**

**

ISt

ock

fund

s 01

.01.

2001

59-0

,042

81,

1318

-0,0

491

-0,0

497

Fund

with

max

. rat

e of

ret

urn

Alli

anz

Bud

owni

ctw

o 20

12 (

21.1

1.20

07)

XX

0,15

141,

7003

0,07

190,

0719

Fund

with

min

. rat

e of

ret

urn

Pion

eer

Akc

ji E

urop

y W

scho

dnie

j (0

8.01

.200

8)

XX

-0,2

874

1,19

53-0

,258

9-0

,259

0

I.1D

omes

tic m

arke

t st

ocks

01

.01.

2001

160,

0301

1,23

340,

0075

0,00

76

I.2E

urop

ean

mar

ket

stoc

ks

23.0

6.20

069

-0,1

161

1,06

97-0

,103

9-0

,104

0

I.3U

S m

arke

t st

ocks

26

.11.

2006

2-0

,096

91,

1808

-0,0

992

-0,0

993

I.4A

sia

Paci

fic m

arke

t st

ocks

03

.11.

2005

6-0

,062

41,

3363

-0,0

453

-0,0

453

I.5St

ocks

– o

ther

12

.03.

2001

12-0

,027

50,

8202

-0,0

350

-0,0

375

I.6SM

E s

tock

s –

dom

estic

01

.08.

2007

4-0

,042

61,

3890

-0,0

502

-0,0

502

I.7SM

E s

tock

s –

Eur

opea

n 10

.01.

2007

3-0

,195

51,

2777

-0,1

689

-0,1

690

I.8SM

E s

tock

s –

othe

r 10

.04.

2007

1-0

,097

91,

1829

-0,1

000

-0,1

001

I.9Se

ctor

al s

tock

s –

dom

estic

21

.11.

2007

10,

1514

1,70

030,

0719

0,07

19

I.10

Sect

oral

sto

cks

– E

urop

ean

07.0

5.20

063

0,08

631,

1027

-0,0

868

-0,0

869

I.11

Sect

oral

sto

cks

– ot

her

12.1

1.20

072

-0,0

508

0,80

54-0

,099

2-0

,099

3

IIM

ixed

fun

ds

01.0

1.20

0155

0,01

310,

6885

-0,0

091

-0,0

089

Fund

with

max

. rat

e of

ret

urn

Supe

rfun

d Su

bfun

dusz

B (

05.1

2.20

05)

XX

0,09

302,

410,

0201

0,02

01(+

)

Fund

with

min

. rat

e of

ret

urn

AIG

Sub

fund

usz

Zró

wno

waż

ony Św

iato

wy

(10.

01.2

007)

X

X-0

,070

90,

6962

-0,1

239

-0,1

242(

+)

II.1

With

cap

ital

prot

ectio

n –

dom

estic

09

.06.

2006

40,

0339

0,39

730,

0563

0,05

65

II.2

Stab

le g

row

th –

dom

estic

01

.01.

2001

120,

0360

0,42

690,

0520

0,05

27

168 MARIAN GÓRSKI, KRZYSZTOF CHRUSTII

.3St

able

gro

wth

– E

urop

ean

01.0

8.20

051

0,01

000,

3057

-0,0

085

-0,0

085

II.4

Stab

le g

row

th –

oth

er

28.0

2.20

055

-0,0

315

0,51

01-0

,102

6-0

,102

9

II.5

Bal

ance

d –

dom

estic

01

.01.

2001

120,

0270

0,77

920,

0121

0,01

22

II.6

Bal

ance

d –

Eur

opea

n 01

.08.

2005

3-0

,001

80,

6926

-0,0

231

-0,0

232

II.7

Bal

ance

d –

Asi

a Pa

cific

10

.01.

2007

1-0

,064

70,

7038

-0,1

139

-0,1

141

II.8

Bal

ance

d –

othe

r 28

.02.

2005

7-0

,015

50,

6191

-0,0

584

-0,0

586

II.9

Oth

er –

dom

estic

21

.06.

2006

20,

0367

0,84

900,

0245

0,02

45

II.1

0O

ther

– o

ther

28

.02.

2005

80,

0102

1,26

68-0

,053

4-0

,053

6

III

Deb

t fu

nds

01.0

1.20

0125

-0,0

017

0,24

90-0

,019

1-0

,017

2

Fund

with

max

. rat

e of

ret

urn

Uni

koro

na O

blig

acje

(26

.04.

2004

)X

X0,

0312

0,13

650,

0994

0,10

82(+

)

Fund

with

min

. rat

e of

ret

urn

AIG

Su

bfun

dusz

Obl

igac

ji Św

iato

wyc

h (1

0.01

.200

7)

XX

-0,0

939

0,59

25-0

,183

3-0

,183

8(+

)

III.1

Inve

stin

g in

PL

N

01.0

1.20

0114

0,01

800,

1057

0,02

080,

0241

III.2

Inve

stin

g in

USD

26

.04.

2004

3-0

,065

20,

6544

-0,1

255

-0,1

258

III.3

Inve

stin

g in

EU

R

03.1

1.20

051

-0,0

163

0,42

38-0

,069

3-0

,069

5

III.4

Inve

stin

g in

CH

F 03

.11.

2005

1-0

,026

30,

5502

-0,0

725

-0,0

727

III.5

Inve

stin

g in

GB

P 03

.11.

2005

1-0

,046

10,

5498

-0,1

086

-0,1

089

III.6

With

out

basi

c cu

rren

cy

05.0

4.20

025

-0,0

021

0,25

14-0

,028

2-0

,027

7

IVM

oney

mar

ket

fund

s 01

.01.

2001

100,

0175

0,03

120,

1012

0,12

73

Fund

with

max

. rat

e of

ret

urn

Uni

Kor

ona

Pien

iężn

y (0

1.01

.200

1)

XX

0,02

680,

0426

0,21

660,

2930

(+)

Fund

with

min

. rat

e of

ret

urn

Luk

as L

okac

yjny

(03

.11.

2006

) X

X0,

0097

0,01

78-0

,169

4–0

,185

6(+

)

Inve

stin

g in

PL

N

01.0

1.20

0110

0,01

750,

0312

0,10

120,

1273

The

tab

le d

oes

not

incl

ude

DW

S Pa

raso

l SF

IO s

et u

p as

a c

ompl

etel

y ne

w u

mbr

ella

fun

d on

28.

01.2

008.

Sour

ce:

Aut

hors

’ stu

dy.


sub-funds. Among the stock sub-funds, the most numerous are domestic stock sub-funds (16) while among mixed sub-funds – domestic stable growth sub-funds (12) and balanced sub-funds (12). The number of debt instrument sub-funds (25) and money market sub-funds (10) were much less numerous. All money market sub-funds and a vast majority of debt instrument sub-funds (14) invest in the domestic currency.

Only money market sub-funds (1.75 bp) and mixed sub-funds (1.31 bp) generated a positive rate of return throughout their life time.

The positive result was due to relatively higher rates of return of funds investing in the domestic currency and negative rates of return of sub-funds investing in foreign currencies. Negative rates of return were generated by stock sub-funds (-4.28 bp) and debt sub-funds (-0.17 bp). In both instances, profit was generated by domestic sub-funds (stocks +15,14 bp, bonds +1,80 bp) while losses were generated by sub-funds investing in foreign currencies.

The risk weighted rate of return is composed of a risk-free rate of return and risk premium inherent in a specific investment (comp. Górski, Górka, Winiarski 2007).

ROF = RFIR + RP

where:ROF – rate of return RFIR – risk free interest rateRP – risk premium

WIMEAN 1 M was assumed in the calculations as a risk free interest rate which is an arithmetic mean of WIBID 1 M (Warsaw Interbank Bid Rate) and WIBOR 1 M (Warsaw Interbank Offered Rate ). The adequacy of the yardstick is due to the largest popularity of one-month deposits in Poland’s interbank market. As proven by M. Górski, J. Górka and R. Winiarski (2007), WIMEAN is a credit risk-free interest rate and market-free interest rate of fluctuations of financial instrument prices resulting from changing demand and supply in respective markets. The volatility of WIMEAN results from the risk of the government’s money policies. The annual levels of the WIMEAN 1 M rates, standard deviation and volatility ratio for the analysed period are presented in table 3.

Risk may be defined as a measure of unsuccessful forecast of a rate of return. The commonly used risk measures are: standard deviation and variance. Standard deviation is a square root of variance and provides information on how broadly the values of an index (rate of return in this case) are spread around its mean value. Change of profitability is characterised by volatility ratio which is a quotient of standard deviation and mean value. Volatility ratios were calculated on the basis of geometric mean.


Table 3. Average annual level of WIBOR, WIBID and WIMEAN (1 M) rates 2001– Q1 2008

2001

2002

2003

2004

2005

2006

2007

Q1

2008

Mean

Stan

d de

v.

Wol

ant

ility

ra

tiogeom. arithm.

WIBOR(1 M) 16,51 9,25 5,75 6,02 5,38 4,17 4,63 5,59 6,47 7,16 4,07 0,63

WIBID(1 M) 16,15 8,92 5,58 5,83 5,18 4,01 4,45 5,39 6,25 6,94 4,00 0,64

WIMEAN(1 M) 16,33 9,09 5,67 5,93 5,28 4,09 4,54 5,49 6,36 7,05 4,04 0,63

Source: Authors’ presentation based on Money.pl.

In order to improve the accuracy of the analysis, the calculations use daily rates of return – this applies both to rates of return of specific sub-funds and the risk-free interest rate. The analysis covers the period January 2001 – March 2008 for the funds that operated in that time and appropriately shorter periods for those that were set up during the period. Daily average rates of return were calculated with an arithmetic mean – rate of return realised on one randomly selected day of the studied period and a geometric mean – a rate of return with an assumption that the investment remains constant over the studied period.

The relation between the rate of return and standard deviation may be presented with a risk map (comp. Tarczyński, Mojsiewicz 2001). In order to verify the hypothetical correlation between the level of rates of return generated in specific fund types and the level of inherent risk, a risk – income map was constructed where the rate of return is represented by the average value of geometric means of daily growth of units in each type of umbrella fund in the domestic market and the risk is represented by the corresponding standard deviation. The analysis was focused to the domestic market in order to eliminate FX risk. The research covers the period from January 2001 to March 2008. The diagram contains also a point which is the income and risk of risk-free rate – WIMEAN 1 M. Two lines with vectors are made through the point that split the map into four areas. In the first area there are funds with a rate of return above WIMEAN 1 M but also with a higher risk.

The second area groups those funds with a rate of return below the risk-free rate and risk that is higher than WIMEAN 1 M. The third area – (lower risk and lower rate of return) and the fourth area which would be most beneficial to investors (lower risk and higher return) do not contain any sub-funds.

The risk – income map shows that over long term there is a close relationship between the rate of return and risk – higher return of a fund is usually subject to higher risk. Money market / cash funds and debt funds are characterised with the lowest risk and the lowest rate of return, comparable to the benchmark risk. Mixed funds (with capital protection and stable growth funds) are characterised with somewhat higher risk and a higher generated rate of return.


Figure 2. Map risk – income for each type of sub-fund, from January 2001 to March 2008.

-0,100

0,000

0, 050

0,100

0,150

Gro

wth

rate

Risk

0,000 0,500 1,000 1,500 2,000

-0,050

Stocks – domestic

SME stocks – domestic

Stocks – sectoral domestic

Mixed with capital protection – domestic

Mixed stable growth – domestic

Mixed balanced – domestic

Debt funds investing in PLN

Cash Funds / money market funds investing in PLN

WIMEAN 1M


Domestic balanced funds generate lower rates of return and higher standard deviation in relation to the latter. Stock funds demonstrate the largest discrepancies as to the rate of return and the corresponding standard deviation. In the upper right-hand part of the map where the values of standard deviation and rate of return are the highest – this is where sectoral stock funds are located. Domestic stock funds display somewhat lower rate of return (however, higher than generated by money market / cash funds, debt funds and mixed funds) with similar risk. The lowest rate of return to risk ratio from among all funds is generated by domestic SME stock funds. The rate of return generated by such funds is negative and the standard deviation is among the highest.

However, a comparison of the quality of investment portfolios irrespective of the analysed period is provided e.g. by the Sharpe index – Ws (comp. Elton, Gruber 1998) and its modified version WG(comp. Górski, Górka, Winiarski 2006).

Sharpe index is calculated with the following formula:

Ws = SZi – RSi


where: SZi – daily average rate of return in i-th class (of each sub-fund),R – daily average rate of return on a risk-free instrument (WIMEAN 1 M),Si – standard deviation of rates of return of each sub-fund.

