world academic journal of business & applied sciences (wajbas)

WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION

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An Open Access & Double Blind Peer Reviewed Journal

PRINT ISSN: 1234-5492 ONLINE ISSN: 1234-5881

WORLD ACADEMIC JOURNAL OF

Business & Applied Sciences

www.wajbas.webs.com

WAJBAS PUBLISHING-GERMANY

International Publisher of Journals, Books and Cases

Volume 1, Issue 1-7 NEW

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WAJBAS Editorial Board Editor-in-Chief

Kreiner Stephan, Goethe-universität Frankfurt am Main, Germany

Associate Editors

Pr. Bostan D.Ionel, Alexandru Ioan Cuza University of Iasi, Faculty of Law ,Romania Dr. Alireza Miremadi, Graduate School of Mgmt & Economics, Sharif University of Technology-Int'l Campus, Iran Dr. Saïd Jaouadi, Jazan University, Saudi Arabia Dr. Saïd Jaouadi, Jazan University, Saudi Arabia Dr.Hai-Linh Dr.Hai-Linh Tran, South Korea Inha University, College of Engineering Dr. Jephte Olimpo Muñez,National College of Public Administration and Governance University of the Philippines Dr. Kleinschwärzer-Meiste Mary, Universität Zu Kiel Dr. Leimgruber Bertram, Hochsule fur Bankwirstchaft, Frankfurt am Main, Germany Dr. Edgar Jamie Calvin, Massachusetts Institute of Technology, USA Dr. Kevin Killinaus, Edingburgh Napier University, UK Dr. John Chen, Nanyang Technological University, Singapore Dr. Maria Gavrilvoa,Calgary University, Canada Dr. Frank Clerkson, Goethe-universität Frankfurt am Main, Germany Dr. Zhou Wen, University of Hongkong, Hongkong, China

International Editorial Review Board Dr. Richard Spanjers, University of Freiburg, Germany

Dr.Bright Meljon. Harvard University, USA

Dr. Geovany Holmes, University of Kent, UK Dr. Emile Martin, Hong Kong University of Science and Technology, Hongkong

Dr. Georges Dreher, Heidelberg University, Germany

Dr. Jose Armando Rosas, University of Texas at El Paso, USA

Dr. Charles Stencer, University Regensburg, Germany

Dr. Mohamed Abu-Taieh, Arab Academy for Banking and Financial Sciences, Jordan

Dr. Didier Wittlinger, Durham University,UK Dr. Ahzam M Amini, University of Memphis, USA

Dr. Andreas Zelin, University of Tübingen, Germany

Dr. Daniel Arendt, ISL Institute of Shipping Economics and Logistics, Germany

Dr. Jim Carsey, University of Pennsylvania, USA

Dr. Nohours Ahmed, London Metropolitan University, UK

Dr. Brahm Steven, Massachusetts Institute of Technology, USA

Dr. Gildas Antoine, Université catholique de Louvain, France

Dr. Georges Stormann, University of Cambridge,UK

Dr. Josia Andresa, University of Hong Kong, Hong Kong

Dr.Bright Meljon, Harvard University, USA Dr. Miguel Cedillo Okampo, Mexico Supply Chain Research and Development Center, Mexico

Dr. James Zimmer, University of Oxford, UK Dr. Mazene Ismael, Ecole Polytechnique Fedrale de Lausanne, Switzerland

Dr. Christine Beverly Cullough, California Institute of Technology, USA

Dr. Josua Davis, Virginia Tech, USA

Dr. Sheryl Goldman, Stanford University,USA Dr. Ronald Delino, Harvard University, USA Dr. Patricia Anderson, Swiss Federal Institute Dr. Andrew Harris, University of Melbourne,


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The Editor-in-Chief of the World Academic Journal of Business & Applied Sciences (WAJBAS) would like to invite you to consider submitting a manuscript for inclusion in this scholarly journal. The following describes the mission, coverage, and guidelines for submission to WAJBAS. Mission The World Academic Journal of Business & Applied Sciences (WAJBAS) provides perspectives on topics relevant to research in the field of business and Applied Sciences. Through its publication the journal contributes to the development of theory and practice. The journal accepts academically robust papers that contribute to the area of research in business, management, and sciences. Papers submitted to the journal are double-blind reviewed by members of the reviewer committee or other suitably qualified readers. The Editor reserves the right to reject papers that, in the view of the editorial board, are either of insufficient quality, or are not relevant enough to the subject area. The editor is happy to discuss contributions before submission. The journal publishes work in the categories described below. TOPICS OF INTEREST (INCLUDE BUT ARE NOT LIMITED TO: Health Science

Environment and Pollution

Biology Chemistry Agricultural Science Statistics and Probability Molecular Biology Plant Food Research Sustainable Agriculture Geography and Geology Marketing Materials Science Research Engineering Management Mathematics Research International Business Sustainable Development Business and Management Mechanical Engineering Research Economics and Finance Modern Applied Science Tourism Management Network and Communication Technologies Logistics & Supply Chain Management Social Sciences and Humanities English Language and Literature Studies International Law Research English Language Teaching Politics and Law French Languages Studies Sustainable Development. Higher Education Studies International Education Studies Psychological Studies Applied Physics Research Computer and Information Science Earth Science Research Energy and Environment Research Engineering Management Research

of Technology, SWISS Australia Dr. Christophe Parant, France Naval Academy Research Institute, France

Dr. Kump Yves, Penn. State University, USA

Dr. Francois Emmanuel, Haute Ecole de Gestion de Genève, SWISS

Dr. Suzanne Pleffer, Stanford School of Medicine,USA

Dr. Aravinda Andrea, Johns Hopkins University, USA

Dr. Didier Wittlinger, Durham University,UK Dr. Richard Spanjers, University of Freiburg, Germany

CALL FOR PAPERS


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Environment and Natural Resources Research Submission Prospective authors should note that only original and previously unpublished articles will be considered. Interested authors must consult the journal’s guidelines for manuscript submissions at: http://wajbas.webs.com/author-guidelines prior to submission. All article submissions will be forwarded to members of the Editorial Review Board of the journal for double-blind, peer review. Final decision regarding acceptance/revision/rejection will be based on the reviews received from the reviewers. All submissions must be forwarded electronically. All submissions and inquiries should be directed to the attention of Editor-in-Chief World Academic Journal of Business & Applied Sciences. E-mail: [email protected]

http://wajbas.webs.com/author-guidelines


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Table of Contents

RESEARCH ARTICLE

JOURNAL PAGE

La théorie des jeux et de la décision en présence d’asymétrie d’information du crédit bancaire Stéphano zico EtoughéFam’Ella & Zhang Zaisheng

Journal of Economics & Finance (JEF)

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Analyse Synoptique de l’impact et du Rôle de la Formation dans la Performance de Gestion d’une Entreprise en Eonomie ouverte Stéphano zico EtoughéFam’Ella


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Does Islamic Banking Have Any Future? A Comparative Study Ammar Ali Gull , Rehan Nasir, Muhammad Bilal, Asad Zaman,& Saqib Iqbal


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Analyzing the current incorporation of social, environmental and economic measures into business strategic performance measurement systems: the case of Enterprises operating in Shanghai Jing Zhou & Li Xu

International Journal of Business & Management

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Supply Chain Efficiency Evaluation: A Contemporary Theoretical Model Janvier-James Assey Mbang

Journal of Logistics & Supply Chain Management

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Delphi, Entropy and TOPSIS Analysis of Political, Economic and Cultural Characteristics that Affect Textile and Apparel Industry Akyene Tetteh

Journal of Engineering Management Research (JEMR)

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Volatility of Tourism Movement in the Hong kong Inbound Market Kaewta Muangasame & Nate-tra Dhevabanchachai

Journal of Tourism Management (JTM)

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The Significant Dimensions of Customer-Based Brand Equity Isaac Twum Asare

International Journal of Marketing Research

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加蓬石油公司特许经营合同：博弈论文的分析 Stéphano zico EtoughéFam’Ella & Zhang Zaisheng


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Lean thinking literature review and suggestions for future research Haritz Gorostidi Martinez & Wang Xue Lu

International Journal of Business & Management (IJBM)

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An Insight of Strategies for improving Public Perception on Life Insurance Policies in Kenya: A case study of Nakuru Municipality Cheruto Roselyne


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Students Satisfaction and Service Quality: Emphasis on Private Universities in Bosnia and Herzegovina Mersid Poturak

International Journal of Marketing Research

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Cost Overrun Causes Related to the Design Phase in the Egyptian Construction Industry

Journal of Engineering Management Research

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WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES

MARCH-SEPTEMBER 2013 VOLUME 1, No 1~7


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Dr. Hisham A. Bassioni, Dr. Alaa Sarhan, Ahmad S.Zaki (Corresponding author)

(JEMR)

The surrogate motherhood: law, morals, and policy Alexey Anisimov

Journal of Politics & Law (JPL)

147

International Inter-institutional Partnerships in Higher Tourism Education: The Case of Moi University, Kenya Beatrice H. Ohutso Imbaya

Journal of Tourism Management (JTM)

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Research regarding calculation of the tensile forces of polyurethane film and protective paper, in the process of polyurethane – pad – protective paper Gheorghe Vasile & Alexis Negrea

Journal of Mechanical Engineering Research (JMER)

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Studies and mechanical tries regarding the cutting process by punching of the package polyurethane-pad-protective paper, components of a medical device (dressing) Gheorghe Vasile & Alexis Negrea

Journal of Mechanical Engineering Research (JMER)

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Environmental Toxic Torts: The Need for Regulatory Change Cliff Fisher

Journal of Environment & Pollution (JEP)

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Internal Marketing: A Spreading Tool within Organizations Haritz Gorostidi Martinez & Wang Xue Lu

International Journal of Marketing Research (IJMR)

205

Stock Market Reforms and Its Impact on FPI in Pakistan Dr.Rashid Saeed,Muhammad Arshad, Rab Nawaz Lodhi & Zeeshan Fareed


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Impact of Liquidity on Capital Structure of Textile Sector of Pakistan Yaser Pervaiz (Corresponding Author), Asad Zaman, Sadia Abdul Salam, Muhammad Bilal


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Challenges in the Adoption and Utilization of Information and Communication Technology in Public Secondary Schools in Molo Sub-County, Kenya Bernard Komu Waweru (Corresponding author) & Cyrus Muigai Kihara

Journal of Network & Communication Technologies(JNCT)

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Impact of Physical Evidence on Perception of Service Quality in the Banking Industry: A case of Transnational Bank,Nakuru Esther Nyambugi Thuku


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An Assessment of the role of financial literacy on Performance of Small and Micro Enterprises: Case of Equity Group Foundation Training Program on SMES in Njoro district, Kenya Jacqueline Siekei (Corresponding author), Juma Wagoki & Aquilars Kalio


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Factors Affecting Effective Management of the procurement Function at Nakuru North Sub-County Arbe Bashuna


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Effects of Weak Legislation on the Performance of Nonlife Insurance Companies in Kenya Joseph Nyongesa Amambia (Corresponding author) & Joseph Githinji Kanai


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Impact of Professional Bodies in Training and Development in Nation Media Group Mercy Gakii Ben (Corresponding author), Grace Neema Kariba,


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Titus Muhoro Njuguna The impact of solar radiation on the human body Saridi Maria (Corresponding author) Papakonstantinou Elpida & Rekleiti Maria

Journal of Health Science (JHS)

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COPYRIGHT The World Academic Journal of Business & Applied Sciences (WAJBAS). Copyright © 2013 WAJBAS. All right, including translation into other languages reserved by the publisher. No part of this journal may be reproduced or used in any form or by any means without written permission from the publisher, except for noncommercial, educational use including classroom teaching purposes. Product or company names used in this journal are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by World Academic Journal of Business & Applied Sciences of the trademark or registered trademark. The views expressed in this journal are those of the authors but not necessarily of World Academic Journal of Business & Applied Sciences.

INDEXING We know that the quality of the academic journals is largely dependent on the indexing of a journal in various renowned databases of the world. Considering this fact, our journal is indexed in the following databases: ACADEMIA, GOOGLE SCHOLAR, RESEARCH BIBLE, EBSCO, PROQUEST, DOAJ, ULRICH'S, AMERICAN PSYCHOLOGICAL ASSOCIATION, WATERLOO PUBLIC LIBRARY, UK KENTUCKY LIBRARY, National Library of Singapore, Fudan University School of Management, California Lutheran, Imperial College of London, University of Cambridge University of South Africa, University of Oxford , University of Manchester, Massachusetts Institute of Technology, Freie Universität Berlin, Universität Tubingen, Ruhr-Universität Bochum.


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La théorie des jeux et de la décision en présence d’asymétrie

d’information du crédit bancaire

Stéphano zico EtoughéFam’Ella (Corresponding author) Tianjin University Liu Yuan D qu，District Foreign Students Flats 92 Weijin Road, Nankai District,

Tianjin 300072 China Tianjin University, School of Management

Zhang Zaisheng Tianjin University Liu Yuan D qu， District Foreign Students Flats 92 Weijin Road, Nankai District,


Accepted 1st March , 2013 Résumé Les relations au sein de l’entreprise tendent à se complexifier depuis quelques années. L’ouverture internationale multiplie en effet le nombre d’incitations entre les différents agents qui constituent la base relationnelle de l’entreprise. Cette dernière peut donc s’appréhender comme un nœud vers lequel les liaisons convergent et ou chaque relation (Entreprise/Actionnaires ; Entreprise/Clients ; Entreprise/Salariés ; Entreprise/Fournisseurs ; Entreprise/Banques…) Cet article s’inscrit dans le contexte actuel ou les PME ne pouvant s’autofinancer et n’ayant pas accès au marché financier, restent fortement dépendantes des banques. Nous montrons dans le cadre d’une revue de la littérature, l’importance du financement de la PME par les banques sur les marchés du crédit. En effet, elles rencontrent des difficultés du fait de leur petite taille. Ce qui conduit à l’asymétrie d’information et le problème d’anti-sélection et d’incitation contraire qui amènent les banques a une mauvaise appréciation du risque PME. Pour améliorer sa structure d’information sur la PME, la banque peut utiliser la méthode prêt-observation dans l’optique d’observer les signaux dégager sur son niveau d’effort. C’est le principe Bayésien qui permettra d’améliorer sa structure d’information sur la PME et de fait，s’engager à offrir des contrats aux meilleurs conditions et de limiter les situations d’asymétries d’informations ex post et le rationnement du crédit qui en découle. Mots clés : asymétrie d’information, sélection adverse, PME, décision, marché, prêt bancaire, contrat 1. Introduction.

La théorie de la décision et des jeux dépasse très largement le cadre étroit des sociétés, même si ces derniers ont constitué son premier objet d’étude et lui ont donné son nom. La théorie de l'équilibre général est une branche de la macroéconomie (dont le terme est introduit en 1933 par l’économiste norvégien Ragnar Frisch1) est l'approche théorique qui étudie l'économie à travers les relations existant entre les grands agrégats économiques, le revenu, l'investissement, la consommation, le taux de chômage, l'inflation, les contrats, le financement etc. En tant que telle, elle constitue l'outil essentiel d'analyse des politiques économiques des États ou des organisations. Elle cherche à expliquer comment se fixe le niveau de production et de consommation des biens et les prix dans une économie. Les modèles d'équilibre général sont donc utilisés pour

1Ragnar Frisch, « Editor's Note », dans Econometrica, vol. 1, no 1, janvier 1933, p. 1-4.

Journal of Economics & Finance (JEF) MARCH 2013 VOL.1, No.1


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mesurer l'impact des décisions politiques, comme l'augmentation d'un taux de prélèvement. Le premier résultat d’Arrow et Debreu synthétise le principal argument pour une dérégulation d'une économie, qui aboutirait à un équilibre Pareto-efficace. En revanche, la dépendance directe de cet équilibre à l'allocation initiale des ressources rentre dans la défense d'une politique de redistribution. De même les banques centrales utilisent des modèles stochastiques dynamiques d'équilibre général pour déterminer leur politique de taux. Par ailleurs, plusieurs auteurs ont bien établit que le principe d’asymétrie d’information est la source du phénomène d’anti-sélection et d’incitations contraires ou risque moral2. Elle peut aboutir à ce qu’une banque offre du crédit sur la base d’un même taux d’intérêt aux entreprises qui présentent des niveaux de risques différents. Elle est particulièrement à la base du phénomène d’anti-sélection et d’anticipations contraires qui conduisent très souvent la banque à ne point discerner avec plus d’objectivité les PME3. Dans le cas du contexte mondiale actuel, il est évident que les PME, quand elles ne peuvent s’autofinancer, restent fortement dépendantes des banques car elles ont peu d’autres opportunités de financement. Du fait de leur chiffre d’affaire qui est trop petit, 80% de celles-ci n’ont vraiment pas accès au marché financier.

La relation banque-entreprise est soumise à plusieurs sources de discordance posant le problème d’asymétrie d’information. Du fait de sa petite taille，la PME à une structure d’information pas toujours lisible a contrario de la grande entreprise (Ang, 1991). Cela conduit les banques à développer des comportements de rationnement du crédit face aux PME (Psyllaki, 1995). Les PME constituent de fait un fonds de commerce des banques. Les banques ne restent donc pas passives face aux asymétries d’information qu’elles subissent. L’asymétrie d’information peut donc être à la fois préjudiciable pour les entreprises que pour les banques. Cette thèse sur la théorie des contrats amène à s’interroger sur la façon d’enrichir le débats relatif aux contrats offerts de sorte à séparer les « bons » des « mauvais » contrats en observant ce qui se pratique sur le marché de l’assurance.

LOBEZ (1997) nous apprend que l’offre appropriée permet de séparer les diverses entreprises sur la base du choix qu’elles font d’un contrat particulier dans un ensemble structure. STGLITZ et WEI (1981, 1983 et 1992) insistent sur le rôle du taux d’intérêt, les garanties, les collatéraux. STIGLITZ et ROTSCHILD (1976), BESTER (1985) s’y alignent à la même analyse. BOOT, THAKOR et RUDELL (1991) vont nous instruire qu’en présence de deux situations présentes au même moment, les banques ne se risquent d’offrir des contrats qui ne sont pas ensembles. Alors qu’avec seulement de l’aléa moral, elles réussissent à ne demander des garanties qu’aux emprunteurs a hauts risque. L’introduction d’information privée les conduit à demander des garanties à tous les emprunteurs sans distinction entre les risques élevés et les risques moins élevés. Au regard de cette observation4, il convient de noter que la banque est dans l’impossibilité de trouver un contrat lui permettant en une seule fois, de séparer le risque. Pour nous, il serait possible de séparer alors les deux effets car la banque octroie deux types de prêts consécutifs et a court-terme dans l’optique du test de la PME. Dans le premier cas, la banque va observer les effets types de l’effort fourni et dans le second cas, c’est l’inverse. Ainsi, nous pourrons inévitablement séparer le problème d’anti-sélection du risque PME de celui de l’incitation à l’effort ponctuel.

L’asymétrie d’information définit les relations ou un agent détient de l’information qu’un autre agent n’a pas. Cette situation est souvent décrite par l’intermédiaire des relations d’agence ou le principal mandant demande a un agent-mandataire d’effectuer une action en son nom. Dès lors l’agent détenant plus d’information peut être tenté d’agir dans son propre intérêt et non dans celui du principal. L’entreprise se définit comme une entité socio-économique réunissant, dans un espace géographique unique, pour une activité déterminée, et dans le cadre de l’économie marchande, un ensemble 2 Voir BESTER H (SEPT 1985), BHATTACHARYA S (Juil 1992), BHATTACHARYA S. et THAKOR A.V. (1994), STIGLITZ J.E et WEISS A (Juin 1981). 3Ils sont d’autant plus importants qu’il s’agit du financement des PME. En effet, l’acceptation commune tend à faire les PME pour plus risquées que les grandes entreprises, ce qui n’est pourtant pas évident 4 Du hasard moral conjuguéa l’information privée


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d’hommes et de moyens. L’entreprise se présente donc comme une somme de relations imbriquées caractérisées par des asymétries d’informations. A cet effet, il serait loisible que la banque approfondisse le cadre de réflexion de la résolution des problèmes du marché financier désire par un grand nombre de PME. Pour cela, nous nous demandons si le modèle propose peut-il fournir des éléments à la pratique de l’intermédiation financière des banques qui tend à se développer.

Cet article est consacré à l’étude des comportements d’asymétrie d’information dans le cadre des contrats banques-PME, comportement de rationnement du crédit d’une part, usage des mécanismes permettant de limiter l’effet rationnement du crédit d’autre part. Nous présentons cette analyse en trois parties. La revue de la littérature qui sous-tend l’objet de la recherche. En second lieu nous évoquerons l’impact qu’a le prêt-observation dans un modèle sur les contrats bancaires aux PME avant d’en évoquer les prolongements de notre discussion qui étend le modèle de base. 2. L’objet de la recherche asymétrie d’information des contrats entre banques-PME

La théorie du rationnement du crédit par le marché financier a fait l’objet de nombreuses évolutions depuis Stiglitz et Weiss （1981）. Leurs travaux ont porté sur les situations d’équilibre non walrasien dit mélangeant dans la mesure où aucun moyen n’existe pour distinguer dans le cadre de cette approche，les bons des mauvais emprunteurs. Dans ce modèle，les banquiers ne cherchent évidemment pas à réduire l’asymétrie d’information. Ils demeurent passifs devant l’imperfection qui les contraint à ne point financer certains agents économiques que sont les PME en particuliers. Les prolongements de l’analyse qui vont s’en suivre ont cherché à lever cette hypothèse. En effet，les banques ne sont pas passives devant l’existence d’asymétries d’informations. Elles le sont encore plus dans la mesure où elles mettent en place des mécanismes qui permettent de régler les problèmes d’asymétries d’informations et leurs impacts sur le marché financier. La théorie des PME au rationnement du crédit dans le cadre des contrats mélangeant Pour revenir au rationnement de crédit, le red-lining terme utilisé par la littérature anglo-saxonne correspond beaucoup plus à la réalité observe. Le red-lining consiste à écarter un groupe d'emprunteurs du crédit, quel que soit le taux en vigueur car supposé très risqué (petites tailles) par la banque. Dans ce cas, le rationnement ne s'explique pas en termes d'adéquation de l'offre et de la demande par les quantités. C'est tout simplement un refus de prêter à une catégorie d'emprunteur en l'occurrence ici les pauvres, même si les banques disposent de suffisamment de ressources. Le red-lining correspond exactement à ce qui se passe dans les PME. En s’appuyant sur le rationnement du crédit d’équilibre : à savoir le modèle de Stiglitz et Weiss (1981), qui repose sur l’existence d’asymétries d’information ex ante et le modèle de Williamson (1986, 1987), qui lui, repose sur l’existence d’asymétries d’information ex post. 2.1 Asymétries d’information ex ante Rationnement du crédit aux PME L'approche de l'école de la répression financière est fondée sur l’hypothèse implicite d'un marché parfait. Et pourtant, avec Stiglitz et Weiss （1981, le rationnement du crédit peut coexister dans un marché du crédit compétitif (Cf. Venet B.1994, p94). L'explication du rationnement du crédit réside dans l'introduction de l’hypothèse de l’asymétrie de l'information dans la théorie de l'équilibre [Arrow G.A, 1970]. Bien avant d'illustrer cette hypothèse, il convient de définir le rationnement du crédit qui désigne le fait que parmi des demandeurs de crédit supposés identiques, certains obtiennent le crédit et d'autres ne l'obtiennent pas, bien que ces derniers soient prêts à payer des taux d'intérêt plus élevés. Le rationnement du crédit fait aussi référence à une situation où certaine catégorie d'individus soient incapables d'accéder au marché du crédit compte tenu du taux d'équilibre du marché. Comme nous l'avons déjà souligné, l'explication pertinente de la persistance du rationnement du crédit réside dans l’asymétrie informationnelle. Une hausse des taux d’intérêts ou des garanties requises peut en effet provoquer l’apparition d’un phénomène d’anti-sélection5 et/ou d’alea de moralité6 qui finalement

5 L’existence d’asymétries d’information impose la fixation du taux d’intérêt sur la base de la qualité moyenne du portefeuille d’emprunteurs. Ce faisant， les entreprises qui présentement une qualité


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limite l’espérance de profit des banques. Dans ce contexte，les banques sont amenées à préférer la limitation du volume de crédits octroyés plutôt que d’augmenter les taux ou les garanties requises. Au demeurant, quand les banques font face à deux situations à la fois。Les choses deviennent plus compliquées. En effet, comment une banque va-t-elle pouvoir trier dans plusieurs PME sans en avoir au préalable leur rendement. Il faudrait qu’elle arrive alors à déceler si de mauvais rendements sont dues à la qualité trop risqué de la PME ou bien simplement à un manqué d’effort. Pour cela, Stiglitz et Weiss （1981）après avoir démontré l’existence possible d’un rationnement du crédit dans leurs travaux, quand tous les emprunteurs sont identiques，lèvent cette hypothèse. Ils supposent dans leur modèle l’existence de groupes d’emprunteurs observables par le prêteur. Sur chaque segment de clientèle , la banque détermine un taux d’intérêt optimal qui permet la maximisation de son profit une fois pris en compte les risqué d’anti-sélection et d’alea de moralité. La fonction de profit de la banque pour la catégorie d’entreprise est represente en fonction du

taux d’intérêt sur la figure 1. Nous representons ici，trios PME. Nous les ordonnons en fonction

de l’espérance de profit anticipé par le prêteur pour chacune d’elles： si alors max

Pour Stiglitz et Weiss （1981），si ，c’est dire que les emprunteurs de la catégorie ne reçoivent des crédits que si les emprunteurs de la catégorie ont ete totalement servis. Au demeurant，si le taux de refinancement des banques s’établit au point ，on constate que les emprunteurs de type 3，qui sont prêts à s’endetter au taux ，reçoivent les crédits qu’ils demandent

（（））. Les emprunteurs de la catégorie 2 peuvent s’endetter au taux mais

seulement seront servis après les clients de la catégorie 3 （）（））. Enfin，aucun individu du groupe 1 ne reçoit de crédit，quel que soit le taux d’intérêt que ces PME acceptant de payer ））.Par conséquent，ces PME de la catégorie 1 sont exclues du marché financier. D’où le redlined. Figure 1 : Le redlining sur le marché du crédit

Source : STIGLIZ, WEISS, 1981, P.406. S'agissant du comportement des banques face à cette situation d’asymétrie d'information qui a été décrit par Stiglitz et Weiss （1981）, le problème d’asymétrie d'information sur le marché du crédit est à l'origine des phénomènes de sélection adverse et d'incitations adverses. Lorsque le taux d'intérêt

supérieure à la moyenne peuvent refuser de payer une prime de risqué jugé injustifié. Elles quittent le marché si bien que la qualité du portefeuille de créances se détériore. 6 Une augmentation des taux incite les dirigeants désirant maximiser le profit à choisir un projet qui présente une plus forte rentabilité mais également une plus forte probabilité de défaut pour le prêteur.


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augmente, les projets les moins risqués, c'est-à-dire ceux ayant le plus de chance d'aboutir et de supporter des charges accrues d'intérêt, voient leur rentabilité espérée diminuer fortement. Les investisseurs les moins risqués se retirent donc au plus vite du marché et il y a entrée des investisseurs plus risqués insensibles aux variations des taux (sélection adverse), tandis que les investisseurs qui ne quittent pas le marché sont plus incités à choisir des projets risqués (incitation adverse). Alors, l'accroissement des taux va entraîner ainsi un accroissement de la proportion des projets risqués dans le portefeuille de prêts bancaires et une baisse de l'espérance de rentabilité des banques. Cela accroît la fragilité bancaire et donc les risques de faillite. Il existe donc un seuil maximum de taux d'intérêt qui correspond à une meilleure diversification du portefeuille de prêts des banques et à une rentabilité espérée maximale. Du coup, au-delà de ce seuil, il y a une baisse de l'espérance de rentabilité du fait de la détérioration de la qualité des emprunteurs. En effet, le système d’information des PME souffre d‘une importante déficience（Ang, 1991 : Ennew et Binks, 1995）.Tout d’abord il existerait une réticence des dirigeants de la PME à transmettre des données comptables et financiers7. De plus，du fait de l’envergure du marché des titres pour les PME，il y aurait peu d’incitations pour une agence à collecter et à diffuser des informations sur cette catégorie de firmes. 2.2 Asymétrie d’information et rationnement du crédit aux PME Le second effet est l'aléa moral, il se manifeste après l'octroi du prêt, le principal est confronté à cet aléa (hasard) si l'agent modifie les termes du contrat signé exante en menant expost des actions qui ne vont pas dans l'intérêt du principal. Il peut s'agit pour l'emprunteur de s'engager par exemple dans des activités risquées qui réduisent la probabilité du remboursement du prêt. Toutefois, l'aléa moral ne saurait être associé à l’asymétrie d'information dans la mesure où, le prêteur peut bien être informé sur les agissements de l'emprunteur, mais n’ayant pas les moyens ou s'il est coûteux d'empêcher l'emprunteur de nuire à ses intérêts l'agent aura un comportement d'aléa moral qui lui-même dépendra des procédures de faillite. Les banques ne sont pas soumises au problème de free rider parce qu’une seule banque peut participer toute seule à l'octroi d'un crédit à un client. Elle peut alors profiter pleinement des retombées de l'activité d'information et de monitoring. Le problème de free-rider: la collecte d'information sur la qualité des projets ou la surveillance des emprunteurs sont un bien public; tout le monde en profite des effets positifs (réduire le risque de sélection adverse et d'aléa moral), il y a un problème de free-rider si certains agents ne subissent pas les coûts de collecte d'information et de monitoring et ils profitent de cet investissement. Pour Williamson (1986, 1987), puisque les dirigeants des PME se faufilent pour cacher les résultants de ses activités financiers dans l’optique de minimiser ses remboursements, à partir de cet instant, les banques peuvent être amenées à Controller la PME financée. Le monitoring intervient ici une fois le défaut de remboursement révèle de manière à s’assurer de la conformité des résultants déclarés et afin de récupérer, le montant requis ou engage une procédure de mise en liquidation. Ce modèle confirme les résultants de Stiglitz et Weiss dans le contexte de l’existence d’asymétries d’information ex post. La limite de cette approche est que cette thèse ne permet pas de spécifier la nature des PME affectées par ce rationnement. YAN.Y. (1996), présente la question dans les sens d’un relâchement d’hypothèse du contrôle non aléatoire de la PME en cas de défaut on peut se prononcer sur la situation des PME sur le marché du crédit financier. 3. Le modèle prêt-observation dans le cadre du rationnement du crédit L‘étude du comportement des firmes en situation d’asymétrie d’information permet de confirmer la surexposition des PME au rationnement du crédit. C’est en cela que nous introduisons le problème dans le modèle suivant： Dans le processus de négociation, nous savons qu’au début, les banques sont réticentes a priori sur les PME. C‘est DIAMOND (1991) qui précise que les banques fondent leurs a priori sur les informations passées détenues des PME. A cet effet, compte tenu du fait que la PME n’a pas le choix

7Au Gabon，95% des PME ne satisfont pas l’obligation légale de dépôt des comptes （Le Guirriec，1996）


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pour son financement car ne pouvant s’autofinancer et que le marché n’exige que de se financer auprès des organismes de crédits, sa source de financement ne peut dans un contexte d’asymétrie d’information, être renseignée sur son potentiel. A cet effet，considérons que la PME a une période donnée a besoin de contracter une somme pour financer un projet à rendement fixe en réussite et 0 en échec. Puisque cette somme est fixe, on constate qu’elle ne peut nullement apporter l’information dont a besoin la banque pour lui permettre de mesurer le risque lié au crédit et les défaillances de la PME8. Chaque période ，insiste la PME à fournir un effort prive soit haut soit bas . Celon RAJAN (1992), ce dernier peut correspondre à un effort inobservable du proprietaire de la PME quand pour une grande entreprise, il correspond à un effort occasionnel observable. Plus loin, BOOT. THAKOR. UDELL (1995), l‘effort ne joue que sur la probabilité de succès du projet， cependant l’effort bas ajoute aux rendements observables une rente privéeinobservable . Pour HOLMSTROM-TIROLE (1993), les PME sont dirigées par des entrepreneurs qui, en l’absence d’incitation et/ou de contrôle, peuvent délibérément réduire la possibilité de réussite afin de bénéficier d’une rente. Dans ce cadre, la PME reste évidemment confronte à l’arbitrage en choisissant l’effort haut , elle devrait dans ce sens, avoir plus de chance de succès mais sa rente privée sur le projet est nulle . De ce fait, en choisissant l’effort bas , la PME a moins de chance de succes mais sa rente privee sur le projet est strictement positive Dans ce cas, la banque propose à la PME deux prêts-observations à court-terme, chaque prêt tient sur une période de sorte à observer si la PME peut désormais recevoir des prêts à long-terme. Lors de la première période, , la banque propose un crédit a court-terme et ouvre un compte courant a la PME de sorte qu’elle y verse régulièrement l’argent minimum nécessaire au remboursement de ce prêt. Pour la deuxième période , la PME ici a deja remboursee l’integralite de son precedent pret. De ce fait, la banque ouvre dans ses comptes, une ligne de crédit à faible risque pour la banque. C’est généralement le profit du premier prêt généré qui est mis à disposition. Ainsi, la PME peut dans les limites d’un maximum convenu, afin d’éviter les décalages temporaires, sortes de « crédits blancs », débiter son compte pour des besoins de financement. Ce prêt n’est point lie au financement d’une quelconque transaction particulière9 et est dépourvue de garanties intrinsèques. Afin de limiter le risque de non-remboursement, la banque peut annoncer qu’elle ne prêtera pour la deuxième période que les PME qui auront intégralement remboursé à la fin de la période indiquée, l’intégralité de leur crédit mais ne précisera pas les critères lui permettant de classer les PME car son but ici est de contrôler, suivre et observer les retards et incidents de paiement durant chaque période10. Figure 2 : Le contrôle de la banque à l’intérieur de la PME

La qualité du projet Le contrôle exercé par la banque à l’intérieur de la PME est une probabilité ex ante que la banque ne sera pas hors limites prescrites. 3.1. La formulation de la structure de l’information bancaire 8Pour des modèles ou le niveau d’investissement M est utilisé comme un signal de la probabilité de remboursement，voir BESTER (84b) et MILDE et RILEY （1984） 9Ce prêt ne porte pas en lui-même son dénouement 10 Et pas seulement à la fin de chaque période


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Au départ，nous nous appuyons sur le modèle bayésien, nous tenons compte alors pour modéliser，les idées a priori qu’a la banque par rapport à l’effort type inobservables fourni par les PME. Considérons la présence des variables aléatoires avec une loi de probabilité à priori. Cette situation conduit à ne pouvoir préciser avec certitude，la valeur que devraient avoir les inobservables. Définissons pour cela la probabilité que cette valeur soit dans certaines régions. Au regard des variables inobservables, , soulignons qu’un élément de est une vecteur , ou represente les types haut ou bas et les , les paramètres de l’effort. L’asymétrie d’information ici est due au fait que lorsque la PME se présente à la banque, celle-ci ne sait rien d’elle. Ce qui pose le problème d’anti-sélection qui désigne un effet pervers du fonctionnement du marché financier résultant de problèmes informationnels qui surviennent lorsqu’il y a inobservabilité d’une caractérisque inaltérable. Cette situation peut traduire les relations qui s’exercent entre la banque-PME. Ainsi si la banque observe imparfaitement les caractéristiques de la PME，elle aura tout intérêt à sous-estimercelle-ci. Ce pourquoi est inconnu. Ainsi, la loi de probabilité a priori est représentée par une fonction Lorsqu’on fait face à une asymétrie d’information sur un marché, qu’il s’agisse d’information portant sur la PME et/ou sn chiffre d’affaires, les agents bancaires vont s’engager dans des activités propres à modifier l’asymétrie initiale. Ainsi, à l’occasion des prets-obsavations, la banque va observer chacune des deux périodes pour avoir l’effectivité d’une variable indiquant si le remboursement a été intégral ou pas. Pour cela, la Banque mettra en place, une variable pour indiquer les incidents de retard de paiement comme signaux sur la qualité de l’effort de la PME. Cette variable est : où la variable représente le remboursement effectif du prêt de la première période Cette variable peut prendre les deux valeurs que sont : :.Ceci, au cas où la PME rembourse globalement son prêt à la première période et pour le cas opposé. , C’est l’ensemble des incidents de paiement que peut causer la PME en cette période. Elle a pour valeur : lorsque la PME a de retard de paiementà dans le cas opposé. On observe lorsque la PME a remboursé son premier crédit. Pour la variable , on attribue aussi deux valeurs à savoir car, on estime que la PME a remboursé globalement son prêt à la deuxième période et dans le cas contraire11 Stigler (1961) est connu pour avoir développé le premier la théorie économique de la réglementation, également connu sous le terme de théorie de la capture ou économie positive de la réglementation. Cette théorie décrit comment des groupes d'intérêts et des acteurs politiques, vont utiliser les moyens de réglementation et le pouvoir coercitif pour orienter les lois et les règles dans des directions qui les favorisent. Le problème est donc le suivant : l'autorité réglementaire étant soumise à l'influence des groupes de pression, elle n'est plus garante de l'intérêt général. Pour Stigler, la réglementation doit s'analyser comme la production d'un service de redistribution politique, offert par les décideurs ici les banques, et demandé par les entrepreneurs, les PME. Les acteurs étant rationnels, les offreurs maximisent leur chance de réélection, ou essaient d'obtenir par la suite des postes dans les industries qu'ils ont sous leur tutelle. Quant aux demandeurs de service, ils recherchent les privilèges de monopole que la réglementation engendre nécessairement, notamment vis-à-vis de leurs concurrents étrangers. La théorie de Stigler n’examine qu’une seule facette du mâché. Pour cela, si l’on doit comprendre l’équilibre dans un marché, il nous conviendrait de regarder aussi du côté du comportement des producteurs. Dans cet aspect, Fisher (1970) et Winter (1971) proposèrent des modèles qui conduisirent à un modèle d’équilibre concurrentiel12, alors que Diamond (1971) et Rothschild (1970) conduisirent des modèles au contrat monopolistique ou à un contrat compris entre le taux concurrentiel et le taux

11La banque observe à la première période, elle ne prête pas à la deuxième période. Pour cela, en observant c’est comprendre 12 Voir Rothschild (1973) pour une exposition précise des caractéristiques essentielles de ces modèles.


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monopolistique. Dans ce cas, les banques savent que les PME ont du mal à obtenir l’information et exploite la force de marché que cela leur confère. En général，la solution retenue se met en place au niveau interne c’est-à-dire au sein de la relation. Aussi souvent, lorsque la PME a globalement remboursé son prêt à , à ce moment-là, la banque va désormais prendre en compte les différents mouvements débiteurs et créditeurs et l’attitude de la PME vis-à-vis de la banque. Apres cette observation, a priori, la banque pourrait désormais déduire la probabilité de vecteur d’observabilité.

. . La première période du prêt Dans le cadre du prêt-observation de la période 1, nous cherchons à comprendre comment l’information du côté de la banque est analysée pour la PME en tenant compte de certaines hypothèses sur les a priori. A priori, pour la banque, une PME peut être de type tout comme elle peut fournir l’effort De cette approche, la distribution de probabilité a priori respecte les égalités suivantes :

De ces probabilités, nous avons :

En regardant du côté de l’effort que doit nécessairement fournir la PME pour avoir plus de chance à ne pas rembourser globalement le crédit. Nous considérons que la PME réussit , le

aura une probabilite bien plus grande àprésenter des retards de paiements que . Il est a noté ici que la fonction vraisemblance respecte les inégalités qui suivent :

On constate que pour un même niveau d’effort, un aura plus de chance de commettre des incidents qu’un

Au regard des hypothèses émises, on constate que la banque a des difficultés de comparaison au regard de : Puisque la banque ne peut évaluer le risque en raison du manque d'informations fiables, et de demandes trop risquées. Afin que la banque soit en mesure de répondre aux demandes de financement des PME, l'asymétrie d'information doit être réduite. On peut espérer une amélioration de la situation grâce aux réformes. S'informer sur ses partenaires commerciaux avant de traiter avec eux est un impératif de bonne gestion. Pour que la banque obtienne facilement des informations sur la PME et sur le comportement de l'entrepreneur et pour qu'un rapport de confiance s'installe, l'accent doit être mis sur la relation de clientèle. Par cette relation, la banque doit mettre en place une base de données comportant toutes les informations concernant la PME. Cette mesure lui permettra d'avoir un suivi des clients et de prendre des mesures face aux concurrents. Pour cela, si les hypothèses sont respectées, la banque augmente sa probabilité de sélectionner une PME de bonne qualité en la choisissant dans le lot des PME qui n’ont pas eu d’incident ou retard de paiement dans les mensualités de leur prêt ), non plus dans l’échéance de leur prêt. Figure 3: Différence d’utilité de la PME ex ante


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La qualité du projet Très souvent, en situation ex ante l'utilité espérée du propriétaire lorsque son activité est financée entièrement par emprunt bancaire à court terme est soustraite de la position a priori ex ante prévue utilité de la Banque en cédant de fonds entièrement par emprunt sans lien de dépendance La deuxième période du prêt Nous nous intéressons au prêt-observation de la période 2 pour voir comment la banque peut affiner son information relative à la capacité de la PME de remboursement a priori. Au départ, il existe une vraisemblance qui conduit a sur définit pour chaque vecteur , la probabilite que le signal soit émis. Dans ce cadre, la banque attribue à chaque signal la vraisemblance suivante : Quel que soit la PME, à la deuxième période, il y a de forte chance qu’elle faille à ses engagements, Inversement, au regard des efforts consentis, elle peut tout de même tenir ses engagements. C’est que pour un effort soutenu, la PME peut réussir tout comme pour un effort bas, la PME est vouée à l’échec. Cela se traduit formellement par :

Pour être informé de la loi jointe, la banque n’a point besoin de connaitre , il suffirait à la banque donc de connaitre

Précisons que le taux de marge général mesure l'évolution de la performance de l'activité commerciale de La PME ; la rentabilité financière mesure l'aptitude de la PME à rentabiliser les fonds apportés par les banques et enfin la rentabilité économique quant à elle, mesure l'aptitude de l'entreprise à rentabiliser les fonds apportés par les associés et les prêteurs. Le rôle du taux d’intérêt dans les prêts-observations Construire une relation équilibrée consiste d'une part à ne pas trop dépendre de son banquier et d'autre part à ne pas lui faire courir des risques qu'il ignore mais pressent. Pour instaurer un climat de confiance durable, le dirigeant doit donc avoir au moins deux interlocuteurs bancaires qu'il peut mettre en concurrence, dans certains cas, ou qui peuvent intervenir ensemble dans d'autres. Par ailleurs, pour rassurer, le meilleur outil du dirigeant reste de montrer, qu'il maîtrise la situation, qu'il anticipe les besoins et prévoit des solutions crédibles. Il ne faut jamais être surpris ou surprendre. Il y a des caractéristiques et des contraintes que les PME doivent respecter si elles veulent participer au processus de prêts-observation. Il s’agit du taux d’intérêt. Le taux d’intérêt de la période 1 doit être conforme à certaines contraintes incitatives de la PME dans son processus d’entrer dans le marché financier bancaire. Pour cela, il faudrait que le gain espéré d’un type haut qui fait des efforts a la période 1 soit positif. D’où :


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0

Soulignons que lors de la période 1, les mêmes taux d’intérêts ( sont proposés aux PME par la banque. Ainsi, les PME dynamiques accepteront d’emprunter à la période 1 si le taux d’intérêt est à la quantité suivante :

/ Pour la période 2, la banque va proposer un taux d’intérêt aux PME qu’elle considère de type haut et qu’elle considère de type bas. De ce fait, les PME dynamique accepteront les prêts si les taux d’intérêts sont à :

En considérant que la banque à la période 2, propose des contrats bancaires dont les taux respectifs sont conformes aux contraintes qui font que pour tout fixe :

De cette présentation, il ressort que les gains espérés seront tels que à chaque niveau d’effort fixe

fourni par la PME, le gain utilisé pour obtenir cette effort haut sera d’un type bas tel que le prêt procure le même gain espéré chez la PME de type b avec ou sans effort à la période 2. Figure 4: Effort exerce par le propriétaire

La qualité du projet La ligne continue représente l'effort exercé par la PME lorsqu’elle est financée entièrement par emprunt sans lien de dépendance tandis que la ligne pointillée représente l'effort exercé par de la banque lorsque la PME est financée entièrement par des emprunts bancaires à court terme. 4. Prolongement du modèle. 4.1. La manifestation d’une situation de sélection adverse：les relations PME-Banque. Certains crédits de trésorerie ont une dénomination précise évoquant un objet spécifique ou tout au moins l'origine principale des besoins. Assortis de conditions d'utilisations particulières, les crédits de trésorerie spécialisés, participent au financement des stocks dont le poids est lourd pour la plupart des PME. Compte tenu de leur spécificité, les crédits de campagne ont des caractéristiques


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particulières. La solution du laisser-faire s’avère désastreuse puisqu’elle conduit à l’élimination des contrats sur le marché financier. On peut en effet s’intéresser à trois solutions： Côté banque，la banque peut proposer un système de garantis aux PME afin de véhiculer une image de sérieux et de crédibilité, par exemple par des engagements type contrat-observable. Ou bien l’instauration de label de crédibilité, la mise en avant de diplômes professionnels Côté PME, la PME doit tenter de s’informer au maximum à partir des données observables sur la banque et les conditions de financement. Figure 5: La fraction optimale accordée par la banque à la PME

La qualité du projet La fraction d'endettement optimal bancaire à court terme est calculée en supposant que la rentabilité financière de la PME est prioritaire. C’est le moyen coercitif pris par la BGFI au Gabon à l’encontre d’une PME dans l’achat des pipelines au Cameroun. Elle instaure une règlementation qui rend obligatoire la révélation de tout ou partie de l’information par la PME ou qui va instituer des procédures de recours efficaces contre les PME de mauvaise qualité. En outre, entre les partenaires par l’instauration d’un système reposant sur la confiance mutuelle. En effet, la confiance va permettre d’obtenir une solution plus efficiente pour les deux parties. On peut supposer que les institutions peuvent adopter un comportement discrétionnaire c’est-à-dire modifier leur comportement en fonction du co-contractant (avoir confiance ou méfiance). La théorie des jeux montre alors qu’il y aura un effet négatif de ce comportement discrétionnaire donnant lieu à un résultat sous-optimal pour les deux parties et un effet positif provenant d’un comportement de confiance réciproque aboutissant à la situation optimale. Ainsi, pour éviter cette situation de méfiance réciproque, il faut que la transaction soit répétée un nombre infini de fois ou un nombre fini mais dont la date d’échéance n’est pas connus. Alors, chaque partie aura intérêt à adopter un comportement de confiance. Hayek (1937) a répondu à cette question en soulignant que les individus étaient les seuls à même de recevoir et de produire les informations nécessaires à leurs besoins. On comprend ici que Le marché financier n’est donc pas un modèle d’équilibre abstrait mais bien un processus de transmission des informations et des connaissances. Cette position théorique repose sur un postulat important (transparence et adéquation de l’information-prix) et sur l’idée qu’il n’y avait pas d’asymétrie d’information. Des idées qui ont été remises en cause par les travaux d’Akerlof (1971), Rothschild (1973), Salop (1977) et Stiglitz (1989). Le marché des Lemons. L’information serait moins homogène qu’il n’y paraît (information multiple), radicalement incomplète et synonyme de coûts élevés (Salop, Stiglitz, 1977, 1982), autant de sources d’inefficience qui pèsent sur la coordination du marché financier. 4.2. Le prix, une source d'information Le prix est lui-même un vecteur d’information. Dans le cadre du modèle concurrence pure et


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parfaite (CPP), sa principale fonction est d'informer de la rareté économique d’une ressource, compte tenu notamment de sa qualité. La qualité est une information complexe. Et obtenir cette information est un processus qui peut être coûteux (en argent, mais aussi en temps). L’information a donc elle-même une valeur et les individus sont disposés à payer pour l’obtenir. Cependant les marchés de l’information posent un problème, car l’information n’est pas tout à fait un bien comme les autres. C’est fondamentalement un bien d’expérience, c'est-à-dire que vous ne connaissez la valeur de l’information (pour vous) qu’après l’avoir obtenue. Dès lors, se pose un dilemme. Devez-vous accepter de payer « pour voir » ? (Au risque d’être déçu par l’information obtenue). Ou n’allez-vous pas essayer d’obtenir l’information avant de payer (au risque de ne plus payer, au prétexte, réel ou imaginaire, que l’information ne vous intéresse pas) ? Ces situations sont caractéristiques de l’existence d’une asymétrie d’information. Celle-ci peut être du côté de la banque (celui-ci en sait plus que vous, et le problème à résoudre a été caractérisé comme un problème de sélection adverse, pour la PME). Le marché des véhicules d’occasion étudié par l’économiste George Akerlof dans un article célèbre, The Market for "Lemons", est l’exemple type. La notion selon laquelle, les prix courants du contrat peuvent transmettre de l’information courante a été utilisée pour la première fois par Lucas (1972)13 Pour lui, dans une économie ou il existe un bien stockable, le prix de ce bien p est déterminé par une variable à qui représente les accroissements permanents de l’offre du bien, ainsi que par la demande temporaire courante du bien, qu’il désigne par b. Nous avons donc une fonction de prix p (a,b). Les agents économiques n’observent directement ni a ni b, mais aimeraient connaitre a, car cette variable influe sur la valeur future du bien stockable. En terme d’approche d’une anticipation rationnelle, on va constater que les agents économiques prévoient a et b pour déduire p. Dans le cadre du modèle de Lucas, la logique est inversée car ici, les agents économiques pouvaient observer le prix courant p puisqu’ils connaissent la relation entre p et a, b. C’est dire qu’en utilisant leur observation de p, ils peuvent déduire la relation qu’il y a entre a et b. 4.3. A priori les hypothèses retenues ne sont pas exhaustives de toutes les informations dont peuvent disposer la banque sur la PME De prime abord, la banque peut être amenée à supposer en a priori que la PME qui fournit des efforts hauts peut être incitée à réaliser cet effort haut que la PME qui se contenterait de l’effort bas. Cette optique tient dans le but de conservation de la réputation de la PME auprès de banque. Ainsi, sur les a priori, nous pouvons retenir que :

En supposant que dans la période 2, la PME a priori de type haut peut réaliser un effort bas dans l’optique de bénéficier d’une rente. Cet aspect a été regardé comme hypothèse par BOOT, THAKOR et UDELL dans leur article (1991), reprise par de Kast (Auteur) de R. et Molkou (Auteur) de Durell, Clement V. (Auteur) dans leur article. A priori donc nous aurons :

Dans l'article d’Arrow et Debreu démontrant l'existence d'un équilibre général14, les auteurs définissent un ensemble d'équations dans l'espace des commodités. Dans le cadre de ce modèle

13 Le concept avait été toutefois par Radner (1967), mais il n’avait pas modélisé l’idée que les agents utilisaient les prix courants pour formuler leurs demandes courantes et n’avait pas défini un équilibre de ce processus. 14(Arrow Debreu).


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économique ils définissent l'ensemble des unités de production et l'ensemble des consommateurs. Au-delà, l’information reste une variante inestimable. En présence de risque moral, les contrats deviennent inefficaces. C’est ce qui amène Holmstrom (1979) et Shavell (1979a et b) à proposer les modalités de récompense et de punition pour réduire cette inefficacité qui ne peut être éliminée que partiellement. Les asymétries d’information présentent des effets distributifs, ce qui amène les agents à surinvestir pour son obtention. Nous venons d’évoquer la complexité du bien qu’est l’information dans le cadre du marché financier. Nous faisons constates qu’à la différence des autres biens, elle ne procure aucune utilité directe, puis elle ne dispose pas de caractéristiques d’un bien public puisqu’elle crée des externalités. D’où la difficulté de l’intégrer dans un modèle d’équilibre général, d’autant plus que la formalisation de la demande d’information15mais surtout de l’offre n’est pas sans problème. 5. Conclusion Les banques refusent la plupart des demandes émanant de petites et moyennes entreprises (PME) d'origine nationale. Deux séries de raisons expliquent ce phénomène. Premièrement, les banques ne peuvent pas orienter toutes les ressources collectées en raison de ratios de liquidité et de solvabilité à respecter. Cette première raison s'explique aussi par l'importance des créances douteuses qui immobilisaient une part importante des liquidités, et du fait du refinancement de la Banque Centrale désormais accordé uniquement aux signatures de bonne qualité. Deuxièmement, en prenant en compte la nature des demandes, les banques n'orientent pas toutes les ressources qui restent à leur disposition après la prise en compte de cette première série de contraintes. Elles écartent les demandes sur lesquelles elles ne peuvent évaluer le risque en raison du manque d'informations fiables, et de demandes trop risquées. Le rôle des banques commerciales dans le financement du développement reste toutefois limité, compte tenu du fait qu'elles n'ont ni les moyens, ni la volonté de s'attaquer au financement de certains secteurs stratégiques de l'économie notamment le secteur des PME / PMI. En effet, les banques privilégient à juste titre la rentabilité (opérations de services, apportant de substantielles commissions) au détriment du financement du développement, le risque accompagnant de tels financements étant incompatibles avec le rendement attendu du capital. La plupart des banques commerciales sont aujourd'hui saines, la solvabilité et la liquidité ayant été restaurées et des marges confortables étant dégagées. Cependant, d'importants progrès restent à accomplir en matière de gestion bancaire dans des domaines tels que la stratégie commerciale, la gestion des ressources humaines, l'organisation de la fonction engagement, la gestion des risques ou encore le contrôle de gestion. Parallèlement, des banques de développement pourraient être instituées pour accompagner les investissements longs. Les nouveaux instruments financiers (titres de créances négociables, émissions obligataires...) et des outils tels que le capital investissement pourraient aider à dynamiser et à moderniser le cadre de l'intermédiation financière. Nous pouvons donc imaginer une nouvelle restructuration du secteur bancaire qui consistera pour les banques commerciales à se spécialiser uniquement sur le secteur des PME/PMI. C'est seulement de cette manière que les banques s'intéresseront au développement des PME. Par ailleurs, d'autres banques pourraient se spécialiser dans le financement des grandes entreprises. Et pour jumeler les deux options, l'Etat mettra un marché des capitaux où chaque opérateur pourrait chercher librement un financement au niveau des offreurs dudit marché. Bibliographies Akerlof. G, (1970), «The Market for "Lemons”: Qualitaty Uncertainty and the Market Mechanism», Quarterly Journal of Economics, 84,488-500. Ang. J.S. （1991）, “Small business uniqueness and the theory of financial management”. The Journal

15Pour la demande d’information, voir Kilstrom (1974a et b). Comme il le souligne, la réflexion économique sur le coût de l’information étant peu riche, la formalisation de l’offre représente une tâche ardue.