The Sharpe index demonstrates what risk premium is realised by investors, converted per a unit of risk incurred by them. When:

Ws > 0 the investor realises risk premium, profitability in i-th investment class is higher than the daily average rate of return on a risk-free instrument and becomes higher with higher SZi and lower Si. Ws ≤ 0 the investor does not realise any risk premium when the profitability of his investment is lower than the rate of return that he would have generated with investments in a risk-free instrument. It is lower with lower jest SZi and higher R and Si.

Sharpe indices calculated for the studies sub-fund population are presented in column 7 of tables 1 and 2. Neither can the assessment of the quality of umbrella fund management be positive with the use of this ratio. An average umbrella fund had the negative value at the level of – 0,0181. Only 10 funds had a positive ratio and as many as 12 had a negative ratio. The negative ratios are characteristic primarily of new funds set up in 2006 and later. The lowest negative ratio Ws(–0,1805) was generated by 4 foreign sub-funds of the PZU group. The highest ratio (+0,3874) was generated by two specialist sub-funds from the Opera group.

By type of fund (table 2) it should be noted that the positive value of Ws(+0,1012) was generated only by money market funds. The other types of funds had the index negative, mostly due to investments in foreign currencies. Positive Sharpe indices were typical of debt funds in PLN (+0,0208) and those investing in domestic stocks (+0,0075).

The modified WG index adds to the formula a standard benchmark deviation as compared to the Sharpe index. Thus it has broader application since it provides also for a situation when market risk may be lower than the systemic risk of the Government’s monetary policies. The WG index has the following formula:

WG = SZi – RSi – SB

where: SZi – daily average rate of return from i-th investment portfolio (of each sub-

fund),B – daily average rate of return from the benchmark (WIMEAN 1 M), Si – standard deviation of rates of return in i-th investment portfolio, SB – standard deviation of rates of return of the benchmark.

WG demonstrates the risk premium expressed as a percentage rate of return generated by investors on a risk unit above standard being the difference between Si and SB.


The index provides additional signs as (+) and (–) which demonstrate the trends in each investment fund class in relation to the money market. (+) is added at the end of the result when Si>SB, which means that the investor is open to a higher risk than the benchmark rate. (–) is added when Si<SB, that is when the investor is open to a risk lower than the benchmark.

Thus, there are four possible combinations of the index:+WG(+) – risk premium is realised despite an increased risk level +WG(–) – risk premium is realised with a lower risk level –+WG(+) – no risk premium is realised despite an increased risk level –+WG(–) – no risk premium is realised with a lower risk level

The calculated Ws and WG indices for all sub-funds are presented in column 8, tables 1 and 2.

Table 4. Distribution of the WG index in the group of 149 studied sub-funds

Number of funds

Daily rate of return Standard deviation WGGeom.

meanArithm.

meanAll funds 149 –0,016 –0,012 0,743 –0,018+WG(+) 69 0,042 0,046 0,613 0,077+WG(–) - - - - -–WG(+) 80 –0,066 –0,061 0,856 –0,100–WG(–) - - - - -


Table 4 shows that ion the period under research only 69 out of 149 sub—funds ensured that investors realised risk premium, however at a higher risk level. The remaining majority of sub-funds did not succeed in realising risk premium which is manifested in negative WG indices. The average value of the WG index for 69 best funds was 0.077 while its average value for all sub-funds was negative at –0.018. This means that an average investment in the funds did not ensure that risk premium was realised despite an elevated risk level. Additionally, average daily rates of return measured with the geometric mean and arithmetic mean were negative. The results were primarily affected by foreign currency denominated sub-funds for which the Ws and WG indices were mostly negative. In the analysed period there was no single sub-fund that would generate a risk premium with risk being lower than the benchmark.

Among the 15 funds operating in the market from the beginning of the analysed period that is from 2001 (SEB FIO, Skarbiec FIO and UniFundusze FIO), despite over 7 years of functioning, there are funds whose rates of return measured with the geometric mean, calculated on the basis of daily quotations of their participation units, failed to exceed the daily WIMEAN (0.017) rate, calculated for the period (UniGlobal: –0.0156 and Skarbiec Private Equity: –0.0046). This is confirmed with negative Sharpe and WG, indices which were –0,0326 and –0,0329(+) for UniGlobal


and –0.0462 and –0.0473(+) for Skarbiec Private Equity respectively. This means that no long-term passive investor, involved in both funds, has realised risk premium over the period despite a risk level that was higher than the risk-free rate. The other majority of funds, in accordance with the positive correlation between profitability and risk as presented earlier, ensured that risk premium was realised with a higher risk level which is confirmed with positive Sharpe and WG(+) indices.

The Ws and WG indices can be applied in evaluating the quality of management of each fund. The higher the Ws and WG indices, that is the higher the risk premium realised by investors per one unit of risk incurred, the more effectively the funds are managed. The lower the Ws and WG indices, that is the risk premium realised by investors per one unit of risk incurred, the less effectively the funds are managed. An important aspect – the Ws and WG indices, contrary to the effectiveness measure being a simple rate of return, may be used to compare the effectiveness of management for various periods which is specifically helpful when not all sub-funds started operation at the same time.

Money market and cash sub-funds displayed the highest quality of management from among all types of funds and a relatively high safety of investment: UniKorona Pieniężny (Ws = 0.2166; WG = 0.2930(+)), Skarbiec Kasa (Ws = 0.2046; WG = 0.3475(+)) and Allianz Pieniężny (Ws = 0.1911; WG = 0.2030(+)) for which the Ws and WG indices were highest while the volatility ratios were as follows:

1.59; 1.17 and 1.45 respectively. An interesting fact is that the highest quality of management measured with the Ws and WG, indices was generated by a fund that was not investing in a strict money market. Opera FIO Universa.pl, functioning since February 2007 proved to be sub-fund number one whose investment policy allows for all investment categories in its portfolio – from debt securities to derivative instruments, within a range from 0 to 100 %.

On the other hand, the lowest Sharpe and WG indices were generated by Subfundusz Rynków Wschodzących Światowego Funduszu Walutowego PKO/Credit Suisse, operating since July 2007 which were –0.6634 and –0.6985(+) respectively. Low management quality was characteristic primarily of funds investing in foreign markets: Millenium SFIO Funduszy Zagranicznych, PKO/CS Światowy Fundusz Walutowy, PZU SFIO Funduszy Zagranicznych and SEB SFIO when all their respective sub-funds had negative values of the Ws and WG. indices.

The high risk characteristic for stock funds was compensated with appropriately high rates of return. The funds that ensured highest rates of return in the period from January 2001 to March 2008 were the sub-funds that invested in Polish stocks:

UniKorona Akcje (170.03%), Skarbiec Akcja (167.01%), SEB 3 Akcji (116.57%) and balanced funds: UniKorona Zrównoważony (108.6%), Skarbiec Waga (94.17%) and SEB 1 Zrównoważonego Wzrostu (92.1%). However, Commercial Union Akcji Polskich is an unquestioned leader whose value of participation units grew from April 2002 by 309.31.


The low profitability of funds investing abroad was affected by the strong PLN appreciation in relation to all funds in which the funds were denominated: USD, EUR, GBP, CHF and JPY, in particular in 2005-2007 when a majority of the funds were set up. Fluctuations of the exchange rates of USD, EUR, JPY, CHF and GBP to PLN in the period from 1 January 2001 to 31 March 2008 are presented in Figure 3.

Figure 3. Exchange rate fl uctuations in the period January 2001 – March 2008

1 GBP

1 USD100 JPY1 CHF

1 EUR

stycze

ń 01

marzec

01maj 0

1lipi

ec 01

wrzesie

ń 01

listop

ad 01

stycze

ń 02

marzec

02maj 0

2lipi

ec 02

wrzesie

ń 02

listop

ad 02

stycze

ń 03

marzec

03maj 0

3lipi

ec 03

wrzesie

ń 03

listop

ad 03

stycze

ń 04

marzec

04maj 0

4lipi

ec 04

wrzesie

ń 04

listop

ad 04

stycze

ń 05

marzec

05maj 0

5lipi

ec 05

wrzesie

ń 05

listop

ad 05

stycze

ń 06

marzec

06maj 0

6lipi

ec 06

wrzesie

ń 06

listop

ad 06

stycze

ń 07

marzec

07maj 0

7lipi

ec 07

wrzesie

ń 07

listop

ad 07

stycze

ń 08

marzec

08

2,0

3,0

4,0

5,0

6,0

7,0

Exch

ange

rate

s

Source: Authors’ presentation based data from NBP.pl.

The analysis produces a conclusion that the development of umbrella funds in Poland occurred in a very difficult period for financial investments:– a strong PLN appreciation throughout the analysed period resulted in losses

on investments in foreign currencies,– a beginning of the bear market at the Warsaw Stock Exchange from the second

half of 2007 devoured the profit previously generated on investments in domestic stock sub-funds.However, with growing financial markets active strategies by investors who

change sub-funds should prove profitable – such investors adjust their investments to the changing market conditions.


5. Premium for activity – frequency and accuracy of sub-fund changes

TFIs do not disclose rates of return of individual participants in umbrella sub-funds which are realised with their active investment strategy consisting in appropriate sub-fund selection at a right time. Further on we will be performing an analysis based on an assumption of the following investor model in an umbrella sub-fund:a) In a specified investment period, the umbrella fund participant locates his entire

capital in one sub-fund.b) Decisions on selecting a sub-fund are taken with a fixed pre-determined

frequency: every month, quarter, six months, year. The decision is taken on the first working day of each calendar month. The first investment period begins on the set up date of the fund and lasts until the end of the first month.

c) The investor is able to select a fund with the highest monthly, quarterly, semi-annual and annual rate of return in a given investment period respectively:

d) The frequency of investment decisions does not have to be equivalent to the frequency of sub-fund change since at the right time the investor may decide to continue investing in the same sub-fund.

e) The investment lasts from the set-up date of the umbrella fund until 31 March 2008. In case of traditional funds converted into umbrella funds, the investment lasts from the moment of setting up such traditional funds.A decision model constructed as specified above allows to determine Benchmark

Max which is a rate of return of an investor most accurately selected sub-funds within one umbrella fund at fixed intervals (monthly, quarterly, semi-annual and annual). The Benchmark Max is a list of investments in sub-funds most accurately reacting to changes of rates of return. It is composed of the highest rates of return generated by each sub-fund in subsequent investment periods within the same umbrella fund.

The Benchmark Min is a list of investments in sub-funds least accurately reacting to changes of rates of return. It is composed of the lowest rates of return generated by each sub-fund in subsequent investment periods within the same umbrella fund. An assumption was made that the investor may change the sub-fund by transferring 100% of his invested capital every month (1 M), every quarter (3 M), every six months (6 M) and every year (12 M). The structure and rules applying to selection of sub-funds that generate the lowest profit in specific periods are identical to those described for the benchmark Max.

Apart from Benchmark Max and Min, table 5 presents the highest and lowest actual rates of return generated by sub-funds within each umbrella fund. Their comparison with maximum and minimum benchmark rates of return is facilitated with the indices that were calculated as a quotient of benchmark rates and actual rates. Wmax is the quotient of the maximum benchmark rate and the actual rate of return on the best sub-funds while Wmin is the quotient of the minimum benchmark rate and the actual rate of return on the worst sub-funds. Wmax which is a multiple

Umbrella funds in Poland – effectiveness and risk of investment strategies 177Ta

ble

5. B

ench

mar

k m

ax a

nd B

ench

mar

k m

in fo

r um

brel

la fu

nds

Um

brel

la f

und,

sta

rt o

f op

erat

ions

, num

ber

of s

ub-fu

nds

Max

/min

rat

e of

ret

urn

of s

ub-fu

nd

(%)

Benc

h m

ax (

%)

W m

axBe

nch

min

(%

)W

min

C

hang

eC

hang

e

Uni

Fund

usze

FIO

max

: U

niK

oron

a A

kcje

170.

031

M

2409

.03

14.1

71

M

–93.

352.

65

Star

t da

te 0

1.01

.200

1m

in:

Uni

Dol

ar O

blig

acje

–35.

263

M

648.

953.

823

M

–73.

842.

09

18 s

ub-f

unds

6 M

52

8.42

3.11

6 M

–6

7.82

1.92

12

M

352.

372.

0712

M

–56.

151.

59

Skar

biec

FIO

max

: A

kcja

167.

011

M

1679

.48

10.0

61

M

–87.

499.

39

Star

t da

te 0

1.01

.200

1m

in:

Priv

ate

Equ

ity–9

.32

3 M

63

3.91

3.80

3 M

–6

7.22

7.21

12 s

ub-f

unds

6 M

43

1.72

2.58

6 M

–5

4.80

5.88

12

M

330.