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of small Business Finance， 2，p.1-13 Arrow K. J. and G. Debreu, (1954),«The Existence of an Equilibrium for a Competitive Economy», Econometrica, vol. XXII, 265-290. Arrow K. J. (1970), Essays in the The Theory of Risk Bearing, North-Holland, Amsterdam. BESTER H. (1985), “Screening versus rationing in credit market with imperfect information”. American Economic Review, Vol 75, no 4 Binks. M., ENNEW. C et G.REED.（1992）, “Information asymmetries and the provision of finance to small firms”.Iternational small Business Journal.1，p.35-46 BOOT, THAKOR et UDELL (may 1991), “Secured lending and default risk equilibrium analysis, policy implication and results”. The Economic Journal 101, p.458-472 Diamond, P.A. (1971), «A Model of Price Adjustment», Journal of Economic Theory, 3, 156-168. Douglas W. Diamond. （1991），“Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt”. Journal of Political Economy, vol. 99, issue 4, pages 689-721 Fisher, F.M. (1970), «Quasi-competitive Price Adjuustment by Individual Firms: A Preliminary Paper», Journal of Economic Theory, 2, 195-206. Hayek, F. (1931), Prix et Production, Calmann Levy, 1975. Hayek, F. A. Von (1945), « The Use of Knowledge in Society», American Economic Review, 30, 519-530. Holmstrom, B. (1979), « Moral Hazard and Observability», Bell Journal of Economics, 10, 74-91. Hotelling H. (1929), « Stability in Competition », Economic Journal, vol. xxxix 41-57 Lucas, R.E. JR. (1972), « Expectations and the Neutrality of Money», Journal of Economic Theory, 4, 103-124. Lucas, R.E. et E.C. Prescott (1974), « Equilibrium Search and Unemployment», Journal of Economic Theory, 7, 188-209. LOBEZ.F (1997), “Intermédiation financière et théorie de contrats”. UII.LILLE. D.T. 97.01 LABORES Psyllaki, M.(1995), “Rationnement du crédit et PME: Une tentative de mise en relation”. Revue Internationale PME, 3-4, 64-87 Ragnar Frisch, « Editor's Note », Econometrica, vol. 1, no 1, Janvier 1933, p. 1-4. Rajan, R., (1991a), Essays on banking, Unpublished Ph.D. thesis, M.I.T. Rajan, R. (1991b), Conflict of interest and the separation of commercial and investment banking, Mimeo, University of Chicago Rothschild, M. (1970), «Prices, Information and Market Structure», Unpublished paper. (Citédan Rothschild (1973)) Salop, J. and Salop, S (1976), «Self-Selection and Turnover in the labor Market », Quarterly Journal of Economics, 90, 619-628 Salop, J. and, Stiglistz, J. (1977), «Bargains and Ripoffs?: A Model of Monopolistically Competitive Price Dispersion», Review of Economic Studies, 44(3), 493-510. Salop, S. (1973), «Systematic Job Search and Unemployment», Review of Economic Studies, 40, 191-201. Salop, S. (1976), «Information and Monopolistic Competition», American Economic Review, 66, 240-245. Salop, S. (1977), «The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination», Review of Economic Studies, 44(3), 393-406. Shavell, S. (1979a),« On Moral Hazard and Insurance», Quarterly Journal of Economics, 93, 541-562. Shavell, S. (1979b), « Risk Sharing and Incentives in the Principal and Agent Relationship», Bell Journal of Economics, 10, 55-73. Stiger G.J. (1961), «The Economics of Information», Journal of Political Economy, Volume 69, Issue 3, 213-225. STIGLITZ Joseph. E. (1977), « Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market», Review of Economic Studies, 44(3), 407-430. STIGLITZ J.E et WEISS.A (1992), “Asymmetric information in credit market and its implication macro-economic”. Oxford Economic Papers, Vol.44, P.694-724


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STIGLITZ J.E et WEISS.A (Dec 1983), “Incentive effects of terminations: application to the credit and labor market”. American Economic Revue, Vol 73, no 5 STIGLITZ J.E et WEISS.A (juin 1981), “Credit rationing in market with imperfect information” American Economic Review, Vol 71, no 3 Walras, Léon, «Éléments d'économie politique pure; ou, Théorie de la richesse sociale. Lausanne, Corbaz, 1874. Winter, S. (1971), «Satisficing, Selection, and the Innovating Remnant», Quarterly Journal of Economics, 85, 237-261. YAN.Y. (1996), “Credit rationing, bankruptcy cost and optimal debt contract for small business”. Document de travail, FederalReserve Bank of cleveland Figure 1 : Le redlining sur le marché du crédit

Source : STIGLIZ, WEISS, 1981, P.406. Figure 2 : Le contrôle de la banque à l’intérieur de la PME

La qualité du projet Figure 3: Différence d’utilité de la PME ex ante

La qualité du projet Figure 4: Effort exerce par le propriétaire


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La qualité du projet Figure 5: La fraction optimale accordée par la banque à la PME

La qualité du projet


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Analyse Synoptique de l’impact et du Rôle de la Formation dans la Performance de Gestion d’une Entreprise

en Eonomie ouverte

Stéphano zico EtoughéFam’Ella Tianjin University Liu Yuan D qu District Foreign Students Flats 92 Weijin Road, Nankai District,


Accepted 20 March 2013 Résumé Il n’est sans doute pas besoin de statistiques ni d’analyses économétriques pour être convaincu de l’importance du savoir et la connaissance dans des contributions de la recherche et de l’innovation aux performances économiques des entreprises. Dans un contexte de mondialisation et de globalisation, la performance, via la compétitivité, est devenue une nécessité. Les compétences sont le reflet du savoir (issu de la formation), du savoir-faire (fruit de l’expérience professionnelle) et du savoir-vivre (expression de la synergie potentielle des individus lorsqu’ils travaillent ensemble). C’est donc ces compétences et cette vision qui seraient les meilleurs déterminants du profil du dirigeant des entreprises car, elles résument les traits de la personnalité et les typologies des compétences managériales de ce dernier lesquels impactent sur leur performance.Ce sont ces déterminants de la performance tangible que nous proposons de vérifier grâce à une enquête réalisée auprès des entreprises. Les résultats de cette étude montrent globalement que la performance tangible des entreprises est significativement influencée, à la fois, par les compétences du dirigeant (expliquées par les 3 et 4S), et la vision stratégique du dirigeant (en particulier la vision stratégique à long terme). Mots clés : Mondialisation, globalisation, Savoir, innovation, connaissances, compétence, performance. 1. Introduction

Mondialisation de l'économie, mondialisation des firmes, mondialisation des marchés financiers. Le concept de mondialisation est sans aucun doute l'un des plus couramment utilisés en ce début de siècle !Ce terme traduit le fait que des produits consommés ici soient fabriqués en Asie, que Coca-Cola soit une marque connue partout dans le monde, que les yaourts Danone soient consommés en Chine, que les Japonais financent la dette américaine en achetant des bons du Trésor…Bref, la mondialisation pourrait se définir comme l'extension de l'économie de marché à l'ensemble de la planète16.

Le terme mondialisation est parfois pris comme synonyme de l'anglicisme globalisation, alors qu'il faudrait plutôt se référer dans ce cas à la locution « market globalisation » ou « corporate globalisation ».Aux Etats–Unis, la notion est fortement connotée au libéralisme, au sens de « libéralisation mondiale ». La globalisation des marchés et ses nombreuses conséquences contraignent les entreprises en général et les employés en particulier à évoluer dans un environnement d’affaires fortement concurrentiel et très changeant. Désormais, les seules barrières nationales et régionales ne suffisent plus pour ralentir la concurrence mieux organisée, plus incisive, et dont le

16"Qu'est-ce que la mondialisation ? "Alternatives économiques hors-série n°36 p 42 et 43

Journal of Economics & Finance (JEF) MARCH 2013 VOL.1, No,2


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positionnement complexifie davantage l’environnementd’affaires en offrant aux clients et fournisseurs un éventail de choix plus large (Ndjambou, 2008).

Dans un contexte aussi mouvant et incertain, les habitudes des managers centrées sur la seule réactivité organisationnelle ne suffisent plus pour garantir un positionnement concurrentiel (Ettien, 2006). Désormais, les entreprises doivent d’abord être de plus en plus flexibles pour s’adapter rapidement aux exigences et à l’évolution du marché, ensuite assez souples pour battre les concurrents sur le terrain du prix (Hammer et Compy, 1993 cités par Ndjambou, 2008), et enfin suffisamment inventives pour se différentier d’un point de vue stratégique et devancer leurs concurrents (Porter, 2003). Dans cette perspective, elles doivent identifier et mettre en œuvre des ressources susceptibles de créer et maintenir durablement, la flexibilité, l’égalité, la réactivité et la proactivité nécessaires à leur positionnement concurrentiel (Bergeron et al., 2004). Même à la veille de la Première Guerre Mondiale, les taux d'exportation des différents pays d'Europe étaient supérieurs à ceux des années 70 avec des taux avoisinant 15% du PIB17. Dès lors, il apparaît évident que le discours médiatique et politique portant sur le défi actuel de la mondialisation a pris un certain retard ! Néanmoins, l'impact de la mondialisation sur l'organisation des firmes est quant à lui plus récent, et c'est à la moitié du XX ème siècle que les firmes ont réellement connu une modification structurelle du fait de la mondialisation des échanges18. Les prémices de la mondialisation apparaissent avec IBM et SINGER, premières multinationales américaines, qui ont réussi à conquérir les marchés mondiaux, en internationalisant leurs activités.

L’internationalisation des firmes reflète le mouvement continu de concentration des entreprises lié à la recherche d'économies d'échelle. D'où une explosion des opérations de fusions/acquisitions dans les pays riche au cours des années 90 et particulièrement depuis 1998 19. Désormais, le développement des entreprises à l'étranger est devenu un passage obligé de survie et de croissance, face à un environnement de plus en plus concurrentiel. En effet, il permet aux entreprises de rester compétitives et d'accroître leurs parts de marché. Des nombreux auteurs, comme Michael Porter ont ainsi tenté de formaliser l'internationalisation des firmes, en distinguant les différentes formes d'organisation interne qui peuvent exister. La différence entre chacune d'elles tient non seulement à la situation de marché mais surtout aux hommes qui les dirigent et qui définissent la politique générale. Nancy ADLER professeur à l'Université Mac Gill au Canada distingue quatre catégories d'entreprises selon leur degré d'internationalisation20.

Les entreprises nationales : Elles visent leurs marchés intérieurs mais aussi il leur arrive d'exporter des produits dans un autre pays. Elles ont tendance à centraliser leur organisation autour de compétences propres. Leurs valeurs sont celles de leur pays d'origine et elles attendent de leurs clients étrangers qu'ils s'adaptent. Les entreprises plurinationales : Elles opèrent dans plusieurs pays différents en y produisant et en y vendant des biens correspondant à une demande locale. Chacun de ces marchés devant être gérés séparément, ce type d'entreprise fonctionne de manière relativement décentralisée. Au siège central, la gestion des affaires internationales est confiée à des équipes spécifiques. Ces entreprises doivent être sensibles aux différences culturelles car elles doivent traiter chaque marché séparément.

Les entreprises multinationales : Elles possèdent des infrastructures dans plusieurs pays différents. Elles les utilisent pour réaliser des économies d'échelle et répondre aux besoins des marchés internationaux. Cette stratégie requière une centralisation forte et une organisation à l'échelle internationale. Dans leur recherche d'économies d'échelle, ces entreprises ont tendance à minimiser les différences culturelles.

17Le journal des professionnels Aquitaine n°8, oct-nov 98, p19 18Le Figaro Etudiant oct. 1998 19Alternatives économiques hors-série n°36 p 42 et 43 opus cit 20 ADLER Nancy " Comportements organisationnels : une approche multiculturelle " Editions Renaud Goulet 1994


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Les entreprises transnationales ou mondiales Le monde représente pour elles un vaste marché où elles peuvent diffuser leurs idées, produire et distribuer des biens et services. Leur objectif est de parvenir " au sur-mesure de masse ", en étant à la fois à l'écoute des besoins spécifiques locaux ou régionaux et à la pointe des ressources et de la production au niveau mondial. Leur double maxime est " Penser local, agir mondial ; Penser mondial, agir local ".

La contrainte structurelle est complexe. Les compétences sont distribuées dans le monde entier plutôt que concentrées au siège, elles doivent être coordonnées à des fins de synergie plutôt que gérer séparément. La sensibilité aux différences culturelles est essentielle au succès des entreprises de ce type. Chacune de ces étapes d'internationalisation engendre des implications spécifiques en termes de connaissances et de savoir.C'est pourquoi nous avons voulu nous pencher sur l'impact de la mondialisation surLe rôle de la connaissance et du savoir dans une économie dynamique.Au rôle résigné d'intendance suiveuse se substitue celui de moteur du développement dont la puissance et la performance contribueront directement au mouvement de l'entreprise(…)21. Dans ce sens, le profil du dirigeant semble jouer un rôle d’autant plus déterminant qu’il permet de mobiliser les ressources conséquentes, de projeter l’entreprise dans son avenir en développant une vision stratégique (Filion, 1989). C’est le développement de ces compétences multiples qui participe à une gestion à la fois réactive et proactive des entreprises, contribuant ainsi à leur positionnement concurrentiel. Ainsi, l’objectif de cette recherche est d’évaluer le rôle joué par la connaissance et les compétences dans la compétitivité des entreprises, afin de servir de base de référence aux dirigeants des entreprises. Cette étude de la relation profil et performance apporte des éléments de réponse à la question de recherche : « Profil du dirigeant, quel impact sur la performance tangible des entreprises à l’heure de l’économie dynamique ? ». Pour répondre à cette question nous avons structuré notre démarche autour de trois points.L'évolution sociale et celle des mentalités accompagnent le mouvement de mondialisation industrielle et les gestionnaires sont promus au rang d'hommes clés de l'entreprise. Ils sont conduits à réinventer leur métier en recombinant les paramètres techniques, humains, sociaux et culturels sur un fond de compétition internationale22 Le premier point présente les choix théoriques relatifs aux approches mobilisées pour étudier le lien entre le profil du dirigeant des entreprises et leur performance. Le second point confronte ces approches et propose un modèle conceptuel original de recherche, avec une définition des concepts, des variables et hypothèses supportant une approche systémique globale de l’évaluation de la performance tangible. La méthodologie de recherche est exposée succinctement dans le troisième point, avec le terrain d’étude, les construits du questionnaire, le choix et enchaînements de modèles d’analyse de données. Le quatrième et dernier point fait état des résultats et de leurs interprétations théoriques et appliquées. 2. Revue de la littérature

La littérature fournit un vaste support à la nature stratégique du profil du dirigeant en tant que ressource génératrice d’avantages concurrentiels pour les entreprises (Barney, 1991 ; Chandler et Jansen, 1992 ; Peteraf, 1993 ; Lorrain et al., 1994 ; Filion, 1996 ; Teece et al., 1997 ; Fabi et al., 2004 ; Mamboundou, 2003; Beamish et Dhanaraj, 2003 et Laghzaoui, 2006 ). Ce cadre théorique souligne l’influence du profil du dirigeant sur la performance tangible des entreprises. Dans cette étude, ce profil du dirigeant est analysé à travers ses compétences et sa vision, lesquelles influencent la performance. 2.1 Les compétences du dirigeant de l’entreprise et la performance

Le dirigeant est celui qui est à la tête de l'organisation sociale dont il est membre. Il dispose de pouvoirs formels qui lui sont donnés par la loi ou par les procédures de nominations. Les missions de direction concernent ceux qui exercent des responsabilités, dirigent un service et réalisent des tâches de prévision, de commandement, de coordination ou de contrôle.

On entend par compétence, la capacité des acteurs à apprendre et à exécuter des tâches

21Préface par SALLAVUARD Guy Directeur du CINDEX, "Vers le management international des Ressources Humaines", PERETTI, CAZAL, QUIQUANDON, 1990 22Idem opus cit.


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(McCormick et Tiffin, 1974 cités par Tsonga, 2008). Elle est constituée des aptitudes, des habiletés et des connaissances (Pettersen et Jacob, 1992). Les aptitudes font référence aux capacités potentielles qui influencent les apprentissages des comportements en général, tandis que les habiletés sont des capacités apprises grâce à la formation ou par expérience, à partir des aptitudes, spécifiquement pour exécuter des tâches ou des fonctions professionnelles à un emploi donné (Szilagyi et Schweiger, 1984). Ainsi, Les compétences sont des capacités particulières de mise en œuvre d’actifs, de façon organisée dans le but d’atteindre des objectifs. Elles sont exploitées dans des actions intentionnelles et finalisées où elles se construisent et s’enrichissent par apprentissage (Tarondeau, 1998). Selon Le Boterf (1994), cité par Tarondeau (2004), la compétence est définie comme l’aptitude à combiner des ressources pour mettre en œuvre une activité ou un processus d’action déterminée : « La compétence n’est pas un état ou une connaissance possédée. Elle ne se réduit ni à un savoir ni à une compétence fait ses preuves dans l’action ». L’auteur ajoute que la valeur créée par ce processus résulte du redéploiement organisé et planifié de combinaisons de ressources, d’ajustements dans le temps, c’est-à-dire de compétences d’assemblage, de coordination, de synchronisation et d’adaptation.

Cette définition fait émerger deux grandes écoles de pensée, à savoir l’école des typologies de propriétaires dirigeants et l’école des caractéristiques. 2.2 L’école des typologies de propriétaires dirigeants

Pour cette école le but est de définir l’entrepreneur selon les typologies ou modes d’actions. Le nombre de typologies développées est considérable. Ainsi, Cole (1959) cité par Tsonga (2008) a établi trois types d’opérations d’affaires : innovation, imitation, répétition. Collins, Moore et Unwalla (1964) et Collins et Moore (1970) cités par Bayad et al (2006) ont établi une distinction entre « l’entrepreneur administratif » et « l’entrepreneur indépendant ». Smith (1967) cité par Bayad et al. (2006) a d’abord observé deux types : l’entrepreneur artisan et l’entrepreneur opportuniste ou entrepreneur d’affaires. Il a considéré l’entrepreneur technologique comme faisant partie d’une catégorie à part. Smith et Miner (1983) ont ensuite regardé les implications de chaque type pour mieux comprendre le type d’entreprise qui découle de chacun. Lorrain et Dussaux (1988b) ont analysé le comportement de gestion de chacun et trouvé que la gestion de l’entrepreneur opportuniste apparaît plus équilibrée. D’où, après l’école des typologies, nous allons maintenant évoquer l’approche de l’école des caractéristiques 2.3 L’école des caractéristiques

Pour les tenants de cette école, plusieurs caractéristiques sont à la base des compétences du propriétaire – dirigeant de l’entreprise à l’heure de la mondialisation. Les variables les plus citées dans plusieurs travaux de recherche sont la formation et l’éducation. Celles-ci sont définies comme un processus d'intervention ou d'acquisition avec lequel se confond en grande partie le propriétaire dirigeant lui-même. La formation et l’éducation doivent être considérées tel un ensemble à transmettre pour combler des lacunes, après les avoir identifiées (Julien et al., 1998). Bélanger et al. (1988) cités par Bayad et al. (2006) la conçoivent comme un ensemble d'activités d'apprentissage planifié visant l'acquisition de connaissances, d'habiletés et d'attitudes propres à faciliter l'adaptation des individus et des groupes à leur environnement socioprofessionnel et en même temps, la réalisation des objectifs d'efficacité de l'organisation.

En dehors de la formation et l’éducation, plusieurs chercheurs évoquent d’autres facteurs explicatifs des compétences du dirigeant. Dans cette optique, Boutary (2001) parle des pratiques managériales riches pour signifier entre autres, la richesse des structures liée à l’attitude proactive du dirigeant et à sa capacité de mobilisation des ressources humaines, technologiques et organisationnelles en matière de gestion de l’information dans la conquête des marchés étrangers.

Parlant des caractéristiques de l’entrepreneur, Gasse et Carrier (1994) font référence à neuf (9) attributs personnels suivants : 1)- motivation et énergie ; 2)- confiance en soi et en son pouvoir sur l’environnement ; 3)- engagement à long terme ; 4)- constance dans la résolution des problèmes ; 5)- souci de l’efficacité et de la prise de risque ; 6)- attention centrée sur les résultats ; 7)- initiative et créativité ; 8)- tolérance face à l’ambiguïté et ; 9)- compétition avec soi-même. Quant à Bayad et al. (2006), ils évoquent sept (7) qualités de l’entrepreneur : 1)- confiance en soi (indépendant et optimiste) ; 2)- volonté déterminée (obstiné et persévérant, déterminé) ; 3)- Concentré sur la tâche à


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accomplir ou les résultats à atteindre (soucieux de la réussite, bûcheur, dynamique, énergétique, prend des initiatives) ; 4)- Acceptation des risques (prend des risques calculés, aime les défis) ; 5)- Etoffe d’un chef (bon communicateur, bon contact avec les autres…); 6)- Originalité (innovateur, créatif, souple et ouvert d’esprit, ingénieux, flexible) 7)- Tourné vers l’avenir (prévoyant, visionnaire, intuitif). De tout ce qui précède, il découle, de façon évidente que les compétences du dirigeant de l’entreprise sont fortement liées à une meilleure formation, à l’expérience professionnelle et aux pratiques managériales.

En appuyant sur ces travaux et sur ceux en management des entreprises, tels les travaux de Lorrain et al., (1994) nous avons répertorié plus de 15 habiletés que les chercheurs attribuent à l’entrepreneur. Selon Chandler et Jansen (1992) cités par Bayad et al. (2006), ces diverses habiletés se regroupent en trois (3) catégories, à savoir : 1)- les compétences entrepreneuriales (capacités : à identifier les opportunités d’affaires, élaborer une vision d’entreprise, créer et gérer son réseau d’affaires et, gérer son travail) ; 2)- les compétences managériales (capacités à : élaborer une stratégie, coordonner et organiser les activités, diriger le personnel, résoudre les problèmes, contrôler les activités et, négocier) et enfin ; 3)- les compétences techniques de gestion du secteur (capacités à : gérer les opérations, gérer les finances, gérer les Ressources Humaines, gérer les ventes et, gérer les lois et règlements gouvernementaux) .

L’ensemble de ces compétences joue sur la performance de l’entreprise. Ainsi, Selon Tarondeau (2004), la compétence est, du fait de son historicité et de sa contextualité, un concept de nature pragmatique et contingente. Elle est indissociable de l’action et donc des processus : l’action passée, actualisée sous forme d’expérience ; l’action présente, qui révèle et valide la compétence et expérimente pour générer des compétences futures ; l’action future, actualisée sous forme de projet et de résultats attendus (la performance). Ces travaux insistent dans leur ensemble sur les variables de formation, l’expérience professionnelle et la proximité métier du dirigeant / activité de l’entreprise, lesquelles ont un impact sur la performance de l’entreprise (Chandler et Jansen 1992 ; Mamboundou, 2003; Tarondeau, 2004 et Bayad et al., 2006 ; Tsonga, 2008). Nous retenons ces variables pour les fins de cette recherche. Qu’en est-il de la vision ? Les lignes qui suivent vont tenter d’apporter une réponse à cette question en mettant l’emphase sur plusieurs approches de construit. 2.4 La vision du dirigeant et la performance

Ce construit de vision est analysé à partir de trois approches ou dimensions, à savoir l’approche stratégique, l’approche leadership et l’approche culturelle. L’approche ou dimension stratégique

Pour les auteurs du premier groupe, la vision est nécessairement stratégique (D’Amboise et Bouchard, 1990) et souvent associée au management stratégique. D’Amboise et Bouchard (1990) affirment que « lier la vision et stratégie consiste, en quelque sorte, à rechercher les effets concrets de la vision » (p.11), car les chercheurs en stratégie sont préoccupés par le contexte environnemental et concurrentiel de l’organisation. La vision est un moyen de prédiction du futur qui permet à l’organisation d’anticiper les changements. Morris (1990) cité par Bahija (2001) affirme que « la concurrence environnementale impose le besoin de développer des techniques et une vision stratégique ».

Selon D’Amboise et Bouchard (1990), la vision est un moyen de prédiction du futur qui permet à l’organisationd’anticiper les changements de l’environnement concurrentiel. Ainsi, elle devient une technique, un outil qui sert à anticiper le changement et à construire des scénarios de prédiction du futur (Bahija, 2001). Cette technicité ne peut être développée que par l’entrepreneur, d’où la dimension leadership. L’approche ou dimension leadership visionnaire

Le leadership visionnaire a longtemps été associé à la théorie du leadership (Morgan, 1996 cité par Filion, 2001), ce qui a motivé plusieurs chercheurs l’associé à l’exerciced’un leadership intuitif et charismatique (Cossette, 1994). D’Amboise et Bouchard (1990) soulignent que l’approche traditionnelle pour aborder la vision est celle du leadership. Le leader devient le pivot central et le leadership confère un pouvoir dynamique relié à la vision (Wilson, 1992) cité par Roger A. (2004).

Le Leadership visionnaire met en évidence deux attributs que sont le développement et


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l’identification des facteurs clés de la vision. Pour les entreprises, les auteurs s’intéressent à la personnalité de l’entrepreneur et au rôle de la vision dans la création et la gestion quotidienne de l’entreprise dans ses premiers stades de développement. La vision peut être vue comme une fonction du leader puisqu’il est responsable de son développement. Mais pour être efficace, une vision a besoin de susciter un mouvement de rassemblement. Le leader a donc le rôle de la communiquer et de la faire partager. D’où la dimension culturelle. L’approche ou dimension culturelle

En matière de culture organisationnelle, on parle surtout de vision partagée véhiculant un ensemble de valeurs et aboutissant à un comportement collectif. La culture est en lien avec la vision en amont et en aval. D’Ambroise et Bouchard (1990) expliquent que « la vision est évolutive : elle émane du leader, se transforme en des valeurs communes et aboutit à une philosophie organisationnelle » (p.8). La culture intervient à, au moins, trois niveaux du processus visionnaire. Les valeurs du milieu influencent la manière de penser du leader qui développe la vision. La vision, une fois créée, doit être communiquée et partagée. Elle intègre des valeurs organisationnelles et conditionne le développement de visions ultérieures. Cette revue de la littérature sur la vision nous permet de synthétiser ces trois types d’approches, à savoir » La dimension, la stratégie, le leadership et la culture.

Dans notre recherche, nous mettrons l’accent sur la vision stratégique dans un contexte de mondialisation et de globalisation sévère afin de mesurer son impact sur la performance, conformément aux prescriptions de Morris (1990, 1996), D’Amboise et Bouchard (1990) et Filion (1996). Apprentissage des paramètres.

Étant donné un corpus d’apprentissage, constitué d’actions et d’arbres d’analyse de ces actions, on cherche à calculer les paramètres du modèle de façon à maximiser la probabilité des arbres conditionnellement aux actions :

(en notant l’action analysée par l’arbre,i.e23. les feuilles de .) est la "vraisemblance conditionnelle" du corpus; l’apprentissage du modèle consiste en la maximisation de ce critère. On note ici l’une des différences fondamentales de ce modèle avec une SCFG, pour laquelle on cherche en général à maximiser la probabilité du corpus , ce qui se résoud facilement en affectant à chaque règle une probabilité proportionnelle à sa fréquence dans le corpus. Improved Iterative Scaling: théorie

La méthode utilisée ici pour le calcul des paramètres de performance s’inspire directement de la méthode IIS (ImprovedIterativeScaling) exposée dans (Berger, ;Pietraet al., 1997; Lafferty, 1996) pour la probabilisation de champs de Markov. Elle est décrite dans la suite de cette section, pour le cas particulier du modèle GCFG. Plutôt que de chercher à maximiser directement le critère , ce qui se révèle trop ardu, la méthode améliore itérativement le modèle, à partir d’un modèle initial . Une itération consiste à passer d’un modèle à un modèle , en tentant de maximiser sur le critère :

Posons la constante de normalisation associée à la phrase dans le modèle . On peut alors écrire , et :

23i.eson nombre d’occurrences divisé par la taille du corpus.


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En majorant le logarithme par la formule , on peut minorer par :

(1)

où et nombre d’arbres de la base d’apprentissage. De plus,

(2)

On note le nombre de règles utilisées dans un arbre . Alors : .

En injectant ce résultat dans l’inéquation (1), il vient :

On obtient ainsi le critère , dont le maximun en forcement positif, car et qui est toujours inferieura . De plus, les gradients au point de et sont égaux, ce qui assure que si le maximum de se trouve en , alors est un maximum local de Pour aller au plus vite vers le maximum de , on va donc chercher à maximiser à chaque itération de l’algorithme. On peut pour cela annuler ses dérivées partielles en , en résolvant pour chaque règle de la formation l’équation suivante :

(3)

Il s’agit d’un polynôme en , de coefficients tous positifs sauf celui de degré zéro. Ce polynôme est donc facilement annulé, par exemple par la méthode de Newton. Cette étape de calcul nécessite dans certains modèles de Markov-Gibbs d’employer une méthode approchée par échantillonnage (Pietra et al., 1997). Ici, une factorisation du calcul peut être effectuée à l’aide d’un algorithme Inside-Outside (Charniak, 1993), comme le montrent les récritures suivantes. On récrit la troisième somme de (3) par :

Notons le fait que, dans l’arbre la règle domine ou non (C(y, . Avec cette notation, on a :

Ou : est le produit des polynômes associés aux règles qui constituent . D’après (Goodman, 1998) (pp.26-57), peut être calculé pour tout à l’aide d’un algorithme Inside-Outside, dans le cas où la grammaire est sans cycle. Preuve : Les conditions définies par J. Goodman sont bien réunies :

est un semi-anneau commutatif. Cadre conceptuel

Le modèle conceptuel est composé des concepts et construits tirés des recherches antérieures en général, et en particulier, ceux de Paradas (1996) et Bayad et al. (2006). Il se décompose en deux niveaux. Le niveau I, dénommé profil du dirigeant correspond aux différents concepts indépendants, à savoir les compétences du dirigeant (qui comprend : la formation du dirigeant, l’expérience professionnelle et la proximité de la formation du dirigeant par rapport aux métiers de l’entreprise) et sa vision stratégique qui comporte deux construits, à savoir : la vision stratégique à long terme et la vision stratégique à court terme. Le niveau II, baptisé sous le nom de performances tangibles, désigne la possibilité pour l’entreprise d’avoir une notoriété commerciale et économique (est expliqué par le


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CA, la part de marché, le profit net et la diversité de marché), en référence aux travaux de Madsen (1987) et de Ramangalahy (2001). La figure ci-après présente le modèle de recherche. Figure 1 : Adapté du modèle de Paradas (1996) et Bayad et al. (2006)

Profil du Managere Compétence du Managere Formation : FRM Expérience professionnelle : (EXP) Proximité de de la formation du Managere/Métier de l’entreprise : (PFM) Vision stratégique Stratégies Opérationnelles : (SOP) Strategies à long termes : (SLT)

H1 H2

Performances tangibles (PRT) Chiffred’affaires Part de marchée Profit Diversité des marchés

Concernant les variables du niveau I, les déterminants de la performance font mentionner deux concepts découlant des travaux de D’Amboise et Bouchard (1990); Chandler et Jansen (1992); Mamboundou (2003); Tarondeau, 2004 et Bayad et al. (2006). Le premier concept concerne « les compétences du dirigeant ». Il est mesuré à l’aide de trois variables à savoir : la formation du dirigeant (FRM), l’expérience professionnelle (EXP), la proximité « Formation du dirigeant / métier de l’entreprise » (PFM). Le deuxième concept concerne « la vision stratégique » du dirigeant de l’entreprise. Ce concept de vision stratégique est mesuré par deux construits tirés des travaux de Filion (1991, 1997), D’Amboise et Bouchard (1990) et Filion (1996) à savoir : la stratégie à long terme (SLT) et la stratégie opérationnelle (SOP).

Quant au niveau II du modèle, il est composé du concept de « Performance Tangible». Ce dernier est mesuré par le construit de performances tangibles (PRT) tiré des travaux de Madsen (1987) et Ramangalahy (2001). *Nous rappelons que le construit variables du niveau I (h1) dU profil du dirigeant fait ici référence à deux concepts qui sont : les compétences du dirigeant et sa vision stratégique. Chacun d’eux fait l’objet de variables explicatives.

Le concept, « Compétences du dirigeant » de la PME, est la capacité des acteurs à apprendre et à exécuter des tâches (McCormick et Tiffin, 1974 cités par Roger A., 2004). Elle est constituée des aptitudes, des habiletés et des connaissances (Pettersen et Jacob, 1992 cités par Roger A., 2004). Les compétences ont aussi un rapport avec la proximité de la formation du dirigeant par rapport aux métiers de l’entreprise (Mamboundou, 2003). Ainsi dans un contexte dévaluation de la performance de l’entreprise, induite par, le profil du dirigeant, les construits retenu sont : la « Formation (FRM) » qui désigne les qualifications ou nouvelles connaissances acquises par le dirigeant de l’entreprise ; « l’expérience professionnelle (EXP)», qui désigne l’ensemble de savoirs, savoir-faire et savoir-être du dirigeant de l’entreprise et enfin la «Proximité de la formation par rapport métiers de l’entreprise (PFM)» qui désigne le savoir ou expérience. *Le niveau II (H2) fait référence au concept de performance tangible, qui désigne la capacité d’une entrerise à obtenir des bons résultats économiques et commerciaux à la fois sur le marché domestique et sur les marchés internationaux (Ramangalahy, 2001).

La performance tangible fait référence aux impacts économiques et commerciaux palpables, concrets, visibles et manifestes que l’on peut remarquer dans les activités des PME, suite à l’intervention du dirigeant. Ces performances sont définies respectivement par des indicateurs, tels que le chiffre d’affaires à l’export, la part de marché à l’étranger, le profit net à l’international, la diversité des marchés. Ce concept est issu des travaux de recherche Madsen (1987), Aaby et Slater (1989), Denis (1990), OCDE (1993), Julien (1994), Roy (1996), Bergeron, Raymond et Rivard (2004).


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2.5 Les Hypothèses de recherche retenues Le modèle introduit des relations de dépendance entre les variables des deux niveaux (I, II) pour

évaluer la performance des entreprises induite par le profil du dirigeant. Ces relations traduisent les hypothèses qui permettent de répondre à la question de recherche :« Le profil du dirigeant, quel impact sur la performance de l’entreprise?» ou quels sont les explicatifs de la performance tangible des entreprises ? Hypothèse générale (HG) : Un profil du dirigeant adapté aux activités de l’entreprise (Niveau I) a une influence significative sur la performance des entreprises(Niveau II). Cette hypothèse trouve ses fondements dans les travaux de (Robidoux, 1973 ; Chandler et Jansen 1992 ; Mamboundou, 2003; Tarondeau, 2004 et Bayad et al., 2006), Madsen (1987) et Ramangalahy (2001), évoqués dans le cadre théorique. Cette hypothèse générale donne lieu à deux (2) hypothèses sous-jacentes : (H1): «Les compétences du dirigeant (niveau Ia) ont une influence significative sur la performance tangible (niveau II) des entreprises ». Cette hypothèse s’appuie sur les travaux de (Robidoux, 1973 ; Chandler et Jansen 1992 ; Mamboundou, 2003; Tarondeau, 2004 et Bayadet al.,2006), Madsen (1987) et Ramangalahy (2001), évoqués dans le cadre théorique. H2 : La vision stratégique élaborée par le dirigeant de l’entreprise (niveau Ib) influence significativement la performance tangible des entreprises(niveau II)». Cette hypothèse est confortée par les travaux de Morris (1990, 1996), D’Amboise et Bouchard (1990), Filion (1996), Madsen (1987) et Ramangalahy (2001). Ce sont ces trois hypothèses que nous tenterons de vérifier dans la suite de notre étude. 3. Méthodologie adoptée Tableau 2 : Répartition sectorielle de l’échantillon Secteurs d’activités fréquences pourcentages Industrie métallurgique 7 19 Transport 5 5 Informatique 4 4 Communication et télécoms 8 4 Industrie pétrolière 1 5 BTP 4 4 Assurance 2 2 Industrie de transformation 5 7 Industrie agricole 7 5 Publicité 1 1 Cabinets d’études 11 11 Cabinet d’Audit 3 3 Import-Export 5 1 Industrie Halieutique 4 4 Les Imprimeries 2 10 Industries Navales 4 2 Bois 19 8 Aéronautique 3 7 Autres services 100 100%

La collecte de données a été effectuée en février 2013 auprès des dirigeants des entreprises, à l’aide d’un questionnaire composé de 35 questions portant sur 4 grandes thématiques, à savoir : 1)- caractéristiques de l’entreprise ; 2)- compétences du dirigeant de l’entreprise, 3)- vision stratégique du dirigeant de l’entreprise et, 4)- performance tangible. Dans ce questionnaire, 6 variables ont été évaluées à partir de 24 items, répartis comme suit : 1)- formation (5 items); 2)- expérience professionnelle (4 items) ; 3)- proximité formation du dirigeant/métier de l’entreprise (3 items) ; 4)- stratégies opérationnelles (5 items); 5)- stratégies à long terme (3 items) ; et, 6)- performances tangibles (4 items). L’échelle de mesure retenue est l’échelle de Likert ou d’intervalle à cinq points (1= Pas du tout d’accord à 5 = Tout à fait d’accord). Cette collecte de données a été effectuée par d’interviews directs, le choix des dirigeants des entreprises s’est fait de façon aléatoire compte tenu du


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caractère informel de certaines entreprises et ce, sur la base de notre échantillon de départ (300 entreprises). Les méthodes utilisées pour analyser les données et tester le modèle de recherche peuvent être rangées en deux catégories, à savoir les méthodes descriptives et les méthodes prédictives. 2.5.1 Les méthodes descriptives

Les méthodes descriptives seront utilisées pour tester de la validité de construit et de la fiabilité des échelles. La validité de construit (qui regroupe en son sein la validité convergente et la validité discriminante) est testée dans le cadre de l’analyse AFCP effectuée sur les items concernés. La fiabilité des échelles, réalisée dans le cadre de cette étude sous le logiciel SPSS 11.0, est testée grâce à l’Alpha de Cronbach (entre 0,6 et à 0,8 pour une étude exploratoire, supérieur à 0,8 pour une étude confirmatoire) conformément aux recommandations d’Evrard et al. (2003). 2.5.2 Les méthodes prédictives

Pour valider la structure interne du modèle et des hypothèses de la recherche, nous utiliserons le test de Fisher et la méthode de régression linéaire (Evrard et al. (2003). La régression simple du modèle

La « régression simple » recherche et établit le type de relation entre les variables à partir d’une équation linéaire, c’est- à- dire, prédire les valeurs de l’une des variables à partir de l’autre. Son objectif est de confirmer une relation de cause à effet entre deux ou plusieurs variables. Elle cherche la droite de régression qui donne le meilleur ajustement linéaire par rapport au nuage de points ayant pour coordonnées les deux variables étudiées. Généralement, nous émettons des hypothèses que la régression doit pouvoir tester. Pour y parvenir, la régression simple utilise quatre coefficients : 1)- le coefficient de corrélation R proche de 1 ; 2)- le coefficient de détermination (R2) qui permet d’apprécier la validité globale du modèle. Si R2 >0,5, le modèle est valable ; 3)- le test de Fisher (F) qui montre si le modèle est significatif ou pas (si F calculé> supérieur à F lu) nous dirons que le modèle est globalement significatif et vice-versa et enfin ; 4)- le Ratio de Student (T) permettant de savoir si le coefficient du modèle est significatif (différent de 0). La variable est pertinente si elle est significative dans l’explication du phénomène étudié et vice versa. La régression multiple du modèle

Selon Evrard et al. (2003), la régression multiple a pour but d’isoler une relation entre une variable à expliquer et plusieurs variables explicatives et les mettre en équation. Cette relation s’exprime sous forme d’équation de régression qui présente la variable à expliquer comme la somme des variables explicatives affectées de leurs coefficients de régression à laquelle s’ajoute un terme constant. 2.6 L’interprétation des résultats

Cette interprétation, basée sur les méthodes descriptives et prédictives, va commencer par le test hypothèse générale pour se terminer par le test hypothèses adjacentes. Test de l’hypothèse générale

Les résultats de cette recherche vont être présentés à partir des indices calculés selon la méthodologie précédemment décrite, et ce, en fonction de hypothèse générale et des hypothèses adjacentes. Pour l’ensemble des tous les 6 facteurs, le test de l’indice de KMO (Kaiser Mater Oklin) est supérieur à 0,5 avec λ >1 pour chacun des facteurs avec des contributions factorielles pour chaque item supérieur à 0,5; ce qui est conforme aux prescriptions de Kaiser (1958) et au critère de communalité (Evrard et al.,2003). Ces indices montrent ainsi l’unidimensionnalité des facteurs utilisés pour mesurer le concept de profil du dirigeant de l’entreprise dans un cadre mondialisé.

Dans l’ensemble des six (6) variables, cinq (5) ont des coefficients α supérieurs à 0,80; un seul facteur (EXP; α = 0,6601), a une valeur de α acceptable dans une étude empirique (Evrard et al.,2003)). Ce test confirme ainsi que les mesures de fiabilité interne des construits relatifs au profil du dirigeant sont acceptables. Ces construits qui ont été testés serviront, par la suite à analyser les relations de causalité du modèle et à tester les hypothèses de recherche, en utilisant une analyse prédictive. Au niveau prédictif, le tableau 3 ci-dessus résume les coefficients qui ont été calculés. Le test de hypothèse générale (HG) effectué à travers une régression multiple entre les cinq construits


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de l’hypothèse 1(profil du dirigeant) et le construit de l’hypothèse 2 (performance tangible de l’entreprise) donne les résultats suivants : Tableau 3 : Récapitulatif des résultats du modèle général(Profil du dirigeant/Performance de la PME) R ,803 R2 ,646 R2 ajuste ,627 Erreur ,61101519 Source : l’auteur

Le modèle général de régression linéaire donne une corrélation forte entre les construits du niveau I (Profil du dirigeant) et ceux du niveau II (Performance tangible de la PME) avec un coefficient de corrélation R égal à 0,803 proche de 1. Le coefficient de détermination (R2) du modèle général de régression linéaire donne une valeur de 0,646 (supérieure à 0,5) qui donne au modèle général (Profil du dirigeant/Performance de la PME) un bon niveau explicatif. De même, la robustesse du modèle produit une valeur de F égale à 34,235, supérieure à Flu (2,48) au seuil de signification (p=0,000<5%) pour des degrés de liberté de 5, 94. Tous les coefficients sont conformes aux normes prescrites. Le modèle augure d’un bon pouvoir explicatif, de même les coefficients observés confirment un lien de causalité entre les variables du niveau I et celles du niveau II. En définitive, hypothèse générale (HG) : «Un profil du dirigeant adapté aux activités de l’entreprise (hypothèse I) favorise la performance tangible des entreprises (hypothèse II) » est globalement validée. Test des hypothèses adjacentes

Nous allons utiliser cette méthode pour vérifier les deux (2) hypothèses adjacentes. Le test d’hypothèse adjacente permet de valider la structure causale entre concept du modèle de recherche ainsi que l’ensemble des relations linéaires susceptibles d’exister entre les variables endogènes et exogènes. Le Tableau 3 ci-dessous présente les différents coefficients calculés pour vérifier ces hypothèses adjacentes H1 et H2. Tableau 3: Vérification des hypothèses adjacentes

Coefficients Valeur des coefficients par hypothèse Normes reconnues H1 H2 R 0.736 0.770 Proche de 1 R2 0.542 0.593 R2＞0.5 R2 ajusté 0.528 0.584 Erreur standard de l’estimation

0.68714987 0.64449318

Coefficient de Fisher à la signification (p) au degré de liberté DL

F=37,889 ; p=0,000 ; DL(3,96)

F=70,670 ; P=0,000 DL(2,97)

F＞Flu;p＜5%

T de Student à la signification (p)

tPRm(8,738) ; pFRM=0,000 tEXP(2,372) ; pEXP=0,02 tPFM(2,402) ; pPFM=0,014

tSOP(10,576) ; pSOP=0,000 tSLT(1,785) ; pSLF=0,016

t (significatif c’est-à-dire≠0) ; p＜5%

Equations de régression multiple Hypothèse H1 : PRT=0,631. FRM+0,1732. EXP+0,237. PFM+1,371.10E-16

Hypothèse H2 : PRT=0,727. SOP+0,109. SLT+4,170.10E-17 Le premier sous-modèle de régression linéaire concernant hypothèse H1 donne une corrélation

forte entre les construits du niveau Ia (Compétences du dirigeant) et ceux du niveau II (Performance tangible de la PME) avec un coefficient de corrélation R, égale à 0,736, proche de 1. Le coefficient de détermination (R2) du sous-modèle de régression linéaire donne une valeur de 0,542, supérieure à 0,5.Toutes ces valeurs sont conformes aux normes.

De même, la robustesse du sous modèle produit une valeur de F égale à 37,889, supérieure à Flu (2,70) au seuil de signification (p=0,000<5%) pour des degrés de liberté de (3, 96). Tous les coefficients sont conformes aux normes prescrites. De même le T de Student relatif à tous les trois construits (formation, expérience professionnelle, proximité formation/métier) est significatif


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(différent de 0) (8,738 ; 2,372 ; 2,402) aux seuils respectifs de (0,000 ; 0,02 ; 0,014) inférieurs à 5%. Toutes ces valeurs sont conformes aux normes. Les coefficients de régression linéaire respectifs des construits de la compétence (formation, expérience prof, proximité formation/métier) et de la performance sont respectivement : 0,631 ; 0,172 ; 0,237. L’équation de régression traduisant des liens causaux significatifs entre le niveau Iaet le niveau II se décline comme suit : PRT = 0,631. FRM + 0,172. EXP +0,237. PFM +1,371.10 E-16 En définitive, hypothèse (H1) selon laquelle, «Les compétences du dirigeant favorisent la performance des entreprises » est validée, confirmant ainsi les travaux de D’Amboise et Bouchard, 1990; Chandler et Jansen 1992 ; Mamboundou, 2003; Tarondeau, 2004 et Bayad et al., 2006) Le deuxième sous modèle de régression linéaire concernant hypothèse H2 donne une corrélation forte entre les construits (Vision stratégique du dirigeant) et ceux de (Performance des entreprises) avec un coefficient decorrélation R, égal à 0,770 proche de 1. Le coefficient de détermination (R2) du sous-modèle de régression linéaire donne une valeur de 0,593, supérieure à 0,5.Toutes ces valeurs sont conformes aux normes. De même, la robustesse du sous modèle produit une valeur de F égale à 70,670, supérieure à Flu (3,10) au seuil de signification (p=0,000<5%) pour des degrés de liberté de (2, 97). Tous les coefficients sont conformes aux normes prescrites. De même, le T de Student, relatif à tous les deux construits (Stratégie opérationnelle et Stratégie à long terme) est significatif (différent de 0) (10,576 ; 1,785) aux seuils respectifs de (0,000 ; 0,016), inférieurs à 5%. Toutes ces valeurs sont conformes aux normes. Les coefficients de régression linéaire respectifs des construits de la vision stratégique du dirigeant des entreprises dans le contexte de globalisation (Stratégie opérationnelle et Stratégie à long terme) et de la performance sont respectivement 0,727 et 0,109. L’équation de régression qui traduit l’existence des liens causaux significatifs entre l’(hypothèse I) et l’(hypothèse II) se décline comme suit : PRT = 0,727. SOP + 0,109. SLT +4,170.10 E-17

En définitive, hypothèse H2, selon laquelle, « la vision stratégique élaborée par le dirigeant de l’entreprise favorise la performance tangible des celles-ci» est validée ; confirmant ainsi les travaux de D’Amboise et Bouchard (1990), Filion (1991), Bahija, 2001 ; Fabi et al., 2004 et Julien (2005). En résumé, ces résultats montrent l’existence des liens de causalités très significatifs entre le profil du dirigeant et la performance des entreprises, au vu de l’ensemble des coefficients issus de l’analyse du modèle général. De même, les hypothèses adjacentes de recherche H1 et H2 consolident hypothèse générale par l’existence de sous-systèmes. Le Tableau 4 ci-dessous synthétise lesdits résultats avec les relations significatives. Tableau 4 : Diagnostic des principaux résultats : Effets sur la performance tangible

Effets Variables explicatives Variables expliquées Modèles ou Approches théoriques mobilisés

effets directs

FRM

PRT

Confirmation de l’Ecole des caractéristiques, de l’Ecole des typologies, la théorie des ressources et le modèle Eclectique

EXP

PFM

SOP PRT Confirmation de l’approche stratégique 2.7 Conclusion :

Cette contribution nous présentons de manière synoptique l’impact et le rôle de la formation dans la performance de gestion d’une entreprise en économie ouverte. Autrement dit : l’impact du profil du dirigeant sur la performance des entreprises. Il est bon de rappeler que le terme profil du dirigeant a été défini dans cette recherche sur la base des compétences du dirigeant et de sa vision stratégique. Les compétences désignent les aptitudes à combiner des ressources pour mettre en œuvre une activité ou un processus d’actions déterminées (Le Boterf, 1994 cité par Tarondeau, 2004). Elle est constituée des aptitudes, des habiletés et des connaissances (Tsonga, 2008). Ces concepts renvoient à la formation, à l’expérience professionnelle et à la proximité métier du dirigeant / activité de l’entreprise. Quant à la vision stratégique, elle représente une prédiction du futur en anticipant sur les changements


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environnementaux. Tous ces éléments impactent sur la performance des PME (D’Amboise et Bouchard, 1990 ; Chandler et Jansen, 1992 ; Filion, 1996 ; Mamboundou, 2003 ; Tarondeau, 2004 ; Roger A., 2004 ; Bayad et al., 2006 et Tsonga, 2008). Cette dernière est mesurée dans cette étude par les critères de Madsen (1987) et de Ramangalahy (2001) à cause de leur caractère synthétique malgré le côté multidimensionnel du concept.

Les résultats de analyse montrent globalement que le profil du dirigeant, induit par ses compétences et sa vision, influence de façon significative la performance de l’entreprise confirmant ainsi les travaux des chercheurs cités plus haut parmi lesquelles D’Amboise et Bouchard (1990), Chandler et Jansen (1992), Filion (1996), Mamboundou, (2003), Tarondeau (2004) et Bayad et al. Ces résultats, validant l’ensemble des préceptes conceptuels, donnent lieu à des contributions théoriques et managériales à la fois sur le plan théorique et managérial. Ainsi, il est recommandé aux dirigeants de mener des actions qui permettent aux employés de suivre ce mouvement de changement afin de veiller aux performances tangibles de leur organisation (Filion, 1997). Références Aaby, N.E. et Slater, S. F. (1989), « Management influences on export performance: a review of the empiricalliterature 1978-1988 », International Marketing Review, Vol.6, N°4, pp.7-26. Allali, B. (2004), “Quel rôle la vision des dirigeants joue-t-elle dans l’internationalisation de leurs PME ? Etude des cas multiples de PME marocaines et canadiennes du secteur agro-alimentaire ”, 7ème CIFEPME, Montpellier, France. Andersen, O. et Low Suat, K. (1998), “resource-based theory and international growth strategy: An exploratory study”, International Business Review, Vol. 7, pp. 164-184. Arrègle, J.L. (2000), “ L’approche fondée sur les ressources”, in les Nouvelles Approches de la gestion des organisations, Arrègle J-L. et al. (éd. par) Economica, pp.193-238. Bahija A. (2001), « La vision en gestion : examen de la documentation », cahier de recherche N°2001-07, HEC Montréal, octobre. 22 Barney, J. (1991) «Firm resources and sustained competitive advantage», Journal of Management, vol.17, pp. 99-120. Barney, J.B. (1996), “The resource-based Theory of the Firm”, Organization Science, Vol.7, N°5, pp. 469-501 Bavaud, F., Capel, R., Rotten, F.C. et Müller, J.P. (1996), Guide de l’analyse statistique de données avec SPSS 6, Editions Stilkine, Genève. Bayad, M. &Garand, J. D. (1998), « Vision du propriétaire – dirigeant de PME et processus décisionnel : de l’image à l’action », 4ème Congrès International Francophone de la PME, octobre, Metz, France . Bayad, M. &Boughattas, Y. & Schmitt, C. (2006), « compétences des dirigeants de très petites entreprises, illustration par études de cas des dirigeants des TPE en Lorraine », AGRH- Evolutions et développements des compétences managériales : quels défis à relever pour la GRH ? Rouen, Mars, pp 30-40 Beamish, P. etDhanaraj, C.A. (2003), “resource-based approach to the study of export performance”, Journal of Small Business Management, Vol. 29, N°3, pp.242-261. Bergeron, F., Raymond, L. etRivard, S. (2004) „„Ideal Patterns of Strategic Alignment and Business Performance‟‟, Information & Management, n° 41, pp. 1003-1020. Beamish, P. etDhanaraj, C.A. (2003), “resource-based approach to the study of export performance”, Journal of Small Business Management, Vol. 29, N°3, pp.242-261. BERGER A. Convexity, maximum likelihood and all that Bergeron, F., Raymond, L. etRivard, S. (2004) „„Ideal Patterns of Strategic Alignment and Business Performance‟‟, Information & Management, n° 41, pp. 1003-1020. Boudon, R. (1965), “A Method of Linear Causal Analysis: Dependence Analysis”, American Sociological Review, Vol.30, pp.365-374. Boutary M. (2001), “PME et NTIC : bienfaits et limites d‟une gestion de proximité”, Actes du 6ème colloque AIM, Nantes, 7-9 juin, pp. 349-355. Carrière J.-B. (1990), “La vision stratégique en contexte de PME : cadre théorique et étude empirique”,


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Does Islamic Banking Have Any Future? A Comparative Study

Ammar Ali Gull (Corresponding author) MBA/ MS (Banking & Finance)

GC University Faisalabad, Pakistan

Rehan Nasir MBA/ MS (Banking & Finance)


Muhammad Bilal MBA/ MS (Banking & Finance)


Asad Zaman MBA/ MS (Banking & Finance)


Saqib Iqbal MBA/ MS (Banking & Finance)


Accepted 10 April 2013

Abstract The purpose of this research was to assess the future growth of Islamic banking. Study is based on comparative analysis of both interest and Sharia based banks listed at Karachi stock exchange over the period of 2007 to 2011 by applying regression analysis. Financial data regarding key performance indicators of banking industry was collected from websites of KSE, State bank of Pakistan and sample banks. Findings of analysis suggested that performance of non-interest banks is much better as compare to conventional banks of Pakistan. Key difference is that Islamic banks are promoting equity financing on the other hand lending procedure of conventional banks is totally based on debt financing. Return on assets for Islamic banks is higher than conventional banks, it represents that working style of these banks is efficient than interest base banks. In nutshell Islamic banks had bright future within banking industry of our country. Key Words: Islamic Banks, Conventional Banks, Return on Assets and Return on Equity. 1. Introduction

Islamic and conventional banks both are operating for providing financial intermediary services. Financial intermediary mean that banks working for two types of customers. First are those who need money to meet their expenditures because their expenditures are higher than their income. That’s why they need more money in shape of further capital or borrowing. Banks provide facility of lending to customers meeting their needs easily without effecting the operations of business. Second type of customers has income higher than their expenditures. So they have surplus money after meeting their

Journal of Economics & Finance (JEF) APRIL 2013 VOL.1, No,2


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expenditures and those deposit surplus money in banks. Banks use this surplus money for lending purpose to needy customers, who have higher expenditures than income for fulfilling their needs. So banks are working as middle men and take commission from borrowing customer and pay to depositing customer according to their packages and provide many more financial facilities. Interest free banking system is fully based on Islamic rules and its banking operations are performed in accordance with Islamic principles and its functional utilization was continued by creating Islamic economic system. In the era of 1940 Islamic banks intensified their growth and became a new rival in banking sector. Islamic banking reached its peak level and expanded in all Muslim and non-Muslims countries. Islamic banks became an alternative for economy and majority of countries were adapting to Islamic banking.