841.

9812

M

–38.

744.

16

Com

mer

cial

Uni

on S

FIO

max

: A

kcji

Pols

kich

309.

311

M

1023

.35

3.31

1 M

–6

0.37

31.9

4

Star

t da

te 0

5.04

.200

2m

in:

Stab

ilneg

o In

wes

tow

ania

–1.8

93

M

493.

681.

603

M

–24.

0012

.70

6 su

b-fu

nds

6 M

43

9.91

1.42

6 M

–1

6.72

8.85

12

M

326.

851.

0612

M

7.11

–3.7

6

SEB

FIO

max

: SE

B3

Akc

ji11

6.57

1 M

94

9.52

8.15

1 M

–7

5.78

–1.5

9

Star

t da

te 0

1.01

.200

1m

in:

SEB

5 O

blig

acji

Skar

bow

ych

47.6

73

M

431.

953.

713

M

–50.

94–1

.07

5 su

b-fu

nds

6 M

31

3.71

2.69

6 M

–3

5.26

–0.7

4

12

M

232.

541.

9912

M

–17.

93–0

.38

KB

C P

aras

ol F

IOm

ax:

Akt

ywny

77.2

61

M

299.

963.

881

M

–49.

595.

12

Star

t da

te 2

6.07

.200

2m

in:

Akc

yjny

–9.6

83

M

169.

342.

193

M

–20.

842.

15

5 su

b-fu

nds

6 M

14

1.41

1.83

6 M

–1

4.25

1.47

12

M

97.9

31.

2712

M

5.75

–0.5

9

178 MARIAN GÓRSKI, KRZYSZTOF CHRUSTAl

lianz

FIO

max

: A

kcji

83.7

21

M

224.

502.

681

M

–48.

883.

50

Star

t da

te 2

8.01

.200

4m

in:

Wal

utow

y–1

3.95

3 M

12

1.16

1.45

3 M

–1

8.97

1.36

9 su

b-fu

nds

6 M

11

9.41

1.43

6 M

–1

6.55

1.19

12

M

90.0

21.

0812

M

–7.5

90.

54

Luka

s FI

Om

ax:

Wzr

ostu

73.0

81

M

181.

002.

481

M

5.85

2.33

Star

t da

te 0

5.05

.200

3m

in:

Akc

ji2.

513

M

129.

001.

773

M

30.0

511

.97

4 su

b-fu

nds

6 M

12

2.39

1.67

6 M

25

.28

10.0

7

12

M

105.

151.

4412

M

35.1

213

.99

Fort

is F

IOm

ax:

Akc

ji 64

.52

1 M

13

8.37

2.14

1 M

–24.

69–1

.03

Star

t da

te 1

9.01

.200

5m

in:

Stab

ilneg

o W

zros

tu23

.97

3 M

11

1.99

1.74

3 M

–14.

14–0

.59

2 su

b-fu

nds

6 M

11

1.30

1.73

6 M

–14.

09–0

.59

12

M

69.9

81.

0812

M9.

420.

39

ING

Par

asol

FIO

max

: A

kcji

Plus

24.5

01

M

97.5

03.

981

M

–51.

001.

68

Star

t da

te 2

1.06

.200

6m

in: Śr

odko

woe

urop

. Sek

t. Fi

n Pl

.–3

0.44

3 M

64

.54

2.63

3 M

–4

0.60

1.33

9 su

b-fu

nds

6 M

60

.44

2.47

6 M

–4

0.60

1.33

12

M

39.1

91.

6012

M

–33.

011.

08

Supe

rfun

d SF

IOm

ax:

Subf

undu

sz B

35.0

01

M

87.6

72.

501

M

–27.

64–1

.70

Star

t da

te 0

5.12

.200

5m

in:

Subf

undu

sz A

16.2

43

M

52.6

71.

503

M

–17.

92–1

.10

3 su

b-fu

nds

6 M

33

.52

0.96

6 M

12

.38

0.76

12

M

31.2

00.

8912

M

13.5

30.

83

KB

C P

ortfe

l VI

P SF

IOm

ax:

KB

C P

ortf

el P

ienięż

ny8.

181

M

78.6

49.

611

M

–49.

623.

31

Star

t da

te 0

3.04

.200

6m

in:

KB

C p

ortf

el A

kcji Śr

. Spółe

k–1

4.97

3 M

33

.81

4.13

3 M

–2

9.95

2.00

4 su

b-fu

nds

6 M

33

.71

4.12

6 M

–2

9.85

1.99

12

M

13.5

71.

6612

M

–14.

260.

95

Umbrella funds in Poland – effectiveness and risk of investment strategies 179N

oble

Fun

ds F

IOm

ax:

Mie

szan

y11

.22

1 M

63

.19

5.63

1 M

–3

3.32

2.32

Star

t da

te 2

1.11

.200

6m

in:

MiŚ

Spółe

k–1

4.34

3 M

42

.85

3.82

3 M

–2

2.61

1.58

5 su

b-fu

nds

6 M

42

.85

3.82

6 M

–2

1.38

1.49

12

M

29.5

32.

6312

M

–11.

900.

83

AIG

SFI

O P

aras

ol P

odat

kowy

max

: Pi

eniężn

y4.

721

M

59.5

212

.61

1 M

–5

9.59

1.39

Star

t da

te 1

0.01

.200

7m

in:

EU

RO

MiŚ

Spółe

k–4

2.91

3 M

38

.28

8.11

3 M

–5

0.94

1.19

12 s

ub-f

unds

6 M

28

.45

6.03

6 M

–4

6.91

1.09

12

M

13.6

92.

9012

M

–42.

911.

00

Pion

eer F

undu

szy G

loba

lnyc

h SF

IOm

ax:

Doc

hodu

i W

zros

tu R

.Chi

n19

.84

1 M

57

.00

2.87

1 M

–3

4.99

1.57

Star

t da

te 0

3.07

.200

6m

in:

MiŚ

Sp.

Ryn

k. R

ozw

inię

tych

–22.

263

M

34.3

91.

733

M

–22.

841.

03

8 su

b-fu

nds

6 M

27

.70

1.40

6 M

–1

7.04

0.77

12

M

19.2

60.

9712

M

–6.4

40.

29

Ope

ra S

FIO

max

: U

nive

rsa.

pl38

.22

1 M

52

.94

1.39

1 M

–1

2.24

–2.4

5

Star

t da

te 2

8.02

.200

7m

in:

Avi

sta.

pl4.

993

M

46.0

21.

203

M

–7.4

6–1

.49

2 su

b-fu

nds

6 M

46

.02

1.20

6 M

–7

.46

–1.4

9

12

M

33.0

50.

8612

M

3.07

0.62

PKO

/CS Św

iato

wy F

und.

W

alut

owy

SFIO

max

: R

ynkó

w W

scho

dząc

ych

0.21

1 M

48

.86

232.

671

M

–73.

851.

32

Star

t da

te 0

3.11

.200

5m

in:

Mał

ych

Sp. J

ap J

PY–5

5.76

3 M

9.

8046

.67

3 M

–6

2.55

1.12

9 su

b-fu

nds

6 M

4.

0919

.48

6 M

–6

0.00

1.08

12

M

–1.5

2–7

.24

12 M

–6

0.00

1.08

Pion

eer

FIO

max

: L

okac

yjny

10.1

71

M

48.4

84.

771

M

–26.

44–4

.28

Star

t da

te 0

1.08

.200

5m

in:

Wzr

ostu

i D

ocho

du M

ix 4

06.

183

M

31.1

93.

073

M

–14.

07–2

.28

4 su

b-fu

nds

6 M

29

.43

2.89

6 M

–1

2.53

–2.0

3

12

M

21.0

12.

0712

M

–5.2

1–0

.84

180 MARIAN GÓRSKI, KRZYSZTOF CHRUSTPK

O/C

S Pa

raso

lowy

SFI

Om

ax:

Stab

ilneg

o W

zr. P

lus

17.9

91

M

30.9

01.

721

M

–19.

08–9

.84

Star

t da

te 3

0.05

.200

7m

in:

Akc

ji Pl

us1.

943

M

24.6

81.

373

M

–14.

69–7

.57

4 su

b-fu

nds

6 M

24

.68

1.37

6 M

–1

4.69

–7.5

7

12

M

––

12 M

–

–

Mill

eniu

m S

FIO

Fun

d.

Zagr

anic

znyc

hm

ax:

Stab

ilny

EU

R

–7.0

61

M

27.7

5–3

.93

1 M

–46.

251.

79

Star

t da

te 2

8.02

.200

5m

in:

Kon

serw

atyw

ny U

SD–2

5.88

3 M

12

.63

–1.7

93

M–3

4.27

1.32

10 s

ub-f

unds

6 M

7.

80–1

.10

6 M

–31.

091.

20

12

M

3.04

–0.4

312

M–2

9.75

1.15

Allia

nz G

loba

lny

SFIO

max

: A

kcji

Azj

i i

Pacy

fiku

8.37

1 M

11

.63

1.39

1 M

–3

7.19

1.45

Star

t da

te 1

3.07

.200

7m

in:

BR

IC–2

5.64

3 M

6.

700.

803

M

–30.

021.

17

8 su

b-fu

nds

6 M

6.

700.

806

M

–29.

841.

16

12

M

––

12 M

–

–

PZU

SFI

O F

undu

szy

Zagr

anic

znyc

hm

ax:

Wie

lu K

las

Akt

ywów

Zag

r.–1

2.95

1 M

–7

.15

0.55

1 M

–2

8.41

1.23

Star

t da

te:

20.1

1.20

06m

in:

Akc

ji Z

agra

nicz

ny–2

3.08

3 M

–9

.81

0.76

3 M

–2

6.34

1.14

4 su

b-fu

nds

6 M

–9

.81

0.76

6 M

–2

6.20

1.14

12

M

–12.

500.

9712

M

–23.

471.

02

SEB

SFIO

max

: M

ałyc

h Sp

. Eur

opej

skic

h–1

3.63

1 M

–8

.25

0.61

1 M

–2

5.54

1.18

Star

t da

te 0

2.11

.200

7m

in:

Eur

opej

ski

–21.

663

M

–10.

460.

773

M

–23.

251.

07

6 su

b-fu

nds

6 M

–

–6

M

––

12

M

––

12 M

–

–

Sour

ce:

Aut

hors

’ stu

dy.


of the benchmark rate of an active investor in relation to the highest rate of return generated by a sub-fund within an umbrella fund may be interpreted as a premium in relation to a passive investor with the best results.

The details provided in table 5 generate the following conclusions: a) The highest rates of return could be generated by active investors who changed

sub-funds every month, who have been investing for the longest time since 01.01.2001. Among all the funds, the highest 1 M benchmark rate of return was generated by UniFundusze FIO: profit was 2,409% and was in excess of the rate of return of its bets sub-fund almost 14 times. Second was Skarbiec FIO with its 1 M benchmark rate of return at 1,679%. The difference between the highest rate of return on an individual sub-fund and the benchmark rate was slightly above 10.

The third position was won by Commercial Union SFIO whose maximum benchmark rate was 1,023% which is three times the profit that could be generated with investments in only one sub-fund.

b) the Benchmark max and Wmax decrease with a shorter investment period and reduced frequency of sub-fund change. However, even with an annual frequency of changes, the benchmark rate of Unifundusz was 352% and would have been 2.07 times higher than a passive investor’s rate of return in a domestic stock fund.

c) Umbrella funds set up after 2006 (except PKO/CS) did not provide an opportunity for positive rates of return even to most active investors.

d) The average value of 1 M Wmax for all umbrella sub-funds was 4.31. Unfortunately, the standard deviation for the period was equal to the average and thus the accuracy of the index is compromised. For quarterly, semi-annual and annual periods, the indices were increasingly lower but more precise which is manifested in a decreasing volatility index. Table 6 presents the average indices and the corresponding standard deviation and volatility index.

Table 6. Average values, standard deviation and volatility index of the Wma. index

1 M 3 M 6 M 12 M

Arithmetic mean 4.31 2.29 2.06 1.45

Standard deviation 4.26 1.89 1.47 0.75

Volatility ratio 0.99 0.82 0.71 0.52


The data we have at our disposal provide for simulation of tax shield for investors in each umbrella fund. The benchmark was calculated in two variants: “umbrella” and “traditional” so that it is possible to compare tax benefits resulting from the umbrella structure as compared to traditional funds. In a Max “umbrella” variant, the 19% tax on capital gains calculated on the difference between the


initial and final values, is deducted from the final value along with the initial value, thus producing a rate of return after tax expressed as a percentage. In a Max “traditional” variant, the 19% tax is charged at each change of sub-fund provided the rate of return over the period is positive.