Within few decades the Islamic economy concept rapidly promoted in four continents likes Asia, Africa, Europe and North America. Presently approximately 300 financial institutions are working as Islamic banks in 70 countries of world and their investment reached up to $500 Billion to $800 Billion. In recent era Islamic banks are having $4 trillion market value. In Arab countries this concept has become a popular economic concept. Bahrain is from those countries who rapidly adopted Islamic economic system and Malaysia is on second due its excellent policies regarding Islamic banking. In Pakistan Islamic banks had 7% market participation and six Islamic banks are operating in Pakistan. Conventional Banking is fully based on financial model which follow capitalistic economy, in this system banks mainly borrow from Savers who have surplus money and lend to enterprises or individuals who need money for meeting their needs. In conventional banks the profits of banks is interest spread which is difference among interest earning and interest expenses. In this system banks also gain revenue from secondary sources by providing services for international trading such as letter of credit and letter of guarantee. In these transactions they work as middle men between exporters and importers and receive commission. Financial sector of Pakistan consist of conventional banks including domestic and foreign, financial institution, Islamic banks, insurance companies and stock exchange.

In furthermore, although interest free base and conventional banks are operating in the same intermediation function, the basis utilized by Islamic Banks is the profit or revenue sharing principle, differ from conventional banks that based on market interest. The revenue sharing basis might influence the Islamic bank’s capital structure. The efficient working of banking operations contributes in economic growth of country because banks play a major and vital role as financial intermediaries. Banks in Pakistan provide financial services and demand commission as reward for these services. Important point is that the funding of banks is financed by deposits the expense of which is also interest rate. Margin of bank’s profit is the difference between the amount earned as interest from lenders and amount paid to depositors. 1.1. Problem statement

Banking industry promotes saving and investment activities for growth of business and trade activities in country. Pakistani banking sector had experienced worst changes in six decades of its life. The start of Islamic banking created a competitive environment for banking sector especially for conventional banks due to its rapid growth in Pakistan. This study will investigate the service quality of banks and its effect on proficiency of interest based and interest free baking. 1.2. Objectives of study Following are the major purposes of this research. To describe the concept of Islamic banking. Performance comparison of Islamic and conventional banks operating in Pakistan. To measure the performance efficiency and growth of Pakistan’s banking sector. 2. Literature Review

The study of Jaffar and Manarvi (2011) showed the effectiveness and efficiency of conventional and Islamic banks working in Pakistan by using CAMEL technique and its sub factors such as capital structure, asset management of banks, efficiency of management, earnings and effective liquidity of banks. Financial data used for financial evaluation of Islamic and conventional banks was collected from financial statements of banks. Financial statements were available on websites of concerned bank and State Bank of Pakistan. CAMEL technique was used for assessing financial proficiency of


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banks. The paper concluded that the conventional banks were founder of banking and had excellent earning ability and Islamic banks were more dependent on equity finance rather than debt finance and also active in liquidity. Asset quality management among the banks was almost similar. The purpose of this paper written by Qureshi and Shaikh (2012) was to analyze the relevant proficiency of Pakistani banking sector, which consist of Islamic and conventional banks. For this determination they used two techniques for assessment, first one was financial ratios to evaluate the production and revenue efficiency and second was envelopment analysis for relevant analysis of banks. They find out that Islamic banks were able to overcome on cost for banking services and have less ability to generate efficient income. They claimed that Islamic Banks could be fortified to become an outstanding leader in financial sector by decreasing bank’s wastage than conventional banks. The study of Shahid, Rehman and Raoof (2010) evaluated the competency of Islamic banks and conventional banks in Pakistan. History of conventional banks in Pakistan from last sixty years was compared with Islamic banks. Islamic banks had short term history in Pakistan and less than seven Islamic banks which are following fully Islamic rules. For conducting research total ten banks were selected which includes five Islamic and five conventional banks from 2005 to 2009. A DEA model was functional to assess the extra outcomes of banking industry. The fallouts were presented that the TE of interest base banks was favorable but in CE and AE both factors were describing that there was a heavy rivalry.

Ansari and Rehman (2011) described the financial efficiency of Pakistani Islamic and interest base banks. For this description they considered five interest free and five interest base banks. Key measurement element was return on total assets and with other helping factors assessment of banking sector was done. The research presented a unique aspect of financial service provider firms which were working as middle men between lender and borrower in Pakistan. Profitability assessment measure was same for both types of banks. At the end of study, they finalized that Islamic banks were providing excellent results than interest base banks and furthermore Islamic banks had bright opportunity and capacity for market share.

Bilal, Saeed, Gull and Akram (2013) conducted a study to investigate the impact of bank related and macroeconomic factors on performance of banks. Findings of their research revealed that net interest margin have a favorable impact on ROA and ROE, while return on equity is adversely affected by inflation and non-performing loans to total advances ratio.

The study of Siraj and Pillai (2012) compared the output of Islamic and non-Islamic banks which were working in gulf and Arab countries for last five years. They said that assessment factors had similarity for Islamic and conventional banks which were established in Arab countries. For this comparative measurement six interest base and six interest free banks were selected. In this study the return on equity, return on total assets, operating income, operating expenses, deposits to total equity and net profit were used as performance indicators. They examined that Islamic banks were more dependent on owner’s equity than debt financing but conventional banks like debt financing. Interest base bank’s growing well but they did not achieve desired outcomes due to increase in unsecured loans. The study notifies that evaluating elements may be affected due to financial crises for the year 2007.

Research of Syafri (2012) analyzed the factors affecting profitability of commercial banks in Indonesia. Secondary data of commercial banks listed on the Indonesia Stock Exchange between 2002 and 2011 was used for analysis. Bank’s profitability was measured by return on assets as a function of banks specific determinants. Analysis technique used was pooling data regression model. The empirical results showed that loan to total assets; total equity to total assets, loan loss provision to total loan had positive effect on profitability, while inflation rate, the size of bank and cost-to-income ratio (BOPO) had a negative effect on profitability. Economic growth and non-interest income to total assets had no effect on bank profitability.

Gull, Akram, Bilal and Muzaffar (2013) studied the importance of board independence in banking sector of Pakistan. Outcomes of analysis suggested that banks with independent board structures have outperformed the banks having dependent boards. In this article Safiullah (2010) emphasized on the financial performance analysis of both stream of banks to measure superiority and efficiency. The study indicated that liquidity efficiency, financial


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structure, surviving in economy and participation in operations were notable. The outcomes were based on economic obligations, optimal productivity and attractive services revealed that interest base banks were operating well than Islamic banks. However Islamic bank’s efficiency was reward able in banking growth and profitability than interest base banks. After comparative research the results suggested that Islamic banks were growing rapidly. Basic theme of study conducted by Saeed, Gull and Rasheed (2013) was to assess the impact of capital structure on banking performance of Pakistan. Study was conducted by applying regression analysis on a sample of 25 banks listed at KSE over the period of 2007 to 2011. Results of study revealed a positive relationship between performance of Pakistani banks and measures of capital structure.

Samad (2004) captured the efficiency results of interest free and interest base banks of Bahrain during the Gulf war. He also evaluated leverage, liquidity and operation of banks. He used financial ratios for assessment of services. He applied student’s financial statement analysis projects on Bahrain banks for ten years trend analysis. The paper finalized that interest base banking and Islamic banking have minor difference in liquidity, efficiency and services. But his investigation revealed that there was a fundamental difference in lending of both banks.

The study of Viverita (2012) was aimed to evaluate the efficiency of Indonesian Islamic banks by using individual banking data for the last 4 years. He used different financial ratios such as cost, revenue and profit efficiency ratios. He observed that Islamic banks have impressive improvement within banking sector. He examined in his research with the help of T-test and F-test that Islamic bank had high cost of production than interest based banks. Furthermore, he investigated that Islamic banks were more active and efficient in their operations than commercial banks and earned more dividend. He lastly described that the profitability of large scale Islamic banks was much better than the huge conventional banks.

Awan (2009) observed that in discouraging global financial conditions, Islamic banking has become an outstanding substitute for financial market. It had noticed the rapid growth within two decades. He conducted a vertical analysis of Islamic banking and then compared it with commercial banks. For the purpose of study he selected new Islamic and commercial banks for the sake of assessment. Primary and secondary data resources were used for measurement of efficiency of banks for 3 years. He used different ratios to analyze the performance of both kinds of banks. Islamic Banks were working on the profit or revenue sharing principle, which was different from conventional banks that were based on market interest. The profit /revenue sharing basis might influence the Islamic bank’s capital structure but it was also helpful in international banking crises to reduce capital risk. Mostly conventional banks have defaulted due to high liquid liabilities but Islamic banks survived in worst conditions due its unique capital structure. 3. Data and methodology

Data for the purpose of this research is collected from secondary sources such as websites of Karachi Stock Exchange (KSE), State Bank of Pakistan (SBP) and concerned banks for the period of five years from 2007 to 2011. This five years period was selected because during this period banking sector passed through worst economic conditions. Five Islamic banks and five conventional banks were selected as sample from the banking sector of Pakistan. All these banks are well known, listed at KSE and have a big market share. For analysis of data collected from above mentioned sources descriptive statistics, correlation and regression analysis are applied as Statistical techniques. 3.1 INDEPENDENT VARIABLES 3.1.1 Capital Adequacy Ratio (CAR) It is an indicator which measures the strength of bank’s capital. It shows the risk weight of credit exposure. CAR ratio is very useful for checking the capital of financial institutions.

3.1.2 Return on Equity (ROE) This ratio is used to measure the return of total capital of a company. ROE is calculated by using firm’s net profit and total equity finance. ROE is shown in percentage.


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3.1.3 Deposits to Total Assets Ratio (DTAR) DTAR shows the credit standing of bank by considering relationship between deposits and total assets of banks.

Advances Turnover Ratio (ATR) Advances turnover represent that how much interest is earned from total advances of bank. It is a useful measure to check the efficiency of bank performance

Net spread ratio (NSR) Spread ratio is used to measure the net interest income earned by a bank. This ratio represents the basic income of banks.

3.2 DEPENDENT VARIABLES 3.2.1 Return on Assets (ROA) ROA is a performance indicator that is used to measure the efficiency of total assets of a company. ROA is obtained with the use total average asset of bank and net profit after tax, ROA is shown as a percentage. Sometimes it’s written as investment on total assets of bank.

4. Hypothesis Ho: Islamic banks are performing better than interest base banks. H1: Conventional banking institutions are performing efficiently than Islamic banks. 3.4, Empirical model Yit = β0 + βXit + µit Return on Assets ROAit = β0it+ β1CARit + β2NSRit + β3ATRit+ β4DTARit + β5ROEit + µit Where: Yit is dependent variable. β0 represents the intercept. Xit is independent variable. µit are the error terms. i is number of banking companies and t is number of years. 4., Results and Discussions This segment explains the statistical results of variables related to study. This section consists of group statistics, correlation and regression analysis of variables and furthermore theoretical discussion on outcomes of these tests. 4.1 Group Statistics

Table- 1 and 2 are used to describe the 5 years summary of statistical analysis for Islamic and non-Islamic banks. Combined descriptive statistics of both banks are presented in table- 3. In Islamic and non-Islamic bank’s mean, median and standard deviation of the dependent variable ROA is -0.3496, -3.1972 0.02, 1.21 and 1.446543, 21.48512 respectively. Return on assets of Islamic banks is better and more consistent than conventional banks. In Islamic and conventional banks ROE, NSR, DTAR, CAR and ATR are independent variables and their means, are 2.46,11.18, 47.7252,37.5244 72.3556,76.1204 23.9012,14.1096 and 14.2088,16.4168 respectively. In case of Islamic banks Mean of independent variables NSR and CAR are higher than conventional banks but ROE, DTAR and ATR are lower than conventional banks. Standard deviation of ROE, NSR, DTAR, CAR and ATR (independent variables) for interest free and interest base banks are 8.979317,27.46183 10.79265,20.10444 13.03161,6.946273 13.73281,7.77835 and 6.91089,3.775496 respectively. Islamic banks SD is less as compare to conventional banks which shows that Islamic banks are performing well than interest based banks. Minor fluctuations in standard deviation are suggesting that Islamic banks are more consistent than conventional banks. 4.2 Correlation Analysis

Table-4 and 5 represents the correlation matrix of the independent variables for Islamic and


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conventional banks. Correlation research is a statistical technique which is used to check the multi co linearity among independent variables. When Correlation is positive then values will move in same direction but when they move in opposite direction correlation is negative.

Islamic banks ROE has a positive relation with NSR, DTAR and ATR but a negative association with CAR. Conventional bank’s ROE having a favorable relationship with NSR, CAR and ATR, while negatively related with DTAR. Islamic bank’s NSR is negatively correlated with all variables except CAR. Non-Islamic bank’s NSR is found to have a positive dependence upon CAR and ATR. NSR and DTA are adversely correlated. DTAR of interest free an interest based banks is positively associated with ATR and negatively related with CAR. Islamic banks CAR have a positive correlation with NSR but it is negatively associated with ROE and DTA. Conventional banks CAR have Positive correlation with NSR and ROE but it is negatively associated with DTAR. In correlation matrix Islamic banks ATR is positively related with ROE, DTAR and CAR and negatively related to NSR. Conventional banks ATR having an optimistic relationship with all independent variables except CAR.

Table- 6 illustrates the combine correlation analysis of Islamic and non-Islamic banks. ROE is having a favorable connection with all independent measures other than CAR. NSR is negatively associated with DTAR and ATR but favorably related to CAR. DTAR have an adverse relationship with CAR and positively correlated to ATR. Finally CAR and ATR are correlated in same direction. 4.3, Regression Results

Outcomes of regression analysis of both banks are separately given in Table-7. According to results demonstrated in above mentioned table ROE of non-interest based banks has a positive significant impact on dependent variable (ROA) and all other variables have an insignificant relationship with ROA. R squared of dependent variable for Islamic banks is 0.671548, which means 67% of sample describes ROA and its F statistics is 7.769405. In case of Conventional banks ROE and CAR are favorably associated with ROA. NSR, DTAR and ATR are having a negative insignificant impact on ROA. R square and F statistics of conventional banks are 0.807808, 15.97187 respectively. Combined results of regression test are elaborated in Table-8. Except ROE all other independent variables are having an insignificant impact on dependent variable and ROE has a strong positive association with ROA. R square and F statistics of combined regression model are 0.632108 and 15.1201. 5. Conclusion

This research is conducted on the basis of comparative analysis of both banking approaches. First one is Islamic banking based on Sharia guidelines and other is Non-Islamic based on manmade principles. Conventional banking institutions are working in Pakistan from four to five decades and having penetration in their services concern. Islamic banks started their operations recently but their position in banking industry is satisfactory. Banks working in accordance of Islamic principles are outperforming conventional banks in recent financial crises. One logical reason is that Islamic banks are not dependent upon debt finance like conventional banks. This is an edge for Islamic banks over conventional banking institutions that they rely on equity financing rather than debt financing. Finally it is reduce bank’s investment risk. This edge is very helpful for Islamic banks to survive in international financial crises.

As per findings of this study in Pakistan Islamic banks are performing better than interest base banks. Return on Assets of Islamic banking is at optimal level and supportive than conventional banking organizations. Islamic banks CAR ratio is too good that is an indication of low risk and secured financing. Conventional bank’s deposit to asset ratio is very attractive for potential customers and also higher than non-conventional banks. It means conventional approach majorly relies on debt financing and in contrast Islamic banks are dependent upon equity financing. Over all Islamic banks have higher growth rate in banking industry as compare to conventional banks. References Ansari, S., & Rehman, K. (2011). Comparative Financial Performance of existing Islamic Banks and Contemporary Conventional Banks in Pakistan. Paper Presented at second International Conference on Economics, Business and Management, IPEDR 22, 45-49. Awan, A. G. (2009). Comparison of Islamic and conventional banking in Pakistan. Proceedings second CBRC, Lahore- Pakistan. 1-36.


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Bilal, M., Saeed, A., Gull, A. A., & Akram, T. (2013). Influence of Bank Specific and Macroeconomic Factors on Profitability of Commercial Banks: A Case Study of Pakistan. Research Journal of Finance and Accounting, 4(2), 117-126. Gull, A. A., Akram, T., Bilal, M., & Muzaffar, Z. (2013). Do Board Independence Carry Value? (A Case Study of Pakistani Banks). Research Journal of Management Sciences, 2(5), 1-5. Jaffar, M., & Manarvi, I. (2011). Performance comparison of Islamic and Conventional banks in Pakistan. Global Journal of Management and Business Research, 11(1), 60-66. Qureshi, M. A., & Shaikh, M. (2012). Efficiency of Islamic and Conventional Banks in Pakistan: A Non-parametric Approach. International Journal of Business and Management, 7(7), 40-50. Saeed, M. M., Gull, A. A., & Rasheed, M. M. (2013). Impact of Capital Structure on Banking Performance (A Case Study of Pakistan). Interdisciplinary Journal of Contemporary Research in Business, 4(10), 393-403. Safiullah, Md. (2010). Superiority of Conventional Banks & Islamic Banks of Bangladesh: A Comparative Study. International Journal of Economics and Finance, 2(3), 199-207. Samad, A. (2004). Performance of interest-free Islamic banks vis-à-vis interest-e-based conventional banks of Bahrain. IIUM Journal of Economics and Management, 12(2), 1-15. Shahid, H., Rehman, R., Niazi, G. S. H., & Raoof, A. (2010). Efficiencies Comparison of Islamic and Conventional Banks of Pakistan. International Research Journal of Finance and Economics, (49), 24-42. Siraj, K. K., & Pillai, P. S. (2012). Comparative Study on Performance of Islamic and Conventional Banks in GCC region. Journal of Applied Finance and Banking, 2(3), 123-161. Syafri. (2012). Factors Affecting Bank Profitability in Indonesia, Paper Presented at The 2012 International Conference on Business and Management, Phuket- Thailand. Viverita. (2010). Performance Analysis of Indonesian Islamic and Conventional Banks. Electronic copy available at: http://ssrn.com/abstract=1868938. List of Tables Table- 1

ROE ROA NSR DTAR CAR ATR

Mean 2.46 -0.3496 47.7252 72.3556 23.9012 14.2088 Median 0.09 0.02 47.7 78.75 17.65 13.61 Std. Dev. 8.979317 1.446543 10.79265 13.03161 13.73281 6.91089 Observations 25 25 25 25 25 25

Descriptive Statistics (Islamic Banks) Table- 2

ROE ROA NSR DTAR CAR ATR

Mean 9.2368 -3.1972 37.5244 76.1204 14.1096 16.4168

Median 11.18 1.21 35.83 76 11.35 16.05

Std. Dev. 27.46183 21.48512 20.10444 6.946273 7.77835 3.775496

Observations 25 25 25 25 25 25

Descriptive Statistics (Conventional Banks) Table- 3 ROE OA NSR TAR CAR TR Mean 5.8484 -1.7734 42.6248 74.238 19.0054 15.3128

Median 4.865 0.51 43.3 76.89 14.365 14.995

Std. Dev. 20.50823 15.13897 16.77996 10.50844 12.10218 5.623013

http://ssrn.com/abstract=1868938


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Observations 50 50 50 50 50 50

Descriptive Statistics (All Banks) Table- 4

ROE NSR DTAR CAR ATR

ROE 1

NSR 0.165986 1

DTAR 0.373151 -0.26903 1

CAR -0.47588 0.364653 -0.69399 1

ATR 0.582182 -0.14538 0.262491 0.48572 1

Correlation Analysis (Islamic Banks) Table- 5

Correlation Analysis (Non-Islamic Banks) Table- 6

Correlation Analysis (Combined)


ROE 1

NSR 0.484697 1

DTAR -0.20929 -0.44872 1

CAR 0.259216 0.569388 -0.77756 1

ATR 0.121465 0.121902 0.339989 -0.17463 1


ROE 1

NSR 0.352529 1

DTAR 0.038702 -0.33473 1 CAR -0.07474 0.470585 -0.71408 1

ATR 0.240036 -0.06915 0.305751 0.44975 1


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Analyzing the current incorporation of social, environmental and economic measures into business strategic performance measurement systems: the case of Enterprises operating in

Shanghai

Jing Zhou (Corresponding author) Fudan University, School of Management

Starr Building 670 Guoshun Road, Shanghai, P.O Box 200433 China E-mail: [email protected]

Li Xu

Fudan University, School of Management Starr Building 670 Guoshun Road, Shanghai, P.O Box 200433 China

E-mail:[email protected]

Accepted 4 March 2013 Abstract: We theorize about the incorporation of social, environmental and economic dimensions into strategic performance measurement systems .81Chinese companies were surveyed for the analysis. Along with the increasing of social responsibility pressure, numbers of enterprises are promoting environmental, social and economic performance as strategic sustainability measures. Although the addition of sustainability measures to enterprise’s long term business strategy has long time been a major preoccupation of literature. Some empirical researches have examined if these nonfinancial measures are effectively incorporated into strategic performance measurement systems. In this research, we will examine why the incorporation of sustainability measures into enterprise business strategy vary across enterprises operating in Shanghai. Keywords: Sustainability measures, Shanghai enterprises, Enterprise strategic performance measurement systems. 1. Introduction

The beginning of 21th century observed unprecedented important changes in enterprise long term strategy and management towards sustainable concerns, the incorporation of sustainability measures as enterprise strategy, and adopting sustainability as entire part of an enterprise’s business strategy in order to obtain important benefits (Epstein 2008).This tendency has been confirmed by S.Gates and C.Germain(2010)who demonstrated that number of enterprises are developing new strategy approaches in relationship with attempts to incorporate sustainability measures into business strategies such as the balanced scorecard (BSC).According to Marcus Wagner, Tobias Hahn ,Frank Figge ,Stefan Schaltegger (2001) social, environmental, and economic performance have become increasingly important for business. To the level that environmental, social and economic problems are shown in the transactions of markets, many enterprises have implemented environmental, social and economic management strategies during the last ten years. These strategies have rarely been incorporated with

International Journal of Business & Management MARCH 2013 VOL.1, No,1


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the general management strategy of an enterprise. The role of enterprises in achieving sustainability has been discussed both on instrumental ( Bennett & James, 1999) and strategic level ( Roome, 1998) .If enterprises are to achieve at the same time improvements of the environmental ,social and economic performance of businesses , this lack of integration turns out to be a major obstruction. The Global Reporting Initiative (GRI) that is“a network-based organization that pioneered the world’s most widely used sustainability reporting framework”, shows that environmental, social and economic performance (sustainability measures) are evolving in some of Asian countries such as China. And number of these countries is incorporating sustainability measures in enterprises long term performance strategies (OECD-DAC, 2011).Some empirical studies have examined if sustainability measures are integrated into enterprises performance measurement systems which are crucial for the implementation of business strategy.

This paper has two main objectives. The first objective is to investigate to what degree Enterprise operating in Shanghai (China) incorporate sustainability measures in their performance measurement systems (PMS) and align them with long term business strategy. The second objective is to evaluate the determinants which explain why these practices vary across these enterprises. 2. Literature review 2.1 Strategic performance measurement system

Strategic performance measurement system determines both the scope and focus of management accounting. Particularly the requisite is that practice of management accounting should reflect the choices of strategies made in enterprises for management accounting to be consistent. The process of SPMS has four important steps. Identifying: 1. The enterprise’s primary goals ( as established by its owners) 2. The role the enterprise’s stakeholders play as the enterprise pursues its primary objectives 3. The requirements of each stakeholder in exchange for pursuing its role in supporting the enterprise’s strategy. 4. How to evaluate the enterprises objectives and stakeholder roles.

The process of PMS starts with the specification of enterprises primary objectives. In profit-seeking enterprises, the primary objectives are financial

In not-for-profit enterprises the primary objectives reflect the objectives of the enterprise’s members For the purpose of strategic performance measurement the enterprise’s objective can be mainly financial, social, or a mix of both social and financial objectives. But, if there are primary objectives that can conflict, the enterprises planners should identify rules that instruct how decision-makers should make trade-offs among the objectives (Anthony A. Atkinson, 1998) Finally, Strategic performance measurement systems have three characteristics in common: 1. They integrate financial measures that capture the short-term consequences of managers’ decisions regarding asset utilization, revenue growth and cash flows problems (Kaplan & Norton, 2001a) 2. They enhance financial measures with nonfinancial measures (that indicate operational achievements likely to drive future financial performance); 3. They are created to achieve multiple objectives (cost determination and value creation) 2.2 Enterprise Social Responsibility (ESR) and Sustainability

The concept of ESR has been first developed by Bowen (1953). In this research, we define ESR as a complete set of programs, practices and policies that are incorporated into specific business operations, decision-making and supply chains processes throughout an enterprise, aiming to instruct responsibility for past and actual actions as well as future influences (Business for Social Responsibility, 2008). The Brundtland Commission report (1987) defines the ESR as “meeting current needs without compromising the capacity of future generations to meet their own needs”. A sustainable corporate contributes to sustainability by bringing social economic and environmental benefits simultaneously (by achieving the triple bottom line) (Dyllick & Hockerts, 2002). Enterprises have been developing new policies and strategies and redelimiting their action domains, roles, and interdependency (Van Marrewijk, M. & Hardjono, T.2003).

ESR and sustainability have gradually converged and nowadays they include similar aspects and are often utilized as comparable terms (Mazon, 2004).


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First, both ESR and sustainability concepts include different levels of analysis and different stakeholders (suppliers, clients, community members, shareholders, employees, partners.). Secondly, these concepts deal with problems related to environmental, social, and economic. The economic dimension is not centralized to short-term performance indicators (return on investment), but also refers to aspects that contribute to long-term financial success (enterprise’s reputation and relationships).

Managing ESR and sustainability implies seeking equilibrium between long and short-term factors, and among the interests of a larger group of stakeholders than those applied by traditional management (Raynard and Forstarter, 2002).ESR and sustainability have come represent an important aspect of enterprise strategy, with an increasing number of enterprises trying to monitor, improve and determine the environmental and social influences of their activities. Despite such interest, effective integration of sustainability into performance measurement systems and management faces many obstacles, raising the need for new research. 2.3 The triple bottom line

After the World Commission on Environment and Development (WCED), many definitions of sustainability have been made and this concept has been interpreted in different ways. Most of these definitions are based upon the concept of triple bottom line (or three-pillar): social, environment and economy (P., J., Annandale, D. and Morrison-Saunders, A., 2004). According to the Portland state university (2011) “The triple bottom line term is a phrase that originated in the corporate sector as a way to think about the social, environmental and economic, value that is added (or destroyed) by an investment”. In others words the meaning behind the “three pillar” is that the health and success of an enterprise not only can be estimated by the economical dimension but also is influenced by social and environmental determinants. Triple bottom line model has been developed by Elkington, J.,(1998).Nowadays number of business companies are implementing this model in their business strategy, and utilizing the terminology in their annual press releases. According to Russel (2008) an active sustainability policy can be advantageous for an enterprise in terms of image and the way the enterprise is profiled in a market. Enterprises developed a need for a model that could help them to integrate the sustainability in their business in a way that was beneficial in according to the triple bottom line. 2.4 Incorporating environmental, social and economic dimensions into strategic PMS

Enterprises are progressively inclined to incorporate social and economic dimensions into their business strategies, to respond to increasing pressure of employees, consumers, and other important stakeholders and also to examine opportunities for building competitive advantage (Bielak, Bonini, & Oppenheim, 2007). Management researchers are aiming to identify a set of determinants for promoting effective incorporation of sustainability into enterprises practices.

Leadership has been recognized as a fundamental alternative, promoting the commitment of enterprise as a whole (Environmental Protection Agency of United States, 2001). Marrewijk (2004) in his study, describes a set of ideal types of enterprises, and develops a system of values and associated institutional structures (governance and the role of leadership).

Fineman (1996) debates the role of leadership in the process of change, highlighting that leadership appears to play an important role in the enterprise adoption of sustainability practices. Others determinants such as communication and training (institutional mechanisms) have been recognized as promoters of sustainability initiatives. Stone (2006) demonstrates that, in order to achieve a high degree of organizational commitment, well-defined training and communication plans are key determinants in promoting a clear understanding of the role of sustainable practices for enterprise strategy and objectives. Tregidga and Milne (2006) investigate enterprise reports in order to understanding the development of the discourse of sustainability. They mainly debate the role of reporting and communication mechanisms in creating enterprise sustainability initiatives.

Bansal (2003) affirms that organizational commitment to sustainability is promoted when top management buy the concept (but also when lower organizational levels engage in sustainability) Henriques and Sadorsky (1999) link perception of management of stakeholders' pressures with more proactive undertakings towards environmental commitment.


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Sharma and Henrique (2005) suggest an analysis associating different types of stakeholder influence strategies with different sustainability practices adopted by enterprises. The literature review proposes that even if researchers are aiming to identify and understand the factors that might influence the incorporation of sustainability by enterprise. Few studies have suggested a more centralized view of these factors. Basu and Palazzo (2008)’s article is one of the rare articles that consider internal and external impacts, suggesting a group of cognitive, linguistic and conative aspects in order to identify an enterprise’s intrinsic orientation toward the choice of ESR .

The cognitive aspect has to do with dimensions including enterprise orientation, identity and legitimacy, managerial beliefs and values regarding the choice of sustainability (USEPA, 2001). The linguistic aspect includes organizational modes of justification and is associated to considerations of transparency and communication (Marrewijk, 2004; Stone, 2006; Tregidga and Milne 2006). The conative aspects involves the way enterprises tend to operate, including coherence among strategic policies and levels of commitment (Marrewijk, 2004; Sharma and Henriques, 2005)。 2.5 Performance measurement system and sustainability management

The Balanced Scorecard (BSC) was created as a new approach to performance measurement (PMS) because of problems of past orientation and short-termism in corporate management (Figge F, Hahn T, Schaltegger S, Wagner M., 2001a.). The Balanced Scorecard is found on the assumption that the efficient utilization of investment capital is not the sole factor for enterprise competitive advantages, but factors such as intellectual capital, customer orientation, knowledge, become very important .Norton and Kaplan proposed then a new performance measurement system approach centered on enterprise strategy in four perspectives(figure1): financial, customer, internal business processes, and learning and growth (Kaplan and Norton, 2001).

The balanced scorecard’s purpose is to contribute and to transform “soft factors” and intangible assets into long-term financial success explicit .The balanced scorecard’s four perspectives can be summarized as follows (Kaplan & Norton, 2001,Weber & Schaffer, 2000) (1) The financial perspective shows if the transformation of a strategy leads to ameliorated economic success. (2) The customer perspective determines the customer or the market segments in which the enterprise competes. (3) The internal process perspective defines internal business processes that enable the firm to meet the customers’ expectations in the target markets. (4) The learning and growth perspective identifies the infrastructure necessary for the achievement of the objectives of qualification, motivation and goal orientation of employees, and information systems. Beside the four perspectives of the balanced Scorecard, a fifth aspect (society) can integrate social and environmental aspects that show nonmarket societal mechanisms (sociocultural mechanism). Figure 1: Four perspectives to integrate sustainability into the balanced scorecard Source: Kaplan, R. S. and Norton D. P. (1992, Jan-Feb) ‘The Balanced Scorecard – Measures That Drive Performance’, Harvard Business Review, Vol.70, No.1, pp.71-79

Thus the new approach is to create a balanced scorecard devoted to social and environmental problems that cover the traditional balanced Scorecard. This choice of a balanced scorecard focused on sustainability (social and environmental) is very important for enterprises management departments that are devoted to social and environmental and issues.

There are many possibilities to incorporate sustainability measures into performance measurement systems, but enterprises’ current practices and the determinants that explain their procedures remain uninvestigated. Sustainability management with the balanced Scorecard aims to focus on the problem of enterprises contributions to sustainability in a centralized way. It assumes that for enterprises to contribute to sustainable development, it’s very important that enterprise performance improves simultaneously in social, economic and environmental dimensions (Figge F, Hahn T, Schaltegger S.,Wagner M., 2001a).

In a balanced scorecard all aspects appropriate for accomplishing a permanent competitive advantage should be incorporated. In the four perspectives of the balanced scorecard, therefore, the enterprise’s activities important for long-term business success are included and causes are connected


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to effects.

In the formulation of a balanced scorecard all the objectives and measures are estimated from the

long-term strategic financial objectives in a top-down process. This structure of the balanced scorecard ensures that all business activities are associated to the successful application of the business strategy. This particularity of the balanced scorecard can also be utilized for the management of social and environmental dimensions. The capacity of the balanced scorecard to incorporate the three dimensions of sustainability gives the opportunity to integrate the management of social and environmental dimensions into normal business activities.

The link between the three performance aspects of sustainability (environmental, social and economic) must be taken into account. Incorporating the three aspects of sustainability into business management offers three principal advantages (Figge F, Hahn T, Schaltegger S, Wagner M. 2001a): (1) Sustainability management that is economically sound is not menaced by economic crisis because it is not only achieved as long as the enterprise is successful. (2) Enterprises that want to promote their social and environmental management sometimes direct themselves towards competitors. (3) An inclusion of social and environmental and dimensions into business management confirms that enterprise sustainability management take into account all three aspects of sustainability. There are three possibilities to incorporate social and environmental dimensions in the balanced scorecard. Firstly, environmental and social dimensions can be incorporated in the current four perspectives. Secondly, an additional perspective can be added to consider social and environmental

FINANCIAL “To succeed financially, how should we appear to

our shareholders?”

CUSTOMER “To achieve our vision, how should we appear

to our customer?”

LEARNING AND GROWTH

“To achieve our vision, how should we sustain

our ability to change and improve?”

INTERNAL BUSINESS PROCESS

“To satisfy our shareholders and

customers, what business process must we excel?”

VISION AND STRATEGY


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dimensions. Third, a particular social and environmental scorecard can be conceived (Deegen T., 2001, Figge F, Hahn T, Schaltegger S, Wagner M. 2001a).

Environmental and social aspects can be classified under the four current bsc perspectives (Deegen T., 2001). This signifies that social and environmental dimensions are included in the four perspectives through particular performance drivers for which leading indicators as well as objectives are conceived (Kaplan and Norton, 2001). The approach of the incorporation of social and environmental dimensions by classifying them under the four perspectives is very important for social and environmental dimensions that are already incorporated in the market system. 3 Methodology 3.1 Data collection

We conducted an empirical study of large enterprises operating in Shanghai. We identified a sample of 250 enterprises. But only 81 companies showed interest in the study which represented 32.4% responses. The type of enterprises chosen for the study are: manufactured enterprises, service enterprises, and distribution enterprises(Table 6,figure 4).We used the strategy of independent contingency variables(ICV) in the survey instrument developed by Edward J. Garrity, G. Lawrence Sanders (1998) to assess enterprise strategy. Respondents were asked to rate on a five-point likert scale to what extent they agreed with a number of statements relating to enterprise principal strategic orientation (Sinkovics, Rudolf R, Roath, Anthony S.,2004,citing Gatignon and Xuereb ,1997 ,define strategic orientation as the specific approach a firm implements to create superior and continuous performance. Strategic orientation provides a foundation of guidelines upon which to continuously improve a company's performance).The statistical method we used to determine enterprises strategies in the overall sample is Factor Analysis(It can be defined as a statistical technique used to describe variability among observed variables in terms of a potentially lower number of unobserved variables called factor). We have chosen three dimensions (1.the strategy of product differentiation according to service and product quality; 2. strategy according to cost leadership; 3.the strategy of product differentiation based on innovation) with eigenvalues higher than 1 (3.21, 1.79, and 1.3).And the percentage of variance explained by each dimension is 32.15%, 17.9%, and 10.30%. The respondents were also asked to indicate the type of business strategy or performance measurement systems they use to conduct performance, their business sector, and if their enterprise is classified as multinational company.

We additionally asked them to indicate on a five-point likert scale to what extent they think the performance measurement system includes both performance and sustainability dimensions (financial PM, internal processes, innovation and learning, customers, and sustainability). We used SPSS software for performing data analysis. 3.2 Results

The results of the data analysis show that among the financial PM, internal processes, innovation and learning, customers, and sustainability categories, only the sustainability measure is (on average) less present in the performance measurement systems (table 1, figure 2).However, the results in table 2 show that sustainable practices are more present in multinational enterprises. Moreover, manufactured enterprises are more likely to promote “sustainable lifestyles” than are both distribution and service enterprises. The results obtained also show that nationality (Chinese or foreign) is not a determinant of the presence of sustainability measures in performance measurement systems. Figure 2: Performance Measures average level of presence


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Figure 3: Mean level of alignment between core business strategy and sustainability

Figure 4: Repartition of types of enterprises interviewed

Table 1: Performance Measures average level of presence

Table 2: Comparison tests of mean level of presence and Standard Deviations of

Measures level of presenceFinancial 4.35Customer 2.65Internal process 2.90Innovation and learning 2.45Sustainability 1.70


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Sustainability Indicators

Contingency variable N

Mean level of sustainability

indicatorStandardDeviation

Mean Difference

Classified as multinational enterprise 35 1.85 1.15Not classified as multinational enterprise 46 1.80 1.06 0.12*Manufactured company 47 1.87 1.08Distribution enterprise 17 1.53 0.89 0.34*Manufactured company 47 1.87 1.08Service enterprise 17 1.53 0.89 0.34*Chinese enterprises 60 1.89 1.09Foreign companies 21 2.00 1.14 0.11 *P< 0.5 Table 3: Correlations between level of presence of sustainability measures in PMS and the type of strategy.

Table 4: Mean level of alignment between core business strategy and sustainability Measures Level of alignment with strategy Sustainability 5.00 Innovation and learning 3.80 Internal processes 4.08 Customer 4.66 Financial 4.70

Table 5: comparison tests mean of core business strategy and sustainability (by contingency variables)

Contingency variable N

Mean level of sustainability

indicatorStandardDeviation

Mean Difference

Classified as multinational enterprise 35 2.40 1.45Not classified as multinational enterprise 46 2.15 1.20 0.25*Manufactured company 47 2.45 1.55Distribution enterprise 17 2.12 1.10 0.33*Manufactured company 47 2.45 1.55Service enterprise 17 2.12 1.10 0.33*Chinese enterprises 60 2.13 1.12Foreign companies 21 2.18 1.19 0.05 *P< .01 Table 6.Repartition of types of enterprises interviewed Enterprises Number of enterprises PercentagesManufactured enterprises 49 60.49%Service enterprises 22 27.16%Distribution enterprises 10 12.34Total 81 100%

The results in table 3 show that there is no link between the presence of sustainability dimensions

in performance measurement systems and business strategy. The table 4 and figure 3 show that among the categories of PMS, sustainability measures are the

Strategy of quality Strategy of cost leadership Strategy of innovation Sustainability dimensions' level of presence -0.24 -0.33 0.42

P<0.05, correlations are significant


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most correlated to enterprise strategy. This result has been confirmed by Rodney Mc Adam and Brian Bailie (2002). They demonstrated that “performance measures associated to strategy are more effective. Also, the alignment between the measures, measurement framework and the strategy must be continually reviewed and treated as a dynamic and complex issue, rather than a linear mechanistic relationship”. The results in table 5 show that the alignment between core business strategy and sustainability is more correlated with multinational enterprises and with manufactured enterprises. 4 Discussions and Conclusion

In investigating to what degree enterprises operating in Shanghai incorporate sustainability measures in their performance measurement systems (PMS) and align them with long term business strategy, we found that among the performance measurement categories, only the sustainability measures appear to be faintly present in strategic performance measurement system and are not fully aligned with business strategies(figure 1,table 2).The alignment of SPMS with business strategies depend on each enterprise objectives .Nowadays only few enterprises align PMS with business strategies. As the results suggest, in China, both multinational and manufactured enterprises align the most SPMS with their business strategies. We also found that multinational enterprises and manufactured enterprises influence the incorporation of sustainability measures into business strategic performance measurement systems. Others reasons that explain the incorporation of sustainability measures are: the high impact nature of these enterprises operations on the environment ;the need to be responsible to environment and build trust with important stakeholders(NGOs and local communities ); high competition ; the need to influence business leaders; the need to make difference between them and competitors in order to increase market share and improving profitability, the requirement of shareholder to monitor and to report sustainability measures internally and externally in order to enhance enterprise valuation’s prospect.

Additionally, the development of ethical investing(also known as sustainable, socially-conscious .It describes an investment strategy which seeks to maximize both financial return and social good. Ehical investors favor enterprise practices that promote environmental stewardship, consumer protection and diversity) and its shareholder activism to get the best sustainability reporting constitute the main reason why multinational enterprises are more likely to integrate sustainability reporting into performance measurement systems (S.Gates and C. Germain ,2010).

We did not find any relationship between the presence of sustainability measures and enterprises nationality and business strategy. Generally, performance measurement systems require that the performance measures must emanate from enterprise’ strategic objectives, because sustainability aspects just now starting to be implemented into many enterprise’ strategic objectives, the relationship between the process of business strategic planning and the formulation of PMS should be nearby to not dissociate the PMS from enterprise’ sustainability strategy Based on Gabriele Rosani and German Rueda (2011)’s recommendation, when building performance strategic measurement system there are important problems that we need to pay attention .The first problem is related to whether the performance measurement system is an instrument for strategy formulation or implementation. The second problem refer to whether the most appropriate approach to sustainability aspects is to treat them collectively or in separately such as social, environmental, and economic. The third problem is related to whether sustainability activities and measures must be controlled by a separate unit in the enterprise. Finally, aligning enterprise sustainability measures with Strategic PMS constitute one of the most complex challenges enterprises are facing. While this important topic has broad implications that touch the enterprises daily operations as well as its budgeting, planning, and processes of goal-setting , at the end of the day if employees have not produced enough goods( or services), enterprises will “take a hit” to the bottom-line and fall sadly short of goal achievement. Developing (or implementing) a strategic PMS will help enterprise to keep employees committed to a enterprise's business system and objectives .Responsibility for implementing a strategic PMS lies with the enterprise management department function. According to Althea DeBrule (2011), for successfully building a strategic performance measurement


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system, it’s important to: 1. Associate PM to enterprise business planning (tie resulting performance metrics to enterprise business result). 2. Design training programs and worker orientation and to help employees become more conscientious about how their work influence the enterprise's bottom line. 3. Reexamine the program of current worker performance management .Remember integrating multiple-rater, 360-degree feedback and transfer into the PMS 4. Involve employees in the PMS project. 5 Implement competency models and use them as a basis for connecting PMS with other people management processes. 6. Disassociated performance evaluation from professional development. Performing a measurement system can be a difficult task. The system becomes visible to the overall enterprise and its reliability is authenticated at this point. Operation must be very well projected and stakeholders’ involvement is important at this step. To answer to the question “where to start for incorporating sustainability measures into strategic performance measurement system?” Gabriele Rosani and German Rueda (2011) argue that, “decision makers in any enterprise can create added value (AV) for their stakeholders by determining and implementing sustainability strategies”. Peter Drucker (Globally renowned management consultant) argues: “you can’t manage what you don’t measure”. The first step for integrating sustainability into strategic PMS is therefore to create an appropriate enterprise sustainability scorecard. Managers need to understand the impact their enterprises have across the value chain. Integrating sustainability into enterprise strategic PMS ultimately gives enterprise a competitive advantage lowers short-term costs and enhances potential long-term revenue. Enterprises managers could be helped to balance sustainability objectives with their profit and revenue goals by integrating social, environment and economic measures into their enterprise’s strategic performance measurement systems. Otherwise, organization’s management runs the risk that its sustainability goals will remain separated from operations (S.Gates and C. Germain (2010).. Future research could examine how both manager administrator and labor force manage sustainability measures. References Atkinson, A.A. (1998).Strategic Performance Measurement and Incentive Compensation, European Management Journal, Vol. 16, No. 5, Oct, pp. 552-561 Althea DeBrule(2011),from http://www.ehow.com/how_4470888_develop-strategic-performance-measurement-system.html Bansal (2003). From issues to actions: the importance of individual concerns and organizational values in responding to natural environmental issues. Organization Science, 14(5), 510-527. Basu, K., & Palazzo, G. (2008). Corporate social responsibility: a process model of sensemaking’.The Academy of Management Review, 33(1), 122-136. values in responding to natural environmental issues. Organization Science, 14(5), 510-527. Bielak, D., Bonini, S.M.J., & Oppenheim, J.M. (2007). CEOs on strategy and social issues. McKinsey Quarterly, 8-12 Bennett M, James P. (1999). Sustainable Measures: Evaluation and Reporting of Environmental and Social Performance. Greenleaf: Sheffield. BSR Conference (2008). Sustainability: Leadership Required November 4-7, 2008 . Grand Hyatt . New York. Brundtland Commission (1987).World Commission on Environment and Development(WCED). Oxford University Press in. Business for Social Responsibility(2008).Independent auditors ‘report financial statements and single audit reports and schedules independent auditors report, financial statements and single audit reports and schedules.From http://www.bsr.org/pdfs/about/2008_BSR_FS.pdf Deegen T.,(2001). Ansatzpunkte zur Integration von Umweltaspekten in die “Balanced


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Scorecard”Center for Sustainability Management: Luneburg. Dyllick and Hockerts(2002). Beyond the business case for corporate sustainability. Env. 11, 130–141 .Wiley InterScience. Edward J. Garrity, G. Lawrence Sanders (1998). Information systems success measurement. Idea Group Inc (IGI), 1998 - Idea Group Inc (IGI) P101-102 Epstein, M. J. (2008). Making Sustainability Work: Best practices in managing and measuring social and environmental impacts, Greenleaf, Sheffield. Forester, J., 1999: The Deliberative Practitioner: Encouraging Participatory Planning Processes, Massachusetts Institute of Technology Press, Cambridge, Massachusetts Frank Figge,Tobias Hahn,Stefan Schaltegger and Marcus Wagner(2002). The sustainability balanced scorecard .Linking sustainability management to business strategy. Business Strategy and the Environment Bus. Strat. Env. 11, 269–284 (2002) Frank Figge,Tobias Hahn,Stefan Schaltegger and Marcus Wagner(2001b). The Sustainability Balanced Scorecard – a tool for value-oriented sustainability management in strategy focused organizations. Conference Proceedings of the 2001 Eco-Management and Auditing Conference. ERP Environment: Shipley; 83–90. Figge F, Hahn T, Schaltegger S, Wagner M. (2001a).Sustainability Balanced Scorecard. Wertorientiertes Nachhaltigkeits management mit der Balanced Scorecard.Center for Sustainability Management: Luneburg. Fineman (1996). Emotional subtexts in corporate greening. Organization Studies, 17(3), 479-500. Henriques and P. Sadorsky (1999).”The relationship between environmental commitment and managerial perceptions of stakeholder importance”, Academy of Management Journal, February, 42 (1): 87-99. Gabriele Rosani and German Rueda(2011) . Incorporating Sustainability into Strategy. Tefen Tribune.Winter Issue, 2011 Kaplan R, Norton D.,(2001). The Strategy-Focused Organization: how Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press:Boston Henriques, I., & Sadorsky, P. (1999). The relationship between environmental commitment and managerial perceptions of stakeholder importance. Academy of Management Journal, 42(1), 87- 99. Mazon, R. (2004). Uma abordagem conceitual aos negocios sustentaveis: manual de negocios sustentáveis. Sao Paulo: FGV-EAESP. Marrewijk, M. van (2004). A value based approach to organization types: towards a coherent set of stakeholder-oriented management tools. Journal of Business Ethics, 55(2), 147-158. Marcus Wagner, Tobias Hahn ,Frank Figge ,Stefan Schaltegger (2001) The sustainable balanced scorecard linking sustainability management to business strategy. Business Strategy and the Environment Bus. Strat. Env. 11, 269–284 N., A. & Adams, C. (2000) .“Perspectives on Performance: The Performance Prism”, In Handbook of Performance Measurement (ed. Bourne, M.), Gee Publishing, London. OECD-DAC (2011). Enterprise Development and Economic Transformation: Creating the Enabling Environment. 16-17 February 2011 African Union Conference Centre and Hilton Hotel, Addis Ababa, Ethiopia Portland state university (2011) .From http://www.pdx.edu/cupa/initiative-triple-bottom-line-development. Peter Drucker (1954).Drucker, Peter F., “The Practice of Management”.HarperBusiness book . ISBN 0060110953 Raynard,P.,Forstarter,M.(2002).Corporate Social Responsibility:Implications for Small and.Medium Enterprises in Developing Countries. United Nations Industrial Development .Strategy and the Environment 11(2), 130–141 (2002) S.Gates and C. Germain (2010).Integrating sustainability measures into strategic performance measurement systems: an empirical study. Spring 2010, Vol 11, No. 3 Sharma, S., & Henriques, I. (2005). Stakeholder influences on sustainability practices in the Canadian forest products industry. Strategic Management Journal, 26(2), 159-180.

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Roome (1998). Sustainability Strategies for Industry: the Future of Corporate Practice. Island: Washington, DC. Stone (2006). Limitations of cleaner production programmes as organisational change agents. II. Leadership, support, communication, involvement and programme design. Journal of Cleaner Production, 14(1), 15-30. Tregidga, H., & Milne, M. (2006). From sustainable management to sustainable development: a longitudinal analysis of a leading New Zealand environmental reporter. Business Strategy and the Environment, 15(4), 219-241. United States Environmental Protection Agency. (2001). An organizational guide to pollution prevention. Retrieved July 18, 2007:http://www.ecy.wa.gov/programs/hwtr/P2/printguid.pdf USEPA. (2001). Inventory of Greenhouse Gas Emissions and Sinks 1990-1999. Office of Atmospheric Programs, U.S. Environmental Protection Agency, Washington, DC; EPA 236-R-01-001. Van Marrewijk, M. & Hardjono, T. (2003). European corporate sustainability framework for managing complexity and corporate transformation. Journal of Business Ethics, 44 (2-3), 121-132. Weber J, Schaffer U.,(2000). Balanced Scorecard and Controlling: Implementierung, Nutzen fur Manager und Controller – Erfahrungen in deutschen Unternehmen.Gabler: Wiesbaden. P., J., Annandale, D. and Morrison-Saunders, A., (2004). Conceptualizing sustainability assessment, Institute for Sustainability and Technology Policy. Murdoch University. Environmental Impact Assessment Review, Science Direct. Elkington, J., (1998). Cannibals With Forks: The Triple Bottom Line of 21st Century Business. CT: New Society Publishers Russel, J., (2008). Corporate Social Responsibility: What It Means for the Project Manager. PMI Global Congress Proceedings. Denver, Colorado, USA. Sinkovics, Rudolf R, Roath, Anthony S (2004).Strategic orientation,capabilities,and performance in manufacturer-3PL relationships,Journal of Business Logistics. Rodney Mc Adam and Brian Bailie (2002).Business performance measures and alignment impact on strategy. International Journal of Operations & Production Management. Volume 22


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Supply Chain Efficiency Evaluation: A Contemporary Theoretical Model

Janvier-James Assey Mbang

Glorious Sun School of Business & Management,Donghua University P.O.box: 200051, 1882 West Yan an road, Shanghai, China

Accepted 2 May 2013 Abstract Supply chain management has gained a prodigious amount of attention from both practitioners and industries since the last decade. Until now, there are many articles, and dissertations that address supply chain management, but there is still a lack of integration between the current efficiency evaluation methods and practical requisites for the supply chain management. A contemporary efficiency evaluation method is proposed to provide necessary support for efficiency improvement in supply chain management. The proposed method will address this aim in the following main aspects: a basic supply chain model; concrete and unconcrete efficiency measurement in various dimensions; a cross-organizational efficiency evaluation; and weighted average and fuzzy set theory method. Keywords: Supply chain, Efficiency evaluations, Theoretical Model 1. Introduction

In contemporary business environments, producers face high pressure of customers' requirements in goods quality amelioration, customization, and demand responsiveness. In consideration of supporting the business under these pressures, many companies are striving to develop long-term collaborations with a few adequate suppliers and cooperate with them in inventory control and product development. Furthermore, the high competitive requirements of customer responsiveness and cost efficiency have encouraged companies to pursue strategic partnership with suppliers, downstream customers to exploit their competences and create new value to end consumers. This alliance is known as supply chain and the control, organizing and planning of the supply chain activities is called supply chain management

Even though supply chain management has become common practice across all enterprises, and many papers related to theories and practices of supply chain management have been published, the topic of efficiency evaluation of supply chain management does not receive enough attention therein (Gunasekaran, A., Patel, C. and Tirtiroglu, E.,2001; Mithun J. Sharma and Song Jin Yu,2010). As a fundamental management tool, efficiency evaluation provides the necessary support for efficiency improvement in pursuit of supply chain superiority. However, many critical deficiencies pervert the current efficiency measurement systems from making important contribution to the development of supply chain management. With the purpose to fill this gap, the present paper attempts to propose a contemporary efficiency evaluation method for supply chain.