Table 7 presents examples of such simulations for an active investor in sub-funds of UniFundusz FIO in the period 01.01.2001–31.03.2008.

The high profit of such investor is largely leveraged with a deferred tax on capital gains. The most active investor who would pay tax at sub-fund change would have achieved a rate of return of 1,529.42% over the period which is over 1.5 times lower than the maximum rate of return in the umbrella fund. It is worth noting that the State – not charging any tax at each sub-fund change – also leverages its future tax revenues.

Table 7. Tax shield simulation in case of investment in umbrella fund UniFundusze FIO (18 sub-funds)

Change Max umbrella Max ordinary

1 M profit % 2409.03 1529.42

tax 565.08 358.75

3 M profit % 648.95 504.43

tax 152.22 118.32

6 M profit % 528.42 425.98

tax 123.95 99.92

12 M profit % 352.37 301.23

tax 82.75 70.66 Source: Authors’ calculations.

The tax payable in one amount by the above investor would amount to 565.95% of his initial capital while the sum of tax payments charged at each sub-fund change would amount to 358.75% of the capital. This means then that the investor invests the deferred tax with substantial benefit to the State.

The data we have at our disposal enable us not only to determine a maximum rate of return of an active investor but also to identify the sub-funds that should be selected at that rate. The scope of this articles does not provide for presentation of the data for all the studied funds and therefore we will present growth paths of an active investor’s rate of return in UniFundusz FIO. In parenthesis the legend provides the selection frequency of each sub-fund.

An investor selecting a sub-fund every month from among the 18 sub-funds offered by Unifundusz would select 7. Including: in 55 month he would invest in stock funds, in 13 periods in bond funds and also in 13 periods in money market funds.


Figure 4. Unifundusz sub-funds selected by an active investor changing sub-funds every month

0

500

1000

1500

2000

2500

3000

3500

Valu

e un

its in

%

Benchmark Max

UniKorona Akcje (36)

UniGlobal akcyjny (17)

UniKorona Pieniężny (13)

UniKorona Obligacje (8)

UniDolar Obligacje (5)

UniAkcje MiŚS (2)


In his benchmark portfolio of a maximum rate of return, an investor changing sub-funds every quarter would also use 7 funds, including stock funds 19 times, bond funds 7 times, stable growth funds twice and money market funds once.

Figure 5. Unifundusz sub-funds selected by an active investor changing sub-funds every quarter

0

100

200

300

400

500

600

700

800

900

1000

Valu

e un

its in

%

Benchmark Max

UniKorona Akcje (16)


UniDolar Obligacje (2)

UniAkcje Nowa Europa (2)

Unistabilny Wzrost (2)

UniGlobal – akcyjny (1)




Figure 6. Unifundusz sub-funds selected by an active investor changing sub-funds every six months

0

100

200

300

400

500

600

700

800

Valu

e un

its in

%

Benchmark Max

UniKorona Akcje (7)



UniAkcje Nowa Europa (1)

UniStabilny Wzrost (1)

UniGlobal – akcyjny (1)


In his benchmark portfolio of a maximum rate of return, an investor changing sub-funds every six months would use 6 funds, including stock funds 9 times, bond funds 4 times, stable growth funds once and money market funds once.

Fig. 7. Unifundusz sub-funds selected by an active investor changing sub-funds every year

0

100

200

300

400

500

600

Valu

e un

its in

%

Benchmark MaxUniKorona Akcje (5)UniKorona Obligacje (2)UniStabilny Wzrost (1)


In his benchmark portfolio of a maximum rate of return, an investor changing sub-funds every year would use only 3 funds, including stock funds 5 times, bond funds twice and stable growth funds once.

Decisions of an active investor investing in the umbrella fund Unifundusz are not typical for the other sub-funds since no Benchmark Max portfolio of any other


umbrella fund contains any mixed sub-funds. That generated a general conclusion. Mixed funds are characteristic for passive investors with specific risk aversion, lower than in case of stable growth funds and higher than in case of balanced funds. Umbrella funds that would like to provide for maximisation of rates of return for active investors, should contain in their offer:a) stock sub-funds (domestic and foreign, general and specialist) – they generate

maximum rates of return in bull markets,b) bond sub-funds (domestic and foreign, Treasury and corporate) – best during

bear markets with normal profitability curves,c) money market sub-funds generating highest profit during bear markets with

reversed profitability curves.The invention of umbrella fund managers should be moved from multiplying

the number of sub-funds, primarily mixed ones, towards advising fund participants in active management of sub-fund selection within a relatively simple offer.

The primary sin of our approach is obviously taking decisions ex post; however, a simulation can be made of effects of investor’s decisions that react to changing markets with e.g. monthly or quarterly delay. However, that could be a subject of another article if this one goes to press.

Information about the authors Prof. Marian Górski – Department of Banking and Financial Markets, Management Faculty of the University of Warsaw. e-mail: [email protected] Chrust – graduate of the Management Faculty, student of the Global MBA program.

Bibliography

Elton, E. i M. Gruber. 1998. Nowoczesna teoria portfelowa i analiza papierów wartościowych, WIG PRESS.

Gabryelczyk, K. 2006. Fundusze inwestycyjne, Warszawa: Oficyna ekonomiczna.Górski, M. 2007. Rynkowy system finansowy, Warszawa: PWE.Górski, M., Górka J. i R. Winiarski. 2007. Realne stopy zwrotu inwestorów krajowych i zagranicznych

z inwestycji finansowych w Polsce w latach 1994-2006. w: Zarządzanie i rozwój, Warszawa: Wydaw-nictwo Naukowe Wydziału Zarządzania Uniwersytetu Warszawskiego.

Tarczyński, W. i M. Mojsiewicz. 2001. Zarządzanie ryzykiem, Warszawa: PWE.


Andrzej Sopoćko

The Impact of Economic Integration on the Direction of Capital Flow

The “old” Union countries have been undergoing the process of economic integration for many years and the new members of the Community are now also actively joining this process. In the pre-accession period, the new members had to adopt a large number of regulations, harmonising their financial standards and procedures with those of the so-called “Fifteen”. As a result, they have become incorporated into the uniform legal framework (though not only) and been provided with a similar level of security and efficiency as the old countries. These changes had an important psychological meaning for investors, making their first encounter with the markets of Central Europe free of any negative surprises, which otherwise could have made them excessively cautious or hesitant in their decision-making processes. Investors could feel almost at home, as they were applying familiar criteria for market entry and exit, without fear that their actions are based on incomplete knowledge of the system. It could be safely assumed that, though the financial systems of the new members were, to some extent, less developed, they did not differ in terms of quality from the ones existing in the so-called Old Europe.

If the systems in respective countries are parallel, then they cease to be identified as separate. This fact is confirmed by the research conducted into the economies of the main European Union countries. This research was aimed at verifying, whether the capital flow within the group of 11 European Union countries is more correlated with an output of these countries or with an output of industries, calculated jointly on the scale of the entire region. If there are indeed any systematic differences between these countries, then the countries with better results should attract capital by themselves, regardless of their industry structure. If the contrary is true, i.e. better results of industries attract capital, regardless of the country, that would mean that the differences between the financial systems of respective countries are of little significance.

The studies conducted by P. Ehling and S.B. Ramos make the second option a more probable scenario. The parameters were calculated on the basis of 15-year time series (1990–2005, tables 1 and 2).

This research justifies a hypothesis that, if the system is seen as uniform, no diversification of trust should take place. It means that capital is expected to move

The Impact of Economic Integration on the Direction of Capital Flow 187

Table 1. Correlation between the capital fl ow and the economic results of respective EU countries

Country Average return Standard deviation Correlation coefficient

Austria 1.71% 18.42% 0.38Belgium 5.58% 16.81% 0.48Finland 11.12% 30.58% 0.51France 6.31% 17.88% 0.54Germany 4.17% 19.23% 0.54Greece 14.02% 30.59% 0.63Ireland 8.68% 18.64% 0.65Italy 4.61% 21.24% 0.69Holland 6.74% 17.02% 0.74Portuguese 3.12% 18.13% 0.76Spain 8.16% 18.97% 0.76Average 6.75% 20.68% 0.61

Source: Paul Ehling, Sophia B. Ramos, Geographic versus industry diversification: Constraints matter Journal of Empirical Finance, Oct. 2006.

Table 2. Correlation between the capital fl ow and the output of respecive EU industries, calculated as a whole

Average return Standard deviation Correlation coefficientProcessing industry 4.34% 17.45% 0.71Seasonal consumer goods 3.22% 20.31% 0.68Seasonal services 4.69% 17.49% 0.72Finance 4.75% 18.53% 0.73Industry in total 4.13% 19.27% 0.73Information technologies 7.43% 31.73% 0.55Non-seasonal consumer goods 8.01% 15.12% 0.63Non-seasonal services 7.49% 21.69% 0.61Resources 8.93% 19.27% 0.49Public services 8.44% 14.87% 0.59Average 6.14% 19.57% 0.64

Source: Paul Ehling, Sophia B. Ramos, Geographic versus industry diversification: Constraints matter Journal of Empirical Finance, Oct. 2006.a

towards the places with a higher rate of return and a risk related to an industry or a product type, regardless of an investment location. Under uniform system, due to low trust levels and abundance of information, more dynamic migration of foreign capital should be expected. The reason for this is that such capital will simply have fewer problems in crossing borders, locating in the country other than that of its dominant owners.

As shown by the studies carried out by Lane and Milesi-Ferreti, such phenomenon only occurs in one region of the world, namely in Europe, where the process of regulatory unification is most advanced.

188 ANDRZEJ SOPOĆKO

Figure 1. The migration of international capital against GNP

Perc

ent o

f GN

P

1994

100

200

300

400

500

1996 1998 2000 2002 2004 1994

100

200

300

400

500

1996 1998 2000 2002 2004

1994

100

200

300

400

500

1996 1998 2000 2002 20041994

100

200

300

400

500

1996 1998 2000 2002 2004

EU-23

Americas The remaining countries

Asia

The sum of foreign assets and liabilities as percent of GNP. The chart shows the means and limits of quartiles for each group of countries. Ireland and Luxemburg have been excluded from the chart, due to their non-matching results (1880 and 20 000%, respectively)

Source: A. Abiad., D. Leigh ,A. Mody. International Finance and Income Convergence: Europe is Different. IMF Working Paper March 2007.

As for the charts in figure 1., the middle line stands for the average value of foreign assets (% GNP) in 23 countries of the European Union (excluding Ireland and Luxemburg, whose results, in the author’s view, raise the mean values too high). The lower and upper limit of the grey belt denotes the value of the first and third quartile for the countries from a given group. Upon closer examination, however, we may find out that the dynamics of international capital flow is significantly higher in Europe than in other world regions (though, European countries are also more diversified).

The intensity of capital flows is also accompanied by a phenomenon, which can be defined as European-specific. The remaining part of the world is governed by the rule, according to which capital flows from less to more developed countries (“uphill”, instead of “downhill”). Only Europe meets the expectations of liberal economists, who claim that cheaper factors of production would, sooner or later, attract global capital, leading, in consequence, to the equalisation, or even gradual increase, of the gross national product in less-developed regions. It is strictly Europe-specific phenomenon that both developed and underdeveloped countries are to be found under the common system, highly integrated at the level of regulations and, partly, at the organisational level. Under such conditions, capital does not flow between systems, but within the system.

The integration of the countries into the system leads to the approximation of and, more strictly speaking, mutual interdependence between the rate of growth and the course of prosperity/recession cycles. Research by IMF reveals significant


Table 3. Correlations of economic growth rates of respective countries (1974–2000)USA Japan Germany France Italy G. Britain Canada

USAJapan –0.60Germany –0.57 0.53France –0.10 0.05 0.72Italy –0.28 0.38 0.75 0.74G. Britain 0.68 –0.36 –0.38 –0.14 0.15Canada 0.79 –0.66 –0.38 0.15 0.08 0.82

Source: International Monetary Fund, World Economic Outlook. Oct. 2001.

interregional correlations. The correlation coefficients between the economic grow-ths of the selected countries are shown in table 3.

The correlations between the growth rate of European continental countries, i.e. Germany, Italy and France are high and positive. Certainly, it can be, in large part, attributed to the existence of the single currency. However, the relations between USA and Canada look similar, though these countries are not linked by any monetary union. Nevertheless, if we take into account the multi-layer interrelations between those countries, reaching far beyond the economic scope, so high correlation coefficient comes as no surprise at all. What is surprising is that there is seemingly little interdependence between the economic results of the Great Britain and those of the remaining big European countries. It appears that British economy is more strongly connected with American economy, though the nature of such connection defies an easy description. As regards the foreign turnover, euro zone plays the more important role. The foreign turnover with a given region does not exhaust the list of important connections between the regions.