Efficiency evaluation is an important element of effective control and decision making, as well as planning It can provide essential feedback information to disclose progress, augment communication and motivation, and identify problems (Waggoner, D.B., Neely, A.D. and Kennerley, M.P., 1999;Amos Sola Ogunsiji and Oluwatosin Oba Ogunsiji,2011). In supply chain management context, efficiency evaluation can further ease integration among the supply chain members. The evaluation results

Journal of Logistics & Supply Chain MAY 2013 VOL.1, No,3


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disclose the effects of potential opportunities strategies in supply chain management. There are many articles and papers that have addressed efficiency evaluation in supply chain management. Beamon Martin (1999), Jian Cai, Xiangdong Liu, Zhihui Xiao,Jin Liu (2009) identifie the following measures: flexibility, output, and resources. Gunasekaran, A., Patel, C. and Tirtiroglu, E.. (2001) develop a model for evaluating the efficiencies from, operational, tactical, and strategic levels in supply chains; this model principally concerns supplier, delivery, inventory and logistics costs, and customer service.

In spite of the importance of efficiency evaluation, there is very little literature available for efficiency evaluation of supply chain management, especially that deals with measures selection and system design (Beamon, 1999; Jian Cai, Xiangdong Liu, Zhihui Xiao,Jin Liu,2009). The contributions of the efficiency evaluation in use are lowered by existence of many imperfections in supply chain management context. Classic finance-based efficiency measurement has already received wide judgment on short-term profit orientation, stimulating local optimization, thus failing to support constant improvement. In addition, efficiency evaluations in supply chain context are also associated with many problems, as asserted below (Gunasekaran, A., Patel, C. and Tirtiroglu, E., 2001, Asghar Sabbaghi and Ganesh Vaidyanathan ,2008):

being not linked with adequate strategy; being lack of equalized approach to integrating non-financial and financial measures; being lack of system thinking, in which a supply chain must be perceived as one whole entity,

and being loss of supply chain context, and thus stimulating local optimization.

With these imperfections above-mentioned, an effective efficiency evaluation method has always been under considerable discussion, and necessitates further research investigation. This paper is organized as following: this part is the preliminary part to supply chain management and efficiency measurements in supply chain management. Part two is literature review. Part three introduces the proposed efficiency evaluation method. Part four is conclusion. 2. Literature review

Supply chain collaboration helps in strengthening the customer responsiveness, increase of flexibility for changing market conditions, amelioration of customer service, and also benefits to retain customers. The primary initiative of supply chain integration could be antedated to 1992, when fourteen trade association sponsors created the Efficient Consumer Response (ECR) group (Robins, 1994; Barratt and Oliveira, 2001; Ursula Y. Alvarado and Herbert Kotzab ,2001). Then in 1995, five enterprises: the Warner-Lambert, Wal-Mart Stores, Manaugistics, and SAP worked on the Collaborative Planning, Forecasting and Replenishment project. The objectives of the project were to ameliorate the business (Cooke, 1998; Felix TS Chan & SH Chung,2004). Collaborative Planning, Forecasting and Replenishment attempted to bring organizations (manufacturers and retailers) together to make collaborative planning, encompassing promotion sales, purchasing, logistics planning, and replenishment. Blair, N. (1998) and Mark Powell, Paul Childerhouse (2010).asserted that Collaborative Planning, Forecasting and Replenishment had won the support of organizations in the grocery, general commodities, and clothing industries.

Practitioners in supply chain management are many. Barratt, M. and Oliveria, A. (2001) and Margaret L. Sheng (2006) pointed out that two important bottlenecks encountered in implementation of supply chain integration were the lack of perceptibility of real customer demand, and the joint relationships in the area involved collaborative decision making. New, S. and Ramsay, J. (1997) also asserted that there was a danger of arbitrary costs’ distribution and advantages in practice. This is due to the inequality of power between different organizations. Neuman, J. and Samuels, C. (1996) suggested that adequately sharing the benefits from the supply chain was important. Pfohl, Hans.Christian. and Buse, H.P. (2001) had interrogated that what type of organization, in the supply chain, should be the fundamental decision maker to decide all of the operation and coordination decisions. Stank, T.P., Daugherty, P.J. and Autry, C.W. (1999) demonstrated that there was a vigorous support in using automatic inventory replenishment in cross-organizational partnership.


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2.1 Supply chain efficiency measures Anderson, P., Aronson, H. and Storhagen, N.G. (1989) pointed out that, in evaluating logistics

efficiency, a strategy of evaluation is necessary for the successful realization, management and planning of the different activities, which include the business logistics function. Thor, C.G. (1994) asserted that there should be a group of measures. This is a collection of four to six efficiency measurements, generally encompassing quality, productivity, and customer satisfaction, which, together, provide an all-embracing view of results but also provide a characteristic value. Stainer, Alan (1997) pointed out that an efficiency measure is used to determine the efficiency and effectiveness of a current system. Efficiency measurements are also used to design proposed systems, by determining the values of the decision variables that grant the most judicious level of efficiency. Generally, efficiency measurements can be categorized as quantitative and qualitative in nature. 2.1.1 Quantitative efficiency measurements

Quantitative efficiency measurements are those measures that may be straightforwardly depicted numerically. Quantitative supply chain efficiency measurements may be classified by goals that are based on profit or cost, productivity, and customer responsiveness’ measures. Since quantitative measurements are something that can be depicted and managed easily, any qualitative measurements should be interpreted into quantitative measurements. Some illustrations of quantitative efficiency measurements are as follows: Measurements based on cost

Cost reduction: Cost is generally reduced for a whole supply chain. For instance transportation cost reduction. Sales increase: Increase the amount of sales dollars. Profit increase:Increase revenues less costs Inventory investment reduction: Reduce the amount of inventory costs so minimization of the inventory level is necessary. Return on investment increase: Increase the ratio of net profit to capital that was used to produce that profit. Measurements based on customer responsiveness: Fill rate increase: Increase the portion of customer orders filled on time. Product lateness reduction: Reduce the amount of time between the agreed goods delivery date and the current goods delivery date. Customer response time reduction: Reduce the amount of time required from the time an order is placed until the time the order is received by the client, such as order lead time. Lead time reduction: Reduce the time that is required from the time an order has started its production until the time the order is ready for shipment. Function duplication reduction: Reduce the volume of business functions that are provided by more than one business entity. Measurements based on productivity: Capacity utilization increase: Increase the capacity utilization. Resources utilization increase: Increase the resources utilization. 2.1.2 Qualitative efficiency measurements

Qualitative efficiency measurements are those measurements for which there is no direct numerical measure, although some aspects of them may be measured. For instance: Consumer satisfaction: The extent e to which consumers are satisfied with the goods and service received, and can be applied to external consumers and internal consumers. Consumer satisfaction mainly includes three components: pre-transaction satisfaction, transaction-satisfaction, and post-transaction satisfaction. Flexibility: The extent to which the supply chain can respond to fluctuation in the demand pattern. Material flow and information integration: The extent to which functions within the supply chain can pass transport materials and information easily.

Effective risk management: The relations within the supply chain include inherent risk. Effective risk management depicts the extent to which the influence of these risks is reduced. Supplier efficiency: A measure to depict how good a supplier can deliver raw materials to manufacturing facilities in good conditions and on time.


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3. A contemporary efficiency evaluation method In consideration of solving the above- mentioned problem, a contemporary efficiency evaluations method is presented in this paper. The proposed method is a model that uses fuzzy-set theory to assess the integrated efficiency of compound supply chain. Fuzzy set theory is generally employed to address the real situation in measurement and judgment processes. It can deal with uncertain information to help decision making. The measurement’s procedure is very simple: after choosing the adequate efficiency measurements as mentioned above, data should be collected for examination. The efficiency measurements are weighted by determining the normalized importance weight through a geometric scale of triangular fuzzy number. Then, fuzzy efficiency grade is defined to determine the fuzzy evaluation result and an efficiency score can be estimated. In conclusion, the evaluation results can be defuzzified to an efficiency index, which can be used to show the efficiency of the system under evaluation. 3.1 Process-based model and System-thinking view

The goal of supply chain management is to create the most value, not only for some enterprises, but for the entire supply chain network, even encompassing the end consumers. In this context, favorable supply chain evaluation systems do more than just concentrate on partial areas, but rather look across the entire network. This paper proposes that an integrated system-thinking view is used to suit the essence of supply chain management, in which the supply chain efficiencies should be evaluated beyond the classic boundaries of organizations and functions. Then, an efficiency evaluation system that bridges the key business aspects will facilitate seamless integration and global optimization of supply chain efficiencies. It is difficult to control supply chains than just to define it. A supply chain is an inter-connected network of various members and complex relationships (Lambert, D.M., Cooper, M.C. and Pagh, J.D., 1998). It is common that, in practice, a company participates in many supply chain, and a company has not all its divisions and functions involved in one supply chain with the same integration. This complexity also confuses efficiency evaluation of supply chains, and then requires building an effective model to facilitate the examination and evaluation of supply chain management.

This research attempts to build a process-based method to facilitate the practical supply chains from their commonalities and essence. In general, a process is a set of activities designed to perform particular functions and generate particular outputs. In this model, a process refers to a series of activities from original producers and suppliers till retailers add value for the end consumers. The core business processes, which are of critical importance to corporate strategies and goals, are proposed to identify and enclose herein as the framework of this efficiency evaluation systems. For any supply chain, the basic structure and processes can be described as indicated in figure 1, in which six core processes are connected.

The key processes identified can be further classified into activities and sub-processes to address their efficiencies. For instance, the inbound logistics can be classified into such sub-processes as purchasing, transportation, supply base management. These key processes and sub-processes consist of a hierarchy of supply chain model, which is the model of the proposed efficiency evaluation systems. This efficiency evaluation method is based on the process model of the supply chain, so the measurements can be formulated from process efficiency.

Any process employs particular company resources, achieves the planned objectives and functions, and then adds value to goods that are delivered to end consumers. The consumed resources, and planned operations are the important efficiency of processes. Power, Time, capital, labor facilities, and information are generally the resources that processes employ. Generally, they can be evaluated in terms of their amount per output unit. The efficiency on expected outcomes and operations can be evaluated according to their planned operations. For instance, purchasing process is principally responsible for material replenishment and supply base management. Thus it can be assessed from such efficiency as quality and reliability of material replenishment, and supplier-purchaser relationship. Reliability in transportation and delivery, and flexibility in production, material supply, and order delivery have received more attention in efficiency evaluation of supply chains. For each process and its sub-processes that need to be evaluated, the corresponding measurements are identified and classified into the processes and measurements hierarchy. This composes the framework


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of the efficiency evaluation systems. For each process and its sub-processes that need to be assessed, the corresponding measurements are identified and classified into the processes and measurements hierarchy (figure 2)

Figure1: Supply chain flow chart

Figure 2: Generic design of the PMH 3.2 Relevant efficiency measurements

These efficiencies should include such areas as those: of important concern to supply chain current objectives and strategies; of inter-influence and of current concern among the supply chain collaborators; and concerned

by both internal collaborators and external customers. 3.3 Efficiency evaluation teamwork In this paper, an efficiency evaluation team is proposed. This efficiency evaluation team is composed of the representatives from different areas of the supply chain, which can be department directors, plant managers, and process supervisors. The members of efficiency evaluation team serve principally as the appraisers, and provide point of views for each efficiency. They come from different management areas and have wide experiences, and thus can cover a wide range of perspectives. Concurrently, the weights of their point of views are not necessarily the same. When combining their point of views, the weights will be assigned. There are varieties of ways to determine the weights; for instance, by the supply chain’s top officials, or balancing the opinions of efficiency evaluation team members. 3.4 The innovative evaluation algorithm

This part is devoted to describe the evaluation algorithm and application of evaluation results. The data that indicate different efficiencies are compared against the evaluation scales that are set by the efficiency evaluation team through measuring the corresponding efficiency objectives and operation environments. An efficiency grade in forms of fuzzy set is acquired to indicate the result of each efficiency measurement. The measurement results of different measurements by each efficiency evaluation team member are integrated with the weighted averaging aggregation method. The aggregated results are defuzzified and employed to measure the supply chain efficiency impartially. 3.4.1 Measure and processes’ relative weights

Considering the changing goals and strategies of supply chains, the prerogatives of individual


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processes and their different dimensions of efficiency should diverge from each other in efficiency measurement. Therefore, it is necessary to set relative weights for them to aggregate the evaluation results. General scale of comparison ratio with crisp numbers fails to address the fuzziness. Until now, many literatures have suggested new applications by using fuzzy set theory. This research proposes a mathematic scale of triangular fuzzy numbers (Boender Boender, C.G.E., de Graan, J.G. and Lootsma, F.A.., 1989). 3.4.2 Fuzzy efficiency grade and measurement scale

After obtaining the relative weights of each efficiency measurements, it is still absurd to measure any efficiency without its related context about histories and goals. Furthermore, the current evaluation methods, in which the current efficiency are assessed through being divided by the expectations, have such imperfections as ignoring operation context, and losing the critical information arising from the ambiguity of human judgment (Zadeh, Lotfi Asker (1965)). This research creates a fuzzy efficiency grade and measurement scale to address these issues.

When assessing efficiency, the appraisers of the efficiency evaluation team consider the planned history and objective, as well as the related operation environments, and then set the measurement scale in forms of the interval, varying from the agreeable bottom of efficiency to the completely satisfactory efficiency. The effect of the supply chain context and associated operation environment being measured and taken into account, the agreeable bottom and completely satisfactory efficiency are not inevitably same to efficiency objective and history, respectively. The measurement scales’ judgment process includes fuzziness as well. Accordingly, the measurement results are acquired and denoted by fuzzy numbers through the following steps: first, comparing current efficiency against their measure scales, and then indicating with the crisp numbers varying from 0 to 10 as script marking method does; second, codifying the acquired crisp number into fuzzy efficiency grade set. The efficiency set in the form of a fuzzy vector . These 6 grades

indicate the gradational measure results varying from the excellent to the worst. The triangular fuzzy numbers defines these grades following:

This efficiency grade set in the finite universe of discourse is defined by a set of ordered pairs as following: Where

a mapping is named “the membership function of the fuzzy set G”, and shows the extent of belongingness. is the crisp number in comparison of current efficiency against measurement scales. 3.4.3 Defuzzi6fing and aggregating the measure results In evaluation activity, the point of views of all the appraisers in the efficiency evaluation team are required to integrate; in order to get the general picture of one process the measure results of individual measurements and its sub-processes are necessary to integrate as well. As annotated above, due to the various backgrounds in different areas, the point of views of the appraisers from diverging areas should be given distinct weights. The relative weights of different efficiency measurements and sub-processes can be deduced from the changing supply chain strategies and objectives. Finally, these results are efficiency grades in forms of fuzzy sets .According to their definitions, these efficiency grades that denote the measure results symbolize the connotations of approximation "about". That is, these 6 grades denote "about 10", "about 8", and "about 0". In this connection, these efficiency grades can be defuzzified into the crisp numbers from 10 to 0 through weighted averaging the grade set . The defuzzified crisp number (efficiency index), indicates the synthetic measurement of the holistic efficiency of different areas of supply chains by the appraiser team. 3.5 The applications of the efficiency index

The efficiency index is a global, single, and integrated process efficiency score. According to the design of this efficiency evaluation method, this integrated result is the weighted integrative measurement of the entire supply chain process efficiency with the multi-dimensions. This number provides a concise means to analyze and measure the efficiency in the supply chain systems for their general managers. Put in the range [0, 10], this result can be measured. Because the evaluation


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result of each process on the higher layer is aggregated from the evaluation results of sub-processes, the bad results can be captured layer by layer in the PMH. Thus the proneness and strengths of supply chain processes are identified. Furthermore, the parallel processes can be compared and the enigmatic nodes can be found. Next, from a dynamic point, the efficiency of all the business processes of the supply chain system can be measured and recorded on the base of a monthly period. With a series of evaluation results at normal intervals, the trend of efficiency of each business process can be examined and irregular efficiency can be disclosed clearly. This information can help corporate managers identify the issues in the management of supply chain processes. Example

In this part we propose an example to illustrate the evaluation method proposed above. Assume cost is one of measurements in a supply chain network to show its efficiencies and there are 4 appraisers in the efficiency evaluation team with the relative weights. WT = (0.10,0.20,0.25,0.45) of their corresponding points of views Note that weights=1,as they must normalized before putting into the equation above.

Firstly, one appraiser makes his judgment for the measure. Suppose that the efficiency history of this cost is $22 per unite, and the efficiency goal requires this cost to be minimized to $19 per unit .The appraiser first determines the measure scale of cost, to suppose which is the interval as [21, 19].Assume the current efficiency on production cost is average 19.45 per unit, according to the daily operation records, the efficiency score and efficiency grades are estimated as following: Efficiency score = , Efficiency grades: PA (7.75) =0, PE (7.75) =0, PC (7.75) =0, PD (7.75) = , PE (7.75) = , PF= 0 Thus, the efficiency grade set can we formulated as follows: PG= (7.75) = Or )

This is the evaluation result of cost that has been judged by the first appraiser. Assume the efficiency grade sets by the other three appraisers, in form of row vector, to be as follows:

These vectors compose the fuzzy efficiency grade matrix as following:

=

Then the evaluation results of these four appraisers, with their corresponding weights are aggregated as following:

.W

=

This vector shows the aggregated point of view of the evaluation of cost efficiency by the four appraisers. It takes the form of fuzzy efficiency grade set. The efficiency index is:


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Undoubtedly “7.13” is not a satisfactory index with respect to the 10- point scale. The supply chain network should be refined in order to improve this efficiency measurements defined by appraisers, the individual efficiency index can be estimated through the same procedures. 4. Conclusions

This research discloses the key problems in the current efficiency evaluation method in supply chain management context. In order to support efficiency improvement in supply chain management, this research proposes a cross-organizational efficiency evaluation method from a system view. Process-based framework, relevant efficiency measurements, teamwork measurement, and fuzzy evaluation algorithm are summarized, and some propositions are given. These designs support integrated evaluation of the holistic efficiencies of supply chains. Particularly, the introduction of fuzzy set theory in evaluating efficiencies is beneficial, because this fuzzy method addresses the actual situation of human judgment with fuzziness in evaluation activity. The defuzzified results provide facile access to benchmark the efficiencies. The main contribution of the proposed approach is to provide a strong model to calculate an efficiency e index of an efficiency evaluation in a supply chain network to deal with both intangible and tangible and efficiency measurements. The model integrates fuzzy set theory, which can symbolize ambiguities in real-life applications. This method can be used to replace a classical pair wise comparison technique such as Analytic Hierarchy Process (Saaty, 1980). De facto, Saaty's pair wise comparison engenders the asymmetrical scale of weight. With the proposed efficiency evaluation method, supply chain managers can smoothly assess the efficiencies of the entire system, and then analyze the efficiency of their strategies, and determine the potential opportunities. This feedback information eases more decision making and efficiency improvement in supply chain management.

To optimize the supply chain model, much efficiency evaluation should be considered. But, the following important question should be answered first: how to combine all quantitative and qualitative efficiency measurements to compose a significant figure to support decision making? In most cases, two methods can be used for the measurement; especially, mathematical simulation and optimization. Mathematical optimization methods encompass accurate algorithms that are settled to find an optimal solution. Additionally, heuristic algorithms can be used to find good solutions, but not inevitably the optimal solutions. Future research could consolidate all efficiency measurements through similar algorithms so that a single efficiency index can be discovered to represent the entire network, regardless of individual efficiency index. Acknowledgements The authors gratefully acknowledge the con-structive and helpful comments of two anonymous referees on the earlier version of the manuscript. References Amos Sola Ogunsiji and Oluwatosin Oba Ogunsiji (2011).Comparative Ports Performance Efficiency Measurement in Developing Nations: A Matching Framework Analysis (M FA) Approach. European Journal of Social Sciences. Volume 18, Number 4 (2011) Anderson, P., Aronson, H. and Storhagen, N.G. (1989).Measuring logistics performance, Engineering Costs and Production Economics, Vol. 17, pp. 253-62. Asghar Sabbaghi and Ganesh Vaidyanathan (2008). Effectiveness and Efficiency of RFID technology in Supply Chain Management: Strategic values and Challenge. Journal of Theoretical and Applied Electronic Commerce Research ISSN 0718–1876 .VOL 3 / ISSUE 2 / AUGUST 2008 / 71-81 Barratt, M. and Oliveria, A. (2001) .Exploring the experiences of collaborative planning initiatives, International Journal of Physical Distribution & Logistics Management, Vol. 31 No. 4, pp. 266-89. Blair, N. (1998).Minding the store: with inventory reduction measures under way in the warehouse, executives are eyeing similar strategies based on store-level data, Supermarket News, Vol. 48 No. 3, pp. 81-2.


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Beamon, Martin (1999). Measuring supply chain performance, International Journal of Operations and Production Management, Volume19 No. 3, pp. 275-92. Boender, C.G.E., de Graan, J.G. and Lootsma, F.A. (1989).Multi-criteria decision analysis with fuzzy pairwise comparisons, Fuzzy Sets and Systems, Vol. 29, pp. 133-43. Cooke, J.A. (1998).Into the great wide open, Logistics Management and Distribution Report, Vol. 37 No. 10, pp.84-7. Felix T.S Chan and S.H. Chung (2004). A multi-criterion genetic algorithm for order distribution in a demand driven supply chain. International Journal of Computer Integrated Manufacturing Volume 17, Issue 4, 2004 Gunasekaran, A., Patel, C. and E.Tirtiroglu,(2001). Performance measurement and metrics in a supply chain environment, International Journal of Operations & Production Management, Vol. 21 No. 1/2, pp. 71-87. Jian Cai, Xiangdong Liu, Zhihui Xiao,Jin Liu (2009). Improving supply chain performance management: A systematic approach to analyzing iterative KPI accomplishment. Decision Support Systems 46 (2009) 512–52 Lambert, D.M., Cooper, M.C. and Pagh, J.D. (1998). Supply chain management: implementation issues and research opportunities, The International Journal of Logistics Management, Vol. 9 No. 2, pp. 1-19. Margaret L. Sheng (2006). Global integrated supply chain implementation: the challenges of E-procurement. DOI: 10.4018/978-1-59140-611-2.ch006, ISBN13: 9781591406112, ISBN10: 1591406110, EISBN13: 9781591406136. Global Integrated Supply Chain Systems Mark Powell, Paul Childerhouse (2010).Retail value management. nternational Journal of Electronic Customer Relationship Management. Inderscience Enterprises Ltd. Volume 4, Number 3/2010. Mithun J. Sharma and Song Jin Yu (2010) .Measuring Supply Chain Efficiency and Congestion. Advance online publication: 23 November 2010. Engineering Letters, 18:4, EL_18_4_08 Neuman, J. and Samuels, C. (1996). Insights from industry supply chain integration: vision or reality, Supply Chain Management: An International Journal, Vol. 1 No. 2, pp. 7-10. New, Steve. and Ramsay, J. (1997). A critical appraisal of aspects of the lean chain approach, European Journal of Purchasing & Supply Management, Vol. 3 No. 2, pp. 93-102. Pfohl, Hans.Christian. and Buse, H.P. (2001). Inter-organizational logistics systems in flexible production networks, an organizational capabilities perspective, International Journal of Physical Distribution & Logistics Management, Vol. 30 No. 5, pp. 388- 408. Robins, Gabriel, (1994).Sailing into ECR's uncharted waters. Stores, Vol. 76 No. 10, pp. 43-4. Saaty, Thomas.L. (1980). The Analytical Hierarchy Process, McGraw-Hill, New York, NY. Stainer, A. (1997). Logistics:a productivity and performance perspective, Supply Chain Management, Vol. 2 No. 2, pp. 53-62. Stank, T.P., Daugherty, P.J. and Autry, C.W. (1999). Collaborative planning: supporting automatic replenishment programs, Supply Chain Management: An International Journal, Vol. 4 No. 2, pp. 75-85. Thor, C.G. (1994). Measures of Success - Creating a High Performing Organization, Oliver Wight, Essex Junction, VT. Ursula Alvarado Y. and Herbert Kotzab (2001). Supply Chain Management: The Integration of Logistics in Marketing. Industrial Marketing Management Volume 30, Pages 183-198. Waggoner, Douglas.B., Neely, Andy.D., and Kennerley, M.P. (1999). The forces that shape organizational performance measurement systems: an interdisciplinary review, International Journal of Production Economics, Vol. 60, pp. 53-60. Zadeh, Lotfi Asker (1965). Fuzzy sets, Information and Control, Vol. 8, pp. 338-56. Stainer, Alan (1997). Capital input and total productivity management.Management Decision, 35:3-4, pp. 224-232.


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Delphi, Entropy and TOPSIS Analysis of Political, Economic

and Cultural Characteristics that Affect Textile and Apparel Industry.

Akyene Tetteh School of Management Science and Engineering,

1882 Yan’an Road West, 200051 P.R. China, Donghua University,

Accepted 8 May 2013

Abstract Textiles and apparel industry sprung up industrialization but political system, economic system and cultural environment characteristics may affect its survival positively or negatively. This paper uses Delphi Method for forecasting in a different fashion to analyze some characteristics of political system, economic system and cultural environment to ascertain how they affect the textiles and apparel industry. The Delphi method exercise in this paper consists of 3 steps and 2 questionnaires format coupled with analysis and consensus. The paper further employed two multiple criteria decision making methods Entropy and TOPSIS to analyze the Delphi result. It was realized that political system dummy is economic system but not cultural environment. The textiles and apparel industry suffers negatively/positively if government disarray/array the political system which intend affect the economic system negatively/positively but does not affect the cultural environment. The textiles and apparel industry can fuse their cultural practice into their company strategy for efficient and effective productivity. Keywords: Delphi Method, Entropy, TOPSIS, Textile and Apparel, Political, Economic and Cultural Characteristics. 1. Introduction Textiles and apparel industry sprung up industrialization, which can be traced back to 1733 when John Kay made a shuttle that speed back and forth on wheels. His invention led to another invention in which we now have heavy machines which can cut and sew apparel in some modern factories today. Most nations derive foreign exchange from exporting textiles and apparel to other countries which boost their GDP growth. United States imports of textiles and apparel in 2010 totaled to $93.3 billion with China being number one exporter (Kim 2011).The textile and apparel industry growth can be hindered/promoted by political benefits (peace, good governments laws, good education system, effective and efficient economy, etc.), economic benefits (good land turner system, labor, good access to capital, low inflation, good exchange rate, etc.) and cultural environment (belief system, language, dressing, food, dance, etc.). This paper seeks to find which of these three conditions hinders/promotes growth of textiles and apparel industry using Delphi Method. The Delphi method is essentially defined as “a method for measuring consensus among group of experts”. The method is used to analyze the characteristics of each condition (Political, Economic and Cultural (PEC)) in no order of priority. The paper further employed two multiple criteria decision making methods (Entropy and TOPSIS) to analyze the Delphi result. The paper found that, political system dummy is economic system but not cultural environment. The textiles and apparel industry suffers negatively/positively if government

Journal of Engineering Management Research MAY 2013 VOL.1, No,3


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disarray/array the political system which intend affect the economic system negatively/positively but does not affect the cultural environment. The textiles and apparel industry can fuse their cultural practice into their company strategy for efficient and effective productivity. The rest of the paper is organized as follows; section 2 covers Delphi method, questionnaires and Delphi method steps whiles section 3 describes the methodology. Section 4 touches on results discussion and finally section 5 conclude with conclusion and limitations. 2. Delphi Method The Delphi method was developed at Rand Corporation by Olaf Helmer, the Delphi method is based on expert opinion24. This was necessary because the existing methods of forecasting were insufficient to generate the report wanted because historical data for this subject were unavailable. In such cases, when a reliable forecast must be issued by qualitative means, the Delphi Method is generally preferred. The Delphi method is a structured technique used to generate forecasting in business, technology, science, education, health and other fields. The traditional Delphi Method aims to identify a consensus from the experts, on the research problem under consideration. Delphi Method is essentially defined25 as “a method for measuring consensus among group of experts”. The method is a long-range forecasting method of aggregating the forecast of experts on multidisciplinary issues, it is an interactive process for soliciting and collating opinions on a particular topic, through a set of carefully designed sequential questionnaires with a summarized feedback of opinions derived from earlier responses26. The Delphi methodology has it strength and weakness. Some of its strengths are: can produce agreements when other methods may not be possible, time for reflection, improving the strength of opinion, learning and motivating experience for participants, and participants have an equal say whiles its weakness are: can be extremely time consuming for participants, ambiguity regarding panel size and consensus levels required, fatigue tendency and care needed to avoid facilitator bias. This paper is the first paper to use Delphi Method of forecasting in a different fashion to analyze the characteristics of government, economic and cultural environment affecting textile and apparel industries. 2.1 Questionnaires The questionnaires were coin from the characteristics of political systems, economics systems and cultural environment that affect the textiles and apparel industry. These characteristics that affect textiles and apparel industries were listed and analyzed one by one. The questionnaires come in three (3) folds. The first questionnaire aimed at capturing more characteristics of PEC as per the one stated in appendix 1. The second analyze each characteristics of PEC by grade: points 1 represent strong disagreement whiles 7 points indicates a strong agreement (i.e. 1≡ 20% to 7≡ 95%). The entire questionnaires are displayed in appendix 2a to 2c. 2.2 Delphi Method Application and Steps The essence of the Delphi Method is to use the assessment of opinions and predictions made by a number of experts; it is an interactive process used to collect and distil the judgment of experts using a series of questionnaires in a number of stages27. The Delphi Method comprises several steps involving participants, who may or may not meet face to face. The Delphi research team (DRT) comprise of 7 PHD scholars, made of three males and four females: 7 where chosen in case of any dead heat. Each classification political, economic and cultural environment was analyzed based on their characteristics and reports were taken as per their characteristics table. The DRT grade each PEC characteristics on 1 to 7 points. The DRT took two weeks to deliberate on each classification characteristics affecting textiles and apparel industry. After these deliberations all the analysis by each steps on PEC’s characteristics affecting textile and apparel industry were arranged in a table form (shown in appendix 5, 6 and 7) for further analysis using entropy and TOPSIS. Delphi method steps for each PEC’s: Step 1, (Individual Analysis): Each DRT member was giving questionnaire 1 (appendix 2) to compare

24James A. & Mona J Fitzsimmons “Service Management Operations, Strategy and Information Technology”, 2002. 25Burns et al. 26 Tam et al., (2006) 27Skulmoski et al. (2007)


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with those stated in the characteristics table in appendix 1. This was amide to extract more characteristics of each PEC’s from the individual analyst. They proceeded to the second questionnaire by awarding grade to each PEC’s and in step 1 each DRT member did independent analysis (not meeting face to face). Step 2 (Group Analysis): The 7 DRT members were divided into two groups (i.e. 3:4 per group). Each group skips questionnaire 1 but all the additional characteristics raised by each individual analyst were amalgamated into the updated PEC characteristics table shown in appendix 3. The groups proceed with questionnaire 2 and award grades and to each updated PEC characteristics. Step 2 is far different from step one since most of the grades were awarded by intense deliberation, debate and consensus reaching. Step 3 (DRT Analysis): This stage the 7 DRT members did the analysis of the each PEC characteristics together. They also skip questionnaire 1 and deal attentively with questionnaire 2 grading the updated PEC characteristics. This step is time consuming and needs a lot of patient in terms of deliberations and approving each grade. In concluding their task they gather all the various steps works and formed a PEC characteristics table (appendix 5, 6 and 7) by finding the mean average of each PEC characteristics analyzed in each step. 3. Methodology Multiple criteria decision making method (MCDM) is a decision making analysis method which has being developed since 1970. A decision making problem is the process of finding the best option from all feasible alternatives. A MCDM problem can be concisely expressed in a matrix format as:

Where A1, A2, A3… Am are possible alternatives among which decision makers have to choose, C1, C2, C3… Cn are criteria with which alternatives performance are measured, Xij is the performance value alternatives Ai with respect to criterion Cj and wj is the weight of criterion Cj. Two MCDM related methods are discussed below. 3.1 Entropy Entropy is a concept use to measure information that is the average amount of information (Ding and Shi, 2005). In this paper we calculate the Delphi analysis index weight by using entropy. Entropy method of weight calculation is highly reliable, free of decision makers’ biasness and can be easily adopted (Zou et al. 2005). If a decision matrix B shown above with m alternatives and n indicators entropy steps of weight calculation are as follows: In matrix B, feature weight pij is of the ith alternatives to the jth factor,

The output entropy ej of the jth factor becomes,

Variation coefficient of the jth factor gj can be defined by the following equation,

Note that the larger gj is the higher the weight should be. Calculate the weight of entropy wj,


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3.2 Technique for Order Preference by Similarity to Ideal Solution Method (TOPSIS) Hwang and Yoon (1981) developed the techniques for order preference by similarity to ideal solution (TOPSIS) method to rank alternative over multiple criteria. TOPSIS finds the best alternatives by minimizing the distance to the ideal solution and maximizing the distance to the nadir or negative-ideal solution (Jahanshahloo et al 2006). Several researchers have used TOPSIS in evaluating several MCDM (Tetteh 2012, Kou et al. 2011, Dai and Wang 2011, Uyun and Riadi 2011, Shahanaghi and Yazdian 2008, Chen 2000) problems. TOPSIS six steps listed below: Calculate the normalized decision matrix A. The normalized value aij is calculated as;

Calculate the weighted normalized decision matrix,

Were wj is the weight of the ith criterion and Calculate the ideal solution V+ and the negative ideal solution V-,

Calculate the separation measures, using the m-dimensional Euclidean distance,

Calculate the relative closeness to the ideal solution

Where The larger Yi is, the closer the alternative is to the ideal solution. The larger TOPSIS value, the better the alternative. 4. Results Discussion 4.1 Political System Political system (democracy, communist, religious, etc.) in nations was not of great interest in this research since this research was interested in the benefits political system provides for textile and apparel industry to function effectively and efficiently. Individual analysis, group analysis and 7 DRT members analysis were grouped together into a table format by finding their average of each political characteristic (appendix 5) for entropy and TOPSIS analysis. Entropy analysis were used to obtained the various weight for each analysis (ten in number) and the result were shown in appendix 5a. TOPSIS followed entropy analysis to rank political characteristics and TOPSIS top five characteristics are: effective economy, peace, good education system, fight against corruption and government laws (appendix 5b). Thou TOPSIS analysis ranked peace number two top characteristics, the 7 DRT members’ final conclusions were in every political system, what textiles and apparel industry valued most is peace since without peace whatever production the industry creates cannot see the light of profit. 4.2 Economic System The same procedure used for political system were administered to economic system in terms of how economic benefit affect textiles and apparel industry (entropy weight, appendix 6a) but an interesting revelation cropped up: for any economic system to function effectively and efficiently it depends on the political system of the day. The DRT realized that the political system puppet is economic system. This revelation is proved in the TOPSIS analysis of political system characteristics were effective economy were ranked number one. TOPSIS rank for economic characteristics are:


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inflation, information technology, purchasing power of money, capital and exchange rate (appendix 6b). 4.3 Cultural Environment Under cultural environment the panel proceeded with the same analysis as per that of political system and economic system. The DRT members realized that cultural environment cannot be influenced by any political system or economic system. Entropy weight analysis is shown in appendix 7a and TOPSIS top five rank characteristics that affect textiles and apparel industry are; language, attitude, food, belief system, color perception and religion (appendix 7b). Conclusion and Limitations This paper has utilized Delphi method of forecasting in another fashion to analyzed political system, economic system and cultural environment that affect textile and apparel industry. After Delphi analysis we used two MCDM entropy and TOPSIS to further analyze each PEC’s characteristics after all the Delphi steps were arranged in a table format. From our analysis we can conclude that in any country, political party in power controls the economic and political system. If the government manipulates the political and economic system in any conventional/unconventional fashion it affects textiles and apparel industry in a positive/negative way. Textiles and apparel industry should fuse their cultural system into their organization structure since political and economic systems cannot manipulate its effective usage in their organization system. The limitations of this paper are: (i) small DRT member size, (ii), consensus difficulty and (iii) time frame for DRT members’ discussion on each issue were not enough. References Asplet, M., Cooper M. (2000), Cultural Designs in New Zealand Souvenir Clothing, Tourism Management, Vol. 21, pp. 307-312. Burns T., Fiander M., Bernard A. (2000), A Delphi approach to characterizing relapse as used in UK clinical practice, International Journal of Social Psychiatry, vol. 46, no. 3. Dai L. and Wang J., (2011), Evaluation of the Profitability of Power Listed Companies Based on Entropy Improved TOPSIS Method”, Science Direct, Vol. 15, pp. 4728 – 4723. Ding S., and Shi Z., (2005), Studies on Incident Pattern Recognition Based on Information Entropy”, Journal of Information Science, Vol. 31, No. 6, pp. 497-294. Fitzsimmons J. A., Fitzsimmons M. J. (2001), Service Management Operation, Strategy and Information Technology, pp. 260. Hwang C.L., and Yoon K., (1981), Multiple Attribute Decision Making: Methods and Applications, Springer-Verlag: New York. Jahanshahloo G.R., Hosseinzadeh L. F., and Izadikhah M. (2006), Extension of the TOPSIS Method for Decision-Making, Applied Mathematics and Computation, Vol. 181, No. 2, pp.1544 – 1551. Kim, G, (2011) U.S. Textile and Apparel Trade Policy Update, Deputy Assistant Secretary for Textiles and Apparel International Trade Administration U.S. Department of Commerce USA-ITA. Kou G., Wu, W., Zhao, Y., Peng, Y., Nti, E. Y., Shi, Y. (2011), A Dynamic Assessment Method for Urban Eco-environmental Quality Evaluation, Journal of Multi-Criteria Decision Analysis, Vol. 18, pp. 23-38. Lazăr, C., Lazăr, M. (2008), Seria Delphi - The Highest Qualitative Forecast Method, Ştiinţe Economice, Vol. LX, No. 1, pp. 31-31. Peng, Y., (2000), “Management Decision Analysis”, Peking: Science Publication. Shahanaghi, K. and Yazdian, S. A. (2009), Vendor Selection Using a New Fuzzy Group TOPSIS Approach, Journal of Uncertain System, Vol. 3, No. 3, pp. 221-231. Skulmoski, G., Hartman, F., Krahn, J. (2007), The Delphi Method for Graduate Research, Journal of Information Technology Education, vol.6. Tam, L. W. H., Mills, J. (2006), Proceedings of the Asia –Pacific Conference on Library & Information Education & Practice, Singapore. Tetteh, A. (2012), Cell Phone Evaluation Base on Entropy and TOPSIS, Interdisciplinary Journal of Research in Business, Vol. 1, No. 12, pp. 9-15.


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Uyun, S., Riadi, I. (2011), A Fuzzy Topsis Multiple-Attribute Decision Making for Scholarship Selection, Telkomnika, Vol. 9, No. 1, pp. 37-46. Zou Z, Sun J, and Ren G., (2005), Study and Application on the Entropy Method for Determination of Weight of Evaluating Indicators in Fuzzy Synthetic Evaluation for Water Quality Assessment, ACTA Scientiae Circumstantiae, Vol. 25, No. 4, pp. 552 – 556. Acknowledgement I wish to thank the entire PhD colleagues for participating in this analysis. My regards also goes to two anonymous reviewers for their constructive and helpful comments. Appendix Appendix 1, Characteristics of PEC Affecting Textile and Apparel Industry

Political System Economic System Cultural Environment Peace Land Belief System Government Laws Labor Language Basic needs Provision (Water, Electricity, fuel and other)

Capital Attitudes

Good Education System Inflation Religion Effective Economy Exchange Rate Food High Efficiency and Promptly Effective Reaction to Emergency Situations

Entrepreneurship Music

Fight Against Corruption Roads, Railways, Aviation Dance Right to Vote Ports and Harbor Ornaments Right of Association Information, Technology Appendix 2a: Questionnaires to capture more PEC’s Characteristics

Questions Yes No 1. Do you agree that all the characteristics listed in appendix 1 affect PEC’s? 2. If No, list other characteristics that affect PEC.

Appendix 2b: PEC’s Characteristics Affecting Textile and Apparel Industry Questions GRADES

1 2 3 4 5 6 7 1. How do you value peace in a Nations? 2. How do you value peace in textile and apparel production? 3. How does peace in a Nation affect textile and apparel industry? 4. How does peace affect the profit of textile and apparel industry? 5. How does peace propel the Textile and apparel industry? Note: 1. Strong Disagreement; 2. Disagreement; 3. Disagree Somewhere; 4. Uncertain; 5. Agree Somewhere; 6. Agree;

and 7. Strong Agreement


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Appendix 3: Updated PEC’s Characteristics Affecting Textile and Apparel Industry Political System Economic System Cultural Environment

Peace Land Belief System Government Laws Labor Language Basic needs Provision (Water, Electricity, fuel and other)

Capital Attitudes

Good Education System Inflation Religion Effective Economy Exchange Rate Food High Efficiency and Promptly Effective Reaction to Emergency Situations

Entrepreneurship Music

Fight Against Corruption Roads, Railways, Aviation Dance Right to Vote Ports and Harbor Ornaments Right of Association Information, Technology Color Perception Tax system Interest rate Factory Incentives Import / Export duties Purchasing Power of Money Appendix 4: Delphi Method Steps

Expert 3 Expert 5 Expert 7 Expert 2 Expert 1 Expert 6

FIRST ROUND

FIRST ROUND

FIRST ROUND

FIRST ROUND

FIRST

FIRST

SECOND ROUND

SECOND ROUND

SECOND ROUND

SECOND ROUND

SECOND ROUND

SECOND ROUND

THIRD ROUND

THIRD ROUND

THIRD ROUND

THIRD ROUND

THIRD ROUND

THIRD ROUND

Delphi Research Team (7 PHD Scholars)

Expert 4

FIRST ROUND

ANSWERS FIRST ROUND QUSTIONS

SECOND ROUND

ANSWERS SECOND ROUND QUSTIONS

ANSWERS THIRD ROUND QUSTIONS

THIRD ROUND


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Appendix 5: Political Characteristics Table. PhD 1 PhD 2 PhD 3 PhD 4 PhD 5 PhD 6 PhD 7 Group 1 Group 2 DRT

Good Education System -0.20046 -0.19512 -0.21436 -0.20523 -0.21296 -0.21894 -0.21203 -0.24702 -0.20430 -0.20627

Government Laws -0.22291 -0.24203 -0.20398 -0.20755 -0.20763 -0.21778 -0.22437 -0.21358 -0.21968 -0.21301

Effective Economy -0.22319 -0.22115 -0.21646 -0.23061 -0.21239 -0.21217 -0.20399 -0.23117 -0.20220 -0.20836

Peace -0.22449 -0.23139 -0.19641 -0.21059 -0.20787 -0.20744 -0.21371 -0.23431 -0.20940 -0.22046

Factory Incentive -0.19788 -0.22854 -0.19922 -0.20882 -0.20245 -0.20957 -0.21912 -0.22361 -0.21943 -0.21094

High Efficiency and Prompt Action -0.22344 -0.21133 -0.22473 -0.22868 -0.22230 -0.22464 -0.21912 -0.20903 -0.22460 -0.22071

Fight Against Corruption -0.22838 -0.21359 -0.23394 -0.20755 -0.20613 -0.20982 -0.24218 -0.20903 -0.23260 -0.23089

Right to Vote -0.22037 -0.21359 -0.22691 -0.23166 -0.23042 -0.22987 -0.21374 -0.20602 -0.22204 -0.21579

Right of Association -0.21000 -0.21861 -0.21898 -0.22327 -0.23071 -0.20772 -0.21943 -0.20602 -0.21461 -0.22071

Tax System -0.21755 -0.21109 -0.22124 -0.22091 -0.23016 -0.22727 -0.21646 -0.20602 -0.22460 -0.22834

Basic Needs Provision -0.22627 -0.20672 -0.23672 -0.22014 -0.23120 -0.23038 -0.21097 -0.20602 -0.22204 -0.22071

Ej 0.99877 0.99803 0.99794 0.99880 0.99846 0.99904 0.99884 0.99748 0.99900 0.99928

dj 0.00123 0.00197 0.00206 0.00120 0.00154 0.00096 0.00116 0.00252 0.00100 0.00072

wj 0.08577 0.13713 0.14343 0.08366 0.10699 0.06687 0.08075 0.17564 0.06967 0.05010

Appendix 5a: Political Characteristics data after Normalization, Entropy value and variation coefficient.

PhD 1 PhD 2 PhD 3 PhD 4 PhD 5 PhD 6 PhD 7 Group 1 Group 2 DRT

Good Education System 4.46421 4.32995 4.86180 4.28347 4.57403 4.61405 4.49267 5.55087 4.27491 4.22012

Government Laws 5.34167 6.26880 4.47276 4.36483 4.38284 4.57214 4.95073 4.29202 4.83334 4.45475

Effective Economy 5.35322 5.34167 4.94317 5.23184 4.55322 4.37339 4.21066 4.92326 4.20210 4.29202

Peace 5.40789 5.78208 4.20210 4.47276 4.39140 4.21066 4.55322 5.04254 4.45475 4.72451

Factory Incentive 4.36996 5.65711 4.30148 4.40941 4.20210 4.28347 4.75198 4.64404 4.82388 4.38194

High Efficiency and Prompt Action 5.36367 4.94317 5.27375 5.15446 4.92326 4.82388 4.75198 4.13876 5.02263 4.73396

Fight Against Corruption 5.57287 5.03309 5.66070 4.36483 4.32995 4.29202 5.67225 4.13876 5.34167 5.12201

Right to Vote 5.23661 5.03309 5.36367 5.27375 5.24229 5.02263 4.55412 4.03938 4.92326 4.55412

Right of Association 4.82388 5.23661 5.04254 4.94317 5.25384 4.22012 4.76333 4.03938 4.64404 4.73396

Tax System 5.12201 4.93371 5.13246 4.85325 5.23184 4.92326 4.65350 4.03938 5.02263 5.02263

Basic Needs Provision 5.48295 4.76333 5.78208 4.82388 5.27375 5.04254 4.45475 4.03938 4.92326 4.73396

Appendix 5b: Political Characteristics separation measure Si

+, Si- , relative closeness Yi and ranking

Si+ Si

- Yi Ranking Good Education System 0.02119 0.01909 0.92002 3 Government Laws 0.02092 0.01731 0.84469 5 Effective Economy 0.01684 0.01643 0.99182 1 Peace 0.01880 0.01759 0.95329 2 Factory Incentive 0.02134 0.01334 0.63851 9 High Efficiency and Prompt Action 0.02103 0.01451 0.70434 8 Fight Against Corruption 0.02123 0.01782 0.85724 4 Right to Vote 0.02171 0.01592 0.74925 7 Right of Association 0.02215 0.01364 0.62956 11 Tax System 0.02242 0.01390 0.63393 10 Basic Needs Provision 0.02263 0.01777 0.80331 6


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Appendix 6: Economic Characteristic Table.

Appendix 6a: Economic Characteristics data after Normalization, Entropy value and variation coefficient.


Land -0.21905 -0.19661 -0.19629 -0.19596 -0.20569 -0.20320 -0.19927 -0.20667 -0.21386 -0.21373

Labor -0.20905 -0.20735 -0.21109 -0.21076 -0.21306 -0.19760 -0.19696 -0.20691 -0.21410 -0.19887

Capital -0.19922 -0.21515 -0.21109 -0.20003 -0.22061 -0.18897 -0.21395 -0.22491 -0.22688 -0.21625

Road, Rail, Aviation -0.22925 -0.19309 -0.19472 -0.19076 -0.21079 -0.19165 -0.20803 -0.20970 -0.20910 -0.20379

Interest Rate -0.18784 -0.22042 -0.20347 -0.20251 -0.21332 -0.20058 -0.21472 -0.22183 -0.21806 -0.18818

Inflation -0.19897 -0.20760 -0.20152 -0.20496 -0.19827 -0.23577 -0.19462 -0.19097 -0.19452 -0.20645

Exchange Rate -0.20394 -0.22264 -0.21391 -0.22773 -0.18238 -0.22000 -0.19978 -0.21169 -0.20396 -0.21142

Entrepreneurship -0.21641 -0.19615 -0.20850 -0.19845 -0.19655 -0.22000 -0.19978 -0.20200 -0.20396 -0.21373

Information and Technology -0.19681 -0.20516 -0.21264 -0.21996 -0.22114 -0.22277 -0.20285 -0.19301 -0.18730 -0.21142

Port and Habor -0.20902 -0.20999 -0.21109 -0.21027 -0.18667 -0.20091 -0.20803 -0.21441 -0.21923 -0.20645

Import/Export -0.20878 -0.19772 -0.20826 -0.21237 -0.21355 -0.19286 -0.20204 -0.20225 -0.20396 -0.21142

Purchasing Power of Money -0.20281 -0.21023 -0.21109 -0.20788 -0.21796 -0.20399 -0.24007 -0.19721 -0.18507 -0.20134

Ej 0.99849 0.99888 0.99951 0.99869 0.99802 0.99734 0.99806 0.99866 0.99802 0.99925

dj 0.00151 0.00112 0.00049 0.00131 0.00198 0.00266 0.00194 0.00134 0.00198 0.00075

wj 0.10019 0.07435 0.03280 0.08714 0.13100 0.17628 0.12846 0.08914 0.13102 0.04962

Appendix 6b: Political Characteristics separation measure Si

+, Si- , relative closeness Yi and ranking.

Si+, Si

- Yi Ranking Land 0.02251 0.01472 0.66852 8 Labor 0.02348 0.01478 0.64418 11 Capital 0.02358 0.02015 0.87477 4 Road, Rail, Aviation 0.02463 0.01559 0.64861 10 Interest Rate 0.02137 0.01729 0.82654 6 Inflation 0.02227 0.02099 0.96359 1 Exchange Rate 0.02128 0.01763 0.84581 5 Entrepreneurship 0.02062 0.01617 0.80056 7 Information and Technology 0.02113 0.01943 0.93899 2 Port and Harbor 0.02251 0.01460 0.66298 9 Import/Export 0.02503 0.01305 0.53427 12 Purchasing Power of Money 0.02145 0.01963 0.93514 3


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Appendix 7: Cultural Characteristic Table. Appendix 7a: Cultural Characteristics data after Normalization, Entropy value and variation coefficient.


Belief System -0.23952 -0.24890 -0.24855 -0.24558 -0.24111 -0.25736 -0.23545 -0.25041 -0.25375 -0.23286

Language -0.24516 -0.24100 -0.24339 -0.24898 -0.25020 -0.22570 -0.24600 -0.24731 -0.22264 -0.27058

Dance -0.23952 -0.24350 -0.24311 -0.24611 -0.25363 -0.22969 -0.24042 -0.24758 -0.25074 -0.24330

Religion -0.26086 -0.24595 -0.24046 -0.24292 -0.24111 -0.25209 -0.24949 -0.23178 -0.23993 -0.24271

Ornaments -0.23767 -0.24404 -0.25159 -0.24847 -0.25331 -0.23419 -0.26986 -0.23460 -0.23146 -0.23091

Music -0.24184 -0.24074 -0.24311 -0.24048 -0.23557 -0.24663 -0.24323 -0.24758 -0.24145 -0.23885

Attitude -0.24492 -0.25124 -0.24572 -0.24847 -0.23584 -0.24126 -0.24042 -0.24731 -0.24207 -0.25518

Food -0.24211 -0.23793 -0.24046 -0.24022 -0.24140 -0.24952 -0.23811 -0.25014 -0.26189 -0.23477

Color Perception -0.24439 -0.24350 -0.24046 -0.23547 -0.24384 -0.25736 -0.23088 -0.23934 -0.24976 -0.24394

Ej 0.99944 0.99980 0.99983 0.99976 0.99945 0.99844 0.99847 0.99946 0.99840 0.99813

dj 0.00056 0.00020 0.00017 0.00024 0.00055 0.00156 0.00153 0.00054 0.00160 0.00187

wj 0.06360 0.02230 0.01978 0.02761 0.06179 0.17634 0.17361 0.06120 0.18163 0.21214

Appendix 7b: Cultural Characteristics separation measure Si

+, Si- , relative closeness Yi and ranking.

Si+, Si

- Yi Ranking Belief System 0.02695 0.01973 0.75174 6 Language 0.02526 0.02318 0.94077 1 Dance 0.02505 0.01484 0.60722 8 Religion 0.02192 0.01712 0.79838 5 Ornaments 0.02845 0.01860 0.67229 7 Music 0.02493 0.01372 0.56404 9 Attitude 0.02080 0.01719 0.84334 2 Food 0.02548 0.02087 0.83990 3 Color Perception 0.02447 0.01936 0.81039 4


5.03309 5.03309 4.73396 4.54467 4.37339 6.01328 4.46331 5.24229 5.54918 4.62261

5.25175 4.74342 4.55412 4.66206 4.68197 4.73396 4.83334 5.12201 4.38194 6.12814

5.03309 4.83334 4.54467 4.56268 4.80334 4.88171 4.63459 5.13246 5.42591 5.00309

5.90345 4.92326 4.45475 4.45475 4.37339 5.78208 4.96118 4.55412 5.00309 4.98109

4.96307 4.85325 4.84280 4.64404 4.79179 5.05299 5.77052 4.65350 4.69052 4.55412

5.12201 4.73396 4.54467 4.37339 4.19355 5.55087 4.73396 5.13246 5.06056 4.83811

5.24229 5.12201 4.63459 4.64404 4.20210 5.33121 4.63459 5.12201 5.08445 5.46782

5.13246 4.63459 4.45475 4.36483 4.38284 5.67225 4.55412 5.23184 5.89462 4.69052

5.22139 4.83334 4.45475 4.21066 4.46421 6.01328 4.31004 4.82388 5.38645 5.02741


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Volatility of Tourism Movement in the Hong kong Inbound Market

Kaewta Muangasame (Corresponding author) Tourism and Hospitality Management Division

Mahidol University International College 999 Phutthamonthon 4 Road, Salaya, Nakhonpathom

Thailand 73170

Nate-tra Dhevabanchachai

Tourism and Hospitality Management Division, Mahidol University International College

999 Phutthamonthon 4 Road, Salaya, Nakhonpathom Thailand 73170

Accepted 9 June 2013

Abstract Exploring trends of tourism demand from the past is essential in measuring the different tourism movement volatility which occurred either nature or man-made. This study analyzes the volatility of tourism demand by data mining tourist numbers arriving in Hong Kong from 1999 to 2010. Eight different markets will be examined, both short haul and long haul, to compare and contrast the characteristic tourist profile and the behavior and attitude changes of each market according to the volume of visitors that come to Hong Kong. There have been significant changes over the past 12 years in different countries with some positive and negative impacts from natural disasters, an economic crisis and mega-events. This paper will compare and contrast different markets and analyze the tourism demand with regards to volatility in relation to the profile characteristics, spending pattern behaviors with tourist’s satisfaction level.