The foregoing cannot be explained solely in terms of the specificity of financial markets. In any case, it would be ridiculous if it could. The parallels between typical elements of these markets run close, as is exemplified by the correlation between the return on debt securities and rate of return on the stock-market (see table 4).

Table 4. Correlations of return rates between debt and equity securities. Based on observations conducted in the period of 1957–2001 (Germany – from 1970, Japa from 1966)

Correlation coefficients of return rates on shares and bondsCanada −0.264France −0.141Germany −0.232Italy −0.264Japan 0.035G. Britain −0.380USA −0.119

Source: Journal of International Financial Market, Institution and Money, Apr. 2007, Kim, Sangbae; In, FrancisOn the relationship between changes in stock prices and bond yields in the G7 countries:Wavelet analysis.


In this juxtaposition, the country which stands out is Japan, which would point to the distinctiveness of its financial system. This is not, however, where the heart of the matter lies. As it is, Japanese interest rates are very low, and at some periods its interest rates (short-term) can even be negative. This is caused by very high savings amounts. Their location in investments is very difficult in such a developed country as Japan. The correlation between the elements of the pair: assets – liabilities turns out to be very unstable. However, due to very low values of both return rates, this problem is, basically, of no economic significance. A leap on one-year securities from 0.1% to 0.15% designates, in fact, the change of 50%, though it matters only in terms of accounting. With such modification of parameter, the change of investor’s motivation is, actually, imperceptible.

As far as Japanese bonds are concerned, the factor which has been playing an important role on the Japanese market in recent years are not so much nominal return rates, but the scale of yen appreciation. It is this phenomenon, and not the classic Yield to Maturity of treasury bonds, that is the centre of attention for the Central Bank of that place.

A diversified course of prosperity cycles worldwide fosters the movement of capital, as it entails diversification of financial parameters responsible for changes in prices of respective assets. This provides an advantageous base for the holders of venture capital, as well as for the process of levelling prosperity cycles in respective regions.

If we adopt a more favourable definition of a venture capital (portfolio capital), such as that of, e.g., D. Hardy, we could recognise this capital as being intrinsically beneficial. Hardy defines an investor from this area as “a responsible man, who anticipates market needs and shoulders the associated risk (Hardy 2006). Thanks to speculations, risk has been transferred to specialists, who have particularly deep knowledge about the market, operations and economic processes, since the predicting of future changes and economic situations requires very high qualifications and broad horizons, enabling one to perform the competent assessment of the current situation, under the conditions of existing dynamics of events. In turn, A. Baker thinks that the speculation, which makes use of modern instruments for risk management, serves as an informal insurance sector (Bakker, Chapple 2006). If it were not for this kind of activity, the stabilisation of financial market would require the introduction of operations and regulations by state authorities. In this way, modern speculative operations serve the purpose of depoliticising financial market. For the followers of globalisation, it is a crucial argument for the emergence of the new level of market self-regulation. In this situation, the restrictions which are being introduced by particular countries, with the view of protecting financial market against excessive fluctuations, would become less justifiable.

Reality, however, does not provide grounds for the excessive optimism or belief in a self-regulatory power of the financial market. Such cautious approach is not a result of the general lack of trust in the short-term capital and the effects of its global movements. The basic problem, as it seems, is that the balance of capital


flows between USA, constituting the world’s main financial centre, and China, which is becoming, at a fast rate, a main global producer. These relations, however, extend far beyond the issues connected with the functioning of venture capital, as they are largely concerned with more fundamental matters.

While considering the role of venture capital, the elements of fundamental nature have to be taken into consideration. The point is there are special situations, in which fundamental processes stimulate great movements of venture capital.

As has already been said, venture capital is attracted by three elements:a) high interest rates, making it possible to obtain, higher than anywhere else,

rates of return on “buy and keep” operations, b) in-occurrence and anticipated falls of interest rates, providing high earnings on

“buy and sell” operations,c) formal and informal improvement of a given country’s rating, raising the quality

of investment portfolioThe fourth issue is concerned with the formation of speculative bubbles, such

as the dramatic increases in land prices (Japan of the 1980s) and speculative screwing-up of share prices (Russia, the second half of the 1990s). These matters, however, require a separate discussion, as their premises are not essentially of the same character, meaning that the processes taking place at those times can hardly be classified as universal principles (unless at a general, philosophical level).

In the case of the first three issues, interdependencies are considered to be commonly binding. If such interdependencies, as presented above, take place, we should expect an inflow of capital, and, on the other hand, if the symmetrically-reverse phenomena take place, then we should expect an outflow of capital. In the first case the result is the appreciation of currency and threat to exports, in the second – devaluation and subsequent inflation.

The main cause of interest rates’ variability and of the trust vested in a given country, is the condition of public finances, and, most of all – the indebtedness of this sector. Public debt becomes really dangerous when it is accompanied by the decrease in economic growth and budget revenue. Difficulties in, or even impossibility of, serving public debt, makes it necessary to run into further debts, until the insolvency crisis is reached (Argentina 2002 r.). If loaning needs are on the increase, then it becomes necessary to raise return rates on treasury securities. If the condition of public finances raises any doubts as to the future regularity of payments, and the country is beset with rising inflation, then, for the purpose of procuring necessary capital, interest rates have to be raised very high, resulting in a painful increase of the sums used for debt-service.

For the countries having a very high level of public debt, the movement of venture capital is critical for maintaining financial balance. The cost of attracting such capital is very high, as the credit risk is also very high. Moreover, in this case, the public debt is particularly unstable. Burdened with the risk of substantial losses, public debt is very sensitive to the signals that inform about the economic (economic results), social (claims) and political (change in the alignment of forces)


condition of a given country. Additionally, public debt also threatens to exceed its limits whenever, in the remaining part of the world, more favourable conditions for deposits appear, due to many different causes. The map presenting the scale of public debt may serve, at the same time, as the map of boiling venture capital, showing places in the world that are particularly sensitive to the unexpected migrations.

It is necessary to note that the prevailing part of public debt exists in the form of market securities, and the turnover, that is a fast entry into and exit from the market is not, technically speaking, problematic at all. From IMF data, it can be inferred that, from amongst OECD countries, only Portuguese, USA, Great Britain, Norway and Austria have the public debt, not occurring in the form of securities, in excess of 10% of their entire level of indebtedness. At any rate, the great majority of these countries have a low ratio of indebtedness to GNP.

Thus, the public debt exists, first and foremost, in the form of assets, which can be freely sold and bought by foreign investors, mainly due to short-term financial benefits. The resultant shifts in rates of return are felt all the more painfully by the countries with high debt. Expenditure side becomes very unstable and the additional burdens, coupled with a very high level of debt, may quickly lead to a financial crisis. For that reason, it is necessary to take into account relative inflexibility of state’s expenditure. Unplanned budgetary expenses affect, first of all, the spheres where their reduction is not guaranteed by statutory law, or pursuant to social agreements or other restrictions (in Poland, inflexible expenditure is estimated at 70% of the whole). Cuts, where they can be possibly carried out, are dramatic in nature and destabilise political systems of a country. Seriousness of the threat itself and its rate of growth make the occurrence of a financial crisis very probable, considering the situation. Table 5 is illustrative of that threat in the area of Central Europe.

To estimate the factual exposure at default of financial crisis, resulting from the condition of public finances, is not a simple task, as it is problematic both with respect to accountancy and, better or worse, international relations of a given country with the countries and institutions which may provide assistance.

In terms of accounting, the problem consists in an unstable, unambiguous correlation: increase of interest rates – increase of service costs. It is always possible to manoeuvre the structure of indebtedness. Apart from the above-mentioned possibilities of issuing zero coupon bonds, which postpone servicing cost until the future date, the operations on public debt would also consist in prolonging or shortening the maturity of rolled treasury securities in such a way as to, given an up-to-date, timely arrangement of interest rates, temporarily obtain the most favourable result for the budget. Therefore, the correlation: increase of base rates by one percentage point – increase of rate of debt service also by one point, practically never occurs. It is always less than that, from 1:0.3 to 1:0.7, respectively1.

1 On the basis of author’s own study of national budgets 1997–2004.


Table 5. Fiscal ranking of new EU countries(as percent of GNP)

Surplus (+) or deficit (-) of the sector of government and self-government institutions

2003 2004 2005Convergence

programme data for 2006

Czech Republic –6.6 2.9 3.7 –3.5Denmark 1.1 2.7 4.9 4.1Estonia 1.9 2.3 2.3 2.6Cyprus –6.3 –4.4 –2.3 –1.9Latvia –1.2 –1.0 0.0 –0.4Lithuania –1.3 –1.5 –0.5 –1.2Hungary –7.2 –6.7 –7.8 –10.1Malta –10.0 –5.0 –3.4 –2.6Poland –4.7 –3.9 –2.5 –1.9Slovenia –2.8 –2.3 –1.4 –1.6Slovakia –3.7 –3.0 –3.1 –3.7Sweden 0.1 1.8 3.0 3.0Great Britain –3.3 –3.2 –3.3 –2.8UE-10 –5.1 –3.8 –3.4 –3.4UE-15 –3.0 –2.3 –2.0 –1.9Euro zone –3.1 –2.8 –2.4 –1.9

Gross indebtedness of the sector of government and self-government institutions

2003 2004 2005Convergence

programme data for 2006

Czech Republic 30.1 30.7 30.4 30.6Denmark 44.4 42.6 35.9 28.6Estonia 5.7 5.2 4.5 3.7Cyprus 69.1 70.3 69.2 64.7Latvia 14.4 14.5 12.1 10.7Lithuania 21.2 19.4 18.7 18.4Hungary 58.0 59.4 61.7 67.5Malta 70.2 74.9 74.2 68.3Poland 43.9 41.8 42.0 42.0Slovenia 28.5 28.7 28.0 28.5Slovakia 42.7 41.6 34.5 33.1Sweden 51.8 50.5 50.4 46.5Great Britain 38.9 40.4 42.4 43.7UE-10 41.6 41.0 40.7 41.2UE-15 41.1 41.8 42.4 42.7Euro zone 69.3 69.8 70.8 69.6

Source: ECB Report for 2006. Source: IMF.


The second element, which has the most essential bearing on the decisions made by trustees of venture capital, is a current account, which has a dominant influence on the exchange rate. In addition to international investment ranking (the balance of direct and portfolio investments), it is the factor which determines a demand for currency of a given country.

The amount of this balance is relatively stable (except for the pre-accession year of 2004 and crisis years of 1999–2000), although its stabilisation is not a result of its main ingredients’ maintaining an identical level. In recent years, a rising deficit in foreign turnover has been accompanied by a high surplus of transfers, caused largely by an inflow of means from people working abroad. Leaving country for work, especially following the EU accession, has become a massive-scale phenomenon, which is also illustrated by this statistics.

Table 6. Foreign turnover in Poland in the period of 1998-20061998 1999 2000 2001 2002 2003 2004 2005 2006

Current account –6 901 –12 487 –9 981 –5 376 –5 009 –4 599 –10 677 –5 105 –7 973

Visible trade balance –12 863 –15 072 –12 307 –7 661 –7 249 –5 725 –5 622 –2 766 –4 953

Balance of transfers 2 897 2 214 2 380 2 889 3 278 4 236 5 451 6 935 8 224

Source: NBP data.

In Poland, portfolio capital is an element of demand side, but Polish investments of this type constitute less than one-tenth of the analogous capital located in Poland. The proportion is similar in case of direct investments.

Both the foreign turnover balance and investment ranking of a country are still subject to some fluctuations, as they result from many processes.

Table 7. Poland’s international investment ranking (mln euro)1998 1999 2000 2001 2002 2003 2004 2005

for. port. invest. in Poland 13 658 14 618 18 057 18 895 24 042 34 080 55 713 69 206

for. dir. invest. in Poland 22 461 26 075 34 227 41 247 48 320 57 877 86 366 89 684

Polish port. invest. abroad 1 093 1 143 1 575 1 311 2 729 4 143 6 711 8 769

Polish dir. invest. abroad 1 165 1 024 1 018 1 156 1 457 2 146 3 223 6 439

Source: NBP data.

Neither the former, nor the latter can be decreed, as it is the case with budget balance. Thus, both these factors should be assessed over the period of a few years to find out whether they show a rising or falling tendency.

In Europe, throughout the last ten years, the second tendency has come to the fore. However, a growing diversification between particular countries can also be noticed. Interestingly, the reason for this is not necessarily the accession of 10 new members, but an increasing diversification taking place within the biggest countries of the old European Union (the table data highlighted in red).