Keywords: volatility, tourism movement, Hong Kong, tourism demand, inbound market 1. Introduction

Hong Kong was considered as a ‘shopping paradise’ by most tourists, (Choi et al, 1999). As a result, there is a massive increase in the number of visitors every year; even with the negative aspects of a crowded, busy and stressful urban environment. In addition, the instability of negative and positive events such as SARS, economic crisis is also influenced the tourism demand. As a result, this study is analyzed the volatility of tourism demand by using tourist numbers arriving in Hong Kong from 1999 to 2010 for data analysis. Eight different markets will be examined, both short haul and long haul markets, to compare and contrast the characteristic tourist profile and the behavior and attitude changes of each market according to the volume of visitors that come to Hong Kong. There have been significant changes over the past 12 years with some positive and negative impacts from natural disasters, an economic crisis and mega-events. Different countries have experienced different impacting events.

This paper will compare and contrast different markets and analyze the tourism demand with regards to volatility in relation to the profile characteristics, spending pattern behaviors and attitude with tourist’s satisfaction level. In this paper, the literature review will identify the impact of tourism demand in relation to volatility of Hong Kong tourism movement. Secondary data from the Hong Kong Tourism board visitor statistics between 1999 and 2010 will be analyzed in order to understand the trend line from eight markets reflecting the impact of tourism demand, tourist characteristic profiles in demographic changes and tourist satisfaction & spending pattern within Hong Kong. Limitations and suggestions for future research are addressed.

Journal of Tourism Management JUNE 2013 VOL.1, No,4


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2. Literature Review 2.1 Impact of tourism demand

Many scholars have stated the varied impact from tourism demand. From literature reviews, potentially important factors can be examined, indicated as follows: Wang (2009), tourists are affected mostly by Safety and Health impacts which are the key to maintain demand in both international and domestic markets. It was shown that SARS, in the year 2003, was ranked as the number 1 impact on inbound tourist arrival numbers, followed by the earthquake in September, 1999 and by 9/11 in 2001. On the other hand, the world financial crisis has had less of an effect on arrival numbers when compared to those three events. In addition, Chu (2008; Huang&Min, 2002; Lim&McAleer, 2005; Okumus, Altinay, &Arasli, 2005; Pizam&Fleischer, 2002; Prideaux&Witt, 2000) stated that natural disaster impact(s) on tourism and they have determined that they do affect the tourism industry.

Wang (2009) also added that tourist arrival numbers can fall dramatically in the immediate aftermath of an event, yet recover just 1-2 years. Income is also the most frequently used explanatory variable when investigating tourist demand studies, (Jensen, 1998 and Dritsakis, 2004).

The research of Vanegas & Croes (2000) also supported that tourist income is an important factor influencing tourist visits. Lim & McAleer (2001) looked at macroeconomic factors such as price and exchange rates in relation to the effects of income. They also examined long term interaction of tourists from Hong Kong and Singapore to Taiwan. The change of international and domestic policies and plans such as a ban on, or a liberalization of, the tourism market and governmental efforts in environmental concerns could result in increasing the number of tourist arrivals, (Kim & Wong, 2006). Similarly, Hiemstra and Wong (2002) researched tourism arrival numbers before and after the transfer of sovereignty of Hong Kong to China as a dummy variable to predict tourist arrivals from six major countries to Hong Kong. Their study showed that the number of tourist arrivals increased more sharply after the transfer of sovereignty than before.

Lastly, an increase of tourism demand could come from positive activities such as international events: world fairs, sporting events and special campaigns from destination marketing organizations. These mega-events could affect tourism demand during those periods, (Crouch 1994b; Qiu and Zhang (1995); Tan, McCahon, and Mliller 2002). However, the negative impacts on tourism demand such as natural disasters, terrorism and economic downturns have a greater influence than positive impacts as people tend to be more sensitive to negative messages, (Diamond and Campbell 1990). Tourism demand reacts sensitively to change of environments surrounding tourist flow depending upon characteristics of the news, (Mansfeld, 1999; Pizam 1999). Nevertheless, Frechtling ( 1996) stated that the more volatility there is in activity, the more difficult it is to discern patterns that can help us forecast futures. 2.2 Volatility in tourism movement

Volatility in tourism is defined as the impact of shocks to the industry that lead to periods of relatively large upturns and downturns of activity, Volatility in tourism is also referred to tourism forecasting to predict the trend for tourism policy development. Furthermore, there have been very few applications of using volatility models in tourism fields, (Coshall, 2009), even though it has been very popular for empirical research in Finance and Economic metrics since early 1990. However, it can be criticized that the volatility model is not straightforward to understand. Thus, this study will focus on the key effects of inbound tourist demand volatility in Hong Kong from 1999 to 2010. In addition the trend line during those periods of the top eight countries as Taiwan, Japan, Korea, Singapore, USA, UK, Australia and Canada will be identified the stability of tourism demand according to tourist’s profile characteristics, tourist behavior-spending patterns and attitudes towards satisfaction. 2.3 Hong Kong inbound market background

In macro perspectives, World tourism Organization (2011) reported that the International tourist arrivals in Asia and the Pacific reached a historic high of 204 million in 2010. These results confirm Asia as the world’s strongest growing region of the past two years. In addition out of North-East Asia, Japan, North Korea, and South Korea, China had the best performance.

WTO (2011) also reviewed the tourism trends in 2010 and found that the most significant change among the top ten of international arrival was the growth of China overtaking both the United Kingdom and Italy within a few years. The economic boom in China after 2007 brought this country up to higher performance both in outbound market receipts to fourth position, with Hong Kong entering the top ten at number 9 from the 12th position.

The Hong Kong Tourism Commission (2011) reported that the tourism performance of inbound market in 2010 is the first time Hong Kong surpassed a record-high of 36 million visitors from around the world, a remarkable increase of 21.8% over 2009. The improving global economy and travel

http://en.wikipedia.org/wiki/North_Korea

http://en.wikipedia.org/wiki/South_Korea

http://en.wikipedia.org/wiki/China


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sentiment have fueled this impressive performance. In addition, short haul markets increased; particularly arrivals from Taiwan by 7.7%. A favorable

exchange rate and strong outbound numbers from Japan and South Korea also went up as well as an increase in arrivals from South and South-East Asia due to increased flight capacity. Furthermore, the long-haul markets have improved from global economic situation and rejuvenated business and vocation arrivals which resulted in a 10.5 % growth rate over 2009 to 4.7 million. In particular, the US remained the largest long haul market with a 9.5% increase. Emerging markets including India ( +44.8%), the middle East ( +20.7%) and also Russia ( +102.0%) also experienced a remarkable increase in arrival numbers, ( UNWTO.org, 2011). 3. Methodology

Secondary data was used in this study. The data was collected mainly from the Hong Kong Tourism board visitor statistics between the years 1999 and 2010 for 8 countries, (Taiwan, Japan, Korea, Singapore, USA, UK, Australia and Canada), based on top ranking inbound tourists excluding mainland China to find the variable between short haul and long haul travelers.

In this paper, 8 different markets attracted to Hong Kong (both short haul and long haul) will be identified and how volatility affected the trend line from 1999 to 2010. Tourism demand and particular impacts are evaluated to enable more accurate future tourism forecasting of the number of inbound tourist arrivals. In addition, this study will analyze the tourism demand impact from the data including comparing and contrasting profile characteristics, behavior towards spending patterns and attitudes with satisfaction level. 4. Results

From the result, the inbound market to Hong Kong was shown comparative top market in the trend line (Figure1) between 1999 and 2010. Long-haul inbound tourists, the top 4 including USA, UK, Australia and Canada were analyzed as well as the top short-haul inbound market from Taiwan, Japan, Korea and Singapore.

Figure 1: Comparing the trend line of inbound markets in Hong Kong (1999-2010). 4.1 Long-haul inbound tourists – Top 4 (USA, UK, Australia and Canada)

To analyze the situation of the US inbound tourist, it can be evaluated starting from 1999, a year of great volatility by natural disaster- serious earthquakes around the world with more than 20,000 people dead, causing economic downturns and homelessness as can be seen in figure 2. However, this market recovered very quickly as shown by the stability of tourist number arrivals between 2000 and 2002. After the September 11, 2002 outbreak, the shock of the news affected people in the US and around the world. As a result, the US inbound market steadily dropped again but less than in 1999. The SARS outbreak lowered all the inbound markets in 2003 including the US market. However, it increased rapidly in 2004 and continued to be stable until 2006 before reaching its highest point in 2007 of the 12


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years of the survey. The growth of economic in China and India affected the unstable situation to US inbound market during 2008 -9 recession, resulting the increasing unemployment and lowest disposable income of US people during crisis, Lapavitsas ( 2009).

Figure 2: Big earthquakes of 1999 source: the millinium group (http://www.tmgnow.com/repository/planetary/1999earthquakes.html)

It can be shown that in last 12 years the US inbound market was quite stable, only in 1999 and 2003 which were rapidly volatized. The trend line shows only slight growth of this market. Focusing on tourist profile characteristics comparing the high-low level of tourist arrivals from 1999-2010, US tourists mainly came for business rather than leisure; therefore, this market depends upon the economic & investment situation. The UK market is not striking when compared to other long haul markets. As seen in the trend line from 1999-2010 that this market slightly increased, even though in 1999 was a serious earthquake but it did not directly influence the UK market compared to the US market. The main volatility was in 2003 with the SARS outbreak from the destination point. In 2007 the UK numbers reached their peak as well as with the US and started to drop again due to the economic recession in 2008 and continued until 2010, unlike other long haul markets in this paper, which slightly increased in 2010.

In the last 12 years the UK inbound market was quite stable, only in 1999 and 2003, which was slightly volatile. To sum up, the trend line shows only slight growth of this market and then begins to decline after 2007. In 2010 World Tourism Organization reported that the United Kingdom was the only market among the ten to record a drop in expenditure (-2%) – due to the weak economy and a weakening of the pound sterling.

The Australian market trend line rapidly grew after 2004 as compared to the UK market. There were two points of volatility in 2003 with the SARS outbreak and in 2009, which was a result of a recession and joblessness in the Australian economy. It was being overwhelmed by the global financial crisis and external growth shocks, the same as other markets, ( BBC.co.uk, 2009). However, the recession was short-lived and therefore had less of an impact on the inbound market as shown. The peak period of tourist arrivals was in 2007 and 2008 during the China economic growth.

The Canadian market trend line showed rapid growth after 2004 as compared to the UK market. There were two points of volatility in 2003 with the SARS outbreak and in 2008-09, which was affected by a recession. However, the Canadian recession wasn’t as brutal; it was the only G7 nation to have recouped its losses from the 2008-2009 recession, both GDP and employment remain below pre-recession levels in the other six countries, (Grant, 2011). As a result, this market has arisen again in 2009 and will continue to grow if there are no unforeseen events. As WTO (2011) reported the greatest amount of movement of top ten tourism spenders came from Canada, which moved up two positions to number six. In this case, the appreciation of their respective currencies has clearly helped. 4.2 Short haul inbound tourists in Hong Kong (Taiwan, Japan, Korea, Singapore)

The Taiwan market was in a mature stage, which has continually declined in the last 12 years. Their numbers dropped three times during these periods shown in the numbers from 1999, 2003 and 2009 from the negative events following the earthquake, SARS and the recession. It was similar to others. Interestingly, the trend line is linear which was slightly tired. It may need to consider the new product for this position. The peak was in 2007, a result of the Chinese economic boom.

Japan is well known as a sensitive market. As it can be seen in the trend line, the year 2003 was

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adversely affected by the SARS outbreak, which was linked to health and security concern as the main determinant factors. There were only two markets in this survey that sharply dropped during the SARS outbreak; the US and Japan. The Korean market was unique in that it has been steadily growing since 2004 to 2007 and then sharply dropped in 2009 after the previous drop from SARS in 2003. Political issues and a weakened exchange rate were the main factors in determining Korean traveling abroad, (Chang & McAleer, 2009). All inbound markets were affected by the recession, but especially the Korean market. As Oh (2005) suggested, important variables such as exchange rates play a critical role in tourism demand. Model specifications could be taken into account and a multivariate approach of multivariate co-integration could be adopted to improve the tourism model performance.

The Singaporean market trend line rapidly grew after 2004 as compared to the Japanese and Taiwanese market. The only point of volatility was in 2003 with the SARS outbreak. Interestingly, during the recession of 2009, all of the top inbound markets were volatilized except Singapore. There are some particular circumstances which caused Singapore to remain in the same position and slightly increase in 2010. 5. Discussion 5.1 Tourism demand impact

Song et al (2009), proposed that the demand of tourism is dependent upon the economic situation and reflects visitor income expenditures and suggested that the income levels of source markets are the main drivers of tourism demand for Hong Kong in the long run, especially in long haul markets: (Australia, US, UK ). For growing economies, (China and Korea), is highly elastic income from the top markets in finding of this study. As mentioned above, the trend lines of those top markets were illustrated related to Song’s et al research. However, there are various key factors that determine tourism demand from external factors, which may have an impact on tourism demand by affecting the ability to travel (freedom, time, money, fitness) and motivation. On the other hand, consumer behavior is also driven by internal factors of demand such as motivation and abilities. Therefore, the impact of a change of a single external factor is limited, (Lohmann. 2004). To understand the volatility of tourism movement both of these factors could be combined with a focus on origin market and its destination.

This study emphasis is on the key factors from both internal and external factors which are the main influences on tourism demand such as “Safety and Health.” As shown during the12 years of this survey, the trend line dramatically dropped in every country from the earthquake of 1999 and SARS in 2003. The natural disaster in 1999 showed a decrease in numbers, thereby reflecting the effect of tourism demand in this regard. However, Wang (2009) stated that the negative effects this event could recover in just 1-2 years. It can be argued that it depends on the origin market how healthy economics as well as demographic changes in terms of tourist behavior. In addition, Pine & Mckercher (2004) reviewed that the SARS situation the visitors declined almost 80 percent from previous years, resulting airline passenger 80%, hotel occupancies around 90 percent, which the massive cost reduction methods had been used after post-recovery stage.

On the other hand, positive activities such as international events can influence tourism demand. Getz (2008), emphasized that a mega-event can increase the number of tourists in the year of the event by roughly 8% above the predicted amount. In the year 2010, the World Expo in Shanghai contributed approximately US $1,456 million into the Chinese economy. This study shows a increase in the number of visitors during the event period, which assumed that the World Expo could be one of the factors in driving tourism demand. In addition, 2010 was the first time that the number of arrivals surpassed the 30 million mark as a result of an improved global economy and tourism business has fueled this impressive performance in Hong Kong, ( Hong Kong tourism commission, 2011). 5.2 Tourist Characteristic profiles in demographic changes

It is interesting to look at the tourist characteristic profile changes in relation to the different emerging patterns. As was shown in Table 1, tourist characteristics combined the visitor’s educational background, average age, gender, types of traveling and whether or not they had had a prior visit. These factors can be examined to find inbound tourist behavior changes during last 12 years. Travel behavior is influenced by many factors in terms of a traveler’s socio-demographic background such as age, income, length of stay and trip expenditures, (Sheldon, 1986; Sheldon & Mak, 1987; Thompson & Pearce, 1980, Hsieh et al, 1993 & 1994; Lang, 1995). Interestingly, The travelers who prefer Asia are food lovers, work oriented, less concerned about their health and less security conscious, are more likely to be risk taker and spend on luxuries, such as eating out and shopping for stylish and fashionable clothes, ( Kattiyapornpong and Miller, 2011).


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The results allow us to identify three main points of demographic changes. Firstly, it is the female market in Hong Kong that generally increased starting in 1999. As can be seen in the increase in the number of female tourists, the Hong Kong positioning of itself as a shopping paradise can be summarized as a good target fit. However, there were mature markets such as the USA, Taiwan, Japan where the number of female visitors were higher than the male and also the expenditures still high. A new campaign to appeal to this market should be considered to rejuvenate tourism numbers. In other words, it is crucial to emphasize destination facilities and security to meet the needs of this target. Secondly, the average ages of this top markets were between 34 to 48 years. It was noticed that majority were from the employment market. In addition, this generation may well be more adventurous. WTO (2010) recommended focusing on this target by providing flexible leisure time for them. In this case, the suggestion was provided for the government policy in terms of the quality life. Lastly, the first time visitor and repeat visitor are different. Lau & Mckercher (2004) proposed that these two targets have different motivations, first time visitors were motivated to visit Hong Kong to explore, while repeat visitors came as consumers; intending to shop, dine and spend time with family. This study found that there were two markets; Taiwan and Singapore and that the repeat visitor numbers were much higher than from other markets since 1999. In addition, Australian repeat visitor numbers increased in 2003. Interestingly, the expenditures by them were also high. As a result, there is some significant correlation between spending power and prior experience, which could be explored.

Seldon & Mak (1987) found that travelers who were older and single women with higher incomes tended to travel on package tours. In the study of Kozak (2002), different factors such as age and income may have had an influence on destination choice. In addition, Hsu & Lam (2003) viewed that the Mainland Chinese visitor had relatively low income as the cost of visiting Hong Kong was too high for most residents of Mainland China. It can be argued from the finding in this study that the trend is changing as currently the Chinese mainland market has the biggest proportion of visitors and high spending power. The tourist demand trend always is changeable and dependent upon internal and external factors as mentioned by tourism demand impacts.

This study found that only the Japanese and Korean markets had continually selected package tours for their trips to Hong Kong from 1999 to 2003 and then began to become increasingly more of an independent traveler. However, if compared to other top markets in this paper, these two markets are still more favorable with package tours than the other markets. The factors affecting travel choice may be more complicated for international travel rather than for domestic travel decisions. Therefore, understanding the choice of package and non-package travelers in terms of socio-demographics, travel characteristics, and psychographic attributes may help influence tourism development and planning as well as promotional and marketing strategies, (Hsieh et al, 1993). 5.3 Tourist Satisfaction & spending patterns within Hong Kong

Hong Kong was positioned as a shopping paradise. Shopping leisure is one of the most popular tourist activities in global tourism, (Law and Au, 2000). Therefore, the attitude towards the level of satisfaction of the inbound market in Hong Kong has been evaluated from 1999-2010. Overall satisfaction of four main categories included value of money, shopping, hotel, dining and sightseeing. There was quite a huge gap in satisfaction; between 50 and 80 percentage points. For example, the level of satisfaction towards value of money for Taiwan market was quite low (47.6 and 38.4) as compared to others. Chang et al (2006) proposed that the Taiwanese tourist generally placed more emphasis on a staff’s attitude and behavior than product prices. In addition, ‘Service Quality’, ‘Room Qualities’, and ‘Value’, appeared to be the top three hotel factors that determined travelers’ overall satisfaction levels and their likelihood of returning to the same hotel, ( Choi, T. and Chu, R. 2001). Interestingly, the Japanese market was among the most widely recognized groups of shopping tourists in the world. In fact, they appear to be more interested in shopping than other national or ethnic groups, (Kim et al 2011). Some studies show that Japanese tourist preferred to use their time in retail venues and noted that shopping is one of the most significant variables that create tour satisfaction among Japanese travelers, (Reisinger and Turner, 2002). However, this study found that the spending pattern of Japanese market has changed and was declining resulting in spending less after 2007 and the least in 2009 ( 3,919 HK/person). On the other hand, Taiwan market was quite stable in terms of overall expenditure.

The Taiwan market, particularly in group tours, was mainly attracted by shopping activities in China, (Mak et al, 1999). This paper found that the Taiwanese tourist was also ranked as the highest spender in the last 12 years. On the other hand, in the long haul markets such as the USA, UK, Australia and Canada, they spent less. The report of the Hong Kong Tourist Association 1991-2000 indicated that Asian visitors tended to spend a larger proportion of their total expenditures on shopping than the Western visitor.


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However, the Korean market was lowest spender and their level of satisfaction was lower when compared to other top markets.

Kim & Prideaux (2005) pointed out that the responses of Western tourists (Americans and Australians) were over all markedly different to the responses of Asian tourists. This is an important observation and indicates that the tourism industry must be prepared to differentiate its range of experiences and services according to the national culture of various visitors as their research found significant variables related to nationality with varied motivations.

Wong and Law (2003) also stated that Asian and Western travelers from different nationalities have varied expectations in relation to satisfaction level. It should be emphasized on improving their approach as some retailers may treat the Western traveler better than the Asian traveler, even though Asian travelers have higher expenditures since 1999. Song, et al (2003) pointed out that Germany, Indonesia, India, Singapore and Taiwan tourists seem very sensitive to the prices of tourism product/services in Hong Kong while tourists from Korea and Japan seem do not pay much attention to tourism prices when they choose Hong Kong as a holiday destination. However, this study found that Japan and Korea expenditures were lower than other top markets since 1999, particularly that of the 2009 Japanese market. 6. Conclusion

To sum up the volatility of tourism demand movement of Hong Kong in last 12 years, (1999 to 2010), there are significant changes in both origin markets and their destinations. In this study volatility behavior can possibly be related to tourism demand from demographic changes. On one hand, it is emphasized by demographic changes of origin market, as it is required to additional study. For example, female market from USA, Taiwan and Japan, their expenditures were still high, the average ages of this top markets were between 34 to 48 years who were called as employment market, and also the first time visitor and repeat visitor have different behaviors. This study found that since 1999 the two markets of Taiwan and Singapore, the repeat visitor numbers were much higher than the others in comparison. In addition, the Australian repeat visitor numbers increased in 2003. Interestingly, their expenditures were also high. As a result, there is some significant correlation between spending power and prior experience, which could be explored. On the other hand, the significant finding from tourist satisfaction and spending pattern is also crucial. This study found that the Taiwanese tourist was ranked in highest spending in last 12 years from the top 8 markets in this research. On the other hand, the long haul markets such as the USA, UK, Australia and Canada spent less. Asian visitors tend to spend a larger proportion of their total expenditure on shopping than the Western visitor. However, the Korean market was the lowest spender and their level of satisfaction was lower when compared to other top markets. In addition, the Japanese market tended to spend less after 2007 in contrast with the Taiwanese market that was quite stable in terms of overall expenditure. As it can be seen there are varied key factors determining tourism demand relating to volatility in tourism movement. It is important to clarify the trends from individual markets both internal and external factors.

This study has a number of limitations that deserve further investigation which can be broken down into three areas. First, it is based on limited secondary data on tourism statistics provided by the Hong Kong Tourism Board and thus one is unable to analyze completely as there is some missing data where they are needed to critique different markets such as the number of expenditures, satisfaction level, and the number of overall visitors from 1999 to 2010. Secondly, in the mistyping from in tourism statistics was resulted of creating incorrect trend line analysis. Lastly, in the study of tourist visitor numbers is imperative to understand market segmentation emerging from a tourist behavior marketing approach. But the tourist statistic data only shows demographics, behavior and satisfaction. The most preferred approach especially in relation to tourism studies is the benefit-sought segmentation, which never fails to provide fresh insight into markets. It has been recommended from many scholars to group travelers by the benefit sought from their experiences that are valuable predictor of travel behavior and destination choice, (Botchen, Thelen and Peiters, 1999; Wind, 1978; Haley, 1968). In other words, a new demographic, geographic, behavioral profile can be developed from benefit-sought segmentation, not only by a traditional one. However, the outbound market data is also important to find the balance between an inbound and outbound approach. In other words, the study of visitor trend line applying to destination life cycle can be recommended to find the appropriate strategy. References: BBC.co.uk, (2009). Australia able to avoid recession, Retrieved on September 25Available at http://news.bbc.co.uk/2/hi/8080446.stm

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The Significant Dimensions of Customer-Based Brand Equity

Isaac Twum Asare Glorious Sun School of Business and Management, Donghua University

West Yan An Road 1882


Abstract Customer-based brand equity has many dimensions, however a general acceptance as to which dimensions to use when measuring customer-based brand equity has not being decided. This study reviews empirical results of literatures that utilized Aaker’s and Keller’s model in measuring brand equity and sum up the main or significant customer-based brand equity. The findings indicate that it is empirical difficult differentiating between brand awareness and brand association.

Keywords: customer-based brand equity, brand association, brand awareness 1. Introduction

In today’s competitive business environment, brand equity has been one of the core issues in most marketing research since it has found to create value for both the firm and the customer (Aaker, 1991). Value to the firm by enhancing efficiency and effectiveness of marketing programs, brand loyalty, price premiums, brand extensions, trade leverage, etc. and value to the customer via enhanced information interpretation and processing purchase decision confidence and satisfaction.

Brand Equity has many definitions and forms. Various authors are of the same notion that brand equity can be created, maintained and intensified by strengthening one of its dimensions (Villarejo and Sanchez-Franco, 2005). A brand with high quality perceptions, that customers have a strong and positive associations related to and are loyal to is said to have high brand equity (Yoo, Donthu and Lee, 2000).

Yoo, Donthu and Lee (2000) define brand equity as the difference in consumer choice between the focal branded product and an unbranded product given the same level of product features. Aaker (1991, 1996) proposes that brand equity is a multidimensional concept consisting of brand loyalty, brand awareness, perceived quality, brand associations and other proprietary brand assets. The fifth brand asset, other proprietary brand assets consists of patents, trademarks, etc and not too relevant in customer-based brand equity. Therefore, we will not consider this in the dimensions of customer-based brand equity. Keller (1993) however suggests brand knowledge, consisting brand awareness and brand image. Lasser, Mittal and Sharma (1995) suggest brand equity is based on five underlying dimensions: performance, value, social image, trustworthiness and commitment, whereas Srivastava and Shocker (1991) view brand equity as consisting two components-brand strength and brand value. Over the years, Keller’s and Aaker’s concepts have been the most used concepts in many academic research articles. A critical study of these two models reveals Keller’s model is a subset of Aaker’s model.

This paper reviews scholarly articles in brand equity and from their findings draws a conclusion on the main customer-based brand equity dimensions that really captures the brand equity or value a branded product has over unbranded product. Since the main focus of the article is on the dimensions of brand equity, less will be discussed about the antecedents (marketing activities) of brand equity. In other words, these selected articles empirical results will be reviewed and analyzed, and the main dimensions of brand equity will be made. This paper begins with a revision of the brand equity dimensions of Aaker and Keller. Which items to to capture the outlined dimensions will not be dealt with in this study. Next, the main dimensions will be deducted from their models, which will be followed by articles that supports these main/significant dimensions which are Brand Awareness/Association (Brand Knowledge), Perceived Quality and

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Brand Loyalty. Brand Awareness with Association: Brand awareness relates to the likelihood that a brand name

easily comes to the mind of a consumer and it consists of brand recognition and brand recall (Keller, 1993). Similarly, Aaker (1991) defines brand awareness as the ability of a consumer to recognize or recall that a brand is a member of a product category. In building brand equity, the first step is to create brand awareness. It plays a critical role in consumer decision making for three major reasons: “It is important that consumers think of a brand when they think about the product category, brand awareness can affect decisions about brands in the consideration set, even if there are essentially no other brand associations and brand awareness affects consumer decision making by influencing the formation and strength of brand associations in the brand image”. Brand awareness is measured through brand recognition and recall (Aaker, 1996; Keller, 2003) Aaker (1991) defines brand association as “anything linked in memory to a brand”. Keller beliefs brand association (or brand image, a dimension of brand knowledge) which are held in the minds of consumers are the other informational nodes connected to the to the brand node in memory. The meaning of the brand is stored in these consumers’ nodes in memory. Purchasing decisions are made based on the images formed through brand associations and are related to a series of tangible and intangible attributes associated with the brand (Villarejo and Sanchez-Franco, 2005). Brand associations are very important to marketers (differentiation, positioning and brand extensions to create positive attitudes and feelings towards the brand) and consumers (processing, organizing and information retrieve to aid in making purchase decision) (Low and Lamb Jnr., 2000). Brand Association is closely related to brand awareness since both brand equity dimensions arise from the consumer-brand contact (Aaker, 1991) and are reported to precede perceived quality and brand loyalty in the hierarchy of effects model (Levidge and Steiner, 1961).

These two dimensions (brand awareness and brand association) are highly correlated but not synonymous since one can be aware of a brand without having any strong links in memory (Washburn and Plank, 2002). Perceived Quality: This is based on consumer’s subjective evaluations of a product’s quality. Zeithaml (1988) defines perceived quality as the “consumer’s judgments about a products overall excellence or superiority”. A consumer’s personal experience with a product, unique needs and expectations, consumption condition may influence the consumer’s judgments of the product quality (Yoo, Donthu and Lee, 2001). Perceived quality can also be seen as the quality perception of consumers comparing a products quality or superiority of the product or service with respect to its intended purpose, relative to alternative. A products performance, features, reliability, durability, serviceability are some factors that influence its perceived quality. Perceived quality is regarded as a core Customer-Based Brand Equity construct because of its association with the willingness to pay a price premium, intention to purchase a brand and choice of brand (Netemeyer et. al, 2004). Brand equity is positively related to perceived quality but that a high perceived quality does not necessarily mean high brand equity (Yoo, et al, 2001).

Brand loyalty: Creativity, building and maintaining brand loyalty has been an important issue for most marketers in establishing sustainable competitive advantage. Brand loyalty, a reflection of brand equity refers to the tendency to be committed to a focal brand demonstrated through the intention of purchasing that brand as a primary choice (Oliver, 1997). Routine purchase of a brand without switching to other brand is referred to as brand loyalty. This brand equity dimension is composed of two different components; attitudinal (which includes cognitive, affective and behavioral intent dimensions) and behavioral (repeat buying behavior) (Dick and Bass, 1994, Taylor et.al, 2004). This dimension plays an outstanding role in creating brand equity. (Aaker, 1991; Grover and Srinivasan, 1992). There are different levels of brand loyalty. Trust plays a vital role in augmenting both behavioral and attitudinal loyalty which makes consumers purchase a brand routinely and resist switching to another brand. 2. Literature Review

As stated earlier, the main/significant dimensions of brand equity are Brand Awareness/Association (Brand Knowledge), Perceived Quality and Brand Loyalty. Developing the right items to measure these three significant dimensions, the brand equity of a product can be well captured.

We begin by reviewing Yoo, Donthu and Lee (2000) paper, where they researched into how marketing activities can increase and decrease brand equity. They employed perceived quality, brand loyalty and brand awareness with strong associations as common dimensions of brand equity in their research. They suggest by strengthening the dimensions of brand equity, brand equity can be created maintained, and expanded. Villajero and Sanchez-Franco (2005) also agree with Yoo et al. (2000) that brand equity can be created, maintained and intensified by strengthening one of its dimensions.


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Data from 569 respondents for twelve brands covering three product categories (athletic shoes, camera film, and color television) were collected. Reliability and confirmatory analysis were performed and was followed by Structural Equation Model (SEM). Exploratory and Confirmatory Factor analysis resulted in only three brand equity dimensions (perceived quality, brand loyalty and brand awareness with strong associations) and these were used as the endogenous mediating constructs which were related to the last endogenous construct, overall brand equity in their SEM. Structural equation model was used to estimate the parameters of their model. In their SEM results, brand equity was positively related to perceived quality, brand loyalty and brand associations with awareness.

Yoo, Donthu and Lee (2000) analysis revealed that there are two types of marketing managerial effort; brand building (high advertising, high price, high distribution through retailers with good store image) and brand harming (frequent use of price promotion). They presented some limitations of their research but the prominent one is looking at the interaction among the marketing efforts and how they affect the brand equity through the dimensions.

To further support that brand knowledge, perceived quality and brand loyalty are the significant dimensions of brand equity, Yoo and Donthu (2001) article titled “Developing and Validating a Multidimensional Consumer-Based Brand Equity Scaled was reviewed.” This paper was selected to show that these three dimensions can be used in cross cultural brand equity studies. Using the same product category in their previous paper (Yoo et. al, 2000), due to its familiarity, difference in price range, frequency of purchase, product involvement, consumption situation, they used an etic approach in developing brand equity measure. The researchers analyzed data from a total of 1530 eligible responses (633 Koreans, 320 Korean Americans and 577 Americans) on three levels: an individual analysis (to determine common items across samples); a multi-group analysis to examine factorial invariance; and an individual-level multicultural factor analysis (pooled analysis).

Reliability analysis were significant in all four brand dimensions (Aaker, 1991) however, exploratory factor analysis resulted in three dimensions because of the inseparability of brand awareness and brand association. Further confirmatory analysis supported the three-dimension model (model comprised brand loyalty, perceived quality and brand awareness/association). The χ2 fit index for the three-dimension model was better than any of the other model. Other values of fit (χ2 fit index, goodness of fit index, comparative fit index, etc) were all significant in the three-dimension model. The three-dimension model was then used for the multi group analysis then followed by the pooled analysis.

Results from the pooled failed to produce the expected four dimensions of brand equity due to lack of discriminant validity between brand awareness and associations. The three-dimension showed a better fit (χ2 d.f=32=326.19, see Yoo and Donthu, 2001, pp.9). Table 1: Intercorrelations among Brand dimensions

Source: B. Yoo and N. Donthu (2001), pg 8

To buttress the three-model dimension, Washburn and Plank (2002) paper was examined. The reason for selecting this paper is to demonstrate that other product categories apart from what Yoo et. al, (2000;2001) used in their research as well as co-branding can also be measured using these three brand equity dimensions. Washburn and Plank investigated empirically the psychometric properties of Yoo and Donthu’s (1997, 2001) customer-based brand equity scale within the context of a co-branding study. Their analysis examined consumer-based brand equity in the context of co-branded products and focused on the brand equity scale and its properties, not on the effects of co-branding. Due to this purpose, they utilized the same scales as Yoo and Donthu (1997), questions used were identical but were


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evaluated on a seven point rather than the five –point response scale employed by Yoo and Donthu. Using the CALIS procedure in SAS, both the four-factor and three factor models were analyzed on the six samples (potato chip/barbecue sauce, towel/disinfectant, high equity, low equity and mixed co-brands in both product classes, and combination of all brands) in their research. Their results supported Yoo and Donthu’s that groups together brand awareness and brand association forming one dimension called brand knowledge.

Furthermore, Gil et. al (2007) study results on the role played by the family on consumer-based brand equity is examined. Their analysis was divided into three sections: effects of the information provided by both family and firm through its marketing actions (they selected advertising, price and promotion); relationships between dimensions of brand equity; and the relationship between each dimension and overall brand equity. Random data were gathered from 360 young adults aged between 18 and 35 years from a major city in Spain for their empirical work. The highest and lowest brands familiar to the sample in the three product categories (olive oil, toothpaste and milk) were selected and used in their research. The reliability and dimensionality of the scales were tested and results were above the values generally accepted. This was followed by confirmatory analysis of the scales through the EQS software to study convergent and discriminant validity. Regarding convergent validity criteria, items with factor loadings below 0.5 were removed. However discriminant validity results for awareness and associations intervals contained the value 1. They considered two alternatives; joint dimension and establishing a second order structure. Results indicated that joint dimension of brand awareness and brand association, on the whole had a better fit. The three-dimension model was then employed in the rest of their research in which they concluded that positive brand information by the family has an important influence on brand equity formation process.

Steve Hoeffler and Kevin Keller (2002) describe six means by which corporate societal marketing (CSM) programs can build brand equity and among the six is building brand awareness, which they refer to the customer’s ability to recall and recognize the brand. They further states that brand awareness also involves linking the brand (brand name, logo, symbol) to certain associations in memory. It can be concluded that brand awareness and brand association are very highly correlated. They distinguish brand awareness into two key dimensions; breadth and depth. From this perspective, the breadth can be considered as being aware of the brand (example ikea) and the depth as linking the brand to certain association (linking ikea to family). Consumers first need to be aware of a product before strong, favorable and unique associations are created in their minds. These two actions often happen at the same time but the level of association will determine how easily a brand is recognized or recalled from memory.

Brand awareness is a fundamental attribute of customer brand equity. Macdonald and Sharp (2003) describes it as being the essential for the communications process to occur as it precedes all brand dimensions. Further, it is the vital step in creating brand association in memory with the brand and this conceptualization has been suggested by other authors. In their study, the objective was to determine the understanding level of brand awareness amongst marketing practitioners and how they use it to measure the effect of their marketing activities. Their results show that a majority of marketing managers have limited knowledge about brand awareness and how to measure it and often use sales figures to measure brand awareness. They concluded that determining the breadth (in line with Hoeffler and Keller, 2002) of brand’s awareness is quite easy, measuring the depth (nodes in memory which allows brand information to be anchored to it-brand association) is extremely difficult. Macdonald and Sharp (2003) final statements expresses the salience of a brand in the consumer’s mind (which involves both brand awareness and brand association) as the most important factor in mature markets. Table 2: Brand Awareness related researches

Author Joint Dimension of Brand Awareness and Brand Association findings with other Brand Dimensions

Keller, K.L., (1993) Brand Knowledge (Brand Awareness & Brand Image)

Yoo B., Donthu N. & Lee S., (2000) Brand Awareness with strong association, Perceived Quality and Brand Loyalty

Yoo Boonghee & Donthu Naveen, (2001) Brand Awareness with strong association, Perceived Quality and Brand Loyalty

Gil R. Bravo, Andres E. Fraj & Salinas E. Martinez, (2007)

Brand Awareness with strong association, Perceived Quality and Brand Loyalty


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Washburn H. Judith & Plank E. Richard, (2002) Brand Awareness with strong association, Perceived Quality and Brand Loyalty

Hoeffler Steve & Keller K.L, (2002) Very high correlation between Brand Awareness and Brand Association

Macdonald Emma & Sharp Bryon, (2003) Very high correlation between Brand Awareness and Brand Association

3. Discussion

Many authors have used different forms of brand equity dimensions in measuring customer – based brand equity but this study focus on the brand equity models of Aaker and keller. Customer – based brand equity is defined by Keller (1993) as the “differential effect of brand knowledge on consumer response to the marketing of the brand.”

Building customer – based initially requires creating a familiar brand (create brand awareness) that has favorable, strong and unique brand associations (Keller, 1993). When companies use advertising and other marketing activities to create awareness of their brand, it increases consumer exposure to the brand and in doing so, results in consumers forming associations with the brand. When familiarity of a brand is increased, it leads to increase consumer ability to recognize and recall the brand (Keller, 1993). The marketing programs by firms try to create awareness and associations simultaneously which makes joining them as one construct/dimension when measuring customer – based brand equity very necessary. Both Aaker and Keller (1996) agree that brand awareness have levels; recognition and Recall. However, Aaker, (1996) add a third level, top – of – mind. These three levels are well connected with brand associations. In other hands, a top of mind level of brand awareness means the brand has favorable, strong and unique brand association, whereas a low level (recognition level) will not have a strong association. According to the literatures reviewed, the three-model dimension, that is brand awareness/association, perceived quality and brand loyalty produced very good fit values. These three dimensions can be utilized in different cultures (Yoo et. al, 2001), it can also be employed in the context of co-branding (Washburn and Plank, 2002) and across product categories (Yoo et. al, 2001; Washburn and Plank, 2002; and Gil et. al, 2007). The fit values for the three-model dimension in all these studies were are significant, that is generally above the acceptance value. 4. Conclusion

The issue of whether or not brand awareness and brand association should be combined is critical. Both Aaker and Keller distinguish between the two constructs, nonetheless from authors like Yoo et. Al (2000; 2001) and Washburn (2002) reported it is difficult to separate brand awareness from brand association. Both dimensions are linked to the memory nodes of consumers’ differently. A brand with a good level of associations can be easily recalled from memory. A brand with top-of-mind awareness will promptly come to mind because of the very strong associations linked in consumers’ mind when given the product category. On the other hand, a brand with weak (or no associations) can be (or not) recognized when given a cue. These two dimensions are very well inter-correlated as awareness is reflected in association which makes it empirically difficult to separate and measure. Future research should concentrate more on these two constructs examining more on whether they are both synonymous or not as well as the relationship between them. Also the three-dimension model should be used to examine more product categories as well as in different regions to see if this model is enough to measure brand equity from the consumers’ perspective. However, in the situations where the need to separate theses two dimensions is vital, then brand awareness and brand association should be separated and measured by designing better items to capture these two dimensions more accurately. When the above situation is not required, the three-dimension model will be well suited to measure customer-based brand equity. References Aaker, David A., (1991), Maintaining Brand Equity, New York: The Free Press Aaker, David A. (1992), Managing the most important Asset: Brand Equity, Planning Review, pp. 56-58 Aaker, David A, (1996), Measuring Brand Equity Across Products and Markets, California Management Review, Vol. 38 No. 3, pp.102-120


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Bonghee Yoo & Naveen Donthu, (2001), Developing and Validating a Multidimensional Consumer-Based Brand Equity Scale, Journal of Business Research, Vol. 52, pp. 1-14 Dick, A. & Basu, K., (1994), Customer Loyalty: Towards an Integrated Conceptual Framework, Journal of the Academic Marketing Science, Vol. 22, No. 2, pp. 99-114 Dyson Paul, Farr Andy & Hollis S. Nigel, (1996), Understanding, Measuring and Using Brand Equity,” Journal of Advertising Research, November/December, pp. 9-21 Gil R. Bravo, Andres E. Fraj & Salinas E. Martinez, (2007), Family as a Source of Consumer-Based Brand Equity, Journal of Product and Brand Management, Vol. 16, No. 3, pp. 188-199 Low S. George & Lamb Charles W. Jnr., (2000), The Measurement and Dimensionality of Brand Associations, Journal of Product and Brand Management, Vol. 9, No. 6, pp.350-368 Grover R. and Srinivasan V., (1992), Evaluating the Multiple Effects of Retail Promotions on Brand Loyalty and Brand Switching Segments, Journal of Marketing Research, Vol. XXIX, pp. 76-89 Keller, K.L., (1993), Conceptualizing, Measuring and Managing Customer-Based Brand Equity, Journal of Marketing, Vol. 53, pp 1-22 Keller, K. L., (2002), Strategic Brand Management; Building, Measuring and Managing Brand Equity, Prentice Hall, Upper Saddle River, N.J Keller, K.L., (2003), Building, Measuring and Managing Brand Equity, 2nd ed., Prentice-Hall, Upper Saddle River, NJ Lasser Walfried, Mittal Banwari & Sharma Arun, (1995), Measuring Customer-Based Brand Equity, The Journal of Consumer Marketing, Vol. 12, No. 4, pp. 11-19 Levidege R.J. and Steiner G.A., (1961), A Model of Predictive Measurement of Advertising Effectiveness, J Mark, Vol. 25, pp. 59-62 Macdonald Emma & Sharp Bryon, (2003), Management Perceptions of the Importance of Brand Awareness as an Indication of Advertising Effectiveness, Marketing Bulletin, 14, Article 2, Reprinted from Marketing Research On-Line, 1996, 1, pp. 1-15 Marcel Gommans, Krish S. Krishnan, & Katrin B. Scheffold, (2001), From Brand Loyalty to E-Loyalty: A Conceptual Framework, Journal of Economic and Social Research, Vol. 3, No. 1, pp. 43 -58 Oliver L. Richard, (1997) Satisfaction: A Behavioral Perspective on the Consumer, New York: McGraw-Hill Pappu R., Quester P.G. & Cooksey R.W., (2005), Consumer-Based Brand Equity: Improving the Measurement-empirical evidence, Journal of Product and Brand Management, Vol. 14, No. 2/3, pp. 143-155 Srivastava, R.K. & Shocker, A.D., (1991), Brand Equity: A Perspective on Its Meaning and Measurement”, Report Number 91-124, Marketing Science Institute, Cambridge, MA Hoeffler Steve & Keller K.L, (2002), Building Brand Equity Through Corporate Societal Marketing,”Journal of Public Policy and Marketing, Vol. 21 (1), pp. 78-89 Taylor S.A., Goodwin S. & Celuch K., (2004) “The Relative Importance of Brand Equity to Customer Loyalty in an Industrial Setting,” Journal Product and Brand Management, Vol. 13, No. 4, pp. 217-227 Villarejo-Ramos A. F. & Manuel J. Sanchez-Franco, (2005), The Impact of Marketing and Communication and Price Promotion on Brand Equity, Brand Management, Vol. 12, No 6, pp. 431-444 Washburn H. Judith & Plank E. Richard, (2002), Measuring Brand Equity: An Evaluation of a Consumer-Based Brand Equity Scale, Journal of Marketing, Theory and Practice, pp.46-61 Yoo Boonghee & Donthu Naveen, (1997), Developing and Validating a Consumer-Based Overall Brand Equity Scale for Americans and Koreans: An Extension of Aaker’s and Keller’s Conceptualization, Paper presented at 1997 AMA Summer Educators Conference, Chicago Yoo B., Donthu N. & Lee S., (2000), An Examination of Selected Marketing Mix Elements and Brand Equity, Journal of the Academy of Marketing Science, Vol. 28, pp. 195-211 Yoo Boonghee & Donthu Naveen, (2001), Developing and Validating a Multidimensional Consumer-Based Brand Equity Scale, Journal of Business Research, Vol. 52, pp. 1-14 Zeithaml A. Valarie, (1988), Consumer Perceptions of Price, Quality and Value: A Means-End Model Synthesis of Evidence, Journal of Marketing, Vol. 52, pp. 2-22


96

加蓬石油公司特许经营合同：博弈论文的分析

Stéphano zico EtoughéFam’Ella (Corresponding author)

Tianjin University Liu Yuan D qu，District Foreign Students Flats 92 Weijin Road, Nankai District, Tianjin 300072 China Tianjin University, School of Management

Zhang Zaisheng

Tianjin University Liu Yuan D qu， District Foreign Students Flats 92 Weijin Road, Nankai District, Tianjin 300072 China Tianjin University, School of Management


摘要

为什么发展中国家政府与跨国矿产公司在关于矿物提炼权利方面的谈判常常会导致低效贸易？

逆向选择是一个重要原因。当合同条款是基于大量的信息时，其产生的合同往往会是低效的。

本文将阐述一类理论模型，这一模型是为发展中国家的政府与跨国矿物公司就签订矿物提炼

权利条款时，双边信息不对称的情况下建立的。当矿主和矿山经营者在进行交易时均掌握私密信

息，同时，当每个缔约方均有一个关于类型的连续分布，和确定的正分布密度函数，低效贸易是

不可避免的结果。

然而，当代理人评估被拍卖或者他们寻求仲裁要求时，降低低效性还是有可能的。因此，作为

第二优选合同，仍然存在两种可行的策略；他们是，简单的双重拍卖和最终报价仲裁。在此两种

策略中，平均的租金数是谈判的最优结果。

关键词：矿物提炼权利，逆向选择，最终报价仲裁，双重拍卖

一、简介

非洲蕴藏着世界重要的矿藏，包括铝、金、金刚石、铬铁矿、锰矿以及钒矿。非洲大陆的铀

储量约占世界总储量的 17%；但是非洲却有大量的人口生活在国家贫困线以下。

诸多因素导致了这一矛盾的出现，比如，其他经济部门竞争力下降；因受到国际商品市

场动荡而使自然资源部门的财政收入蒸发；政府对于资源的管理不善；疲软、低效、不稳定以及

腐败的体系；政府无力对新的开采权进行谈判；监控和缓解环境、社会对于矿产部门活动的影响，

同时确保遵守土地使用管理和权利界限。

另一方面，发展中国家政府总是声称从自然资源提炼中得到的股息不足以使其有能力丰富他

们的经济。在这一观点上，矿主得到的已收的租金总额使我们很感兴趣，同时我们在这次研究中

也会集中关注怎样改善这部分分配。本论文会展示一种理论模型，这一模型是为发展中国家的政

府与跨国矿物公司就签订矿物提炼权利条款时，双边信息不对称的情况下建立的。

双边契约是协议双方对协议另一方许下承诺的协定。逆向选择可能会在双方均拥有私有

资讯时出现，然后会造成，协议双方均不会完全告知对方己方的特性。

正式发展了基础逆向选择问题的首创性文章是莫里斯（撰写的）（1972）。揭示原理的观

点可以在哈蒙德和马斯金的著作中找到（1978），它也被应用于多代理人的情况中。然而，揭示

原理的前几次应用则是由拜伦和迈尔森（1981）在以未透露的代价基础上规范垄断者行为，哈特

（1982）提出隐性合约以及非自愿性失业理论，以及撒平顿代理理论完成的。解决连续型问题的

关键要归功于拜伦和迈尔森（1981），同时他们也为“必需和充足”情况的特性描述问题和第二

Journal of Economics & Finance (JEF) JUNE 2013 VOL.1, No.4


97

优选在一维案例中的存在性做出了巨大的贡献。

本文中，要对可再生资源进行完整的分析必须重视下几个要求：

假设矿产公司比矿藏拥有者得到的关于资源存量水平、非金属矿物品质、矿物成分多样性以及资

源质量方面的信息更多。

假设矿藏拥有者有特定的承诺。他与矿藏经营者签订了或者没有签订特许经营权合约。

假设代理人对于可耗减的储层的评估与他们对矿藏带来的财政收益相同。因此，不对称变量既是

他们对矿床的评估。

最后，假设仲裁首选解决方案是平均值 m 和标准偏差2σ 的正态分布。本文的结构如下：介

绍(ii)正式的在双方信息不对称情况下矿物提炼权谈判框架。这会使得双方代理人得到私有信息

同时充分的知道财产价值，(iii)在双边贸易进行时，当签约双方为类型的连续分布和严格的正

密度函数，低效便会产生。为了降低低效，代理人的评估可以与(iv)双重拍卖策略交换，或诉诸

(v)仲裁。因此，作为第二优选，简单的双重拍卖和最终报价仲裁这两种策略均有应用的可能。

在此两种策略中，平均的租金数是谈判的最优结果。本论文的新颖之处在于(v) 无论使用两种方

法时，我们都发现平均租金数和最优合同是谈判的最好结果。基于此，我们提供了一些讨论、结

果和最终选择。

二、正式框架

让我们来介绍一下矿产资源开采动态特点：

iQ =总称为存储（库存）有一定的不可再生的资源

iq =资源的提取量（消费）每单位时间.

iπ =净效益

( )iη π =收到的分红份额由股东（采矿所有者）。

我们设想，随着时间的推移，不可再生资源的需求是曲线性的。因此，在同年的逆需求曲线

我可以写为：

总收益

( )0 2

iq

i i i i ibB a bq dq a q q = − = −

∫净效益

2i i iba c q qπ = − −

利润

( )2i i i ibM a c q q η π = − − −

知道了这个资源的总量，然后对多年的自然层以上进行动态分系，这将是一个很大的问题：

( ) 11 1

( )21

i i in n

iii i

ba c q qMax Q q

r

η πλ−

= −

− − − + − + ∑ ∑

. 这将意味着： 1

n

ii

Q q−

=∑

我们接下来谈双边贸易工程，是发展中国家之间的政府（矿主）和外国矿业公司（采矿经营

者）的谈判。

该谈判涉及到财矿场进行收购资金。

如果跨国矿业公司签订合同，那么他将每年的按金额的 ifq支付， if ifP a bq= −

为自己的需

求.该公司将每年支付股东分红，直到合同结束。

该公司的利润将是：

2 ( )2f if if if f ifbM aq cq q η π= − − −

.

采矿公司支付给政府( )f ifη π

的股息金额。因此，企业的预算利润值是：


98

( ) 11 1

( )2

1

if if f ifn n

ifii i

ba c q qMax Q q

r

η πλ−

= −

− − − + − + ∑ ∑

该矿业公司的采矿场预估值等于预期净利润，他可以赚取提取耗竭资源为(( )f fV E π=

).

另一方面，如果发展中国家的政府可以按照收益的合同获取上市公司的利润，最后净效益将是：

2

2g ig ig igbM aq cq q= − −

因此，上市公司预计其净效益值是：

( ) 11 1

21

ig ign n

igii i

ba c q qMax Q q

rλ−

= −

− − + − + ∑ ∑

如果政府对矿业领域的估值等于预期的净利益，可以通过采矿提取获得(( )g gV E π=

).

当( ) ( )f gE Eπ π≥

时,政府收益资金的矿业公司，就意味着( ) ( )( ) ( )g fg fE Eπ πη η≤

.

，政府将要求该公司随着( )( )gg E πη

变化,来调整股息金额。

但是，他不是超出成本的提取 ig ifcq cq≥，所以我们认为政府不能获取他的资金，因为它会

更加亏损. 当然贸易必须是发生当在( ) ( )( ) ( )g fg fE Eπ πη η=

的情况下，该矿业公司要求谈判，他

可以每年赚取的股息金额( ) ( )( ; )g fE EH π π

。

然而，采矿经营者对于实际情况要有一定的了解，总称为储备信息的真实大小，应该从

资源的实际强度中获得实际的预算利润，真实的股息的数据应该提供给政府，这才是真正的环境

成本。采矿经营者要有实际丰富的经验，才可以在评估中预算出地面储备质量，从而预算出经营

相关的采矿活动的支出。

这样的情况可能源于非洲国家的矿业立法。它给予矿业公司的勘探许可证，没有任何控制和

监查.

当然这针对在自然环境中，由该公司的警告部门负责，因此，在利润与实际信息不对称

时，矿业公司将会声名有一个采矿层估值偏低.在另一方面，针对他实际情况，政府可能也会做

出一定的评估值。因此，政府将会有一个他的耗竭资源的高估值，包括环境风险，为此提取利润。

因此，在这样的环境，如果易履行合同时，它不是无效的。

三、低效率的双边贸易

正如帕特里克博尔顿和 Mathias Lewatripont分析，由于双边信息不对称，也未必总是能够

实现贸易。其中如果两个风险中性代理人（个人），要算出独立分配的多少取决于他们的耗竭资

源信息。政府对矿业领域的估值实际上等于净采邑他可以提高提取耗竭资源的预期金额，对于所

有公司( )gE π

.我们认为，政府预计估值( )gE π

有严格正密度微[ ( )]g gf E π

在区间

( ); ( )ggE Eπ π 律师事务所的私人已知的估值（也是他的预期净采邑）有严格的正密度微

[ ( )]f ff E π在区间

( ); ( )ffE Eπ π ( ) ( ) ( ) ( )g fg fE E E Eπ π π π< < <.