Figure 2. Diversifi cation of the current account amount in EU

1970

-6-4

-20

24

1980 1990 2000 2100

Perc

ent o

f GN

P

Median Lower and upper quartile

Source: A. Abiad., D. Leigh, A. Mody. International Finance and Income Convergence: Europe is Different. IMF Working Paper March 2007.

Although, in the more developed European Union countries, fluctuations do occur, no tendency towards a dangerous increment of current account deficit has been witnessed. Likewise, the generally favourable situation presented in figure 2. is not accompanied by an appearance of specific financial crisis fuses, which mount tensions in key regions of a country. Thus, seemingly, there is no threat of domino effect either, that is transferring the financial problems of one country to another, due to economic links existing between the two. The above argumentation is true in the light of the data included in table 8.

The third factor, determining speculative expectations, and, at the same time, decisive in the prevention of a possible financial crisis is the Central Bank reserves. For the entire European Union, the ECB reserves, which in May 2007 amounted to 327 billion €, are of fundamental importance. The sum is almost ten times the total current account deficit of all European Union countries. Under such conditions, a speculative attack on euro or disorganised fluctuations of global capital, are practically incapable, on their own, of upsetting the exchange rate. Perhaps, some threat would be posed by the fund, with the capital of circa 300 billion dollars, announced by Chinese government, which is to be created from one-billion foreign exchange surplus of this nation. The Chinese government declared that it is designed for improving the effectiveness of investments. Despite of the assurances that it would not be used for political ends, it is difficult not to give in to the fear that this powerful country is motivated by other goals, of a more long-term and uneconomical nature. Even if such fund-related actions by Chinese authorities did not cover euro zone, the similar actions taken in other regions could have destabilisation effects.

196 ANDRZEJ SOPOĆKOTa

b. 8

. Bud

get d

efi c

its in

EU

2004

q02

2004

q03

2004

q04

2005

q01

2005

q02

2005

q03

2005

q04

2006

q01

2006

q02

2006

q03

2006

q04

2007

q01

Eur

o zo

ne61

2314

221

2456

397

90–4

565

521

–595

1–1

3839

–687

1–4

938

2187

7–1

427

EU

(27

cou

ntri

es)

–100

23–1

0140

7217

–101

29–9

115

–203

14–2

6497

–362

11–1

0812

–269

08–1

1590

–353

65

EU

(25

cou

ntri

es)

–548

1–6

331

1120

9–5

556

–841

8–1

5655

–239

53–3

0037

–144

45–2

0463

–482

6–3

1273

EU

(15

cou

ntri

es)

6818

5053

2121

1:

::

::

::

::

Bel

gium

5683

551

2179

1498

5449

–423

1128

–568

5366

–898

2286

:

Cze

ch R

epub

lic–1

346

–212

6–1

352

479

–119

8–1

107

–767

240

–164

0–1

543

–179

5:

Den

mar

k18

8414

5886

667

425

1326

8320

0348

715

8623

8073

0:

Ger

man

y27

052

1703

822

848

3165

825

632

2184

823

915

2527

325

698

2288

042

712

:

Est

onia

–429

–170

–343

–286

–334

–256

–283

–407

–436

–479

–619

:

Irel

and

–149

–359

–252

–167

6–1

424

–793

–307

–202

4–1

770

–115

5–8

39:

Gre

ece

–299

148

9–4

637

–451

1–3

269

–345

–590

4–8

095

::

::

Spai

n–1

1134

–110

25–1

0724

–181

95–1

6442

–152

70–1

6952

–221

16–1

9150

–223

35–2

1135

:

Fran

ce–4

271

–133

9–2

625

–351

9–9

370

–337

9–1

0686

–338

9–1

0389

–527

8–2

991

:

Ital

y–5

059

3436

–625

1–7

915

–671

3–1

100

–631

6–1

1999

–869

1–6

513

–880

6:

Cyp

rus

–41

243

–616

–309

124

269

–849

–367

–90

321

–724

:

Lat

via

–515

–390

–318

–279

–346

–435

–574

–486

–681

–100

4–1

240

:


04q0

220

04q0

320

04q0

420

05q0

120

05q0

220

05q0

320

05q0

420

06q0

120

06q0

220

06q0

320

06q0

420

07q0

1

Lith

uani

a–4

57–3

44–2

95–2

25–3

91–4

11–4

55–5

11–5

35–7

63–7

63:

Lux

embu

rg

3495

910

5211

5532

094

585

411

0972

810

4662

6:

Hun

gary

–224

4–1

706

–164

7–1

310

–151

7–1

863

–139

7–1

516

–123

3–1

135

–107

7:

Mal

ta–1

1253

–186

–129

–100

38–1

89–1

41–1

0236

–102

:

Hol

land

1025

885

1513

735

1441

780

0563

8410

195

1232

213

335

7619

1253

4:

Aus

tria

189

–150

210

823

0138

8–9

1414

7338

8644

159

437

15:

Pola

nd–3

028

–210

6–1

183

–843

–741

–116

3–1

385

–283

2–1

265

–950

–266

4:

Port

ugal

–286

2–2

263

–351

9–3

701

–400

8–2

761

–401

4–4

166

–406

6–2

785

–358

3:

Slov

enia

–232

–147

–272

–125

33–6

0–3

95–1

6353

–213

–431

:

Slov

akia

–518

–423

–322

–168

–105

8–4

90–1

526

–745

–708

–112

1–8

34:

Finl

and

1119

3120

4683

2179

–526

2765

3534

2167

1273

2654

3694

:

Swed

en54

6648

1744

4851

4747

9554

0849

1063

2247

1353

5762

59:

Gre

at B

rita

in–1

0043

–110

57–1

657

–100

72–4

822

–154

01–1

2326

–167

72–1

2785

–171

59–1

6968

:

Nor

way

6276

7618

8020

8655

6686

9706

1258

711

022

1195

6:

::

USA

–138

737

–145

668

–144

195

–134

052

–154

917

–161

621

–188

037

–164

154

–173

867

–188

313

::

Japa

n34

356

3591

030

450

3394

330

207

3499

834

111

3931

527

603

3574

8:

:

Sour

ce:

Eur

osta

t.


The ECB is an official bank of the entire EU, not only of euro zone, and is obliged to provide assistance to member states. This support is given, under numerous conditions, when the occurring problems are not of a temporary character. The countries outside euro zone must deal with periodical fluctuations of exchange rate on their own, using their own reserves.

In Poland, these reserves exceed the deficit amount by almost six times (table 9.).

Tab. 9. Polish foreign currency reservesOfficial reserve assets of NBP, mln euro

1998 1999 2000 2001 2002 2003 2004 2005 2007

24 209 27 179 29 524 30 067 28 450 27 095 26 966 35 970 44 633

Source: NBP data, May 2007.

These reserves are relatively high, and, given the simultaneous opportunity of using ECB assistance, provide a high probability of maintaining relative stability of exchange rate, and, thereby, of the entire financial system. Admittedly, it is hard to produce numerical evidence with that respect.

Over the period of 10 months of year 2003, the Bank of Japan spent approx. 150 billion dollars2 on monetary interventions. These monetary interventions had been the world’s greatest interventions up to that time. Then, Japanese portfolio investments reached approx. 1700 billion USD ((Bank of Japan. International Investment Position in 2003). When we juxtapose one amount with the other, we will receive the following correlation 1:11. If we applied these relations to Polish conditions, that is, if we indicated the amount of monetary interventions that could possibly be needed in Poland under similar conditions, we will end up with the sum of 6 billion USD, i.e. a little more than the one-fifth of official monetary reserves.

Japan is a great financial centre with large capital resources. Having that in mind, its interventions, aimed at holding back many years’ yen appreciation, exceed in scale all the other interventions by central banks. It would be quite inadequate to juxtapose Poland and Japan in order to draw conclusions on financial market phenomena. However, such juxtaposition may provide information about the amount of financial means needed for monetary interventions, even if those needs are particularly great.

Obviously, a key factor in performing the assessment is the absolute value of the means, at the disposal of the central bank. Because, the greater the amount of such means, the bigger the capital resources necessary for, e.g. triggering the movement of exchange rate, and such resources remain under the control of one harmoniously-operating group of investors. However, direct actions by big financial institutions are, at least on a bigger scale, not very probable. Their resources

2 Compare: FRBSF Economic Letter, Dec 2003.


are divided by limits, depending on the size of particular currency markets and their attached risks. Fast changing of such limits would also entail fast changing of cautiousness procedures, which, in case of very big companies, is almost an unfeasible task. At any rate, these institutions are, as a rule, relatively transparent in order to meet the requirements of supervision and principles of transparency, becoming ever more common, with respect to shareholders. Big-scale speculative operations, aimed at one country, would undoubtedly encounter negative reactions of the agencies supervising banking sector, as well as shareholders’ discontent. A more probable scenario is the cooperation of big private investors, also not a direct one, but through related and subsidiary companies. Their likely area of activity would be a simultaneous operation on the spot and forward market in order to achieve a considerable financial leverage. One may assume that these would be, nevertheless, short-term operations, since longer operations are costly and more identifiable, both by supervisory agencies and competition.

The possible threat of destabilising Polish financial market by potential speculative attacks cannot be, to all appearances, theoretically defined. What would be needed for that purpose is the analysis of specific instances of such operations, with the awareness that the information about the same would be rather limited. Right now, with respect to Poland, there are no grounds for making plausible the hypothesis that an effective speculative attack, destabilising Polish financial system, is possible.

Information about the authorProf. dr hab. Andrzej Sopoćko – Institute for Banking and Financial Markets, Faculty of Management, University of Warsaw. E-mail: [email protected].

Bibliografia

Abiad, A., Leigh, D. i A. Mody. 2007. International Finance and Income Convergence: Europe is Different, IMF Working Paper.

Bakker, A. i B. Chapple. 2006. Advances Countries Experiences wit Capital Account Liberalization. IMF Occasional Paper, nr 214.

Bank of Japan. 2003. International Investment Position in 2003.Ehling, P. i Ramos, S.B. 2006. Geographic versus industry diversification: Constraints matter. Journal

of Empirical Finance, vol. 13(4–5).Hardy, D.C.L. 2006. Regulatory Capture in Banking, IMF Working Papers.FRBSF. 2003. Economic Letter.Sangbae, K. i I. Francis. 2007. On the relationship between changes in stock prices and bond yields

in the G7 countries: Wavelet analysis. Journal of International Financial Markets, Institutions and Money, nr 2.


Renata Karkowska

Hedge funds – identification of risks and investment opportunities

1. Introduction

Hedge funds are an alternative form of investment in capital markets. The idea of the first such funds was to bur and short sell securities in the market in order to hedge the risk of price fluctuations while endeavouring to maximise profit. The major feature of the funds was a possibility to generate high rates of return both during bull and bear markets. Hedge funds are characterised by a very high investment risk and their investment strategy is often aggressive and speculative.

Hedge funds have been operating in financial markets since mid-20th century. The first fund of this type was set up by an American citizen of Australian origin Alfred Winslow Jones in 1949. Its uniqueness consisted in mitigation of market risk with simultaneous sale and purchase of stocks. With the new technique, a more stable growth of the portfolio was achieved while eliminating sudden drops in the value with price corrections during bear markets.

Hedge funds mean primarily non-typical investment strategies and as a result positive rates of return can be achieved both during bull and bear markets. A key feature of classical investment funds is that their rates of return are subject to random fluctuations of prices in financial markets. Therefore, hedge funds are an effect of a search for alternative strategies whose financial results are independent of market risk. Hedge funds are characterised by a very high investment risk and their investment strategy is often aggressive and speculative. Low correlation with traditional asset classes (stocks, bonds), providing for a better diversification of the investment portfolio, result in classifying hedge funds as alternative investment (Sławiński 2006: 93). A good example of an alternative strategy is speculation aimed at generating profit if the anticipated change of prices of two securities occur. If the speculator’s expectations prove right, he will reach profit irrespective of any general growth or drop of prices in the specific market.

Hedge funds neutralise market risk so that they could apply their capital to where they expect a rate of return above average (Loeys, Bransolet 2004).

The name of hedge funds may be somewhat misleading – although they get involved in opposite transactions to control the risk they undertake, frequently such risk is relatively high.

Hedge funds – identification of risks and investment opportunities 201

Worldwide bear markets have resulted in growing popularity of hedge funds among individual and institutional investors. According to Hedge Fund Research, in Q3 2006 there were about 9 000 hedge funds worldwide that managed assets totalling USD 1,200 billion (compared to USD 39.9 billion under management in 1990). It is estimated that by the end of 2008 the number of such funds will grow to 12 000 with the assets under management of about USD 1.8 billion (Hexus 2007).