以上可以证明，如果承包在中期阶段时，有效的贸易无法实现，我们将首先掌握实际的环境，

满足个人理性临时设置，然后将声明，有效的交易不在此进行。

而实现的交易集

应用原则的启示，主要的问题是选择一个启示合同{ }Pr( ; ); ( ; )g f g fHπ π π π

其中


99

Pr( ; )g fπ π ⇒代表着贸易的概率

( ; )g fH π π ⇒从公司到政府支付;

( ; )g fπ π ⇒然上公布

关于激励团队使每个人具有满足感和对个人理性约束，能最大限度地从生产中提高预期收

益。对于真实的数据，我们应该有：

采矿业主：

( )

( )

( )( ) ( ); ( ) ( )Pr( ) Pr( ) ( )f

f

fg g f f

E

E f

EE E E E dfπ

π

ππ π π π= ⇒∫政府预计概率贸易

( ) ( )( )

( )

( ); ( ) ( )( ) ( )( )f

f

g g f f fg

f

E

E

E E EE E dH fπ

π

ππ ππ πη = ⇒∫政府预计净股息，该公司

- 采矿经营者：

( ) ( )( )

( )

( ); ( )( ) ( ) ( )Pr Pr( )f

f g f g g

fg

E

E

E EE E Edfπ

π

π ππ π π= ⇒∫公司的预期概率贸易

( ) ( )( )

( )

( ); ( )( ) ( ) ( )( )f

f g f g g

f

f

g

E

E

E EE E EdH fπ

π

π ππ π πη = ⇒∫公司预计支付给政府

因此，每个代理类型的合同的预期收益{ }; ;Pr( ); ( )

g f g fHπ π π π

，可以写成：

和

( ) ( )

( ) ( )

( )

( ); ( ) ( ); ( )

( ) ( ) ( )

( ) ( ) ( ) ( ) ( ) ( )

( ) Pr( )

( ) ( ) Pr( ) ( )( )f f

g g g gg

g g f f f g g f f f

f f

g

g

E E

fE E

fE E E E

E E E

E E E E E E

U

U H d f dfπ π

π π

π

π π π π

π π π

π π π π π π

η= −

= −∫ ∫

( ) ( )

( ) ( )

( ); ( ) ( ); ( )

( ) ( ) ( ) ( )

( ) ( ) ( ) ( ) ( ) ( )

( )( ) Pr( )

( ) Pr( ) ( )( ) ( )g g

f f f ff

f f g f g g g f g g

g g

f

E E

f

E Eg g

E E E E

E E E E

E E E E E E

U

U d H df fπ π

π π

π π π π

π π π π

π π π π π π

η= −

= −∫ ∫

激励与个体理性约束的并用，然后给出：( ) ( )( ) ( ) Pr( )

g gg ggg E EU π ππ πη≥ −

任何

( ); ( )[ ]ggg E Eπ ππ ∈ ⇒政府的激励约束 ;

( ) ( )( ) Pr( ) ( )f f f ff f

E EU π π ηπ π≥ −任何

( ); ( )[ ]fff E Eπ ππ ∈ ⇒矿业公司的激励约束;

( )( ) 0gg EU π ≥

任何( ); ( )[ ]ggg E Eπ ππ ∈ ⇒

政府

的个人理性;( )( ) 0

ff EU π ≥任何

( ); ( )[ ]fff E Eπ ππ ∈ ⇒矿业公司个人理性

假设代理商想要满足单一生产力条件的问题，我们应该做到以下几点：


100

- 想要对最低生产力理性约束具有约束力：( )( ) 0g

gEU π ≥

，是( )( ) 0

ffEU π ≥

最低的政府预期估值

( )gE π ; 当然，因为他是矿产资源的创造者，首先，他预计估值应被解释为预算成本。这意味着，

当他的租金变成最低的预算成本时，那么他才是最高的利润。

在上述方程中替代贸易概率,以最优交易概率;Pr( )e e

g fπ π=1，一得到

{ }

{ }

( ) ( )

( ) ( )

min ;( )

( ) ( )

min ;( )

( ) ( )

( ) ( ) ( )

( ) ( ) ( ) ( ) ( ) ( )

( ) ( ) ( ) ( )

( )

( )( ) ( ) ( ) ( ) 1 ( )

( ) ( ) ( ) ( )

g

g

gf f f f

f

ff

f g

ff

f g

E E

f g

E E

g

E

gg f

E E

E

g g g f

E E

E E E

E E E E E E

ff g

g gg g f

E E E E

E

E d d

d d

f F fU U

f F f f

π π

π π

π

π π

π

π π

π π π

π π π π π π

π π π π

π

π + = + − −

+

∫ ∫

∫ ∫

( ) ( )

( ) ( )

( ) ( )

( ) ( )

( ) ( ) ( ) ( )

( ) ( ) ( ) ( )

( )

( )

( )

( )

( ) ( ) ( ) ( ) )

( ) )

1 ( )(

( )

( )( ) (

( )

( ) ( )f

gg f g f

f

f

g f g f

f

f g

f g

f g

f g

f f

E E

f

g f

E Ef

E E

g

g

E Eg

E E E E

E E E E

E

E

E

E

g f

g f

E E E d d

d d

F

f

FE

f

f fU U

f f

π π

π π

π π

π π

π π π π

π π π π

π

π

π

π

π π π

π

−−

+

+ = −

∫ ∫

∫ ∫

但是

{ }( ) ( )min ;

( )

( ) ( ) ( )( ) ( )f g

g

E E

gg g

E

E E Egg

df Fπ π

π

π π π=∫

并运用莱布尼兹定则一得到：

{ }( ) ( );

( )

min

( ) ( ) ( )

( )

( ) ( )

( )

( )

( ) ( )

( ) ( ) ( )

( ) ( )

f

g

g

g

g

E E

gg

g

g g

E

g

f

E E E

E

g gg

f gg

E E

E

d E

E E

f F F

F F

π π

π

π π π

π

π π

π

π

π π

+ =

=

∫

然后得到:

{ }

( ) ( )

( ) ( )

( )

( )

( ) ( ) ( ) ( ) ( )

( ) ( ) ( )

( )( ) ( ( ))

min ( )( )

( ) ( ) 1 ( )

( ); ( )

gg f

f g

f g

f

f

f

E E

E E

E

g

Ef

f f f f f

g f f

f gf

g f

E E E E E

E E E

E E d

E dE

f F F

f

U U

F

π π

π π

π

π

π π π π π

π π π

π π

ππ

+ = + − − ∫ ∫

∫

一方面，政府方面认为( )

fE π

是最高预期公司的估价，将意味着( )( ) 1fg EF π =

对于


101

e

fπ− ( )( ) gf EE ππ ≥

。另一方面，最小{ }( )( ); ( )( ) gg

gfE EE F π ππ

=( )gE π

任何时候

( ) ( )gfE Eπ π≥。因为政府的最低期望估价(或最高预期机会成本) 。因此，上述表达式可以

改写为：

( )

( )

( ) ( )

( ) ( )

( ) ( ) ( )

( ) ( ) ( )

( )

( )

( ) ( ( )) ( ) ( )

1 ( ) ( )

gg f

f

f

f

f f

f f

f

E

e

f

E

E E

e

f

E E

f f f

f f f

ff

f f

E E E

E E E

E

E

E d

d d

f F

F f

U Uπ

π

π π

π π

π π π

π π π

π

π

π π

π

+ = −

− −

∫

∫ ∫

( ) ( )

( ) ( )

( ) ( ) ( ) ( ) ( )( ) ( )( ) ( ( )) 1 ( ) ( ) ( )g fg f

f f

f f

f

E E

e

f

E E

f f f f ff f fE E E E EE EE d dF f fU U

π π

π π

π π π π ππ ππ π+ = − − + − ∫ ∫

( ) ( )

( ) ( )

( ) ( ) ( ) ( ) ( )( ) ( )( ) ( ( )) 1 ( ) ( ) ( )g fg f

f f

f f

f

E E

E E

f f f f ff fE E E E EE EE d dF fU U

π π

π π

π π π π ππ ππ+ − = − − + ∫ ∫

当公司提高其预期估价到政府最高预期机会成本，(( ) ( )gfE Eπ π=

),其剩余价值明显为负值。

( )

( )

( ) ( )( )( ) ( ( )) 1 ( )gg f

g

f

f

E

E

f ffE EE E dFU U

π

π

π ππ π+ = − − ∫

因此,

( )( ) ( ( )) 0gg f f

E EU Uπ π+ ≤

这一结果的产生引发双边贸易问题，当政府和矿业公司双方在贸易过程中保存私有资讯，

往往将导致贸易低效当每个缔约方存在一个连续分布的类型，伴随严格的正向密度函数。

然而，它还是人就有可能提高或降低效率低的交易主体的估值在拍卖过程中或者如果他们诉

诸仲裁。

由此，作为第二个最优契约，两种战略保持其可能性；简单的复式拍卖或者最后的报价仲裁。

在这两种战略中，平均月租金额为最优谈判的结果。

四、复式拍卖中的次佳契约

政府应施加严格平均支付方式或开价( )( )

ggE πη

，自交易开始。更准确地讲，同意卖给采矿运营

商的一个租金要价金额, 提取不可再生资源的权利。另一方面，采矿运营商进行投标

( )( )ff

E πη。

在这一环节，首先将表现一个贝氏均衡的复式拍卖合同，然后表现的简单的复式拍卖就是次优契

约。

贝氏均衡表现


102

假设一个公司同时列举房租28

( )( )ff

E πη.如果

( ) ( )( ) ( )f ggf

E Eπ πηη ≥, 那么交易出现在代

理当中一个平均租金。

( ) ( );( )

2

( ) ( )g f

g fg fE E

Hπ π

η ηη η+

=.否则就没有交易的发生。

如果采矿运营商得到开采矿产的所有权，其效用将成为：

{ ( ( )) ( ) ( ( ); ( )),. ....Pr( ( ); ( )) 1

( ( )) 0,......f f f f g f gf

ff

E E H E E with E E

E otherwiseUU

π π π π π π

π

= − =

=

矿业公司策略：( )( )

ffE πη

是租金金额，他将对每一项可能性估值提出报价。另一方面，如

果政府投资开采产权到矿业公司，其效用将成为：

{ ( ( )) ( ( ); ( )) ( ),. ....Pr( ( ); ( )) 1

( ( )) 0,......g g f g g f gg

gg

E H E E E with E E

E otherwiseUU

π π π π π π

π

= − =

=

矿主策略：( )( )

gE

gπη

租金金额是他要求的每一个可能性估值。

因此，一对策略{ }( ) ( )( ); ( )

f gf gE Eπ πη η是贝叶斯纳什均衡如果其符合两个条件：

对任意0;1( )

fE π ∈

,

( )( )f

Ef

πη做解答

[ ] { }( ) ( ) ( )

( )( ) ( ) / ( )

( )2

Pr ( )maxg f g

g

f g gf f g

E E EE

f

E EE

π π ππ

π η ηπ η η

+ ≥≥

−

在( ) ( )( ) ( ) / ( ) ( )g gf g f gE EE E Eπ ππ η π η + ≥ 是政府要求下的期望租金值。有条件的需求少于公

司的报价( )( )ff

E πη

对任意0;1( )gE π ∈

, ( )( )gg E πη

做解答

{ }( )( ) ( )

max( )

( ) Pr ( )( ) / ( )

2 g

f gf

g fg g

g

f gE

E EEE

Eπ

π πη

π ηπ η

η η≥

≥ + −

在( ) ( )( ) / ( )f g ff gE EE π π ηη η ≥ 是公司报价的期望租金值，有条件的报价将大于政

府的需求 gη

.

假设他们的策略是线性的，另外公司-政府战略是相互间最优的回应，因此这些战略是确实

的贝叶斯纳什均衡。在这一均衡原理中，双方业务的发生{ }( ) ( )( ); ( )

f gf gE Eπ πη η，将对双方行

之有效{ }( ) ( )( ); ( )

f gf gE Eπ πη η如

( ) ( )f g

E Eπ π≥。


103

线性贝叶斯纳什均衡

相对于政府：

{ }( ) ( )

( ) ( )max( ) / ( ) ( )

Pr ( )2

f g

g fg

f f gf f gg

E EE E

E EV

η

π ππ π

η π ηη η η

≥= + − ≥

转变为：

33 ( )max

4 2f f g

f

g f f g

gg

aa EV

η

δ ηδ

η δ π + −

+ += −

如果政府选择了一个线性的策略，那么矿业公司的最佳选择也会表现为线性。

相对于公司：

{ }( ) ( )

( )max( ) ( ) / ( )

( ) Pr ( )2

eg f g

gf

f g gf f gf

E EE

E EV E

η

π π ππ

π η ηπ η η

+ ≥= − ≥

转变为：

3( )max

4f g

g

f gff

f

aaEV η

δ

ηπ

−

+−=

在第一阶段，对于双方代理，提出：

( ) ( )10

4 4 2

,

( ) ( ) 330

4 4

g f f g g f f g

g f f f

f f g f f g

f g g g

dE a a E

d

and

dE a E a

d

π δ η η δ π

η δ δ δ

π η π η

η δ δ δ

+ − + += − − =

− += − + − =

因此：

23 3

,23 3

g

f

f feg

gef

a

anda

δη π

η π

+= +

= +

鉴定为变量，一得到：

2 1( ( )) ( )3 4

,2 1( ( )) ( )3 12

g g g

f f f

E E

and

E E

η π π

η π π

= +

= +

这一对策略

2 1 2 1( ) ; ( )3 4 3 12g fE Eπ π + +

是贝叶斯纳什均衡，交易发生在


104

( ) ( )( ) ( )f gf gE Eπ πη η≥或在

( ) ( )14f gE Eπ π≥ +.。

简单复式拍卖为次优契约

表达次优契约并在复式拍卖中实行次优契约。

-表达次优契约

次优契约实现选择结果最大化将应用于两方之间受制于激励相容和临时个别合理性约束条

件的任何一方的预计值。

政府期望效用：

( ) ( )

( ) ( )

;

( ) ( ) ( ) ( )

( ) ( ) ( ) ( ) ( ) ( ) ( ); ( ) ( ) ( )Pr( )

Pr( )

( )

( ) ( )

( ) ( ) ( )

g

g f g f

f f

f f

g g g g g

E E

g g f f g f ff fE E

E E E E

E E E E E E E E E EH d

U

U f f dπ π

π π

π π π π

π π π π π π π π π π

η= −

= −∫ ∫

因此 1 1 1

0 0 0

( ) ( ) ( ); ( ) ( ) ( ); ( ) ( ) ( )( ) Pr( )( )g f g fg g g g f gE E E E E E E E EU d H d dπ π π π π π π π π = − ∫ ∫ ∫

矿业公司期望效用：

( ) ( )

( ) ( )

( ) ( ) ( ) ( )

( ) ( ) ( ); ( ) ( ) ( ) ( ); ( ) ( ) ( )Pr( ) ( )

Pr( )( ) ( )

( ) ( ) ( )

f

g f g f

g f

g f

E E

E E

f f f f f

f f f g g g gg g

E E E E

E E E E E E E E E Ed H d

U

U f fπ π

π π

π π π π

π π π π π π π π π π

η= −

= −∫ ∫

因此：

1 1 1

0 0 0

( ) ( ) ( ) ( ); ( ) ( ); ( ) ( ) ( )( )Pr( )( )f g f g ff f f gf E E E E E E E E EU d H d dπ π π π π π π π π= − ∫ ∫ ∫

因此两方之间应用的期望值转变为：

( )1 1 1 1

0 0 0 0

( ) ( ) ( ); ( ) ( ) ( )( ) ( ) ( ) ( ) Pr( )( ) ( )g g f f g g ffg f f gE E E E E EE E E EU d U d d dπ π π π π ππ π π π−+ =∫ ∫ ∫ ∫

次优契约是解决以下限制最佳化问题的方法：

( )

1 1

0 0

1 1

0 0

;

( ) ( ) ( ) ( )

( ) ( ) ( ) ( ) ( ) ( )max

max ( ) ( )

Pr( )

g g f f

f g g f g f

fg E E E E

E E E E E E

U d

d d

U dV

V

π π π π

π π π π π π−

= +

=

∫ ∫

∫ ∫

受限于

( )1 1

0 0

( ); ( )( ) ( ) ( ) ( )2 2 1 Pr( )g ff g g f

E EE E E Ed dπ ππ π π π− −∫ ∫

当用上述方法解决，所有激励相容和临时个别合理性约束条件得到满足，在一定的约束条件

约束下最优化。目前可以在复式拍卖中实施目标函数。

-复式拍卖中实施次优


105

交易的发生，如果 g fη η≤这一项意味着政府与矿业公司间交易租金水平为

( ); ( )2

( )g ff gE EH π π

η η+=

。这种情况下，其中复式契约中现有的贝氏均衡，政府和公司给

出的解决方案中最好的反应函数： 1

0

( )

( )

( )

( )

max ( )2

,

max ( )2

f

g

g

f

fg

g

f

gf

g ff

g fg

E

E

E

E

f d

and

f d

ηηη

η

ηη

π

π

π

π

η ηη

η ηη

+ −

+ −

∫

∫

假设矿业公司同意支付租金( ); ( )( )g fE EH π π

如政府所称；由此暗含政府和矿业公司实际上

对可耗减的资源有着相同的估值。

因此，矿业运营商声明要支付给矿主的租金 f gη η=

所以：

( )

( )

1 1

0 0

( ) ( )

( ) ( ) ( ) ( )

( )( )

max ( ) max ( )2

,

max ( ) max ( )2 g g

g f g f

f

f fg g

g g

f f

g gf f

f

g ff g f

g fg f gE E

E E E E

EE

f d f d

and

f d f d

η ηη ηη η

η η

η ηη ηπ π

π π π π

ππ

η ηη η η

η ηη η η

+ − = −

+ − = −

∫ ∫

∫ ∫

政府与矿业公司尝试最大化其剩余价采取其双方通过密度函数投标分发( )

i ifη η.

运用莱布尼兹定则

-政府剩余价值

11 1 1 1

0 0

( ) ( )1( ) ( ) ( )

2 2 2g g g

g g g

f f g g g gg f g f

f f fE E dd d df f Fη η η

π π ηη η η η η ηη η η η + +

− = − − ∫ ∫ ∫ ∫

所以，一得到关于政府最大化计划的一阶条件；

( )( )1( ) 1 ( )2gg f g f gE f Fπη η η − = −

-对于矿业公司剩余价值：

11 1

0 0 0 0

( ) ( )1( ) ( ) ( )

2 2 2f f

f f

g

g f g fg f g f g f g g f fE Ef d d F d F d

η η

η

π πη η η η

η η η η η η η + +

− = − + ∫ ∫ ∫ ∫

所以，一得到关于矿业公司最大化计划的一阶条件:

( )( )1( ) ( )2f f g f g fE f Fπ η η η− =


106

此外，对于候选平衡策略一包含：

-相对于政府：

( )3 1 3 1( ) Pr( ) Pr2 8 2 8ff g f g g gEF πη η η η η = ≤ = ≤ − = −

所以：

'( ) 3( ) ( )2f

f gg f g

g

dFF f

dη

η ηη

= = =

代替这个值的累计分布( )f gF η

和密度分布( )f gf η

在政府的一阶条件，一得到：

( )1 7 3 3 ( )2 8 8 2 gg g E πη η − = −

所以，

( )2 13 4gg E πη = +

这是政府的最佳策略，也是实际的贝叶斯纳什均衡。

-相对于矿业公司：

( )3 3 3 3( ) Pr( ) Pr2 8 2 8gg f g f f fEF πη η η η η = ≤ = ≤ − = −

又因为：

'( ) 3( ) ( )2g

g ff g f

f

dFF f

dη

η ηη

= = =

代替这个值的累计分布( )g fF η

和密度分布( )g ff η

在政府的一阶条件，一得到：

( )1 3 3 3 ( )2 2 8 2 ff f E πη η − = −

所以：

( )2 13 12ff E πη = +

这是矿业公司的最佳策略，也是实际的贝叶斯纳什均衡。

租金在 fη和 gη 之中，实际上相对其他来说是最佳的响应函数，也因为其源于贝叶斯纳什均衡。

在这一平衡当中，交易发生在一租金水平中：

fη ≥gη = ( ) ( )( );g fE EH π π

.

更确切地说，是在

1( ) ( )4f gE Eπ π≥ +或

1

4;( ) ( )( )( ) g ff E EE H π ππ ≥ +

五最终报价仲裁中的次优契约

这一分析紧随罗伯特-吉本斯的最终报价仲裁步骤，政府会提出仲裁来调节诉讼，作为第二

策略。事实上，斯瓦尔巴德采矿法规条款对于一些发展中国家为解决诉讼问题的方案中有一定的

法律倾向。

试假设，政府和矿业公司同时提出报价，分别用 fη和 gη 表示。

假设仲裁者的理想解决方式，他期望征收 kη


107

假如 f gη η<，仲裁者选择 fη

，如果( ; )k f gHη η η<

；并选择 gη 如果

( ; )k f gHη η η>。

仲裁者知道 kη 但是另外两方不清楚这一点。政府和矿业公司两方认为 kη 是由累计概率分

配中而来的任意分配，表达为( )kF η

，与之相关的概率密度函数表达为( )kf η

。

五.1.矿主与矿业运营商的想法

政府与矿业公司相信的概率 Prob { fηchosen} = Prob {

( ; )k g fHη η η<} =

( ; )g fF H η η 与

Prob { gη chosen} = Prob {( ; )k g fHη η η>

} = 1-( ; )g fF H η η

因此，期望租金的结算价：

fηProb {

( ; )k g fHη η η<} + gη Prob {

( ; )k g fHη η η>} =

( )( ; ) 1 ( ; )f g f g g fF H F Hη η η η η η + − 假设矿业公司想要将仲裁员要求的租金结算价值最小化，政府要将其最大化，这一对出价：

* *( );g f

η η是纳什均衡中在矿主与矿业运营商之间的协商，

*f

η作为解答；

{ }* * *min ( ; ) 1 ( ; )g g g

ff f fF H F H

ηη η η η η η + −

*g

η作为解答：

{ }* * *max ( ; ) 1 ( ; )f f f

gg g gF H F H

ηη η η η η η + −

租金供应对

* *( ; )g f

η η作为解决这些优化问题的一阶条件。

* * * * * *1( ) ( ; ) ( ; )2g f g f g f

f H F Hη η η η η η − =

和

{ }* * * * * *1( ) ( ; ) 1 ( ; )2g f g f g f

f H F Hη η η η η η − = −

说明：

* * 1( ; )2g f

F H η η =

即,报价的平均值等于仲裁者首选结算值的中数。对于上述最佳化问题替代的平均值的一阶

条件，我们得到:

* *

* * * *1

( ; )( ; )

1

g f

g f g fHHf f

η ηη η η η−− = =

即，作为仲裁员优先解决方案，两者间报价的差距必须等于相互间的密度函数值。

五.2 仲裁者优选解决方案

假设，仲裁者优选解决方案平均分布，与中数 m和方差2σ 在这种情况下密度函数为：


108

( )[ ]2

2

2

1

2

2

1 k

k

mf e ηση

πσ

−−

=

正态分布对称绕其中数; 分布的中位数等于分布的中数。

所以：

* *( ; )g f

H mη η =

* * 21 2( )g f f m

η η πσ− = =

和

因此纳什均衡出价为：

2* * *( ; )

2g g fH πση η η= +

和

2* * *( ; )

2g ff H πση η η= −

在纳什均衡之中，政府与矿业公司的报价集中在仲裁者预期的优选的解决方案之中* *( ; )g f

H η η，也由于仲裁者优选解决方案

2σ 双方不确定性的出价值差距的升高。

六、结论

贝林加（加蓬 TOTAL）铁矿项目是提取资源合同的一个例子。从 2002 年到 2007 年，加蓬政

府和加蓬 TOTAL之间的贝林加铁层的谈判并没有导致双方的协议。

蓬政府指出矿业公司，没有真正的环境研究。而在 2002年加蓬政府根这家公司签署了公约。

公约签署了五年后，政府委员会估计，环境风险太大政府决定重新谈判提取合同，这次将开采周

边地区从 7700 平方公里减少到 600 平方公里。并提高了环境税收，要求公司具有较大份额的红

利; 这种情况由上面述的模型研究。加蓬政府战略是信息不对称的一种典型。另一边，矿业公司

（加蓬 TOTAL）利用了加蓬共和国第 69 条和 83 采矿守则。据这种守则本有权利前景、提取铁矿

石，没有任何监测控制。上述的理论模型已经提出一个事实也就是，信息的不对称性的风险是够

高的。因此，资源开采合有着相反的选择。双方信息不对称的资源提取合约的模型认为，这样的

情况会带来效率低下的后果。5 年以来，加蓬政府和矿业公司没找到一个有利的协议，这是无效

率的一个形状。在这种情况下，模型提出为了避免这种失真，开始进行谈判时政府应该要求租金

的平均水平并威胁放弃谈判如果对方不愿意这样做。自 2008 年以来，还有就该项目还达到合议

的要求。加蓬政府已要求将其在加蓬 TOTAL 具有的 10％股份提高至 30％。理论模型有助于我们

理解政府的份额增加。 30％是加蓬政府需要的平均以正确失真。它知道，矿业公司加蓬 TOTAL

明知资源层领域，因此将自己的出价增加到 20%。但是发展中国家面临的开采提取合同的无效率

不仅来自双方信息不对称。多边信息不对称也是这个问题的根源之一。为了避免一个国际资源开

采公司的垄断，发展中国家向几家专门公司提供一些原材料、勘探和开采探矿目的是创造竞争环

境。在这种经济形势下，未知值的自然资源开采公司的竞争如何对政府最优资源开采合同带来影

响。这时我们要关注的一个核心问题。

援引 Robert Gibbons, ISBN: 0745011594, ISBN13: 9780745011592, 288 pages, paperback, Pearson Higher Education in 1992, “A Primer in Game Theory” (Paperback) Mathias Dewatripont, Patrick Bolton, (Hardcover, 2004), “Contract Theory” Bernard Salanié, second edition, ISBN-10: 0-262-19525-9, ISBN-13: 978-0-262- 19525-6, March 2005, “The Economics of Contracts: A Primer “(Hardcover) Myrick Freeman III, second edition RFF Press, November 1, 1993, “The Measurement of Environmental and Resource Values: Theory and Methods “ N.V. Hritonenko, Yuri P. Yatsenko, Springer US (February 19, 2010), “Mathematical Modeling in Economics, Ecology and the Environment “(APPLIED OPTIMIZATION Volume 34) Tom Tietenberg，Lynne Lewis, Addison Wesley; 8 edition (July 31, 2008), “Environmental and Natural Resource Economics” Drew Fudenberg, and Jean Tirole, ISBN-10:0-262-06141-4, ISBN-13: 978-0-262-06141-4, August 1991


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604 pp., 139 illus “Game Theory” RB Myerson, MA Satterthwaite - Journal of economic theory, 1983 – Elsevier, “Efficient mechanisms for bilateral trading” R.G. Lipsey& Kelvin Lancaster, the Review of Economic Studies, Vol. 24, No. 1. (1956 - 1957), pp. 11–32, “The General Theory of Second Best” Nguyen ManhHunga, Jean-Christophe Poudoub, ‘’Optimal resource extraction contract with adverse selection’’, Received 19 January 2005; revised 17 July 2006; accepted 19 July 2006. Available online 6 October 2006. Myerson, R. (1981). Optimal auction design, Mathematics of Operations Research, 6(1), 58–A seminal paper, “introduced revenue equivalence and optimal auctions” McAfee, R. P. and J. McMillan (1987), "Auctions and Bidding", Journal of Economic Literature 708–47. A survey. Klemperer, P. (Ed.). (1999b). The economic theory of auctions. Edward Elgar. A collection of seminal papers in auction theory.


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Lean Thinking Literature Review and Suggestions for

Future Research

Haritz Gorostidi Martinez (Corresponding author)

Glorious Sun School of Business and Management, Donghua University West Yan An Road 1882

Wang Xue Lu

Shanghai First Maternity and Infant Hospital, 536 Changle Road Jing’an, Shanghai 200040, China


Abstract The research provides a literature overview from a timespan of more than 60 years with articles historically and thematically organized about the application of “Lean thinking” (LT) concept and the main research findings through different industries. Lean thinking is an important but yet still under researched aspect of strategic management. By collecting research records from ISI web of knowledge naming directly the lean thinking issue; 34 Web of science records, 10 Medline records and 2 Chinese citation database records were found. Results show that the main focus areas on lean thinking researches are mainly applied in health care industry (with the 48% of the collected records) followed by manufacturing industry (17%), construction (10%), product development (7%), training and education (7%) and supply chain (2%). Other industries (9%) are also starting to apply lean thinking philosophy according to the particularities of their domain. We find research gaps and provide directions for further investigation. Key words: Lean thinking, strategic management, health care 1. Introduction

The application of lean thinking has made a significant impact both in academic and industrial circles over the last decade, at the same time, fostered by a rapid spread into many other industry sectors beyond the automotive industry, there has been a significant development and "localization" of the lean concept (P. Hines, Holwe, & Rich, 2004). Lean is a revolution, not just about the using of tools, or changing few steps in manufacturing processes, it's about the complete change of the businesses; how the supply chain operates, how the directors direct, how the managers manage, how employees or people go about their daily work, in short words, every aspect of the business (Czabke, Hansen, & Doolen, 2008; Melton, 2005).

The background of lean thinking is based in the history of Japanese manufacturing techniques which have now been applied world-wide within many types of industry (Melton, 2005). As prescribed by Womack and Jones, LT principles have been successfully applied to manufacturing and operations environments. Case studies as well as research literatures have been published extensively (Haque & James-Moore, 2004). Its advantages and advancements have turned into a new generation guidance thinking of management revolution since the 21st century (Wang, Qi, & Ieee, 2008). Even though initially lean thinking was mainly applied within the manufacturing industry (Czabke, et al., 2008; Davies & Greenough, 2001; Fearne & Fowler, 2006; Haque & James-Moore, 2004; P. Hines, et al., 2004; Melton, 2005). Lean thinking has also been introduced in the health care service industry helping to get rid of wasteful steps and fasten up patient flow problems (Ben-Tovim et al., 2008; Ben-Tovim et

International Journal of Business & Management June 2013 VOL.1, No,4


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al., 2007; Holden, 2011; Joosten, Bongers, & Janssen, 2009; King, Ben-Tovim, & Bassham, 2006; Mazzocato, Savage, Brommels, Aronsson, & Thor, 2010; Young & McClean, 2008). 2. Literature review 2.1. Manufacturing lean thinking

Maintenance practices within manufacturing industry can cost companies between 30-50% of their production, to avoid that burden, an investigation on the level of presence of LT within the maintenance domain was done, resulting in a summary of maintenance techniques (Davies & Greenough, 2001). Despite successful "lean" applications in a range of settings, lean approach has also been criticized on many levels such as the lack of human integration or its limited applicability outside highly repetitive manufacturing environments. The resulting lack of definition has also led to a confusion and fuzzy boundaries with other management concepts (P. Hines, et al., 2004). Lean thinking philosophy can enable any enterprise including a power plant to run at maximum efficiency or constructing a lean production information system, and produce top-quality products at the lowest cost (Meng, Liu, & Fan, 2007; Motley, 2004). LT can also help secondary wood product manufacturers become more profitable, improving the marketing process, customer services, new product development process and customer satisfaction. There are challenges however related to communication. Its critical to communicate the vision and values of lean thinking to all the employees, making them understand and accept the LT benefits (Czabke, et al., 2008). Traditional applications of lean thinking are also believed to be limited in production, manufacturing, and just in time projects. These traditional lean thinking have some limitations and that is why a “Total Life cycle Lean Thinking” should be promoted through the total life cycle of the product (Wang, et al., 2008).

Using lean manufacturing methodology in a remanufacturing industry, a disassembly and reassembly product scheme with nine scenarios of material and information flows processes were offered for future managerial advice (Kanikula & Koch, 2010). A boat factory that would put the lean thinking into practice, proposing the most appropriate concepts was also shown, taking from case study of Finish LT pioneer boat factories (Ehrs, Rymaszewska, & Pekkala, 2012). 2.2. Product Development lean thinking

Womack and Jones’ principles of lean thinking were applied to the New Product Introduction (NPI). In particular, the five lean principles; specify value, identify the value stream and eliminate waste, make the value flow, let the customer pull the process and pursue perfection in 40 aerospace companies. Finalizing with a summary of the key methods and tools that enable LT in NPI (Haque & James-Moore, 2004).

A study in product development in a traditional sector such as the furniture industry two case studies were analyzed focusing on the organization to balance functional expertise, establish customer defined value, front load the product development process and standardization tools. The results in new product development in furniture study revealed an inefficient flow of information in all phases of the product development leading to numerous sources of waste (Medeiros, Seibel, Jorge, Fernandes, & Asme, 2010). One of the latest studies addresses sustainability and environmental issues from the product development design state through its product life cycle, identifying a baseline on developing tools for future research (Sorli, Sopelana, Salgado, Pelaez, & Ares, 2012). 2.3. Construction lean thinking

To use lean thinking discretely and indiscriminately in an environmental project with high levels of complexity and uncertainty can produce a potential danger. Some attempts as removing capacity in transportation, stockholding and on-site labor can be logical and cost-saving but others can result in reduced levels of responsiveness and flexibility. Common thinking to the application of lean principles to the construction industry is challenged and called for awareness of the project-centric nature of the construction industry and the application of LT on it (Fearne & Fowler, 2006).

The aim of presenting a study discussing the role of rapid prototyping in a seamless lean process from the concept design (3D CAD models) to the construction of a building was also proposed in the fields of rapid manufacturing and automated construction techniques (Celani, Granja, & Pinheiro, 2008).

To increase productivity in installation of water and sewer services in metropolitan construction projects, avoiding delays workflow must be improved (Kung, Alex, Al-Hussein, & Fernando, 2008). The recognition of the importance of sustainable construction by the government gives impulse to the investigation of a sustainable construction model based on LT. This made construction schemes more


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sustainable, acceptable, saving resources and costs of the projects, benefiting society, environment, as well as cutting the construction cycle and enhancing the building quality (Yan, Wang, Zhang, & Zou, 2008). 2.4. Supply chain lean thinking

Food value chain analysis (FVCA) based on lean paradigm has been applied to eight different value chains in the UK. System theory was used to evaluate FVCA, based on four sub-system goals and values; logistics, human resources and management structure, resulting in a positive potential logistics benefits along the chain. The two most important implementation issues proved to be the intercompany alignment of other sub-systems and chain organizational stability through time (Simons & Taylor, 2007). 2.5. Health care service lean thinking 2.5.1. Helping to eliminate wasteful activities

Adopting the “Lean” management technique can help hospital staff to eliminate wasteful activities (Castle, 2007). Bone and brain metastases treatment for example should begin as soon as possible and the operational improvement method based on lean thinking could help. LT’s main principles improved the processes, cutting the number of individual steps to begin treatment. The patients receiving consultation, simulation and treatment on a day, rose form 43% to 95%, improving the overall delivery of clinical care to bone or brain metastases patients (Kim, Hayman, Billi, Lash, & Lawrence, 2007). In health care, lean thinking has emerged as a comprehensive approach towards improving processes in the diagnostic, treatment and care activities with cost containment results, however it can be used also as an approach to effective organizational change (Tsasis & Bruce-Barrett, 2008). One of the concepts used for redesign health care delivery is lean thinking; however lean often leads to resistance due to its lack of high quality evidence supporting lean premises. The need to use the original lean tools may be limited because health care may have different instruments and tools already in use that are in line with lean thinking principles. LT has the potential to improve health care delivery but there are some methodological and practical considerations that need to be taken into account otherwise lean implementation will be superficial and fail, adding the existing resistance and making it difficult to improve health care for the long term (Joosten, et al., 2009). Lean thinking encourages service providers to focus on value as defined by the customer and the elimination of waste that impedes the flow of value. The following factors are key for Lean project success: expert guidance for initial efforts, leadership in the form of clinical champions, senior management support of the improvement work, frontline worker engagement in mapping out "current state" processes, identifying waste and designing an improved "future state," using metrics to develop and track interventions, and defining a realistic project scope (Kim, Spahlinger, Kin, Coffey, & Billi, 2009).

Disruption affecting surgical process can be identified and reduced addressing firstly these questions; (1) what elements of information flow govern the implementation of an existing activity within surgical process? (2) What information is needed from other activities before starting and completing the existing activity? (3) How can the interdependencies between disruption events be identified? (Al-Hakim & Su, 2010). Lean thinking has been applied successfully in a wide variety of healthcare settings. But while lean theory emphasizes a holistic view, most cases report narrower technical applications with limited organizational reach. To better realize the potential benefits, healthcare organizations need to directly involve senior management, pursue value creation for patients and other customers, and nurture a long-term view of continual improvement (Mazzocato, et al., 2010). Actor network theory (ANT) is useful for explicitly tracking how organizational players shift their positions and network allegiances over time, and for identifying objects and actions that are effective in engaging individuals in networks which enable transition to a Lean process (Papadopoulos, Radnor, & Merali, 2011).

In a study of process design comparison in lean thinking framework, exploring efficiency in terms of lead times, visits and costs, the environmental context and operational focus primarily influenced the process design of cataract pathways. Hospitals can use these systematic benchmarking data to decrease the frequency of hospital visits, lead times and costs (Van Vliet et al., 2011).

There is experience in hip fracture patients after applying LT value-stream approach. Using available resources in an efficient manner, there is a significant reduction of 5%-9.3% in the 30 day and overall mortality after its implementation (Yousri, Khan, Chakrabarti, Fernandes, & Wahab, 2011).

The new approach of identifying areas for change in an ongoing nurse-led liaison service for older adults resulted in improving access to mental health services for elderly medically ill inpatients and


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improved quality of their overall care (Atkinson & Mukaetova-Ladinska, 2012). Redesigning the pathway for un-sedated patients, using lean thinking transformation to focus on patient-derived value-adding steps, wastes was removed and creating a more efficient process. In the primary unit the patient pathway reduced from 19 to 11 steps with a reduction in the maximum lead time from 375 to 80 min following the pretended lean thinking transformation (Hydes, Hansi, & Trebble, 2012). Lean thinking principles were also utilized to set up “One-stop cholecystectomy clinics” at which patients underwent the surgical and the preoperative assessment during the same visit. This resulted on a significant reduction in the number of patient visits as well as the waiting time to surgery. It can be highlighted too, that patient care can be improved by good team working (Siddique, Elsayed, Cheema, Mirza, & Basu, 2012).

A pilot study in a hospital showed that many unnecessary diagnostic tests were performed routinely. To reduce costs of unnecessary diagnostic tests, with the introduction of few simple measures to improve awareness among the physicians, LT led to a significant reduction in the diagnostic costs in the department of internal medicine (Vegting et al., 2012).

In a cardiology department’s investigation to adopt and adapt lean, its adoption varied with the degree to which the staff saw a need for change. Work redesign and teamwork were also found helpful to improve patient care (Ulhassan et al., 2013). 2.5.2. Lean thinking to help patient flow

The flow of patients into groups of patients cared for by a specific team of doctors and nurses, and the minimizing of complex queues in emergency department by altering the practices in relation to the function of the Australasian Triage Scale method improved patient flow, decreasing chances for overcrowding (King, et al., 2006).

Redesigning care has not been aimed at changing the specifics of clinical practice but rather has been concerned with improving the flow of patients through clinical and other systems (Ben-Tovim, et al., 2007). The Flinders medical center program was on improving the flow of patients through the emergency department, but the program quickly spread to involve the redesign of managing medical and surgical patients throughout the hospital, and improving major support services. The program had three main phases: "getting the knowledge"; "establishing high-volume flows"; and "standardizing and sustaining". Results showed that the redesigning care program enabled the hospital to provide safer and more accessible care during a period of growth in demand (Ben-Tovim, et al., 2008). In the 7th people’s hospital of Shanghai, the business process of an outpatient appointment and queuing system was improved with a system of operation efficiency and patients waiting time, on the basis of lean thinking (Xiangpeng, Rui, & Zhibin, 2008).

There is still scope for methodological development by defining three themes associated with the operational, the clinical and the experiential value (Young & McClean, 2008). Emergency departments (EDs) face problems with crowding, delays, cost containment, and patient safety. After the implementation of lean in a study, patient care improved, decreasing the length of stay, waiting times etc. There were some indications of positive effects on employees and organizational culture too as employee involvement, management support, and preparedness for change (Holden, 2011). Bottlenecks in patients journeys trough an emergency department were evaluated with reference to a lean thinking value-stream map (Ryan et al., 2013). 2.6. Training and education lean thinking

A lean course arrangement model of a university under the guidance of lean production thinking was proposed. The aim was to solve the time conflict in the election courses proposing a “same group different time, same class different heads” course arrangement model. The basic idea was not arranging schedule ranked by the same group courses at the same time, but ranked by different group of courses (Li & Liu, 2008).

A rational for the design and development of a video simulation used to teach lean thinking and workflow analysis was judged effective because it allowed students to visualize a real-world process, contemplate the scenes depicted in the video along with the concepts presented in class in a risk-free environment, developing hypotheses about why problems occurred in the workflow process and therefore develop solutions to redesign a process (Campbell, Gantt, & Congdon, 2009).

A case study described one residency program's educational curriculum to provide foundational knowledge in quality improvement QI and patient’s safety PS to all its trainees. The aim was to highlight a resident team based project that apply principles of LT to evaluate the process responding to an in-hospital cardiopulmonary arrest providing residents with a practical experience but also presenting an opportunity for trainees to align with the health system's approach to improving quality and safety


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(Kim et al., 2010). 2.7. Other Industry LT

A tentative legal supply chain model was explored in how lean thinking can be successfully extended into the legal sector, looking where and how the implementation of LT could start, and the modifications required to its success (Peter Hines, Martins, & Beale, 2008).

Lean government is part of a growing trend of management tools designed to lower costs and improve efficiency of government operations. However, the transference of lean techniques from the private sector to the public sector requires a careful balancing of administrative law and management labor relations (Scorsone, 2008).

Lean methods are difficult to implement in companies from the distribution sector due to the volatility of customer demand, the high degree of human participation and the demanding mechanical and repetitive activities in retail and storage activities. A methodology for change management to adopt lean practices in distribution centers was presented proving it suitable for establishing a lean culture in these type of companies and resulting in good outcomes in terms of productivity, employee attitudes and participation (Jaca, Santos, Errasti, & Viles, 2012).

Waste management using a sample of small and medium sized hotels in 19 European countries was researched naming the LT seven value mapping streams: Process activity mapping, supply chain response matrix, production variety channel, quality filter mapping, demand amplification mapping, decision point analysis and physical structure with particular reference guest reservation and reception. It was found that hotels do apply value mapping techniques, and similarities were found in hotel operations regardless of location. It is suggested that every value stream mapping technique (except production variety funnel and supply chain response matrix), can have a high impact on detecting and eliminating waste both upstream and downstream of the value chain. (Vlachos & Bogdanovic, 2013). 3. Methodology

The research plan was carried on analyzing the concept of lean thinking as a business strategy philosophy as well as to determine the focus areas of this concept. The research review findings from all available research articles on lean thinking. After general literature search, it was decided to use “lean thinking” term as the key phrase to find articles directly related with lean thinking business philosophy avoiding “lean”, “lean management” or “total lean management” concepts. Specific search was created by the use of limiting and refining search criteria. Limiting criteria was: ISI Web of Knowledge, publication period 1950-2013 and “lean thinking”. The refining criteria on the search were: social science as research domain and academic articles as document types sorted by relevance. It was decided to produce data sheet consisting of the key focus areas of the fields of interest using Endnote 4X software. After reading the titles, abstracts and conclusions, the following articles were included in the review; from a timespan of 63 years, all those mentioning directly the lean thinking term in their title, from the databases; Web of Science, Inspec, Derwent Innovations Index, Chinese Science Citation Database and Medline. 4. Findings and discussion

The search resulted in 46 papers from year 2001-2013, 34 Web of science records, 10 Medline records and 2 Chinese citation database records covering a wide range of areas. 2007, 2008 and year 2012 showed the highest publication rate on lean thinking, with a significant publication rate on 2008 (Appendix a). Findings from main focus areas, from highest to lowest show: Health care (with a 48% of found records), manufacturing (17%), construction (10%), product development (7%), training-education (7%) and supply chain (2%). Other industries (9%) are also attempting to implement or improve LT within their domain; Government administrations, distribution centers, legal sector and hospitality industry (Appendix b). It seems that apart from the expected manufacturing LT publications, an especial big amount of research has been held in health care service industry LT，fields like supply chain, hotel service, distribution, legal sector, universities, government have just started. Other new fields could be included in the future. LT research literatures have been published extensively. Its theory and practice has had a significant impact as well as a rapid spread into many industry sectors considering it as a new generation guidance thinking of management revolution. It implies a complete change in all terms inside a business and it’s considered as “the lean thinking philosophy”. It has been successfully applied to manufacturing and operations environments as well as improving patient care in health services, indicating also positive effects on organization culture, management support and readiness for change from employees. Using video simulations has been judged effective for LT


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trainings. Different type of industries and sectors as health care services, shipping industries, legal industry,

government and distribution companies have started to implement LT, but adapting it to their specific industry characteristics.

On the negative side, adapting LT into each industry as well as establishing lean culture takes time. There have been authors reporting difficulties in applying lean outside highly repetitive manufacturing environments, the lack of human integration, and the lack of LT definition leads also to confusion with other management concepts. Some industries might be applying some instruments and tools already in lined with lean thinking principles. There have been reported also cases that found challenge related to communication and its understanding, making it difficult accepting a lean thinking business strategy among employees. Also a total live cycle lean thinking should be stressed considering all the processes through the total life cycle of the product or service. In short words, the focus for future research should be to keep the path of specific researches for each industry taking into account their particularities so that LT can be implemented in a customized way.

Appendix

a) Lean thinking: Year Wise

b) Lean thinking: Literature Review

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Hines, Peter, Martins, Ana Lucia, & Beale, Jo. (2008). Testing the boundaries of Lean thinking: Observations from the legal public sector. Public Money & Management, 28(1), 35-40.

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An Insight of Strategies for improving Public Perception on Life Insurance Policies in Kenya: A case study of Nakuru

Municipality

Cheruto Roselyne

Transnational Bank, City Hall Way Transnational Building 2nd floor P.O BOX 34353 - 00100 Nairobi, Kenya

Accepted 6 July, 2013

Abstract Insurance companies registered in Kenya have provided a wide range of insurance covers to enable Kenyan’s have financial control of personal risk. However life insurance in Kenya continues to experience various challenges, key among them poor public perception, which is attributed highly to low penetration levels, therefore there is need to explore ways to curb these challenges and exploit the benefits of life insurance in the economy. The study was meant to investigate possible strategies that can be used to improve public perception on life insurance in Kenya. The specific objectives included: to determine the communication strategies that can help improve public perception on life insurance in Kenya; to establish the ethical practices that can help boost the public perception on life insurance in Kenya and to determine community involvement strategies that can help raise the public perception on life insurance in Kenya. The key variables of the study were communication strategies, ethical practices and community involvement strategies. The study thus adopted a descriptive survey technique where life insurance sales agents and secondary school teachers from Nakuru municipality were selected to represent the public. Stratified random sampling method was used to select the elements of the study sample. The target population for the study comprised of 82 sales agents and 303 teachers in public secondary schools. From the target population, a sample size of 120 was selected comprising of 45 sales agents and 75 secondary school teachers. Data was collected by use of questionnaires designed by the researcher and based on the study objectives. The data was then analyzed using descriptive statistics such as percentages, frequencies, mean and chi-square analysis. The study revealed that the public perception of life insurance companies remained low based on opinions from both agents and the teachers. Further, there existed a significant relationship between the communication strategies adopted, ethical practices and level of involvement in community activities and the public perception of life insurance companies. These could therefore be used as strategies for effectively changing the public perception by life insurance companies in Kenya, which would also change the public perception. However further studies should be done on factors contributing to the ethical practices in life insurance companies and also to determine the choice and application of communication strategies for life insurance companies. Keywords: Communication Strategies, Community involvement, Ethical practices, Public perception and life insurance.

1. Introduction Insurance in Kenya is closely related to the historical emancipation of Kenya as a nation (Throup,

1998). With the conquest of Kenya as a British colony, settlers initiated various economic activities which required insurance cover. In the forty years after independence, Kenya’s insurance industry had flourished and by the year 2003, check recent statistics e.g. 2010, the country had 41 registered insurers: 15 transacting general insurance business, 2 transacting life insurance business while 24 were composite insurers transacting both life and general insurances (Rand,2004). By world’s standards, the Kenya insurance market is very small in terms of premium income. However, it is one of the leading markets

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in Africa occupying the 7th position going by the 2003 statistics published in sigma. It ranked fourth in terms of insurance penetration after South Africa, Mauritius and Zimbabwe with a rate of 0.81 % (life insurance and 2.28 % non-life insurance (Olotch, 2006).

Insurance companies registered in Kenya have provided a wide range of insurance covers to enable Kenyan’s have financial control of personal risk. Nevertheless, only a small percentage of Kenyans have personal insurance covers and the insurance premiums contribute only 3 percent to the country’s Gross Domestic Product (GDP) instead of the ideal 7 percent (Kimura, 2000). Consumers’ ignorance has contributed significantly to the negative attitude towards insurance (Kieti, 1998). Kowour (nd) posits that in the more advanced economies characterized by consumer awareness and sophistication amongst other positive socio-economic indicators, virtually everyone is insured against all insurable risk. In the 3rd world countries majority of the people lack financial resources and the little they have is for basic needs. In many developing countries, the population is divided into rich and poor, with the rich having plenty of financial power while the poor are struggling to meet their basic needs. In the developing countries, education is very low and hence many people lack knowledge of health care and life insurance policies (Bert, 2009). The lack of education and basic needs to be met, as well as governments’ efforts in other national areas make these countries infertile territory for life insurance companies

In Kenya, issues with insurance companies abound. A great challenge for insurers is the lack of information that the population has about insurance products and the trust issues due to the same lack of information. There are also issues of fraudulent companies and scams, as well as issues of not paying claims and mismanagement of insurance companies. This and other issues have hampered insurance companies in the Country and there are other government issues and license issues as well. Although there are insurance laws in Kenya, the biggest challenge continues to be how to convince a struggling population that they need a product for which they have no money, no education, and certainly have a negative perception about (Bert, 2009).

Perception influences individuals to select, organize, and interpret the input from their senses to give meaning and order to the world around them (Elsbach, 2006). Katz’s (1960) functional approach to attitude change argues that both attitude formation and change must be understood in terms of the functions that attitude serve. “As these functions differ, so will the conditions and techniques of attitude change” (Severin & Tankard, 1997). For the sake of clarity, the term attitude has been substituted with perception. In order to effect change, the right strategies have to be used; ones that would help the prospect to appreciate the need for an insurance cover. This calls for some level of involvement with the prospect. Smith (1992) opines that for involvement to be attained, using a common language, sharing experiences, participation in culture, and understanding beliefs of the person we intend to engage with are necessary. This implies that, first and foremost, insurance companies must strive to understand the prospect’s perception of the concept of life insurance and then use the right strategies to try and influence their perceptions positively. The term strategies here refer to the methods or plans that insurance companies must implement so as to enhance positive public perception on life insurance products.

Several studies have found evidence that development of the insurance sectors is related to economic growth and key elements in the economic development of a country (Ward & Zurbrueg, 2000; Webb, 2000 & Soo, 1996). Beck and Webb (2003) established that insurance companies play an important role in the financial sector. It is thus imperative for Kenya which has gone through high inflation and slow economic growth to propel life insurance segment in order to increase financial stability that will stimulate growth of domestic output, minimize the rate of inflation, reduce the rate of unemployment and attract investment needed to boost economic development.

According to Faida Securities, (2007), Kenya is still under-insured at a penetration rate of 2.6% compared to India and South Africa with penetration rates of 3.7% and 14.7% respectively. Faida securities continue to posit that the major challenge for the insurance industry in Kenya is to increase penetration in the life sub – sector. Association of Kenyan Insurance (AKI) (2008) carried out a survey to understand the uninsured market unique needs and establish the best way in which this market could be insured. According to Olotch (2006), there were only 367,059 individual life policies at the end of the year 2006 in a working population of 8.74 million (about 4 % coverage). The main reasons for lack of insurance cover were found to be: Lack of awareness on products, low income levels, perceived low rate of returns for policies, cumbersome claim settlement procedures, lack of trust in the insurance industry and expensive premiums. As pertains to image, AKI observed that the insurance industry is


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affected by the persistent poor public image which has caused distrust among potential customers. In addition, according to the latest annual AKI report, the insurance industry in Kenya continues to experience various challenges, key among them the poor public perception, which has led to low penetration levels of 1.76 per cent and 0.87 per cent for non-life and life insurance respectively (Microfinance Africa, 2010). Opiyo (2011) notes that many people perceive life insurance cover as devoid any tangible benefits for the insured while alive since all the benefits are accessible upon the demise of the insured.

It can thus be noted that low penetration of life insurance in Kenya is caused by reasons ranging from prospects ignorance, negative public perception and economic reasons such as low income levels and expensive premiums. While several studies have dealt with the relationship between insurance and economic development and the identification of factors limiting insurance investment, no studies available to the researcher have been found dealing exclusively with strategies of boosting public perception on life insurance in Kenya. This study hence seeks to fill this gap in research by investigating possible strategies of improving public perception on life insurance in Kenya using the case of life insurance companies in Nakuru town. 2. LITERATURE REVIEW 2.1 Life insurance in Developed world

A report released by Price Water house Coopers [PWC] (2012) dubbed life insurance 2020: competing for a future indicated that, in the recent past life insurance in the mature markets has been moving in different directions. Demand for life cover has been slowing down. In the US, the number of life insurance policies was lowest in 2010 -2011 for the past 50 years (Charlotte, 2011). The decline in demand for life insurance in the mature markets is attributed to the mounting pressure on the margins and disillusionment created by the financial crisis which has dented public trust and fundamentally changed customers risk appetite and perceptions. This is presenting a challenge to life insurance companies on how to regain public trust and reengage with customers. A study by OECD (2000) indicates that life insurance is still fairly undeveloped in the Baltic States, as in all Europe’s emerging markets, since in 1998 the penetration of life insurance (direct gross premiums / GDP) was only 0.43% in the Central and Eastern European countries and the new independent states. Premiums ranged from 0.06% in Romania to 0.90% in Slovakia and 0.81% in Slovenia. In comparison, in 1998 the OECD countries devoted 4.58% of their aggregate GDP to life insurance. The study further indicates that in 1998, life insurance accounted for only 16% of total premiums in the Central and Eastern European countries and the new independent states, the percentages in each country ranging from nearly 30% in Russia and Slovakia to less than 2% in Ukraine. In comparison, life insurance accounted for 54.34% of total insurance premiums in the OECD countries in 1998. In these countries, the low volume of life insurance business was attributed to the role played by government provident schemes which posed competition to life insurance policies. 2.1 Life Insurance in Africa

The situation on life insurance in Africa is also different despite the important role played by life insurance and its ability to mobilize and channel savings. According to UN (2007) the life insurance industry in Africa is characterized by regional peculiarities. The South African life insurance industry is highly developed and has always been in the forefront of life insurance. In fact, some of the first linked investment products (e.g. insurance products where a specified part of the premium is invested in securities and funds) originated in South Africa. In comparison, the life insurance sector in Anglophone East and Southern Africa is significantly underdeveloped. In some of these countries, the majority of the business relates to pension investment, coupled with group life risk cover.