As compared to traditional forms of investment, in Poland hedge funds continue to be a relatively seldom used tool to multiply profit. In our market there are only 3 hedge funds: Opera, Superfund and Investors. However, there are indications that changes are just about to come. One of the facts is that in April 2008 the total amount invested by Poles in hedge funds exceed PLN 1 billion (Kossowski 2007).

One of the reasons is that this form of investing has become more affordable in Poland since the minimum amount to invest in a hedge fund has been decreasing (over the last six month from about PLN 40,000 to a few thousand).

2. Characteristics of hedge funds

Most hedge funds operate on the basis of “multi strategies” which are quite opposite to the investment policies applied by classical investment funds. They may assume long positions and draw profit from market growth as well as short positions that generate profit when the markets fall.

Usually they are looking for opportunities when high rates of return may be generated. Therefore, their investment portfolio contain listed stocks and stocks that are to be listed, shares in limited liability companies, derivatives with currencies, stock indices as the underlying as well as investments in physical goods such as properties or commodities.

Investment strategies of hedge funds are based on:– arbitration transactions (transactions guaranteeing profit without accompanying

risk due to price differential in various markets),– expansion to global markets, also emerging markets,– M&A transactions,– investments in commodity markets,– investments in difficult debt,– use of sophisticated derivatives,– term transactions,– short sale (Wojtaszek 2006).

There are other major differences between hedge funds and traditional investment funds that are specified in table 1.

The key objective of a hedge fund is to limit price fluctuations of its participation unit (return variability) with a simultaneous effort to mitigate investment risk and generate high rates of return, irrespective of changing markets or current market situation. Investment horizon of hedge funds may be very different with

202 RENATA KARKOWSKA

two years being a minimum. This means that the investments are long-term. The management style provides for continuous adjustment to current market trends and use of short-term price fluctuations. Additionally, many hedge funds set internal volume limits (a maximum value of assets under management) which allows them to focus on most attractive opportunities that occur in the market. Therefore, the managers are characterised by higher flexibility and they can jump on opportunities when they arise.

Table 1. Differences and similarities of hedge funds and traditional investment fundsCategory Hedge funds Classical investment funds

Investment objective

Absolute rate of return – positive rate of return irrespective of the market (bull, bear)

Market rate of return – results are referred to a market benchmark

Strategies Use of financial leverage, short sale and other strategies, active management

Restrictions in application of risky strategies

Type of strategy

Use of financial leverage and often strategies based on derivatives

Do not use of financial leverage and derivatives only to a limited extent

Risk Highly hedged against market risk Open to market risk Liquidity Restrictions in investments and withdrawal High liquidity Marketing Access to a limited group of investors Broad access to retail markets Fees On assets and profit – administration fee,

success fee On assets

Regulations No legislation dedicated solely to hedge funds, operating subject to rules applicable to close-end funds

Detailed legal regulations

Entry/exit barriers

High – as specified in respective policies None

Source: Author’s presentation based on K. Gabryelczyk, 2007, Nowe usługi finansowe.

Also the method of charging fees in hedge funds is different than in ordinary funds. Generally there are two types of fees paid to managers:– management fee/administrative fee – usually 1–4% of the net asset value of

the fund (2% is standard). Management fees are usually calculated annually and paid monthly,

– success fee/performance fee – usually 20% on profit but the scales of such fees may differ among funds.Success fee may be charged in three ways:

a) in a first case, the fee is charged on the profit generated by the fund,b) the second method – high water marks is very interesting and more favourable

to investors. The trick is that the manager charges no fee until the assets reach a higher (being the highest) level than a pre-determined level.

c) the third method is hurdle rate – in this case the fund sets a benchmark (e.g. 15%). If during a year the fund generates profit above the benchmark, the fee is charged on the actually generated profit (Gabryelczyk 2006).In hedge funds there is also an exit fee (Withdrawal/Redemption fee/Surrender

charge) applicable when investment is withdrawn from the fund before expiry of


a pre-determined period. The objective of the fee is to secure long-term investments of the fund (reduced risk related to a need to liquidate fund assets when an investor wishes to withdraw) and persuading investors against withdrawing from a fund in a period with lower results.

Subscriptions and redemptions of participation titles under hedge funds occur quarterly or monthly. For instance, Polish hedge funds in the Superfund SFIO series can be bought once a week and redeemed once a month. However, not on any day but only on the first working day of each month. Such orders have to be placed latest 7 days before the deadline. Additionally, hedge funds may reserve a right to suspend redemptions in specified circumstances.

Contrary to typical investment funds, hedge funds are usually offshore funds.

Figure 1. Number of hedge funds in 1990–2007

0

1000

2000

3000

4000

5000

6000

7000

8000

1990 1995 2000 2005 2007 (1st, 2nd quarter)

Number of hedge funds

Source: Author’s presentation based on: Hedge Fund Research INC, Investment Company Institute 2007.

Figure 2. Asset value of hedge funds in 1990–2007

0

200

400

600

800

1000

1200

1400

1600

1800

1990 1995 2000 2005 2007 (1st, 2nd quarter)

Asset value ($ bln)

Source: Author’s presentation based on: Hedge Fund Research INC, Investment Company Institute 2007.


The American East Coast – mainly New York and the Gold Coast with such cities as Stamford or Greenwich are primary locations in the terms of the number of fund managers operating there – the number is almost twice as many as the number of fund managers operating in the second largest hedge fund centre – London. However, considering the vast number of hedge funds coming from the USA, the proportion comes at no surprise.

Australia is the major centre of hedge fund management in Asia-Pacific with over one fourth of the total amount of USD 140 billion of assets invested in the entire Asia-Pacific area in 20061.

The number of hedge funds has been fast growing in the recent years; however, the value of assets under management has not been growing that fast. For comparison, in 2006 the value of managed assets was as follows:– traditional investment funds: USD 10,400 billion,– NYSE: USD 15,400 billion,– worldwide FX market: USD 44,000 billion2.

Recently, hedge funds have been turning to new areas of alternative investments. Those include the following sectors (Mazurek 2007):– power sector (use of contracts, option spreads and swaps for oil or energy or

direct financing of construction of oil pipelines and power plants),– Private Equity (purchase of interests in and restructuring of companies or

investments in difficult receivables),– real estate properties, – financing of medium-size companies,– investments in listed funds,– credit derivatives.

3. Strategies of hedge funds

Hedge funds may not be assigned one specific investment strategy. Most of such funds operate on the basis of various strategies looking for opportunities wherever high rates of return can be generated.

Due to a large variety of strategies, it is difficult to develop a classification that would cover them all. One of existing proposals is systemisation developed by VAN Hedge Fund Advisors, LLC, Nashville, USA.

With reference to hedge funds it identifies 11 key investment strategies:a) Aggressive Growth – aggressive growth hedge funds invest mainly in capital

markets in companies with high growth potential.b) Distressed Assets – hedge funds following this strategy look for profit in stocks,

debt or receivables from companies that are undervalued by the market as

1 The information comes from www.wikipedia.pl, term “Hedge Fund” (fragment: “Hedge fund mana-gement worldwide”), http://en.wikipedia.org/wiki/Hedge_fund.

2 The information comes from Hedge Fund Research INC, Investment Company Institute 2007.


well as those that undergo restructuring, are being liquidated or bankrupt. Profit is generated on the basis of a lack of understanding of debt whose value is depreciated. A typical strategy would be to buy debt of such company at a discount, hold the assets throughout the restructuring process and sell such assets when their value recovers. In this strategy, profit is not related to the current market condition.

c) Emerging Markets – the strategy is based on investing in capital, debt of currency markets in emerging economies. Those markets are characterised with higher inflation rates and highly volatile rates of return.

d) Fund of Hedge Funds –the strategy is that funds invest most of its assets in participation units of other hedge funds.

e) Equity market neutral – the manager invests a similar amount of capital in a long and short position of equity securities. Long positions are taken in securities where growth is anticipated and short positions in securities where the price is expected to drop. Often decisions are based on fundamental analyses of companies and anticipated development.

f) Income funds – hedge funds applying this strategy are largely focused on profit in terms of interest, dividend than capital gains. The funds apply financial leverage to buy stocks ort debt derivatives in order to benefit from appreciated of the principal and from interest.

g) Macro or Global – the investment objective of hedge funds with a macro strategy is to make profit on developments in global economy while investment decisions are made on the basis of macroeconomic forecasts.

h) Arbitrage – hedge funds using arbitrage strategy make profit due to market inefficiencies. Their strategies are based in balancing their positions, often with various assets of the same issuers.

The most common example may be simultaneous purchase and sale of stock of the same company in two markets (with dual listing) or purchase of bonds of a company with simultaneous hedge in the credit derivative market.

i) Multi funds – the investment strategy of multi hedge funds is characterised with no attachment and specialisation in one strategy. The funds apply different strategies at the same time to accomplish their short- and long-term goals. Risk diversification consists in various maturities of the instruments in the portfolio.

Frequently, automatic transacting systems and technical analysis are applied.j) Short Only/Short Sell – funds using this strategy sell short assets which in their opinion

are overvalued expecting to buy them back in the future at a lower price.k) Event Driven – event driven hedge funds invest in markets when extraordinary

situations occur: take-over, mergers, hostile take-over, Leveraged acquisition. Funds following this strategy are able to invest their cash in the safe and very liquid money market (deposits, short-term securities) for weeks or even months so that when an extraordinary situation occurs they are able to invest most of their cash in one or several investments (New World Alternative Investment 2007).Figure 3 presents percentage proportions of the specific types of strategies.


Figure 3. Share of investment strategies in the portfolios of hedge funds

Source: Author’s study on the basis of http://www.bestwaytoinvest.com

4. Risk and rates of return generated by hedge funds

The goal of strategies applied by investment funds is to achieve a market rate of return which is due to passive management by classical funds, or to achieve a rate of return above average (above a market benchmark) which applies to active management of hedge funds. A frequent element of hedging strategies is to hedge against market risk.

Therefore, the variability of rates of return generated with alternative strategies is hardly correlated with the variability of rates of return on market portfolios.

It should be noted that statistics concerning rates of return and risk assumed by hedge funds are not transparently disclosed to the public. As there is no legal requirement to disclose such information, hedge funds rarely publish their results or publish only good results. Therefore, the analysis was performed only on the basis of available data.

Rates of return generated by hedge funds over the last years have been displaying high effectiveness of operation. Historic data shows that rates of return of hedge funds have been much above stock indices. In 1988–2005 the annual average rate of return for the entire sector was 15.7% and was higher than the rate of return generated on stock investments (S&P500 was gaining 12% annually in the same period while MSCI World Equity Index – 6.8%). The results of 2007 confirm the trend – in 2007 hedge funds were gaining 11.2% on the average. For comparison, in the same period S&P500 gained 5.5% while MSCI World Equity – 7.1%. Recently the best results were generated by a strategy based on investments in emerging markets. Good results are also delivered by opportunistic managers


and those that invest in company inherent value. The table below presents average rates of return of hedge funds subject to the applied strategy and risk calculated with standard deviation as compared to the same measures generated by market stock benchmarks (MSCI Word Equity Index, S&P 500 Index) in 1988–2005.

The date in table 2 shows that not all strategies applied by hedge funds generated rates of return above market rates and that the volatility of the rates was high in certain instances (like in Short Selling, Futures, Aggressive Growth strategies in 2001–2005).