Low income people in developing countries are exposed to a variety of significant risks to their wealth and life. To manage these risks, they resort to a number of strategies for example; informed risk sharing arrangements, conservation (avoiding risks) and self insurance through saving, reduced expenditure and emergency credit from family and friends and money lending institutions. The penetration of general insurance is 1.9 per cent, while that of life is 0.94 per cent of GDP. This is considered to be very low compared to other countries in Africa such as South Africa with a 12.9 per cent penetration rate, which is among the highest in the world, well above the 8.6 per cent average penetration for industrialized countries, according to Sigma (2010). The low penetration rate across the continent can be attributable to a number of factors associated with economic development in general, but they also reflect the development of the insurance industry in particular. 2.3 Life insurance in Kenya

The penetration of insurance among the Kenyan population is also low as compared to other


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countries. A good example is Malaysia which has an estimated 41% of the population covered by some form of life insurance in comparison to Kenya that has less than 1% of the population insured. The licensed insurance companies therefore compete for a limited market characterized by low penetration. Kenyans' uptake of insurance cover, both at corporate and personal level, remains predominantly in the motor, fire industrial and personal accident (mainly group medical cover) classes. This illustrates a poor attitude towards personal insurance cover in general. According to the (UN, 2007), the low penetration of insurance in the Kenyan market, relative to other more developed markets could be attributable to: lack of a savings culture among Kenyans; low disposable incomes for the majority of the population, with close to 50% of Kenyans living below the poverty line; inadequate tax incentives that could encourage the middle classes to purchase life insurance products; and a perceived credibility crisis of the industry in the eyes of the public particularly with regard to settlement of claims

Siddharth (2010) cites lack of trust in the insurance industry, limited knowledge on its products, limited reach to the informal sector; the perception that insurance is expensive, and the fear of not being able to service it continuously as some of the factors hindering penetration of the service. Kieti, (1998) adds that consumer ignorance has contributed significantly to the negative attitude towards insurance. This is based on a realization that in the more advanced economies characterized by consumer awareness and sophistication amongst other positive socio-economic indicators, virtually everyone is insured against all insurable risk. 2.4 Communication strategies and Public perception

On a study about links between communication strategies and personal insurance covers, Kowuor (n.d) found out that the perceptions an individual holds about insurance would determine their response to a personal insurance sales interview or presentation. Kowuor notes that a communication strategy plays a crucial role in understanding these conceptions and effecting the desired change.

In order to effect change, the right communication strategy has to be used; one that would help the prospect to appreciate the need for an insurance cover. This calls for some level of involvement with the prospect. Communication is involvement, and for involvement to be attained, using a common language, sharing experiences, participation in culture, and understanding beliefs of the person we intend to communicate with are necessary (Smith, 1992). This implies that, first and foremost, insurance agents must identify the language the prospect understands best and use it to explain the concept of insurance. Hence there is need for insurance sales agents and employees to be properly trained and well equipped with product knowledge and the necessary communication skills to put this knowledge across. Kenyans also need to be sensitized on the necessity of personal insurance and how it works in controlling risks and life’s uncertainties; this knowledge is wanting. According to Kowour, there is need to use the language that the prospect understands best and a more simplified version of policy documents including Kiswahili versions for the rural based clients.

According to AKI (2008) the various communication strategies to increase awareness on life insurance include: Testimonial advertising where the real beneficiaries of insurance need to be used in electronic and print media advertising so as to present the benefits of insurance. It can also be done by publishing testimonial stories in magazines or TV documentaries of how insurance helped a beneficiary e.g. payment of hospital bills following an accident; Information advertising where the benefits of insurance as a risk management and savings tool have to be emphasized in the media; Reinforcement advertising: This can be done in print and electronic media to assure customers who have bought insurance that they made the right decision so as to reduce on lapses; Participation in Trade Fares: Insurance companies can increase their visibility by participating in ASK shows in Nairobi and other major towns. Other avenues include motor shows, property exhibitions, banking and wedding expos. AKI proposes to enhance the insurance open day to take a longer period and cover other towns apart from Nairobi. 2.5 Ethical practices and Public Perception

Trust is a fundamental principle of insurance (Sadri & Tara, 2012).This is best achieved when both parties in the insurance contract fulfill their part of the contract in good faith. Business ethics is a form of applied ethics. It aims at inculcating a sense within a company’s employee population of how to conduct business responsibly. The insurance agent who writes a policy, and the underwriter who approves it as business for his company, must trust that the information on the application is correct. The agent and the company providing the insurance must trust that the policyholder making a claim will accurately assess the loss. In turn, the applicant must trust that the agent is giving proper advice, untainted by a conflict of self-interest. The applicant must trust that the company underwriter will not discriminate when establishing the premium. Lastly, the policyholder must have faith that the company


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adjusters will pay a fair amount for a claim, should it become necessary. In the absence of trust, the transactional fees from legal and governmental bodies would make a business like insurance difficult at least, and perhaps impossible. Without trust, insurance cannot perform its proper function as a risk management device for companies and individuals.

Observing ethics has been identified as a key strategy to attract and retain customers. A special report on the dynamics of public trust in business emerging opportunities for leaders recognized the critical importance of public trust, identifying it as the most important and overarching ethics issue facing business. Not only did CEOs identify regaining the public trust as the single most important corporate ethics issue facing business, but each of the top five issues cited in response to this open-ended question is strongly related to public trust (Arthur, 2009). 2.6 Community involvement and Public Perception

In the past, financial performance was the major criterion to evaluate a firm's value. Higher ranks were given to firms that provide greater margins financially. Maximization of shareholders' wealth was, by far, the focal point of profit-driven organizations. In this regard, the emphasis on corporate social responsibility (CSR) in the past was not evident. In this decade, however, the perception about CSR has changed significantly (Aasad, 2010). The success of a company is now also being measured by its contribution to society (Saunders, 2006).

More firms today are beginning to realize the importance of CSR and its impact on societal well being. Ratings are being developed to measure performance of most firms with regard to their CSR efforts besides their financial performance. Such ratings are being carefully monitored by independent watchdogs (Lim, 2011). To date, some countries have already made it compulsory to include CSR ratings into their corporate report and some are even required to publish their CSR scores to the public. This reaffirms the relevance of CSR to the context of modern day business and management. 3. Methodology

The research design that this study adopted was the descriptive survey. The descriptive survey was chosen for the study because it allows the researcher to study phenomena that do not allow for manipulation of variables (Kombo & Tromp, 2006). This study will survey a sample of life insurance companies and members of the public in Nakuru town so as to be able to investigate possible strategies that can be used to enhance positive public perception on life insurance in Kenya. Stratified random sampling technique was used to select the elements into the study sample. The two strata used were: staff of insurance companies and secondary school teachers. The sample size in each strata was determined using the formula by Nassiuma (2000) as follows. n= (Ncv

2) / ( cv 2 + (N-1) e2 )

Where n= Sample size N= Population Cv = Coefficient of variation (take 0.5)

e= Tolerance at desired level of confidence, take 0.05 at 95% confidence level Applying the formulae to the two categories of respondents, the sample size drawn for this study was 120 respondents which is 25.4% of the target population. This is shown in Table Table 3.1: The Sample Size Matrix

Category Population (N) Sample Size (n) Percentage (%) Sales Agents 82 45 38 Teachers 303 75 25 TOTAL 385 120 25.4

Data collected was coded and analyzed using Statistical Package for Social Sciences (SPSS) Version 21 computer programme to facilitate addressing the research objectives and questions. Quantitative data was analyzed using descriptive statistics such as percentages and frequencies chi-square while the qualitative data derived from open-ended questions were analyzed according to themes based on the study objectives and research questions and there after inferences and conclusions were drawn. Findings were presented using tables and charts. 4. Findings

The study was to investigate the strategies that can be used to improve the public perception of life insurance companies. The research objectives were to determine the communication strategies that can help improve public perception on life insurance in Kenya; to establish the ethical practices that can help boost the public perception on life insurance in Kenya and finally to find out how community involvement strategies can help raise the public perception on life insurance in Kenya.


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Findings of the study were organized according to research objectives as shown in the preceding section. Generally, teachers’ response indicates that the teacher community generally has a negative perception towards life insurance though not very strongly negative. Agents on the other hand were of the view that public was negative on life insurance. On communication strategies used by life insurance companies to communicate their companies. Majority of teachers who took part in the study 34.33% get information on life insurance mostly from TVs and Radio advertisements followed by print media such as newspapers and magazines cited by 22.39%. Those who received communications about insurance companies and their products from friends and relatives were 17.9% while communication through colleagues at work was 10.45%. Companies also communicated about their products through their agents 8.96% and also by sending texts or information direct to the customers 5.97% either by mobile phones, emails or other forms of communication. There is a significant relationship between the communication strategies adopted and the public perception of life insurance companies. The most effective method of communication was observed as News papers and Magazines and other print media followed by TV and radio, agents were found to be the least effective in company publicity.

In terms of upholding to ethical standards in the eyes of the public, insurance companies were rated poorly by 43.28% of the teachers who represent the public, further, 23.88% rated very poor implying that over two thirds of the public (teachers) consider life insurance companies unethical in their practices. Those of different opinion were 16.42% who rated them fair and 10.45% who rated them good and 5.97% who considered insurance companies very good. There also existssignificant relationship between companies’ ethical practices and the public perception. On community involvement by life insurance companies teachers in Nakuru Municipality, insurance companies rarely participate in community activities 61.19%, 22.39% were of the opinion that insurance companies never participated while 16.42% cited active involvement. There is a significant relationship between the two variables the level of involvement in community activities and the public perception on life insurance. 5. Conclusions

Based on the findings of the study as summarized, it can be concluded that indeed life insurance companies in Nakuru score low on public perception which could be one of the main causes of poor penetration of life insurance in the society. Communication strategies used by the life insurance are also not very effective in providing the right information to the customers, therefore it is important for life insurance to identify the correct method through which to reach their clients through effective information needs assessment, designing the right communication tool, information monitoring and evaluation strategies, and strategies to deal with negative publicity.

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Students Satisfaction and Service Quality: Emphasis on Private Universities in Bosnia and Herzegovina

Mersid Poturak

International Burch University

Faculty of Economics, Management Department, Francuskerevolucijeb.b. 71200 Sarajevo, BiH

Accepted 24 July 2013

Abstract The purpose of this study is to examine overall service quality of private higher education institutions in Bosnia and Herzegovina and its affect on students satisfaction. Questionnaire was designed and delivered to a sample of 300 respondents from four higher education institutions. Data were future more statistically analyzed by performing descriptive statistics in order to get students perceptions about service quality in these institutions. In general the results show that the students have slightly positive opinion about the service quality at these private institutions. The institutions that are used as a sample in this research have to design and put into practice quality standards and system and constantly check it with the aim to raise the quality of education and achieve competitive advantage on quickly rising institutions in private sector . Key words: Students, Students Satisfaction, Service Quality, Private Education Institutions

1. Introduction Selection of the university is one of the most important life decisions among young people. With a

continually rising assortment of educational options, future students look for institutions that will provide them a distinctive educational knowledge that they will keep in their minds for a life time. Also, students usually seek an educational program that will prepare them for a successful profession and that will provide them profitable employment. In order to satisfy mention needs, private higher education institutions have to do constant research in the area of student satisfaction and they have to find ways how to increase service quality that will bring them new students every year.

Although in developed countries the state still plays a dominant role in the “production” of primary and secondary education, in higher education, the private sector is gradually becoming ever more important. The development of the market, science and technology has led to an increase in demand for education and professional quality experience that are generally acquired in the private higher education institutions. In transitional societies reception of new value takes place slowly. There is obviously distrust, in the Bosnian society, in newly opened private universities and colleges. The transition actually allows for a large number of private higher education institutions of questionable quality for which the public discourse prevailing opinion that private education in Bosnia and Herzegovina is a simple form of taking diploma in a easier way(Mehmedić-Džonlić, 2012).

As a response to the global economic challenges, the European countries have developed the Bologna Process which is mainly based on the underlying principle to initiate the research and development of society with the ability to make stronger the international competitiveness of the European economy. Furthermore, the Bologna Process may especially become a significant chance to transition countries such as Bosnia and Herzegovina to bring up to date its higher education, therefore investing in the development of its human resources.

European Union countries tend to have 30 percent of the population to be higher educated, while in Bosnia and Herzegovina, bellow 5 percent of the population has a university degree. Moreover, there are more important questions such as whether and how quality of our high education institutions lags

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behind the European. These and many other questions are the questions that higher education institution and government representatives have to think about. Unlike Europe and the United States, Bosnia and Herzegovina imposes another dilemma - private or public university. According to experts, this dilemma does not exist because there is room for one and other and in equal competition game students can only be beneficial.

Today's academic environment is constantly changing and becoming more and more competitive, where future students have numerous opportunities available to them. Knowing this fact higher educational institutions have to find ways haw to attract and keep existing students and how to develop stronger relationships with them. Higher education institutions that want to gain competitive advantage, they have to take student satisfaction as the main source of competitive advantage. If they succeed to satisfy their customers (students), this satisfaction will bring student retention, new students will be also attracted and positive word of mouth about institution will be spread as well.(Arambewela & Hall, 2009)

In order to perform Bologna Process and ensure the high quality education the private universities should be aware of current situation that is related to students’ satisfaction and quality of the services. The reason for conducting this study was because, Bologna Process requires quality of service and student’s perception on quality service at private universities is valuable data.

Specifically, we can say that the purpose of this study is to examine overall service quality of private higher education institutions in Bosnia and Herzegovina and also to get students perceptions on University services such as Academic and Administration Staff services as well as their perception on facilities and equipment adequacy. In following sections basic definitions of customer satisfaction, brief summary of relevant literature on this topic as well as background of the private higher education in Bosnia and Herzegovina will be presented. How data were collected for this study will be presented in methodology section. Collected data, from 300 surveyed students will be analyzed by performing descriptive statistics. As last part of this study, results from descriptive analyzes will be presented together with the conclusion section were different suggestions for private higher education institutions’ representatives will be provided, in order to improve quality of the service as well as building good relationships with their customers. 2. Literature Review

The topic of service quality in higher education institutions and students satisfaction has been widely explored in the literature. Satisfaction and motivation of students play important role in determining education quality. The most important purpose in education sector is to satisfy students. Students that are satisfied with the service quality of their institution will become a basis of competitive advantage. Moreover, satisfied students will provide word of mouth marketing for higher educational institutions. Since students are direct recipients of university services, students’ perceptions about service quality of higher education institutions become significant issue for universities and their top management representatives. (Brochado, 2009)

Measuring the quality of services was a focus to a big number of the practitioners and researches in past decades because of its intangible and compound character as well as because of rivalry between the educational institutions and the tendency for excellence in education(Ramseook-Munhurrun, Naidoo, &Nundlall, 2010).

Service quality of higher education institution is basically defined considering students overall assessment on the services they received that is actually element of their learning experience (Asaduzzaman, 2013).This covers a diversity of educational behavior both within and outer the classroom such as satisfaction with an academic staff, staff services, satisfaction with a campus and dormitory, overall services, different programs organized by university, personal development, education facilities, etc.

There are many definitions about satisfaction in literature that is related to service as well as to consumer behavior. In his study Oliver defined satisfaction as a pleasing accomplishment of needs and wants. On the other hand student satisfaction is a bit compound experience and it has special dimensions (Richardson, 2005). Elliott & Shin, (2002p.198), Defined student satisfaction as; “the favorability of a student’s subjective evaluation of the various outcomes and experiences associated with education. Student satisfaction is being shaped continually by repeated experiences in campus life”.


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Alves & Raposo (2010) in their study found that positive perceptions of service quality has a important power on student satisfaction and therefore satisfied student would spread positive word-of-mouth which will attract more students.

Both academic performances of the higher education institution representatives as well as the administrative efficiency of the institution can lead to the fact that students are more motivated or inspired therefore more satisfied with the service. (Asaduzzaman, 2013)

In their study (Abbasi, Malik, Chaudhry, & Imdadullah, 2011)used ten major constructs i.e. teaching, administrative/management support, transportation, library, computer labs & general labs, accommodation, medical; sports, prayer/religious facilities, and class room facilities to measure students satisfaction in Pakistan Universities. Findings showed that students are dissatisfied with many core services and facilities like teaching, administrative support, library, labs, accommodation, medical, and sports, while they are satisfied only in three augmented areas like transportation, class room and prayer facilities. 3. Background of the Private Higher Education in Bosnia and Herzegovina

Public higher education in Bosnia-Herzegovina is not in good way systematized at the all levels of country structure (state, entity and cantonal levels), while private higher education is not evidently synchronized within the legal context. The authors of the law[s] of the higher education actually did not realize that the contemporary private higher education cannot be controlled by such law(s), which was/were formed with mainly goal to retain the conventionally advantaged position of the public higher education institutions (Dizdar, 2010).

In order to confirm the quality of public higher education, Bosnia-Herzegovina has launched an initiative to acquire the sponsorships of the European Commission and the Council of Europe, at the beginning from 2003, By the way, Bosnia-Herzegovina established the Agency for Development of Higher Education and Quality Assurance (HEA) and nearly altogether public universities established Quality Assurance Office with the aim to ensure standards for internal and external quality assurance, but its application is mainly behindhand. Also, it should be noted that for the reason that very deprived quality of education students who complete studies at public universities are not able to respond to the needs of a market because graduates do not own satisfactory practical knowledge and abilities to use modern technology. The curricula and programs at public universities are obsolete and put-upon with the traditional courses that highlight only the theoretical knowledge and neglect handling of new technology. Furthermore, as a implication of the earlier communist system, public universities exaggerate social sciences while natural and technical sciences are overlooked(Mulalic, 2012). Therefore private higher education institutions found the room for their development and for a bit different offer to potential students by providing internships and other distinguish market offerings. 4. Methodology

Data for the study were collected through a survey delivered to students in Bosnia and Herzegovina. A total of 300 questionnaires were distributed to students who live in different cities in Bosnia and Herzegovina. Of the 300 questionnaires, 292 were accepted as usable for the study. Pilot test was conducted to ensure consistency and validity of the measures. Data have been analyzed by using SPSS software. For the first part frequency distribution statistics was performed. Future more data were analyzed by performing descriptive statistics. Specifically, this research looks for some empirical evidence that could be used for explaining the students' satisfaction with the private universities in Bosnia and Herzegovina, including components like: Academic staff, Staff Services, Campus, Dormitory, Services, Programs, Personal Development, Education facilities, Cafeteria and etc. Results of these findings will be presented in following section. 5. Results

In the following table we can see which faculties as private higher education institutions are used in our study. There were four private higher education institutions and majority of students are coming from Education faculty, 46,23 %. 19,86 are from Faculty of Economics while 16.09 % and 12,67 are from Faculty of Engineering and IT and English Preparation school. Table 1. Private Higher Education Institutions Used in the Study


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Institution Frequency Percent Valid

Percent

Faculty of Engineering and IT 47 16.09 16.09

Education faculty 135 46.23 46.23

Faculty of Economics 58 19.86 19.86

English Prep. school 38 12.67 12.67

Total 292 100 100

Descriptive statistics was performed for the survey questions number 8, 9 and 10. In table 2 we

can see students’ opinion about quality of the institution's services in general, their feelings towards the institution's services and how likely they would recommend the institution to others.

Table 2. Descriptive Statistics N Minimum Maximum Mean

How do you rate the quality of the

institution's services in general? 288.00 1.00 7.00 4.97

How do you describe your feelings towards

the institution's services in general? 288.00 1.00 7.00 5.20

How likely are you to recommend the

institution to others? 284.00 1.00 7.00 5.05

Valid N (list wise) 284.00

For the question “How do you rate the quality of the institution's services in general?”, we can notice that there are 288 respondents. Minimum value of the scale used is 1 (Very poor) and the maximum value is 7 (Excellent) (seven point scale). The mean value is 4.97. This shows us that there is a slight satisfaction with the quality of the institution’s services in general.

For the question “How do you describe your feelings towards the institution's services in general?”, we can notice that there are 288 respondents. The mean value is 5.20. This shows us that there is a slight satisfaction with the feelings about the institution’s services in general.

For the question “How likely are you to recommend the institution to others?”, we can notice that there are 284 respondents. The mean value is 5.05. This shows us that there is a slightly positive likeliness of recommending the institution to others.

In the following part of the analysis descriptive statistics was performed for the questions related with Academic staff, Staff Services, Campus, Dormitory, Services, Programmes, Personal Development, Education facilities, Cafeteria.

Mean values and standard deviation is provided for each question, as well as the number of respondents. Furthermore, overall mean value is provided for each type of the questions.

Table 3. Student Satisfaction with Academic Staff at Their Institution

N Minimum Maximum Mean

Std.

Deviation

Academic staff deals with me in

a caring and courteous manner. 287.00 1.00 7.00 5.28 1.62

Academic staffs are never too

busy to respond to my request

for assistance.

279.00 1.00 7.00 5.28 1.58


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Academic staff show positive

attitude towards students. 284.00 1.00 7.00 5.27 1.58

Academic staffs have the

knowledge to answer my

questions relating to the course

content.

266.00 1.00 7.00 5.17 1.47

When I have problem, academic

staffs show a sincere interest in

solving it.

283.00 1.00 7.00 5.11 1.73

Academic staffs communicate

well in the classroom. 284.00 1.00 7.00 5.04 1.67

Academic staffs provide

feedback about my progress. 282.00 1.00 7.00 4.79 1.69

Academic staffs allocate

sufficient and convenient time

for consultation.

281.00 1.00 7.00 4.64 1.81

Academic staffs are highly

educated and experienced in

their respective field.

282.00 1.00 7.00 4.62 1.64

Overall Mean Value 5.02

If we look at table 3, we can see students opinions about academic staff at their institution. We can notice that overall mean value is 5.02. This shows that the students slightly agree with the statements from the questionnaire, which implies that they have slightly positive opinion about the academic staff. The highest mean value (5.28) is related with questions: “Academic staff deals with me in a caring and courteous manner” and “Academic staff are never too busy to respond to my request for assistance”. The lowest mean value (4.62) is related with the question: “Academic staff is highly educated and experienced in their respective field.”

Table 4. Student Satisfaction with Staff Services at Their Institution

N Minimum Maximum Mean Std.

Deviation

The staffs respect my

confidentiality when I disclosed

information to them.

278.00 1.00 7.00 4.76 1.77

The opening hours of

administrative offices are

personally convenient for me.

282.00 1.00 7.00 4.71 1.83

Administrative staff

communicate well with students. 279.00 1.00 7.00 4.67 1.85

Administrative staff show

positive work attitude towards

students.

282.00 1.00 7.00 4.67 1.81


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Administrative staff have good

knowledge of the

systems/procedures

280.00 1.00 7.00 4.58 1.89

When I have problem,

administrative staffs show a

sincere interest in solving it.

283.00 1.00 7.00 4.55 1.78

Administrative staffs are never

too busy to respond to a request

for assistance.

277.00 1.00 7.00 4.55 1.79

Administration offices keep

accurate and retrievable records. 279.00 1.00 7.00 4.51 1.90

Students are treated equally and

with respect by the staff. 280.00 1.00 7.00 4.51 1.94

Administrative staffs provide

caring and individual attention. 283.00 1.00 7.00 4.49 1.82

When the staffs promise to do

something by a certain time,

they do so.

272.00 1.00 7.00 4.35 1.90


When we look at table 4 we can notice that overall mean value about student satisfaction with staff services at their institution is 4.58. This shows that the students’ opinion about staff services is between “slightly agree” and “neutral”. This implies that they have slightly positive opinion about the academic staff. The highest mean value (4.76) is related with question: “The staff respects my confidentiality when I disclosed information to them”. The lowest mean value (4.35) is related with the question: “When the staffs promise to do something by a certain time, they do so.”

Table 5.Student Satisfaction with Campus

N Minimum Maximum Mean

Std.

Deviation

The institution has a professional

appearance/ image. 283.00 1.00 7.00 4.97 1.71

The university has an easily

accessible location. 283.00 1.00 7.00 4.91 1.75

The university campus has a safe

environment. 284.00 1.00 7.00 4.73 1.89

The institution has an ideal

location with excellent campus

layout and appearance.

285.00 1.00 7.00 4.49 1.80

The parking services at the

university are adequate. 281.00 1.00 7.00 4.46 1.99



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Table 5 presents student satisfaction with campus. We can notice that overall mean value is 4.66. This shows that the students’ opinion about campus is between “slightly agree” and “neutral”. This implies that they have slightly positive opinion about the academic staff. The highest mean value (4.97) is related with question: “The institution has a professional appearance/ image”. The lowest mean value (4.46) is related with the question: “The parking services at the university are adequate.”

Table 6. Student Satisfaction with Services at Their Institution


Deviation

I feel secure and confident in my

dealings with this institution. 281.00 1.00 7.00 4.92 1.86

The institution provides services

within reasonable/expected time

frame.

275.00 1.00 7.00 4.64 1.78

The institution has standardized

and simple service delivery

procedures.

279.00 1.00 7.00 4.62 1.76

Students are given fair amount

of freedom. 277.00 1.00 7.00 4.53 1.95

The institution operates

excellent counseling services. 276.00 1.00 7.00 4.52 1.81

The institution values feedback

from students to improve service

performance.

276.00 1.00 7.00 4.50 1.81

The institution encourages and

promotes the setting up of

student’s Union.

276.00 1.00 7.00 4.49 1.93

The university provides services

for students with special needs. 260.00 1.00 7.00 4.43 1.76

Inquiries/complaints are dealt

with efficiently and promptly. 282.00 1.00 7.00 4.17 1.86

Information services via

web-site are adequate. 276.00 1.00 7.00 4.01 1.88

Health services are adequate. 279.00 1.00 7.00 3.87 1.92


When we look at table 6, we can notice that overall mean value of students’ perceptions about services at their institution is 4.43. This shows that the students’ opinion about services is between “slightly agree” and “neutral”. This implies that they have slightly positive opinion about the dormitory. The highest mean value (4.92) is related with question: “I feel secure and confident in my dealings with this institution.” The lowest mean value (3.87) is related with the question: “Health services are adequate.”


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Table 7.Student Satisfaction with Dormitory at Their Institution


Deviation

The dormitory facilities are

usually clean and well taken

care of.

252.00 1.00 7.00 4.77 1.78

The dormitory facilities and

equipment are adequate. 256.00 1.00 7.00 4.74 1.81

Dormitory staff provides

good quality service to

students.

251.00 1.00 7.00 4.74 1.75

Dormitory fees are

reasonable. 249.00 1.00 7.00 4.41 1.85


When we speak about the dormitory (table7), we can notice that overall mean value is 4.66. This shows that the students’ opinion about dormitory is between “slightly agree” and “neutral”. This implies that they have slightly positive opinion about the dormitory. The highest mean value (4.77) is related with question: “The dormitory facilities are usually clean and well taken care of.” The lowest mean value (4.41) is related with the question: “Dormitory fees are reasonable.”

Table 8. Student Satisfaction with Programs at Their Institution


Deviation

The institution runs excellent

quality programmes. 280.00 1.00 7.00 4.67 1.81

The institution offers

programmes with flexible

syllabus and structure.

281.00 1.00 7.00 4.57 1.78

The institution offers a wide

range of programmes with

various specialisations.

281.00 1.00 7.00 4.56 1.74

The institution offers highly

reputable programmes. 279.00 1.00 7.00 4.54 1.82

The institution’s graduates are

easily employable. 272.00 1.00 7.00 4.44 1.76


Table 8 presents student satisfaction with programs at their institution. We can notice that overall mean value is 4.56. This shows that the students’ opinion about the programs is between “slightly agree” and “neutral”. This implies that they have slightly positive opinion about the programs. The highest mean value (4.67) is related with question: “The institution runs excellent quality programs”. The lowest mean value (4.44) is related with the question: “The institution’s graduates are easily employable.”


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Table 9.Student Satisfaction with Personal Development at Their Institution


Deviation

The university supports students'

personal development projects. 278.00 1.00 7.00 4.27 1.85

International cooperation

programs at the university

(student exchange, study visits

etc.) are adequate.

280.00 1.00 7.00 4.17 1.97

Extracurricular activities

(seminars, workshops etc.) at the

university are adequate.

280.00 1.00 7.00 4.11 1.96

Recreation and sport facilities at

the university are adequate. 280.00 1.00 7.00 3.82 1.96

Services and facilities of art at

the university are adequate

(music, photography, painting

etc.).

278.00 1.00 7.00 3.78 1.92


When we speak about the personal development (table 9), we can notice that overall mean value is 4.03. This value is lower than mean values of the other sections. This shows that the students’ opinion about the personal development section is “neutral”. This implies that they neither have positive nor negative opinion about the personal development. The highest mean value (4.27) is related with question: “The University supports students' personal development projects.” The lowest mean value (3.78) is related with the question: “Services and facilities of art at the university are adequate (music, photography, painting etc.).”

Table 10.Student Satisfaction with Education Facilities at Their Institution


Deviation

Class sizes are adequate for high

quality education. 277.00 1.00 7.00 4.83 1.74

The labs at the university are

adequate for quality education. 275.00 1.00 7.00 4.73 1.69

Academic facilities are adequate

for quality education. 276.00 1.00 7.00 4.64 1.73

The institution has up to date

equipment. 280.00 1.00 7.00 4.63 1.75

The university provides

up-to-date information

technology for students.

278.00 1.00 7.00 4.61 1.77

The library services at the

university are adequate. 281.00 1.00 7.00 4.21 1.90


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From table 10 we can see student satisfaction with education facilities at their institution. We can notice that overall mean value is 4.61. This shows that the students’ opinion about the programs is between “slightly agree” and “neutral”. This implies that they have slightly positive opinion about the education facilities. The highest mean value (4.83) is related with the question: “Class sizes are adequate for high quality education.” The lowest mean value (4.21) is related with the question: “The library services at the university are adequate.”

Table 11.Student Satisfaction with Cafeteria at Their Institution


Deviation

The university cafeteria is

usually clean and well taken care

of.

279.00 1.00 7.00 3.85 2.19

Cafeteria staffs provide good

quality service to students. 284.00 1.00 7.00 3.61 2.16

The university cafeteria provides

high quality food and beverages. 283.00 1.00 7.00 3.36 2.02

The food variety is adequate. 284.00 1.00 7.00 2.76 1.95

Prices at the university cafeteria

are reasonable. 284.00 1.00 7.00 2.24 1.69

Valid N (list wise) 81.00


If we speak about the cafeteria (table 11), we can notice that overall mean value is3.16. This shows that the students’ opinion about the programs is between “neutral” and “slightly disagree”. This implies that they have slightly negative opinion about the education cafeteria. The highest mean value (3.85) is related with the question: “The university cafeteria is usually clean and well taken care of.” The lowest mean value (2.24) is related with the question: “Prices at the university cafeteria are reasonable.”

6. Conclusion

Over the past decade there have been significant changes in the business of higher education institutions. Higher education institutions are under pressure from society and the state to achieve the best possible relationship between the services provided and the compensation they receive. Since student satisfaction positively influences their decision to continue their education at that institution and the positive buzz that will attract prospective students of higher institutions are making great efforts to ensure a higher quality of education that will meet the social and individual needs of students.

Findings show that there is a slight satisfaction with the quality of the institution’s services in general. We could notice that students have slightly positive opinion about the academic staff and between “slightly agree” and “neutral” for staff services, campus, dormitory, services, programs, personal development and education facilities. For cafeteriafindings show that the students’ opinion about the education cafeteria is between “neutral” and “slightly disagree”. This implies that they have slightly negative opinion about the education cafeteria. These findings can help private higher education institutions representatives to have feedback about students’ satisfaction with the services that are provided. The institutions that are used as a sample in this research in order to keep and improve current quality of education and achieve competitive advantage on quickly rising institutions in private sector, they have to design and put into practice quality standards and system and constantly check it.

The fact that the results are based on a predefined sample is a constraint in terms of their applicability to theoretical courses that are conducted at other higher institutions. Consequently, recommendation for future research is the extension of the sample to other private higher education institutions in Bosnia and Herzegovina.


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Cost Overrun Causes Related to the Design Phase in the

Egyptian Construction Industry

Dr. Hisham A. Bassioni, Dr. Alaa Sarhan, Ahmad S.Zaki (Corresponding author)

Department of Architectural Engineering and Environmental Design, College of Engineering and

Technology, The Arab Academy for Science, Technology and Maritime Transport.

Abu Kir AAST Campus, Alexandria. Egypt. P.O. Box 1029


Abstract Cost overrun is one of the most common problems that threaten any construction project. As the Design phase is responsible for many critical decisions, many of cost overrun causes are related to such phase. This paper aims to identify the most significant causes of cost overrun related to the design phase in the Egyptian construction industry from the point of view of owners, consultant, designers, project managers and contractors. A list of cost overrun causes related to the design phase collected through an extensive literature review, main causes were adapted to the Egyptian construction industry through seven semi-structured interviews. The resultant list was submitted to a questionnaire survey for the impact and frequency quantitative evaluation. the results of the research is expected to help the participants in the design phase to develop more optimized design and avoid the most usual flaws that could led to cost overruns Key Words: Buildings ; Design management; Design Phases; Cost overrun; Cost Control; Cost

Planning and Egypt.

1. Introduction Construction projects could be measured or evaluated against many important performance criteria; however cost remains the most agreed indicator of a project success (Tichacek, 2006). On other hand due to a various number of cost overrun causes, it is usual for a construction project to witness variations in value regarding the first approved budget estimate describing the project cost, the contract price agreed for construction and the further final account of the project. Attempts to study and mitigate the causes and the severe consequences of such problem started during the construction boom after World War II; recently the construction industry in both developing and developed countries suffers from the same problem. Cost overrun causes are diverse regarding their sources, many are directly related to the critical pre-construction design and tender phases where most of decisions that affect the project ability to meet the addressed expectations, are made and where changes could be implemented with no severe impact on the project objectives. This paper aims to identify and evaluate cost overrun causes related to pre-construction stages in the Egyptian construction industry. 2. Literature Review Cost overrun in construction arises when the incurred costs exceeds the expected budget designated for the building. Causes of this overrun originate from a variety of reasons and many are related to the

Journal of Engineering Management Research JULY 2013 VOL.1, No,5


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stages preceding construction where most of the substantial decisions are made determining the ability of the project to meet its objectives. 2.1 Design Phase Cost Management Discussing cost overrun causes related to the pre-construction stage requires a thorough understanding of this phase cost management activities and practices; Jaggar, Ross, Smith, & Love (2002) depicted the notion of design phase cost management as it is the successful applying of planning, controlling and feedback in terms of design, cost, time and quality to achieve the project objectives through : cost planning, which define the amount to be spent on the various building components, cost controlling as the design develops, in the form of cost checks to ensure the deliverables compliance with the cost plan. The RIBA Plan of Work provides an organized presentation of the essential process of the preconstruction phase. The plan of Work is recommended by many researchers to provide a sound pattern for the procedures of the design process, and the recommended cost management practices (Seely, 1996). Accordingly the Pre Construction phase is divided into Preparation stage, Design stage and the Pre Construction stage; the following lines are intended to briefly describe the main objectives of each stage and the practical adjacent cost management practices. Figure (1) shows cost management functions related to the plan of work stages. 2.1.1 Cost management in the preparation stage The preparation stage generally aims to understand the client’s needs and develop a design brief that reflects those needs effectively. Cost management through this stage intends determine the cost of design brief through value planning and cost estimation functions. Value planning is considered as a very helpful tool To develop a consistent, reliable and optimized design brief that offers alternative solutions to meet the owner’s needs. Cost estimation at this stage tries to determine a cost limit for the project either based on the client’s maximum affordability, or on historical data for similar projects. It should be considered that during this early stage detailed information are usually unavailable, and therefore estimates rely on the design brief as a result of business case analysis recommendations that may quantify or describe generally the capacity of the project, the gross area or number of service units. 2.1.2 Cost management in the conceptual and schematic design stage It is the stage where the main concept is outlined and developed into detailed design including the building’s different systems. Cost management efforts through this stage aims to define a cost plan for the design, which is an estimate based on the approved design concept. Furthermore as the design develops and includes more systems and disciplines in details the cost plan is developed and divided into cost targets for every discipline in the building as a cost limit for such discipline; and therefore the cost plan is considered as a baseline to check whether the developed design is within the agreed cost framework. Cost estimating is one of the most essential tools to control cost as the design develops; unlike previously conducted estimates; estimates through this stage relies on more accurate data in the form of quantities and specifications where prices are based on historical data, trade specialists, sub-contractors, vendors quotations or cost book. Another essential tool of cost management is value engineering that helps in assessing design outcomes and eliminating unnecessary costs through defining the required function and comparing different alternatives to achieve better value design. 2.1.3 Cost management in the detailed design and construction document stage It is the final stage of the design process that incorporates various tasks: completing final layouts that coordinate in details all elements and components of the building; obtaining the client’s approval; applying for statutory approvals and preparing detailed drawings and specifications needed for the tender documents. The cost management through this stage aims to ensure the alignment of disciplines costs and the relevant cost targets defined in the cost plan for such disciplines through performing accurate cost estimations that tries to depict the contractors offer during tender. Value engineering and life cycles costing are considered as helpful tools in addressing the spotted variances and proposing modifications to maintain the cost plan. Additionally the appropriateness of tender documents and the selected procurement method affects the ability of the design to meet its objectives during construction. Design coordination within design documents, specifying method, risk allocation between the owner and contractor and the procurement method for selecting the contractor are of the main important arrangements to ensure minimizing of cost overruns during construction. 2.2 International Studies The previous review of cost management principles during design was essential to understand the causes of cost overrun discussed in many international studies. Twelve studies were incorporated in this research to assemble a list of cost overrun causes. Kaming et al. (1997) classified the severity and


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frequency of ten main causes of cost overrun in developing countries’ construction projects. Jackson (2002) identified causes of cost overrun in the UK. Koushki et al. (2005) identified causes of time delay and cost overruns in residential construction projects in Kuwait. Le-Hoai et al. (2008) classified the severity and frequency of factors of delay and cost overruns in Vietnamese construction industry. Azhar et al. (2008) categorized the severity of selected forty two cause of cost overrun in the construction sector of Pakistan. Apolot et al. (2009) ranked twenty two time delay factors and cost overrun causes in Uganda’s public sector projects. Ameh et al. (2010) indicated the importance of significant factors that cause cost overruns in Nigerian telecommunication projects. Bubshait & Al-Juwairah (2002) measured the severity of factors affecting the construction costs in Saudi Arabia. Chang (2002) identify reasons of cost and schedule increase based on four completed construction projects in the US. Durdyev et al.(2012) evaluated factors of cost overruns in residential projects in Turkey based on their relative importance. Ali & Kamaruzzaman, (2010) identify factors of cost overrun in construction projects in Malysia 3. Experts Interviews Based on the previously held literature review and findings an expert interview is performed to adapt the selected causes according to the Egyptian construction industry. A varied sample including five representatives reflecting various backgrounds: architects, consultants, contractors and project managers experienced in construction each with minimum experience 20 years. The sample size in qualitative research methods could be figured through saturation were additional interviews do not produce new information or data (Guest et al. 2006) which was met through two additional interviews. The interview depended on a semi structured interview design where a set of question was addressed in addition to allowing probing when needed, the collected causes from literature review were assessed to three main questions “From your expert opinion: What would you like to omit or remove ? What would you like to change or modify? What would you like to add as a significant cause of cost overrun? During the interviews cost overrun causes selected from literature were generally considered appropriate to discuss the cost overrun causes related from the design and the later pre-construction phases in the Egyptian construction industry, however some descriptions where slightly modified in order to be more defined. Table (1) shows causes of cost overrun selected from literature after experts’ interviews adaptation to the Egyptian construction industry. 4. Questionnaire Survey A questionnaire survey was conducted to quantitatively evaluate the frequency of occurrence and the severity or impact of causes of cost overrun selected from literature and adapted through experts interviews. The questionnaire was divided into two parts: Part 1 – Participant’s personal information (e.g. Name, occupation, company name, organization type, experience, age and gender) : and Part 2 – Evaluation of causes according to Frequency and Impact, each cause was measured on a likert scale using four options: Always, Sometimes, Rarely and Never for Frequency and Extreme, Moderate, Little and no for Impact. A total of 115 survey questionnaire was distributed, 101 was completed successfully and involved in the study. Participants’ organizations were distributed as: 45 owner, 11 contractor, 33 architect and 12 project manager 5. Result Analysis 5.1 Analysis of overall results To identify the importance degree of each cause of cost overrun, an importance index was calculated based on the frequency index and impact index in a manner similar to Assaf et al. (1995). Frequency index is calculated according to the following equation:

Where: F.I. = Frequency index; = Weight of response; = Frequency of response and i =

Response category index. A response of “Always” was given a weight of 3; “Sometimes” was given a weight of 2; “Rarely” was given a weight of 1 and “Never” was given a weight of 0. For example if 100 responds was received for a certain cause where: 20 responds were “Always”; 65 responds were “Sometimes”; 10 responds were “Rarely” and 5 were “Never” then the frequency index for this cause would be calculated as the following equation:

F.I= = 66.67


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Impact index is calculated according to the following equation: Where: I.I. = Impact index; = Weight of response; = Frequency of response and i = Response

category index. A response of “Extreme” was given a weight of 3; “Moderate” was given a weight of 2; “Little” was given a weight of 1 and “No” was given a weight of 0 and the index was calculated similar to the frequency index previously shown. The Importance Index was calculated through using a similar methodology to that used by Assaf and Hejji (2006):

Importance index (IMP. I.) (%) = [F.I. (%) * I.I. (%)] The Importance indexes were calculated for the cost overrun causes where they were ranked accordingly as shown in chart (1). 5.2 Analysis of results by Project Parties In order to asses the cost overrun causes by each party independently, the contractors’, consultants’, owners’, and project managers’ data were separated and analyized seperatly. This helped in in identifing the degree of agreement between each party responses. The frequency index, impact index and importance index was calculated according to each party respons where causes were ranked accordingly as shown in table (2). The following are comments on the data shown in Table (2) and Chart (2):

• “Occurrence of design variations, changes or additional work by owner or designer” is considered as the most important factor of cost overrun causes regarding the general overall results. Design changes and variation orders can affect the project’s estimated budget and time for construction due to reworks and delays and subsequent claims, and this could illustrate why the contractors’ relative importance of this cause is the lowest among the other parties.

• “Unrealistic estimation of construction period” is the second most important factor of cost overrun causes according to the overall results. This cause recorded a high relative importance according to the contractors’ and the project managers’ results which reflects the project managers’ and contractor’ perception of the importance of accurate time estimation on the project budget due to the nature of their work.

• “Inadequate design, design errors and mistakes, lack of details or contradiction in design and conflict between design documents (drawings and specifications)”ranked a high relative importance according to the contractors’ results unlike the other parties, showing a conflicting opinion with other parties as the design process is merely under their responsibility unlike with no contribution of the contractor in most of the cases.

• “Lack of communication and coordination between design participants of different background”, recorded a much higher relative importance according to the owners’ and project managers’ results unlike the architects’ results The results shows a conflicting opinion between the design main participants as it is believed that it is the architect’s responsibility to assure the integration of the design.

• “Lack of Designers understanding of cost and value and the subsequent cost implications of what included in the design” ranked a higher relative importance according to the architects’ and contractors’ results than the owners’ and project managers’ results. Again the results show conflicting opinions between design participants regarding what to be included in the design and ways of cost optimization that may be not agreed by owner or project manager.

• Causes “Inadequate consideration of risks” and “Quantities taking off mistakes” recorded a higher importance regarding the project managers’ results than other parties reflecting the perception of the importance of considering the risks and the accurate real quantities of work; this is due to the nature of the project manager in a construction project.

• “Lack of involving contractors or suppliers during in design” recorded a higher importance regarding the contractors’ results than other parties; this could be justified as many problems during construction could be avoided if contractor participation took place earlier during design.

• “Selection of inappropriate big construction companies” recorded the lowest relative importance among the contractors’ results. Reflecting the contradiction in opinion as architects, owners and project managers may consider the added markups and profit may increase the cost of the building in an avoidable way if smaller contractor companies are selected.


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6. Degree of Agreement between Parties To quantitatively measure the agreement between parties the following two approaches are adopted: Pearson’s Correlation Coefficient in comparing values of Importance Index; and Rank Agreement Factor in comparing the Ranking 6.1 Pearson’s Correlation Coefficient (C.C.) The C.C. is described as the “product moment correlation coefficient” is one of the most reliable and common adopted statistical techniques to identify the correlation between two sets of data. The following formula is used to calculate the C.C. (probability, Statistics & Reliability; Ayyub, B.A. & McCuen, R.H. pp 279). The values of C.C. range from +1 which means “perfect correlation”, through 0 which means “no correlation’, to -1 which means “perfect negative correlation”. The results of correlation between the contractor and the architect- consultant was -0.0434, between the contractor and the owner was 0.0725, between the contractor and the project manager was 0.0490, between the architect - consultant and owner was 0.0659, between the architect – consultant and the project manager was 0.0424, between the owner and project manager was 0.1584. 6.2 Spearman Rank Correlation Coefficient Spearman Rank Correlation Coefficient was calculated based on the following formula (Assaf and Al-Hejji 2006):

Spearman rank coefficient = 1-

Where “d” is the difference between ranks indicated by the two parties and “n” is the number of records. The values range from (+1) as perfect correlation, (0) no correlation and (-1) as negative correlation. The results of correlation between the contractor and the architect- consultant was 0.67, between the contractor and the owner was 0.6, between the contractor and the project manager was 0.63, between the architect - consultant and owner was -0.38, between the architect – consultant and the project manager was -0.34, between the owner and project manager was 0.99. 6.3 Rank Agreement Factor (R.A.F.) The R.A.F is known as the average absolute difference in rank of the items (Baldwin et al. 1971). It is a method of quantifying the agreement between the parties result.

Where “X” and “Y” are the ranks in a two party results, “N” is the number of records. Values of the R.A.F. Range from 0 which means “perfect agreement” to N/2 which means “perfect negative correlation, i.e. the highest agreement the lowest the R.A.F. The results of correlation between the contractor and the architect- consultant was 3.55, between the contractor and the owner was 3.94, between the contractor and the project manager was 3.81, between the architect - consultant and owner was 7.48, between the architect – consultant and the project manager was 7.36, between the owner and project manager was 0.13. The results showed that the highest agreement factor lies between the owners’ and the project managers’ results this is due to the contractual nature between them. The architects’ results degree of agreement with owners or project managers showed low correlation, this due to that both parties are mainly involved in the design stage and therefore it is likely to have opposite opinion regarding the importance of causes. On other hand it is not usual that the contractor to be involved during design stage and this shows why correlation levels of contractor with other parties could be considered as in between. 7. Conclusion The aim of the research was to identify cause of cost overrun related to the design stage in the Egyptian construction industry. A literature review was conducted to recognize the proper technique of managing cost during design stage and to identify causes of cost overrun that arise during the design stage and affect the project’s budget during the later stages. Seven semi-structured interviews were conducted to adapt the selected causes according to the Egyptian building projects. The resultant list of 16 cause of cost overrun was raised for a questionnaire to quantitatively evaluate their importance according to their frequency and impact. The survey overall results showed that the most important causes are Occurrence of design variations, changes or additional work by owner or designer; Unrealistic estimation of construction period; Lack of information and definitions of scope due to incomplete recognizing or badly developed client's needs and lack of involvement of the appropriate stake holders; Inadequate design, design errors and mistakes;


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lack of details or contradiction in design and conflict between design documents (drawings and specifications); Lack of communication and coordination between design participants of different background. The results show that the topmost important five causes of cost overrun are almost agreed by all project parties however there are disagreement considering their ranking which extended to the rest of causes this is due to the attempt of each party to promote the importance of causes under other’s responsibility. A correlation of the responses of each party showed the architect – consultant and the owner or the project manager to have dissimilar opinions regarding cost overrun causes, while the contractor held an intermediate position. Further research can be conducted based on the findings of this paper. For example identifying causes of cost overrun related to design stage in other countries which may rise different due to geographical and socio-economic variations. Moreover, an advance research could suggest set of guide lines or recommendations to manage costs during design or a process plan for the functions to be incorporated within the design stage. References Ali, A. S., & Kamaruzzaman, S. N. (2010). Cost performance for building construction projects in

Klang Valley. Journal of Building Performance , 1 (1), 110-118. Ameh, O. J., Soyingbe, A. A., & Odusami, K. T. (2010). Significant Factors Causing Cost Overruns in

Telecommunication Projects in Nigeria. Journal of Construction in Developing Countries , 15 (2), 49-67.

Apolot, R., Alinaitwe, H., & Tindiwensi, D. (2009). An Investigation into the Causes of Delay and Cost Overrun in Uganda's Public Sector Construction Projects. Second International Conference on Advances in Engineering and Technology, (pp. 305-311).

Ashworth, A. (2004). Cost Studies of Buildings. Essex: Pearson Education Limited. Azhar, N., Farooqui, U. R., & Ahmed, M. S. (2008). Cost Overrun Factors In Construction Industry of

Pakistan. Proceeding of first International Conference on Construction in Developing Countries (ICCIDE-1) (pp. 499-508). Karachi: First International Conference on Construction In Developing Countries.

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Brook, M. (2004). Estimating and Tendering for Construction Work. London: Elsevier Butterworth- Heinemann.

Bubshait, A. A., & Al-Juwairah, Y. A. (2002). Factors Contributing to Construction Costs in Saudi Arabia. Cost Engineering , 44 (5), 30-34.

Chang, A. S.-T. (2002). Reasons for Cost and Schedule Increase for Engineering Design Projects. Journal of Management in Engineering , 18 (1), 29-36.

Chappell, D., & Willis, A. (2005). The Architect in Practice. Oxford: Blackwell Publishing Ltd. Clark, F. D., & Lorenzoni, A. B. (2003). Applied Cost Engineering. New York: Marcel Dekker, Inc. Dell’Isola, M. D. (2002). Architect’s Essentials of Cost Management. New York: John Wiley & Sons,

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residential projects; case study of Turkey. International Journal of Science and Management , 1 (1), 3-12.

Emmitt, S., & Yeomans, D. (2008). Specifying Buildings: A Design Management perspective. London: Butterworth-Heinemann .

Fisk, E. R. (2000). Construction Project Adminstration. Ohio: Prentice Hall. Flanagan, R., & Norman, G. (1999). Risk management and construction. Somerset: Blackwell Science. Flanagan, R., & Tate, B. (1997). Cost Control in Building Design . Oxford: Wiley-Blackwell . Gould, F. E. (1997). Managing the construction process :estimating, scheduling and project control.

New jersy: Prentice-Hall, Inc. Gray, C., & Hughes, W. (2001). Building Design Management. Oxford: Butterworth - Heinemann. Holm, L. (2005). Construction Cost Estimating : Process and practice. London: Pearson Education,

Inc. Holroyd, T. M. (2000). Principles Of Estimating. London: Thomas Telford.


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Jackson, S. (2002). Project cost overrun and cost management. Proceedings of Association of Researchers in Construction Management 18th Annual ARCOM Conference. Newcastle: Northumber University.

Jaggar, D., Ross, A., Smith, J., & Love, P. (2002). Building Design Cost Management. Oxford: Blackwell Science Ltd.

Kaming, P. F., Olomolaiye, P. O., Holt, G. D., & Harris, F. C. (1997). Factors influencing construction time and cost overruns on high-rise projects in Indonesia. Construction Management and Economics (15), 83-94.

Koushki, P A; Al-Rashid, K; Kartam, N. (2005, March). Delays and cost increase in the construction private resedential projects in Kwait. 23 (3), pp. 285-294.

Le-Hoai, L., Lee, Y. D., & Lee, J. Y. (2008). Dealy and Cost Overruns in Vietnam Large Construction Projects: A Comparisom with Other Selected Countries. KSCE Journal of Civil Engineering , 12 (6), 367-377.

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Reinhold. PMI. (2008). A Guide to the Project Management Body of Knowledge (Fourth ed.). Sylva: PMI

Publishing. Potts, K. (2008). Construction Cost Management. New York: Taylor and Francis. Regener, J. R., Rosen, H. J., Wegant, R. S., & Kalin, M. (2010). Construction Specifications Writing:

Principles and Procedures. London: John Wiley & Sons. RIBA. (2007). Outline Plan of Work. London: Royal Institute of British Architects. Schutte, S. D., & Liska, R. W. (1994). Building Construction Estimating. Singapore: Mcgraw-Hill, Inc. Seeley, I. H. (1996). Building Economics (Fourth ed.). London: Macmillan Press LTD. Smith, J., & Jagger, D. (2007). Building Cost Planning for the Design Team (2nd ed.). Oxford: Elsevier. Sundaram, V. (2008). Essentials of Design Phase Cost Management and Budget Control. Cost

Engineering , 50 (2), 24-28. Tichacek, R. L. (2006). Effective Cost Management - Back to Basics. Cost Engineering , 48 (3), 27-33. Twyford, J. (2002). Design and Construction: Building in Value. (R. Best, & G. De Valence, Eds.)

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opportunities. Pennsylvania: PMI. Woodward, J. (1997). Construction project Management. london: Thomas Telford Publishing.