Table 2. Results of hedge funds in 1988–2005

StrategyAnnual rates of return Volatility

2001–2005Rate of

return / risk 1988–2005 2001–2005 2005

Market Neutral Group 14.9% 7.4% 5.2% 2.4% 3.1Equity Market Neutral 14.8% 7.4% 7.1% 2.3% 3.2Event-Driven 17.0% 9.4% 7.3% 4.6% 2.0Distressed Securities 18.2% 14.9% 9.6% 4.6% 3.2

Merger Arbitrage 5.0% 3.5% 5.6% 2.1% 1.7

Special Situations 16.8% 6.8% 6.2% 5.3% 1.3Market Neutral Arbitrage 12.5% 6.2% 3.1% 2.0% 3.1Convertible Arbitrage 10.5% 7.2% –1.7% 4.1% 1.8

Fixed Income Arbitrage 6.4% 8.2% 6.0% 1.9% 4.3

Statistical Arbitrage 3.8% 5.6% 4.7% 3.5% 1.6Long/Short Equity Group 16.7% 7.9% 10.9% 7.0% 1.1Aggressive Growth 16.9% 2.7% 8.5% 10.8% 0.3

Opportunistic 19.3% 9.5% 13.4% 6.3% 1.5

Short Selling 1.4% 1.0% 3.7% 14.3% 0.1

Value 16.6% 9.9% 11.6% 8.4% 1.2Directional Trading Group 17.1% 7.5% 4.6% 6.8% 1.1Futures 17.1% 9.5% 2.8% 12.2% 0.8

Macro 16.0% 6.0% 8.6% 4.7% 1.3

Market Timing 15.3% 3.6% 0.9% 5.2% 0.7Specialty Strategies Group 14.5% 12.1% 12.0% 7.6% 1.6Emerging Markets 16.8% 15.7% 16.8% 11.4% 1.4

Income 9.9% 8.6% 6.4% 2.3% 3.7

Multi-Strategy 14.5% 6.9% 7.2% 6.5% 1.1BenchmarksVan Global Hedge Fund Index 15.7% 7.9% 8.4% 4.9% 1.6MSCI World Equity Index 6.8% 0.9% 9.5% 9.8%

S&P 500 Index 12.0% 0.5% 4.9% 14.9%

Source: Author’s studies on the basis of data from VAN Hedge Fund Advisors, LLC, Nashville, USA. http://cfo.cxo.pl/ (issue 5/2006).


The rate of return shows that the Equity Market Neutral strategy and Event Driven strategies proved most effective. On the other hand, there were strategies where the rate was below the Van Global Hedge Fund Index – 1.6. The high potential of the market is proven with the high value of the Sharpe index – calculated for 18 months the Sharpe index for hedge funds was 1.6.

At the same time, the index for trust funds was 0.6 and for the MSCI Word Equity Index – 0.3 (Mazurek 2006).

Analysis the rates of return generated by hedge funds we can note that during bull markets their profit level is less than of the stock market while during bear markets they lose less than stocks. That is due to an effort to maintain a stable rate of return to guarantee bonus for the manager. Resistance to decreasing stock indices is also due to the application of a strategy with low correlation to the stock market and playing on spreads by entering into opposite transactions or short selling (Wojtaszek). This is confirmed in Figure 4.

Figure 4. Rates of return of hedge funds as compared to market benchmarks in 1988–2005

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

–30%

–20%

–10%

0%

10%

20%

30%

40%

50%

Van Global Hedge Fund IndexMSCI World EquityS&P500

Source: study on the basis of Mazurek, J., 2006, Kierunki rozwoju funduszy hedgingowych, www.skarbiec.biz.

Why are hedge funds able to be ahead of the market and generate profit above average? This is possible since contrary to assumptions of the market effectiveness hypothesis, in the world at large understanding of the market situation differs among investors. The more time and resources a fund devotes to analysing information on listed companies, the higher the probability that it will find securities that are undervalued. Thus, such securities can be purchased inexpensively and sold at a higher price before the market equalises the prices, in accordance with their fundamental value. An actively managed fund may generate a rate of return above market when most of its decisions prove correct despite the random price changes in the financial market. This occurs when the fund manager finds an “effectiveness niche” in the market in the form price anomaly that they can draw on. However,


such opportunities are less and less because financial markets become more effective as per Figure 5 (Sławiński 2006: 90-91).

With respect to hedge funds, they can be divided into groups of institutions specialising in various types of investments; however, it is impossible to find out the risk scale assumed by specific funds. This is so because funds use derivative instruments and other forms of financial leverage. Additionally, they often change the leverage volume, depending on the market situation. Therefore, when clients of a fund are convinced that it operated cautiously, they do not know what risk are assumed. In exchange they may count on rates of return above average that – when one looks at historic data – have been generated quite often. High rates of return are generated mainly on the use of price anomalies on multiple markets, also commodity markets. The question is, however, for how long more thousands of new funds will be able to continue finding attractive anomalies to offer spectacular returns to their clients? (Loeys 2004).

Figure 5. Reasons for converging rates of return generated by actively and passively managed fund

Common activemanagement ofinvestment funds

Improved marketefficiency anddisappearance ofprice anomalies

Equalised rates ofreturn of fundsmanaged actively andpassively

Source: author’s study on the basis of Sławiński, A., 2006, Rynki finansowe, Polskie Wydawnictwo Ekonomiczne, Warszawa.

Obviously, Polish market indices cannot be taken as comparable; especially that the hedge funds in the Van Global Hedge Fund Index do not invest in Poland. In Poland we have only one strictly hedge fund – Superfund. Furthermore, there are two funds following similar strategies: Opera TFI and Investors TFI. They invest inter alia in commodities, currencies, derivatives (Szweda 2008).

5. Entities collaborating with and investing in hedge funds

Investment strategies of funds provide for entering into a large number of transactions and thus they require strong operating support, brokerage and financial services from banks and brokers and other specialist companies providing services to hedge funds and other large institutional clients.

A reason for the growing number of hedge funds in recent years was based in problems of banks which limiting their lending (as a result of a growing corporate bond market) were looking for new sources of income. Thus banks were increasing the number of transactions directly in financial markets which however was related to excessive risk and required substantial equity involvement. Therefore, banks began to increase their capital market investments indirectly via hedge funds.


At the beginning and in the mid-1990s, high net worth individuals were almost exclusively the clients of hedge funds. Mainly due to high capital requirements.

A minimum amount required to commence investments in hedge funds is USD 250,000. However, this has been changing.

Now such funds are becoming the focus of institutional investors, including pension funds and foundations. The chart below shows the structure of hedge fund investors in 1992–2004.

Fig. 6. Structure of hedge fund investors in 1992–2005 (%)

19920

20

40

60

80

100

0

20

40

60

80

100

1996 1997 1998 1999 2000 2001 2002 2003 2004

Individual investorsFOHF fundsInstitutional investorsPension funds and programsFoundations

FOHF – funds of hedge funds.

Source: Zalewski, G., Klienci funduszy hedge, Portal Inwestycji Alternatywnych, www.ai.pl, 26.04.2005.

The important position occupied now by FOHF (funds of hedge funds) is worth noting. Funds of hedge funds invest in a number of various hedge funds. They are expected to ensure lower volatility and an attractive risk adjusted rate of return due to higher differentiation. Funds of funds are also more accessible to less affluent clients since they reduce the amount of the first investment (even 10 times). Their popularity is due to the fact that even institutional investors prefer to rely on their experience and benefit from a more differentiated portfolio. Apart from a main market portfolio which is often managed passively, they also hold investments in hedge funds – satellite portfolios (Amenc 2004: 64).

6. Legal regulations of the hedge fund market

The growing share of hedge funds in capital markets and the concerns related to their transparency for a long time have stimulated attempts at introducing detailed regulations of their business. The arguments in favour of introducing


regulations dedicated to hedge funds are as follows: financial stability, investor protection and market integrity. Sometimes a fourth argument is mentioned that introduction of a uniform (although soft) regulation regime would favour market integration (Hucik-Gaicka 2006). The argument was raised in a debate on potential introduction of EU level regulations on hedge funds so that they could use a common passport (just like in the case of UCITS – undertaking for collective investments in transferable securities).

Among the potential methods to regulate the sector there are completely opposite approaches – from no regulations at all to full direct regulation – and a number of indirect solutions, including self-regulation, indirect regulations (e.g. by relations between hedge funds and regulated counterparties) and soft indirect regulations (e.g. voluntary disclosures or relations with individual investors). Since the hedge fund sector is international by nature and may easily evade national regulations, so far specific stress has been put on indirect regulations that are part of banking supervision. On the other hand, the US Securities and Exchange Commission, “SEC” has introduced regulations requiring registration of hedge fund managers. The authors of the initiative specify the following benefits from such registration: control and verification of the managers’ know-how, possibility for SEC to collect comprehensive information on operations of the managers, requiring the managers to provide investors with information on conflicts of interest or identification of a minimum direct investment on which the manager may charge success fee (Mazurek 2007).

At present in the European Union there is no single regulation regime applicable specifically to hedge funds and managers of such funds while some countries launch their own regulations. France, Germany, Italy, Spain, Ireland and Luxembourg have introduced national regulations focusing primarily on investor protection but differing with respect to distribution methods, subscription restrictions, rules concerning fund management and disclosure requirements. However, the global nature of hedge funds is an obstacle to regulating the sector and a possibility to transfer funds to another country in order to avoid specific national regulations (Kupiecka 2005).

7. Final conclusions

Hedge funds have been blossoming. With high rates of return they generate, they can afford not to disclose information on the related risk. Clients usually only hope that also they can generate profit above average. However, it seems that with time the rates of return generated by hedge funds will not differ from those generated by traditional funds. This is due to increasing competition among them and market efficiency. Also the regulators of institutional investors who invest in such funds will require disclosure on the risks assumed.

However, no control by regulators does not enable to perform a complete analysis of hedge funds. Hedge funds are not required to disclose their financial statements and therefore all numbers in this article are only estimates.


Among the major advantages of hedge funds is their participation in improved market liquidity since they are more open to risk their capital in more volatile markets and thus help amortise market disruptions (Hucik-Gaicka 2006).

The very presence of hedge funds as entities actively assuming risks may contribute to development of emerging markets as well as highly specialised OTC markets. They may also improve risk distribution among market participants. However, the diversification potential is most important for investors.

However, there is much more discussion on hazards related to the operation of hedge funds than on their advantages. Hedge funds exert strong influence on the functioning of financial markets and banks and may destabilise the entire financial sector via them. Without appropriate reserves and credit availability, the application of leverage and assuming market risk may cause that funds will not be able to provide the required margin and meet their obligations. Additionally, in a situation of rapid changes of market conditions, hedge funds when closing their exposures may affect the prices of investments and thus market stability.

Information about the author Renata Karkowska PhD – Associate Professor in the Department of Banking and Financial Markets, Faculty of Management, University of Warsaw. E-mail: [email protected]

Bibliography

Amenc, N., Malaise, L. i L. Martellini. 2004, Revisiting Core-Satelite Investing. The Journal of Portfolio management, nr 3/2004.

Biuletyn Miesięczny Europejskiego Banku Centralnego. 2006. Fundusze hedgingowe: rozwój i implikacje prawne, styczeń.

Brodzka, A. 2006, Fundusze hedgingowe: alternatywne możliwości inwestowania, www.aip.pl.Gabryelczyk, K. 2006. Fundusze inwestycyjne. Rodzaje, zasady funkcjonowania, efektywność, Kraków:

Wolters Kluwer.Gabryelczyk, K. i U. Ziarko-Siwek. 2007. Inwestycje finansowe, Warszawa: Wydawnictwo: CEDEWU.Gabryelczyk, K. 2007. Nowe usługi finansowe, Warszawa: Wydawnictwo: CEDEWU.Garbaravicius, T. i F. Dierick. 2005. Hedge funds and their implications for stability. ECB: Occasion

Paper, sierpień.Hucik-Gaicka, S. 2006. Rozwój branży funduszy hedgingowych – regulacje, www.aii.pl.http://euro.bankier.pl. 2007. Hexus Capital Management – Fundusze hedgingowe, czyli jak dziś zarabiać

duże pieniądze?Kossowski, M. 2007. Więcej funduszy hedge na polskim rynku, www.aii.pl.Kupiecka, E. 2005. Regulować czy nie regulować. Gazeta Giełdy Parkiet, 02.07.2005.Loeys, J. i L. Bransolet. 2004. Have Hedge Funds Eroded Market Opportunities? Londyn: J.P. Morgan.Mazurek, J. 2006. Kierunki rozwoju funduszy hedgingowych, www.skarbiec.biz.Mazurek, J. 2007. Nadzór nad funduszami hedgingowymi i regulacje prawne, www.skarbiec.biz,New World Alternative Investment 2007. 2008, styczeń.


Sławiński, A. 2006. Rynki finansowe, Warszawa: Polskie Wydawnictwo Ekonomiczne.Szeląg, T. 2003. Hedging w teorii i praktyce, Wrocław: Wydawnictwo przecinek.Szulec, P. 2007. Fundusze hedgingowe: wyższe zyski, niższe ryzyko? www.bankier.pl.Szweda, E. 2008. Nieszczelne ogrodzenie. Manager Magazin, nr 5 (40).The Economist. 2005. Hedge Funds. Too Clever by Half, 14 maja.Van Hedge Fund Advisors International, Van Hedge Fund Indices – Global U.S. and Worldwide Hedge

Fund Demand Outstripping Capacity?, August 2005.Wojtaszek, J. Co to są fundusze hedgingowe, www.nbporta.pl.Zalewski, G. 2005. Klienci funduszy hedge, Portal Inwestycji Alternatywnych, www.aii.pl, 26.04.2005.