Figure (1): Design cost management concept map. Adapted from Smith and love (2000)

No. Causes of Cost Overrun

1

Lack of information and definitions of scope due to incomplete recognizing or badly developed client's needs and lack of involvement of the appropriate stake holders


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2 Inadequate design, design errors and mistakes, lack of details or contradiction in design and conflict between design documents (drawings and specifications)

3 Occurrence of design variations, changes or additional work by owner or designer

4 Selection of inappropriate designer according to the project's complexity and specialty

5 Not allocating sufficient resources and time to develop appropriate design

6 Lack of Designers understanding of cost and value and the subsequent cost implications of what included in the design

7 Lack of value management and Buildability consideration

8 Lack of communication and coordination between design participants of different background

9 Lack of involving special trades contractors or suppliers during the design development

10 Occurrence of mistakes in quantities taking off

11 Unavailability of construction cost data to develop a realistic cost estimate

12 Unrealistic estimation of construction period

13 Inadequate consideration of risks regarding site location and the unavailability of building materials, environmental concerns, weather, market trends, financing burdens, bonds and insurance costs, statutory constrains and other unforeseen risks

14 Selection of inappropriate contract type or the inappropriate allocation of risks in contract

15 Adopting Tight bidding conditions during tender regarding bonds, insurances or certificates required

16

Selection of inappropriate big construction companies with high mark-up and profits added to the presented tender price

Table (1): Selected causes of cost overrun from literature and after experts’ interviews adaptation for questionnaire evaluation.


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No. Causes Overall results Owners’ Architects’ Contractors’ Project

Managers’

Rank Rel. Imp. Rank Rel.

Imp. Rank Rel. Imp. Rank Rel.

Imp. Rank Rel. Imp.

3 Design changes and variations 1 100.00% 2 97.50% 1 100.00% 4 90.51% 3 96.88%

12 Unrealistic estimation of construction period 2 97.48% 4 86.67% 2 89.57% 2 100.00% 1 100.00%

1 Lack of scope definition 3 95.76% 3 93.33% 3 85.91% 1 100.00% 4 93.75%

2 Inadequate design, design errors and mistakes 4 90.92% 5 79.44% 4 84.76% 3 95.83% 5 84.13%

8 Lack of communication and coordination 5 85.27% 1 100.00% 7 68.80% 5 88.34% 2 99.16%

7 Lack of value management and Buildability consideration

6 79.52% 6 76.39% 5 80.60% 7 73.84% 8 69.11%

6 Lack of Designers understanding of cost and value in design 7 77.75% 8 66.67% 6 75.10% 6 81.22% 9 65.63%

13 Inadequate consideration of risks 8 71.48% 7 68.61% 8 68.00% 11 65.96% 7 78.13%

10 Quantities taking off mistakes 9 65.91% 13 52.78% 12 58.67% 9 66.74% 6 80.17%

11 Unavailability of cost data 10 65.68% 9 63.33% 10 60.34% 10 66.35% 10 64.90%

9 Lack of involving contractors or suppliers during in design 11 63.37% 12 54.31% 13 57.48% 8 68.46% 11 57.09%

5 Not allocating sufficient resources and time to develop appropriate design 12 60.66% 10 57.50% 9 66.00% 13 50.28% 13 54.09%

4 Selection of inappropriate designer 13 57.26% 14 46.94% 11 58.80% 12 54.15% 14 51.92%

16 Selection of inappropriate big construction companies 14 52.80% 11 55.56% 14 56.51% 16 39.45% 12 54.81%

14 Selection of inappropriate contract type 15 46.49% 15 44.86% 16 42.06% 14 47.96% 16 44.95%

15 Adopting Tight bidding conditions 16 45.70% 16 28.89% 15 47.33% 15 43.04% 15 50.24% Table (2): Ranking and relative importance according to the questionnaire overall results and each party’s results


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Chart (1): Frequency index, impact index, importance index and relative importance of cost overrun cause according

to the questionnaire overall results. Chart (2): Overall and different parties’ relative importance of causes

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148

The surrogate motherhood: law, morals, and policy

Alexey Anisimov

Professor, Chair of Civil Law and Procedure, Volgograd Institute of Business, Russia


Abstract The surrogate motherhood implies bearing and delivering of a child (premature delivery included) under the contract concluded between a surrogate mother (a woman bearing a child after a donor embryo transfer) and potential parents, whose germ cells were used for the fertilization, or a single woman, who cannot bear and deliver a child for medical grounds. The article focuses on the number of legal, political, moral, and ethical problems arising when implementing surrogate motherhood. The author analyzes laws of various countries in the world as well as the court practice. The author distinguishes the following legal problems in this sphere: ensuring rights of a married infertile couple that concluded a contract with a surrogate mother; ensuring rights of children born by a surrogate mother; and the necessity to clarify the content of a contract with a surrogate mother. Within the study of the moral and ethical aspect of surrogate motherhood two issues are under consideration – secular and religious. In the first sense, representatives of medicine considering the problem of surrogate motherhood from a pragmatic point of view adhere to the up-to-date reproductive technologies and support them. Lawyers also don’t see here any particular ethical problems. They suppose that the right to physical and mental integrity involves a legal power of a citizen to independently use and dispose of his own body and freely commit acts in accordance with his consciousness and will. The position of religious communities on this problem is controversial. Islamic theologists admit the application of this method provided that it is the only way to bear a child. The Russian Orthodox Church has a very negative attitude toward the idea of surrogate motherhood. Its representatives sometimes compare surrogate motherhood with prostitution. They claim that if the God did not give children to a married couple, it is inadmissible to correct it with medical remedies (by means of reproductive technologies). In conclusion the attention is drawn to the necessity of political solution of this problem by developing and providing government financing for a special program to support those women, who got into a tight real-life situation. It is expected that the solution of this range of existing problems will diminish the acuteness of public discussions. Keywords: surrogate motherhood; reproductive technologies; contract; infertility; child; human rights; medicine; policy. 1. Introduction

At the end of the 1970s the number of infertile couples in the world amounted to 5%. At the present time, their number has increased up to 10-15%. According to some reports, they are now up to 30%. In the meanwhile,

Journal of Politics & Law JULY 2013 VOL.1, No,5


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even the 15% figure proves that this is the nationwide problem (Malinovskaya, E.G.,2007). To cure infertility, modern medicine uses assisted reproductive technologies (ART), i.e. the methods of treatment, when some certain or all stages of conception and early fetation are implemented out of the body. One of the ART methods is surrogate motherhood based on in vitro fertilization (IVF), i.e. the conception out of the human body and further transfer of the fertilized ovum into the uterus of another woman (a surrogate mother).

The surrogate motherhood implies bearing and delivering of a child (premature delivery included) under the contract concluded between a surrogate mother (a woman bearing a child after a donor embryo transfer) and potential parents, whose germ cells were used for the fertilization, or a single woman, who cannot bear and deliver a child for medical grounds (Item 9 of Article 55 of the Law of the Russian Federation passed on November 21, 2011 “On the fundamentals of the Russian Federation citizens’ health care”).

This method of artificial fertilization was first applied in Great Britain in 1978. The first child properly carried by a surrogate mother was born in the USA in 1986. Shortly after the wide-scale application of this method, it became evident that this medical problem has some serious legal, political, ethical, and other aspects. 2. The attitude of different countries in the world toward the legality of this procedure

The surrogate motherhood was prohibited by the Brussels Declaration of the World Medical Association in 1985. The draft resolution about the legislative recognition of surrogate motherhood was rejected by majority of voters of the Social, Health and Family Affairs Committee of the Council of Europe on December 16, 2005. The prohibition was supported in Austria, Norway, Sweden, France, some states of the USA, Italy, Switzerland, and Germany. Its violation involves sanctions up to imprisonment. In some countries only non-profit surrogate motherhood is permitted (Australia, Great Britain, Denmark, Spain, Canada, the Netherlands, and some states of the USA). In Israel an agreement for surrogate motherhood is to be approved by a special committee consisting of social workers, doctors, and religious figures. In Belgium, Greece, Ireland, and Finland the engagement of surrogate mothers for infertility treatment is not regulated by law but exists in practice. In most states of the USA, the Republic of South Africa, Russia, Georgia, Ukraine, Belarus, and Kazakhstan the surrogate motherhood on a commercial basis is allowed (Besedkina, N., 2011; Vonsovich, K.I., 2013).

In those countries, where the surrogate motherhood is allowed, there are two legal approaches: 1) all the rights for a child born by a surrogate mother belong to his/her genetic parents; 2) genetic parents can be registered as parents of a child only with the consent of a surrogate mother (Khazova, O.A., 1996). For instance, in the Russian Federation the second approach is used. 3. The legal aspect of surrogate motherhood

The legal aspect of the problem of surrogate motherhood in those countries, where this medical procedure has been legalized, has the following issues: 1) ensuring rights of a married infertile couple that concluded a contract with a surrogate mother. In this regard, the main problem is the standards of laws of some countries, according to which a surrogate mother has a right to keep her child. And there is no way to prevent it. As a result, the rights of the married couple, who gave their consent for an embryo implantation and concluded a contract with another woman to bear their child, will be violated. Undoubtedly, the deceived customers will be able to seek reimbursement for their expenses and return of an advance (and even compensation for moral damage). However, taking into account that women, who agree to become surrogate mothers, in most cases suffer financial hardship, it will be hard to enforce the court decision. Such an ambiguity makes it possible for a surrogate mother to abuse the law. As a vivid example, one can consider a case that took place in the Russian city of Chita. In 2004 a married couple entered into an agreement with a surrogate mother, who then refused to give them a born child. Moreover, she filed a lawsuit against the child’s father to recover child support and won it. In this case, as O.Y. Lebedeva points out, “there is an obvious


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violation of rights of the man being the child’s natural father as well as legal principles of reasonableness and justness.” (Lebedeva, O.Y., 2012). To prevent such situations, it is necessary to legislatively enshrine that if a surrogate mother refuses to register a married couple as parents, legal relations of surrogate motherhood cease to exist, because its main purpose was not implemented, i.e. the couple did not get a child. It is recommended to apply the RF Family Code standards concerning an artificial fertilization. Then a husband will get a donor status and won’t be acknowledged as a father under these circumstances (Mitryakova, E.S., 2005).

The following case from the Russian court practice can serve as another striking example. On February 8, 2010 the married couple Ch. being genetic parents and Mrs. R. concluded a contract for surrogate motherhood, according to which a surrogate mother after the implantation of an embryo obtained by means of in vitro fertilization of the genetic parents’ germ cells, in case of pregnancy commits herself to bear, deliver and give a born child to the genetic parents. On February 19, 2010 Mrs. R.’s pregnancy was clinically confirmed. On June 15, 2010 she took her application for participation in the surrogate motherhood program from the clinic. On November 4, 2010 she delivered a baby. On December 14, 2010 she registered the child in the civil registry office and indicated herself as his mother and her ex-husband as his father with his consent. According to the general jurisdiction court decision made on March 11, 2011 that was left unchanged by the cassation court (court ruling, April 19, 2011), the married couple Ch.’s claims toward Mrs. R. and her ex-husband in order to establish the fact of origin of the child born by the surrogate mother, cancel the birth statement in the civil registry office, and oblige them not to create obstacles in registering the claimants as the child’s parents were dismissed, because the surrogate mother (defendant) hadn’t given her consent to indicate the claimants, the child’s genetic parents, in the official register of births as parents of the child born by her. Judges of superior authorities as well as the RF Constitutional Court didn’t find any violations of the Russian Constitution in the RF Family Code standards. However, Judge of the RF Constitutional Court S.D. Knyazev pointed out in his special opinion that when enshrining the exclusive prerogative of a surrogate mother in vesting genetic parents with “maternal and paternal rights, the legislator remains indifferent to the interests of those individuals, whose germ cells were used to fertilize a woman bearing a child. In such a way, it creates a legal framework for violating the balance of constitutional values and diminishing the rights and legal interests not only of genetic parents, but also of a child born as a result of application… of assisted reproductive technology.” (The decision of the RF Constitutional Court made on May 15, 2012. No. 880-O “On the refusal to accept for consideration a claim of Mr. and Mrs. Ch. about the violation of their constitutional rights by provisions of Item 4 Article 51 of the Russian Federation Family Code and Item 5 Article 16 of the Federal Law “On the acts of civil status”).

The practice of other countries regarding this issue can also seem ambiguous. Thus, in 1987 in New Jersey “the Sterns against Whitehead” case was considered. The genetic parents were claimants, while the surrogate mother, who decided to keep the child after the birth, was a defendant. When solving the problem of parental rights, the court took the genetic parents’ side. In such a way, the first judicial precedent was created. At the same time, in November 1997 the first legal proceedings on surrogate motherhood in Australia finished in favor of the surrogate mother. The court found the agreement for child-bearing to be invalid (Dikova, I., 2009).

In laws of some countries of the former USSR (Armenia, Kyrgyzia, etc.) it led to the appearance of standards, that a surrogate mother has no right to refuse to give a born child to those individuals or married couples who used assisted reproductive technologies and entered into an agreement in the manner prescribed by law. Special laws of these countries include standards related to responsibility of a surrogate mother for failure to execute a contract.


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2) ensuring rights of children born by a surrogate mother. In practice sometimes there can be situations, when a child is delivered with some genetic defects, and his natural parents refuse to take him (or divorce during the period of a surrogate mother’s pregnancy). Thus, in 1998 in the case In re marriage of Buzzanca (USA, California) a married couple concluded an agreement with a surrogate mother using ova and spermatozoa of anonymous donors. The husband filed his documents for divorce six days before the child was born. He refused him and stated that he was not his genetic father. However, the court came to a conclusion that both parents that entered into the agreement with the surrogate mother are his legal parents (Pestrikova, A.A., 2006). In this respect, the development of a mechanism to protect such children’s rights is required. 3) establishing a legal essence of a contract with a surrogate mother. In Russian civil law there are contracts that are directly indicated in the Civil Code of the Russian Federation as well as contracts that are not directly named in the RF CC. As for the second ones, law prescribes that such contracts must not contradict the fundamentals of civil legislation. An agreement between an infertile couple and a surrogate mother also belongs to this category of contracts. Unlike other contracts, it has a substantial specific character. The subject matter of such a contract is related to rendering specific services connected with child-bearing and further waiver of parental rights. The subject matter of this contract is property (civil) relations and closely related to them non-property (family) relations. It would be reasonable to include provisions about this contract (indicating its substantial terms, rights and obligations of the parties) in a special chapter of the Civil Code of the Russian Federation acknowledging the possibility of its conclusion. There are also some other legal aspects that are not still completely solved: - the period of time, during which a surrogate mother must make a decision whether to give or not a born child to genetic parents, is not determined (in those countries, where laws allow her to make such a choice); - apart from the age, having her own child or state of health, is it allowed to impose restrictions of non-medical character (criminal record, deprivation of parental rights, hereditary diseases, alcohol abuse, etc.) on a woman being a surrogate mother? - what guarantees of rights of genetic parents in good faith must be stipulated by law? And what penalties should be provided for a surrogate mother, who refused to perform a contract? - can the parties dissolve a contract for surrogate motherhood at the stage of a woman’s pregnancy? And if it is possible, then in what cases can they do it? - does a surrogate mother have a right to her remuneration (or part of it) if a child was still born through no fault of hers? - should the secret of adoption be extended to these relations? - is it possible to put a limit on the number of times for a surrogate mother to carry out her functions (or will it turn into a commercial activity)? - what form of consent of a surrogate mother’s husband to her participation in an agreement is required? What are the consequences of his refusal? If they cause the impossibility to conclude a contract, does it violate the surrogate mother’s rights?

In various countries in the world, which admit the possibility of surrogate motherhood, there are answers of different extent of completeness to these questions. However, the lack of clear regulation causes the controversial court practice. 4. The moral and ethical aspect of surrogate motherhood

This aspect of the matter has two issues – secular and religious. In the first sense, representatives of medicine considering the problem of surrogate motherhood from a pragmatic point of view adhere to the up-to-date reproductive technologies. As for the ethical aspect of the problem, a lot of medical workers suppose


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that surrogate motherhood does not contradict to ethics, if it “comes from medical grounds and excludes social reasons, when a woman is lazy to bear a child or she is afraid of the very act of delivery or doesn’t want her pregnancy to be an obstacle to her career.” (Shilova, S.D., 2012). Representatives of legal science also don’t see here any particular ethical problems. They suppose that the right to physical and mental integrity involves a legal power of a citizen to independently use and dispose of his own body and freely commit acts in accordance with his consciousness and will. The use and disposal of his own body by a person is carried out by exercising his legal powers as a proprietor. The citizen’s legal power to independently dispose of his own body is considered as the expression of his own will. That is why when a woman gives her consent to participate in the surrogate motherhood program possessing all the necessary information about possible complications, she can weigh the risks and make a reasonable decision toward her own health.” (Maleina, M.N., 1993). Beyond any doubt, such technologies are supported by childless couples wishing to have a baby that would be genetically “theirs”. Their only chance is to conclude a contract with a surrogate mother. Along with this, infertile couples’ relatives quite often agree to be surrogate mothers in order to exclude the commercial aspect condemned by society.

Opponents of this medical technology consider surrogate motherhood as a form of women’s exploitation and an unnatural phenomenon traumatizing a mental state of a surrogate mother and violating her dignity. In their opinion, children turn into goods in this case. (See the review of such a point of view: Reznik, E.S., 2007). Religious communities take a significant part in the discussion. Thus, Islamic theologists admit the application of this method provided that it is the only way to bear a child (a detailed report on this issue was made in the document No. 6/6/57 of the theological conference that was held on March 14-20, 1990 in Jiddah (Saudi Arabia). (Dronova, Y.A., 2007)

The Russian Orthodox Church has a very negative attitude toward the idea of surrogate motherhood. As its representatives point out, “surrogate motherhood just as well as prostitution humiliates a human being – whether a man or a woman.” (Smirnov D., 2011). Therefore, if the God did not give children to a married couple, it is inadmissible to correct it with medical remedies (by means of the mentioned type of reproductive technologies). However, such an approach cannot be acknowledged as convincing. First, the comparison of surrogate motherhood with prostitution is not really relevant, because these are absolutely different social phenomena. The prostitution at all times had been morally condemned by all the peoples and considered as unlawful, while an agreement for surrogate motherhood involves nothing illegal or immoral in terms of secular morals. Second, the ethical prohibition of phenomena and processes existing within the country and not presenting a big social danger doesn’t often give positive results.

For instance, the attempts to pass a “dry law” and impose restrictions on alcohol sales in different countries throughout the world didn’t give positive results anywhere. In Russia several years ago a gambling business was completely prohibited. All the casinos and other similar establishments were closed down. To develop a gambling industry, the special reservations far from major populated areas were allocated. It led to the appearance of underworld gambling business and caused a high-profile corruption scandal, in which leaders of the Prosecutor’s Office of the Moscow region were involved. As a result, instead of legal gambling business and payments into the budget, the country got the growth of crime and corruption. Fighting against prostitution is equally inefficient in Russia and many other countries of the former USSR. The existence of legal components of offences (crimes) in criminal and administrative codes in no way helps to eliminate it. It only criminalizes the problem. A much more sober approach was implemented by the authorities of Amsterdam that legalized this oldest profession and put its representatives under medical and tax control of the state.


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The situation with the prohibition of surrogate motherhood is just the same. The attempts to condemn and prohibit this type of social relations can only cause their criminalization within the corresponding country or the appearance of “reproductive tourism”. The “reproductive tourism” in scientific literature implies visiting another country that doesn’t prohibit but regulates these social relations by rule of law. (Rusanova, N.E., 2009). It seems that the wisest decision was made by legislators of those countries, which regulated actual in-demand relations of surrogate motherhood, put them under state control, and provided a legal framework for them. The existing legal or moral prohibition to use reproductive technologies by the same-sex couples creates one more problem in the context of human rights. In the former Soviet Union this issue is not even under discussion, while in Europe the attitude toward it is rather negative. 5. The political aspect of surrogate motherhood The political aspect of this problem has two issues: 1) The state policy can be directed at creating legal conditions for surrogate motherhood, can ignore this problem or create various obstacles. When the state power has a positive attitude toward surrogate motherhood, the question about the necessity to provide conditions to support women, who got into a tight financial real-life situation, inevitably arises. It is clear that in most cases a woman takes such a step because of money. But if there were consulting centers and governmental programs to help these women, there would be less surrogate mothers for financial reasons. The creation of appropriate conditions for a woman to take reasonable and completely voluntary steps to enter into an agreement for surrogate motherhood would diminish the acuteness of discussion about morals and ethics. The foundation of such centers could promote fighting against prostitution. In Russia and some other countries of the former USSR there is no such a policy even at the level of plans and concepts. In more developed European countries such a deliberate state policy is just a matter of time. 2) in Russia the possibility to create and register political parties appeared only in 2012. There aren’t so many radically different political forces expressing the interests of various groups of society and distinguished by propagandized values. It seems that in the near future there will be a political party standing up for conservative values and proclaiming a fight against all the visible social follies. The surrogate motherhood will probably be included in their number. If this party wins the election, it will very likely lead to changes in state policy in order to prohibit such reproductive technologies as surrogate motherhood. 3) in many European states there are objective demographic problems related to the birth rate decrease and impossibility to increase it by paying allowances for born children. In this case the legalization of the mentioned new reproductive technologies at the governmental level can diminish the acuteness of the problem. 6. Conclusion

The theory and practice of surrogate motherhood prove that various representatives of society are uncertain about this reproductive technology. Regardless of the objectively existing moral and ethical problems, this medical technology gains momentum each year. In the near future society will inevitably have to accept it. However, it is important to prevent indifference toward the evaluation of those reasons which make women serve as donors. In all the countries in the world that legalized surrogate motherhood appropriate measures should be taken to support women involved in a tight financial real-life situation. It must be done in order to diminish the social condemnation of this reproductive technology. In those countries, where its application is prohibited, the understanding of the necessity to develop a special state policy in the sphere of regulation of reproductive technologies is yet to come. The analysis of laws of the countries which legalized surrogate motherhood proves that there is a different attitude toward the rights of married couples and donor women. The choice of a certain model of legal status of subjects of a contract for surrogate motherhood mainly depends on the national specific character of a state.


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6. Bibliography [1] Malinovskaya E.G. Legal regulation of surrogate motherhood in the Russian Federation and the Republic of Belarus, Family and housing law. 2, 29-31, 2007. [2] Besedkina N. About the surrogate motherhood, Law and life. 7-8, 2011. [3] Vonsovich K.I. Assisted reproductive technologies as a method to increase the birth rate: legal aspects, Electronic journal “Vestnik of Novosibirsk State Pedagogical University”. 1, 2013. // www.vestnik.nspu.ru [4] Khazova O.A. The RF Family Code Comment, Moscow: BEK, 1996. [5] Lebedeva O.Y. Some problems of legal regulation of assisted reproduction in the context of the new Federal Law “On the fundamentals of the Russian Federation citizens’ health care”, Medical law, 2, 16-20, 2012. [6] Mitryakova E.S. Contestation of parental rights when applying the method of surrogate motherhood, Family and housing law, 2, 2-3, 2005. [7] Dikova I. Establishing paternity and maternity when applying assisted reproductive technologies, Law and life. 2, 2009. [8] Pestrikova A.A. Problems of an agreement for surrogate motherhood, Civil law, 2, 14-17, 2006. [9] Shilova S.D. New medical technologies in reproduction and their legislative support, Protection of maternity and childhood, 1, 8-10, 2012. [10] Maleina M.N. The right of an individual to bodily (physical) integrity, State and law. 4, 97-106, 1993. [11] Reznik E.S. The right to life: civil-legal aspects: Candidate’s thesis in law, Ekaterinburg, 2007. [12] Dronova Y.A. What one should know about surrogate motherhood, Moscow, 2007. [13] Smirnov D. Surrogacy is akin to prostitution http://www.pravmir.ru/protoierej-dimitrij-smirnov-surrogatnoe-materinstvo-srodni-prostitucii/ [14] Rusanova N.E. The “reproductive tourism” in Russia: possibilities and problems, The Service Plus scientific journal, 3, 83-86, 2009.


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International Inter-institutional Partnerships in Higher Tourism

Education: The Case of Moi University, Kenya

Beatrice H. Ohutso Imbaya

Department of Tourism Management, Moi University, P O Box 3900 – 30100

Eldoret, Kenya

Accepted 6 August, 2013

Abstract Though internationalization of higher education is now well documented in the developed nations, there is a dearth of literature in this area in Africa. In Kenya, the few studies available focus on inter-institutional partnerships between higher institutions of learning offering tourism education and so little is known about these partnerships. And yet Kenya being a leading tourist destination in Africa, it has increased engagements with other parts of the world including academic partnerships motivated by its position in tourism. Consequently, Kenyan universities have introduced academic programs in tourism and hospitality which are now attracting more inter-institutional partnerships. Using the case of Moi University, this study seeks to establish the extent to which staff and student exchanges resulting from these partnerships serve the interest of the collaborating departments in Kenyan universities. Key Words: Inter-institutional, Collaborations, Internationalization, Tourism education

1.Introduction

Recently, there is an increasing focus on higher education collaboration and exchange within regions, but without withdrawing the attention given to inter-regional cooperation in higher education (Abebaw, n.d.). The underlying strategies are to promote international education programs and encourage staff and student exchange programs with foreign institutions. In the context of globalization and the rapid changes experienced in higher education (HE) in the last few decades world-wide, internationalization of HE is now well documented, especially in the developed nations. Various partnerships and international research networks linking Higher Education Institutions (HEIs) in the global North and South have emerged, as an expression of higher education’s contribution to international development and of the need to bridge the North/South knowledge divide. Such

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partnerships have contributed to enhanced human and infrastructural capacity, as well as to a better integration of the Southern partners in international exchanges (Nakabugo et al., n.d.). Thus, inter-institutional alliances or partnerships are of increasing importance in higher education (Shaw & Holmes, 2005).

The motives for the formation of these alliances include resource needs for assets or capabilities which the university does not possess, such as the need to cross organization boundaries to create interdisciplinary teams (Shaw & Holmes, 2005). This suggests that such linkages and inter-institutional collaborations constitute the future of higher education. However, despite the benefits of inter-institutional collaborations, myriad of problems have emerged including management and financial limitation, that this study using primary and secondary data purposes to discuss and through SWOT analysis make tangible recommendations for effective collaborations in view of the benefits (Cultural exchange, networking, academic advancement among others) that are associated with such collaborations.

In addition, generally in Africa, and particularly in Kenya, there is a dearth of literature in this area, especially as it relates to internationalization of higher education in tourism. Yet Kenya is one of the leading tourist destinations in Africa. A position that has led to increased engagements with other parts of the world. Even academic partnerships have been motivated by this position of Kenya and thus Kenyan universities have introduced programs in tourism and hospitality which are now attracting more inter-institutional partnerships. In Kenya, it is Moi University (MU) which spearheaded higher education in tourism and it is therefore arguable that a study of the MU case is representative of Kenya as a whole. Few studies available, in Kenya, (Munavu, 2004; Jowi, 2009; Ooro, 2009) have focused mainly on internationalization of higher education in general. Likewise, little is known regarding higher education inter-institutional partnerships in tourism education and hence this constitutes the gap that this paper endeavors to fill.

2.Literature Review

2.1Partnerships and Collaborations in Higher Education

In HE, internationalization was for a long time mainly considered as the cross-border mobility of individual students (de Wit, 2002; Van der Wende, 2001). In the last three decades, however, the conceptual understanding of internationalization has broadened, and started to include many international activities. This includes collaboration in teaching, research, and other projects; mobility of students and scholars; inclusion of international dimensions into the curriculum; recruitment of foreign students, establishing campuses in foreign countries; and countries collaborative works toward common frame of reference (Oyewole, 2009; Teferra & Knight, 2008).

Previously, development organizations worldwide have endeavored to facilitate North – South university collaborations, to help tackle issues that mainly affect the South, such as hunger, ill-health, illiteracy, conflict, human rights abuse, and environmental degradation (Samoff & Carrol, 2002; Bradley, 2007). However, as indicate by Nakabugo et al., ( n.d.), though previous North-South partnerships have contributed significantly to enhancing research capacity in the South (Gaillard, 1994), a number of weaknesses have emerged. These include, among others, the fact that such partnerships’ impact on research capacity building has often related more to individual capacity building rather than at an institutional level (Velho, 2002). Katz and Martin (1997) distinguish between collaboration at different levels and show that inter-institutional and international collaboration need not necessarily involve inter-individual collaboration. Lariviere, Gingras and Archambault (2006), concur that there are two types of collaboration: international and inter-institutional.

In addition, the rationale for most North-South partnerships has been narrowly focused on addressing capacity gaps in the South and less on the learning and building of capacity within Northern counterparts (King,


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2008); they have been largely managed from outside the developing countries, and their sustainability has been donor-dependent. While principles of good partnership practice have existed for decades (for example, United Nations, 1979), the actual nurturing of mutually-beneficial North-South partnerships still remains a challenge not least because the ‘…asymmetry between partners remains the principal obstacle to productive research collaboration’ (Bradley, 2007:2).

Kritz (2006) states that, in the past, international research collaboration, mainly, involved individual faculty members from developed countries travelling to other developed countries or to a developing one for research collaboration. On those trips, the visiting foreign faculty member may have delivered lectures or participated in seminars at the host institution but the main purpose of the visit was to collaborate with research colleagues in another country. On the other hand, Khaemba, (2004) explains that the objective of student exchange is to enable the university students to gain a better understanding of the cultural, economic and social systems of the countries of the host institutions, while staff exchange is seen as a strategy in working towards international best practices in teaching. Presently, these Cross Boarder Higher Education (CBHE) initiatives are growing rapidly and they will allow students in different countries to do their tertiary studies in their homelands or neighboring countries in their regions (Kritz, 2006) or in other continents. Nevertheless, in the context of higher tourism education, exchange programmes for staff and students can act as excellent experiential learning engagement that accords the beneficiaries the kind of exposure needed to understand the intricate dynamics of tourism both at domestic and international level.

2.2History of Tourism Education in Kenya

The history of tourism education dates back to 1969 when the first Hotel Management course in Kenya was introduced at the Kenya Polytechnic, Nairobi. Since the hotel management focus of this course was narrow, there was still need for broader training and education to cover other areas in tourism. This led to the establishment of Kenya Utalii College (KUC) as a joint project between the Swiss and Kenyan governments in 1975. Thereafter a number of private and public middle level training were established to provide tourism training in specific skill for operatives in various subsectors.

Unfortunately, the private provision was so heavily commercialized that there were calls for regulation and a harmonization of both curricula and qualifications (Sindiga, 1994; Mayaka, 1999; Mayaka & King, 2002). It is in view of these limitations that the presidential committee on employment saw a need for training of tourism officers at university level (Kenya, 1991).

2.3Higher Education in Tourism in Kenya

In Kenya, Tourism training and education at university level was initiated at MU’s Chepkoilel Campus in 1992 as a result of a presidential committee report. Later the Moi University Department of Tourism (MUDOT) was established to meet the industry demand for trained employees in the tourism sector and to undertake research to promote the sustainable development of tourism in Kenya.

In an attempt to fill a gap in resource and staff training needs, MUDOT forged collaborations with international institutions of higher learning. For instance, a collaboration between MUDOT and the Institute for Service Management of the CHN University of Professional Education in Leeuwarden (the Netherlands) and Wageningen University and Research Centre (the Netherlands) provided financial investments, workshops, short term and long term strategic planning assistance as well as Master and Ph.D. training to Kenyan students. This collaboration also assisted in the founding of a research centre; the training of staff at Master and Ph.D. level; the development and implementation of a curriculum on problem Based Learning (PBL); the establishment of a documentation and computer centre; and the establishment of an African Chapter of the Association for Tourism


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and Leisure Education (ATLAS).

Other universities, both public and private, including Maseno, Kenyatta, Nairobi, Egerton, United States International University (USIU), among others, have followed and introduced either schools and departments in tourism and related areas (for instance. hospitality and institutional management) or tourism subjects within traditional discipline-based departments such as Geography, Business, History, and others. The African Virtual University based at Kenyatta University also offers some tourism subjects via distance education. However, MU is the foremost institution, having a School of Tourism, Hospitality and Events Management which has three specialized departments namely Tourism Management, Travel and Tour Operations Management and Hospitality and Hotel Management and now offers degrees up to Ph.D. level.

Therefore, this paper seeks to establish how Kenyan Universities, using the case of MU, have applied international inter-institutional collaborations in the links they forge with similar institutions from other countries and the implications of these collaborations for higher education in tourism in Kenya. Specifically, this paper attempts to establish the extent to which staff and student exchanges resulting from these inter-institutional collaborations serve the interest of the collaborating departments in Kenyan universities.

3.Research Questions

• What are the international inter-institutional collaborations existing in Moi University?

• To what extent have staff and student exchanges resulting from international inter-institutional collaborations served the interest of the collaborating university?

4.Methodology

This paper was based on a document analysis and in-depth-interviews with staff and beneficiaries of these collaborations at MUDOT and International Office. The paper uses the SWOT analysis as its analytical model to expose the strengths, weakness, opportunities and threats associated with international inter-institutional collaborations. The SWOT analysis informs the way forward regarding the implications of existing international inter-institutional collaborations on higher education in tourism in Kenya. It also explores the extent to which staff and student exchanges resulting from these collaborations serve the interest of the collaborating Institutions.

5.Limitations of the study

The study is primarily based on Moi University, Kenyan experience, but it may be generalized in view of the fact that literature sources address related situations from other parts of the world.

6. Findings

6.1Memoranda of Understanding between Moi University and International HE institutions by region

In order to assess the implications of the international inter-institutional collaborations existing in Moi University on higher education in tourism, this study sought to examine the number of Memoranda of Understanding (MOU) signed between MU and HE institutions from other countries by region (Table 1). The regions were grouped according to the United Nations World Tourism Organization (UNWTO) classification of tourism regions. Further, the study examined the Objectives of the Signed MOU with MUDOT.

The study found that, most (75%) institutions collaborating with MU were from outside the African region with United States of America having the highest (25%; N=5) number of institutions collaborating with MU. The rest of the countries had one (5%), except for France, South Africa and Egypt each of which had 2 (10%) institution collaborating with MU (Table 1).

All collaborating institutions, except 1(5.3%), were universities. The nature of collaborations included:


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Project funding, education, Academic cooperation and exchange, teaching, scientific cooperation, double degree agreement, strategic alliance, technological research collaboration (Table 1).

6.2International Inter-institutional Collaborations with MUDOT

6.2.1Objectives of the Signed MOU with MUDOT

Available documents revealed 5 signed MOU between MUDOT and international HE institutions (Table 2). These MOUs were signed with Lyon II University, France; Indiana University, USA; University of Wales Institute, UK; Suez Canal University, Egypt; and University of Nordland, Norway (Table 2).

Information obtained from document analysis indicates that the collaboration between MUDOT and Lyon II France (Lumiere), France with the objective of Exchange of students programmes; exchange of lecturers/joint researchers; upgrading of teaching resources; and developing article writing in French/English(peer review) (Table 2). The study revealed that this collaboration has resulted in: 4 teaching staff from MUDOT visiting Lyon II on exchange as visiting lecturers while 2 professors from Lyon have visited MUDOT to give lectures to undergraduate and Post-graduate students in MUDOT. Further, 4 students from MUDOT have been trained in Lyon II at Masters level and 6 at Ph.D. level.

The objectives of the collaboration existing between MUDOT and Indiana University, USA were found to be: to establish a mechanism for economic development; facilitate continuing Education; Research; Service; and to provide international experience for IUPUI and MU faculty and students. The results of this collaboration are that 9 Students and 7 faculty members of IUPUI have visited MUDOT on summer study abroad program.

The collaboration between MUDOT and University of Wales Institute, Cardiff, UK aimed to facilitate students exchange visits; staff exchange visits; networking; thematic workshops; and documentation. This collaboration has resulted in 6 students visiting Wales Institute on exchange to develop their research proposals for Ph.D. degree. 1 professor from Wales Institute has been involved in the supervision of Ph.D. students at MUDOT and examining of post graduate student projects.

6.3Staff and Student Exchange Programmes in MUDOT

To determine the extent to which staff and student exchanges resulting from international inter-institutional collaborations served the interest of the collaborating department this study sought to establish the areas of exchange and the number of staff and students coming in and those going out of MUDOT on exchange between 2008 and 2012 (Table 3 and Table 4).

6.3.1Staff Exchange in MUDOT (2008 – 2012)

The findings of this study indicate that between 2008 and 2012, the areas in which MUDOT had received staff from collaborating institutions on exchange were: research collaboration; and supervision of graduate students (Table 3). On the other hand, MUDOT members of staff have gone to collaborating institutions for international experience; as external examiners; to participate in seminars, workshops and conferences (Table 3).

In terms of the number of staff participating in the exchange, it was found that between 2008- 2012, a total of 19 (100%) members of staff from collaborating institutions visited MUDOT on exchange, while 13 (100%) members of MUDOT went out to collaborating institutions on exchange (Table 3). Majority (42.1%; N = 8) of staff from collaborating institutions visited MUDOT to have an international experience. A significant number of those from collaborating institutions also visited as external examiners (21.1%; N=4) and to supervise graduate students (21.1%; N=4). Conversely, most (76.9%; N=10) staff from MUDOT visited collaborating institution to attend seminars, workshops and conferences (Table 3).


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6.3.2Student Exchange in MUDOT (2008 – 2012)

The areas of exchange for students between 2008–2012 were internship; developing research skills; and study abroad program (Table 4). A total of 11 (100%) students visited MUDOT while 4 (100%) from MUDOT went out on exchange. Most (81.8%; N= 9) of those from collaborating institutions who visited MUDOT were on study abroad program while All (100%; N=4) those from MUDOT went to collaborating institutions to develop research skills (Table 4).

A SWOT Analysis of the International Inter-institutional Collaborations in MU

Strengths Weaknesses

1. MOU between MU and Partners

- Collaborates with many institutions from all regions in the world good for benchmarking as MU can draw from the strengths of each

2. Objectives of Collaborations with MUDOT

- Center on empowerment and skills development such as research, teaching etc.

3. Staff and Student Exchange

- Gives Students and staff exposure and encourages scholarship

1. Sustainability of MOU is donor dependent

2. Objectives set are similar for all the partners(Duplication)

3. MUDOT partners not regionally balanced. Not augur well for tourism

4. Both staff and student exchange not mutually beneficial to both partners

5. Financial limitations

- Administrative and Managerial

Opportunities Threats

1. Foreign relations for tourism/trade

2. Recruitment of foreign students

3. Inclusion of foreign dimensions in the curriculum

4. Mobility of staff and students

5. Improvement of human resource

6. Establishing campuses in foreign countries

7. Chances for education/conference tourism

1. Loss of identity

2. PR gimmick to gain international recognition/branding

3. Brain drain/turnover

4. Competition

5. Commercialization of HE

6. Pursuing self-interest

7. Integrity issues (accreditation)

Source; (Authors, 2012)

7. Way Forward

Proper collaborations are needed for balance in terms of participation and contribution from both parties. Therefore there should be:


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Pre-collaboration planning/needs analysis taking into account the needs of the tourism department, university and industry at large.

A Departmental policy on international collaborations/staff and student exchange outlining the selection criteria.

An Implementation plan/strategy at departmental level with clear time lines and a budget.

Enhanced financing/funding to departments to support staff and student exchange.

Department to pursue increased regional collaborations to enhance tourism.

REFERENCES Abebaw Y. A. (n.d.). Internationalization of higher education and the need for introducing credit

accumulation and transfer system (CATS) in Africa: Potential opportunities and challenges. Tampere University, School of Education, Tampere, Finland. http://www.nai.uu.se/ecas-4/panels/1-20/panel-6/Abebaw-Adamu-Full-paper.pdf

Bradley, M. (2007). North-South Research Partnerships: Challenges, Responses and Trends—A

Literature Review and Annotated Bibliography, Working Paper 1, IDRC Canadian Partnerships Working Paper Series, International Development Research Centre, Ottawa.

De Wit, H. (2002). Internationalisation of Higher Education in the United States and Europe.

Westport. CT: Greenwood Gaillard, J. F. (1994). ‘North-South research partnership: Is collaboration possible between

unequal partners?’ in Knowledge and Policy, Vol. 7, 2, pp. 31-63. Jowi, James O. 2009. “Internationalization of Higher Education in Africa: Developments, Emerging

Trends, Issues and Policy Implications.” Higher Education Policy 22:263-281.

Katz, J. S. & Martin, R. B. (1997). What Is Research Collaboration? Research Policy, 26, p. 1-18. Kenya, Republic of (1991). Development and employment in Kenya: A strategy for the

transformation of the economy - Report of the Presidential Committee on Employment. Nairobi: Government Printer

Khaemba, B. M. (2004). “International Dimensions of Moi University.” In Internationalisationof

Higher Education: The African Experiences and Perspective (Eds) D. K. Some and B. M. Khaemba. Eldoret Moi University Press.

King, K. (2008). ‘The promise and peril of partnership (editorial)’ In King, K. (ed.) The politics

of partnerships: Peril or promise, NORRAG NEWS, No. 41 (Special Issue): http://www.norrag.org/pdf/*NN41.THE%20POLITICS%20OF%20PARTNERSHIP.pdf

Kritz, M. M. (2006). Globalisation and Internationalisation of Tertiary Education. Ithaca, New York: Cornell University.

Larivière, V., Gingras, Y. and Archambault, E. (2006). Canadian Collaboration Networks: A Comparative Analysis of

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The Natural Sciences, Social Sciences And The Humanities. Scientometrics, Vol. 68, No. 3 519–533. Munavu, R., (2004). “Internationalisation Perspectives in the Context of the African Continent.” In

Internationalisation of Higher Education: The African Experiences and Perspective (Eds) D. K. Some and B. M. Khaemba. Eldoret Moi University Press.

Mayaka, M. A. (1999). An Assessment of Tourism Training and Education Quality, The case of Kenya’s Tour Operators Thesis submitted in partial fulfillment of the requirement for Masters of Business in Tourism Management, Victoria University of Technology, Melbourne.

Mayaka, M. & King B. (2002). A Quality Assessment of Education For Kenya Tour Operations Sector. Curr. Iss. Tourism, 5(2): 112 – 133.

Nakabugo, M. G., Barret, E., McEvoy, P. & Munck, R. (n.d.). Best practice in North-South research relationships in higher education: The Irish African partnership model. Policy and Practice - A Development Education Review. Retrieved from: http://www.developmenteducationreview.com

Ooro, S., (2009). The Quest for Inclusive Higher Education in Kenya: A Vivisection of Concerns, Policies and Reform Initiatives. OCIDES, MAHE INCHER-Kassel, Germany.

Oyewole, O. (2009). Internationalization and its implications for the quality of higher education

In Africa. Higher Education Policy, 22(3), 319-329. Samoff, J & Carrol, B (2002) ‘The promise of partnership and continuities of dependence:

External support to Higher Education in Africa’ In Proceedings of the 45th Annual Meeting of the African Studies Association, 5-8 December 2002, Washington.

Shaw, S. & Holmes, P. (2005). Collaboration processes in inter-institutional alliances in higher education: Higher education in a changing world. Proceedings of the 28th HERDSA Annual Conference, Sydney, 3-6 July 2005: p. 480. Australia: Higher Education Research and Development Society of Australasia, Inc.

Sindiga, I. (1994). Employment and training in tourism in Kenya. Journal of Tourism Studies, 5(2), 45-52.

Teferra D. & Knight, J. (2008). Introduction. In D. Teferra & J. Knight (Eds.), Higher education

in Africa: The international dimension (pp. xix–xxiv). Accra/Boston: Association of African Universities/Center for International Higher Education.

United Nations, (1979) United Nations Conference on Science and Technology for

Development, 20 August to 1 September 1979, Vienna. Van der Wende, M. (2001). Internationalisation Policies: About New Trends and Contrasting

Paradigms, Higher Education Policy, 14 (3): pp. 249-259. Velho, L. (2002). ‘North-South collaboration and systems of innovation.’ In Royal Netherlands

Academy of Arts and Sciences North-South Research Cooperation, international conference, December 2001: http://www.knaw.nl/publicaties/pdf/20021020.pdf.

http://www.developmenteducationreview.com/


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Appendix Tables Region Country Collaborating Institutions Nature of Collaboration

Africa Morocco Moi University Chepkoilel Campus and Institut Mondial Du Phosphate. (World Phosphate Institute)

Project Funding

South Africa Moi University and the University of Cape Town

Funding of Projects and research

South Africa Moi University and Tshwane University of Technology

Research, Education, Training and Technological Development

Ethiopia Moi University and Jimma University-Ethiopia(JU-E)

Training and Research Collaboration

Namibia Moi University and University of Namibia(UNAM)

Teaching, Research and Outreach

Americas USA Moi University and Ball State University Muncie, Indiana, USA

Educational Exchange

USA Moi University and Indiana University Education and research especially in Health related areas

USA Moi University Oklahoma State University Okmulgee, USA

Strategic Alliance

USA Moi University and the University of Georgia, USA

International Cooperative Agreement

USA Moi University and Michigan State University, USA

Project Funding

Canada Moi University and the University of Western Ontario-Canada

International Research Collaboration

Asia and Pacific

China Moi University and Jiangxi Normal University, China

Friend University ties

Singapore Moi University and The Technische Universität Mϋnchen, Singapore

Academic Cooperation and Exchange

Europe France Moi University Chepkoilel Campus and Nancy University, France

Education

Netherlands Moi University and Hogeschool Utrecht University of Applied Sciences, Netherlands

Double Degree Agreement

Germany Moi University and University of Bayreuth, Germany

Academic and Cultural exchange in Education and Research.

France Moi University and The Universitè Academic Cooperation

http://www.imphos.org/

http://www.uct.ac.za/

http://www.uct.ac.za/

http://www.tut.ac.za/

http://www.tut.ac.za/

http://www.ju.edu.et/

http://www.ju.edu.et/

http://www.unam.na/

http://www.unam.na/

http://io.mu.ac.ke/cms.bsu.edu/

http://io.mu.ac.ke/cms.bsu.edu/

http://www.indiana.edu/

http://www.osuit.edu/

http://www.osuit.edu/

http://www.uga.edu/

http://www.uga.edu/

http://www.msu.edu/

http://www.msu.edu/

http://www.uwo.ca/

http://www.uwo.ca/

http://www.jxnu.edu.cn/

http://www.jxnu.edu.cn/

http://www.nus.edu.sg/iro/sep/partners/pu/germany/tu-munich.html

http://www.nus.edu.sg/iro/sep/partners/pu/germany/tu-munich.html

http://www.en.uhp-nancy.fr/

http://io.mu.ac.ke/international.hu.nl/



http://www.neu.uni-bayreuth.de/en/Uni_Bayreuth/home/index.html

http://www.neu.uni-bayreuth.de/en/Uni_Bayreuth/home/index.html

http://www.univ-lyon2.fr/www0-home-157320.kjsp


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Lumiére lyon 2, France

Norway Moi University and University of Nordland, Norway

Academic and Cultural exchange in and Research Collaboration

Middle East

Egypt Moi University and Alexandria University, Egypt

Synergy on Academic Programmes

Egypt Moi University and Suez Canal University

Exchange of International Scientific and Educational Co-operation

Table 1: Signed MOU between MU and International Institutions by Region

(Source: Moi University International Office, 2012)

Collaborating Institutions Expected Outputs/Objectives

Moi university and Lyon II France (Lumiere), France

2009

i. Exchange of students programmes

ii. Exchange of lecturers/joint researchers

iii. Upgrading of teaching resources

iv. Developing article writing in French/English(peer review)

Moi University and Indiana University (IUPUI), USA

i. Establish a mechanism for economic development

ii. Facilitate continuing Education

iii. Research

iv. Service

v. Provide international Experience for IUPUI and MU faculty and students

Moi University and University of Wales Institute, Cardiff, UK

i. Students Exchange Visits

ii. Staff Exchange Visits

iii. Networking

iv. Thematic Workshops

v. Documentation

Moi University and Suez Canal University, Egypt

i. Staff training /exchange

ii. Visiting professors

iii. Student exchange

Moi University and University of Nordland, Norway

i. Promoting educational opportunities

ii. Cross-cultural understanding

iii. Staff exchanges

iv. Student exchange

v. Curriculum development

vi. Comparative research

Table 2: Outputs/Objectives of MUDOT’s International Inter-institutional Collaborations

http://www.univ-lyon2.fr/www0-home-157320.kjsp

http://www.alexu.edu.eg/

http://www.alexu.edu.eg/

http://scuegypt.edu.eg/

http://scuegypt.edu.eg/


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Source (MUDOT, 2012)

Areas of Exchange No. from Collaborating Institution

No. from MUDOT

Participation at Seminars, Workshops and Conferences 0 10

External Examiners 4 1

Research Collaboration 3 -

International experience 8 2

Teaching and Graduate supervision 4 0

Total 19 13

Table 3: Staff Exchange in MUDOT (2008 – 2012)

Source: (MUDOT, 2012)

Areas of Exchange No. of Students from Collaborating Institutions

No. of Students from MUDOT

Teaching Internship 2 0

Developing contemporary research skills 0 4

Study abroad program 9 4

Total 11 4

Table 4: Student Exchange in MUDOT (2008 – 2012)

Source (MUDOT, 2012)


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Research regarding calculation of the tensile forces of

polyurethane film and protective paper, in the process of

Polyurethane – pad – protective paper

Gheorghe Vasile (Corresponding author) & Alexis Negrea

Valahia University, Romania

Accepted 13 August 2013

Abstract

In this paper it is analyzed in terms of kinematics and mechanical, stress occurring in protective paper all the way. It will be analyzed forces and tensions that arise in paper strip in the stretch area, stretching determining race. It follows determination of a continuous tension in the paper strip to optimize the operation. Keywords: paper route, tension, polyurethane Note to Practitioners: The present paper was inspired by the need to create adapted dressing that must adapt to end users requires. In medical practice meets different kind of wounds and most of the time the common dressing can offer the exact support. Most of similar equipments produce only rectangular shapes and the medical field requires special adapted shapes to anatomical folds. In this field every day rise new technologies that improve the medical act and this must be a concern for more people. The paper helps to understand and apply exact forces required to cut the dressings in request shapes and sizes. Mathematically I determine the mechanism and elements need to obtain the results establish in the first steps only theoretically. In this paper we studied the correlation of speeds for of polyurethane adhesive tapes and protective silicone paper. This helps me to find the perfect balance between internal tensions between these considering that the advance is step by step.

1. Positioning and Kinematics of Protective Paper Route.

As it shows figure 1.,the protective paper and polyurethane film ahs different routes. The protective paper has the blue color route and polyurethane film red color route. Both are wrapped in rolls, rolls that will be

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unrolled by operating with gear motors groups. Both routes follow a predetermined route, routes set by positioning of fixed rollers to engine rollers where they unite and final product will be cut.

Figure 1. Position of rolls for the two routes

The route of protective paper (figure 2) is determined by the impose by conditions for achieving the final product that means package of polyurethane – pad – protective paper. This package has different dimensions in terms of length and width of the package. Therefore for packages smaller than the width of the paper this is cut to the direction of transport, the rest of paper is recovered by wrapping on a roll. The cut is made on the engine roll 5(ω2) after the strip is cross over roll 6. Strip stretch is made between rollers 5 and 2 by a roller mounted on a swing arm (calender). Roll 1 leads the band in the motor area of the package, package is taken by the group of pressing rolls, lead into the cutting die and towed by engine rolls (ω1).

Figure 2. Protective paper route. Position of stretch roll.

Operation from two points of protective paper strip is required by cutting step (cutting) because the package must stop during cutting; during this the strip stays free without tense. For maintain the tension in the strip this is made with gravitational system roll – swing arm. Command of engine roll 5(ω2) is made by superior positioning of stretch roll (figure 3). Also for stopping of it is command by inferior position of this roll.

Figure 3. Positioning of the stretch roll. Route made.


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To maintain a constant tension in paper tape we must analyze the forces from strip, in right of stretching roll, for different positions from minimum to maximum of it.

2. Forces from Protective Paper Band at Stretching Roll

Position of minim for route of stretching roll was established consecutive from construction of equipment (figure 4). The stretching roll makes an angle with the vertical: α0 = 28 (1)

Figure 4. Route made.

In point of maxim, roll is at angle α, this angle is measure on a image capture that is a frame from a film made with a high speed camera. Angle α measure in this conditions has about the same value with angle α0 :

α ≈ 280 (2) Graphic representation of stretching roll position in point of minimum of and forces from the strip for this

position are showed in figure 5.

Figure 5. Minim position of roll.


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Figure 6. Minim and maxim position of roll.

Engines roll strip transmit traction force necessary using friction between roll and strip (figure 7). Wrap angle of the strip on the roll is β [rad] and the coefficient of friction between paper strip and roll µ. The Euler relation can be written:

Fînf = Fdesf ˑeµα (3)

where: Fînf – force from strip branch which is wrapped roll [N]; Fdesf – force from strip branch which is unwrapped roll [N]; β – angle for wrapping of strip on the roll [rad] e – natural logarithm base .

Figure 7. Group of rolls for pressing of package.

Relation (3) is a maxim of wrapping force for a specific angle and a specific friction coefficient; but in practice the strip can slip from the roll so should be taken a safety coefficient k = 1,20.

k ˑ Fînf = Fdesf ˑeµα (4) In case of stretching roll relation (3) becomes: F2 = F3 ˑeµα (5)


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Maintaining a constant problem in strip is the end position paper roll tension when engine roll (ω1) is stopped for puncher to cut package.

The problem to maintain a constant tension in the paper strip is at the end of stretching roll route, when engine roll (ω1) is stopped so that the cutting die to cut the package. We will analyze the extreme position of stretching roll: α0 = 00 – stretching roll is in the lower position and then: G1 = 0, the gravity force of roll is taking by the

joint bearings; Resultant forces from paper strip, when is trailed:

R = F2 sin γ – G1 = F2 sin γ (6)

Figure 8.

During cutting the strip is stopped. Then: F2 = 0.:

R = 0 (7) The strip stays without tension and this must be avoided. α0 ≈ 900 – the stretching roll is the higher position and then: G1 ≠ 0 – gravity force of roll is made by the

mass of the system roll – swing arm; Resultant of forces from paper strip, when is trailed:

R = F2 sin γ – G1 (8)

Figure 9.

But in this position the strip touch the joint arm, thing unwanted. It can be seen in figure 4, 6, 8 and 9 that


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angle γ that the strip makes with vertical, between the stretching roll 3 and fix roll 2 takes values between: γ = 380 ÷ 480, values difference not affects the resultant forces R. 3. Conclusions

In figure 6 can be seen the chosen position for end route sensors installation for stretching roll: γ = 460 – point t for minim; γ = 470 – point for maxim; chosen position mainly because the angle γ varies only with 10 that leads to keep an almost equable tension in paper strip.

REFERENCES

[1] Viviana Filip, Cornel Marin, Lucian Gruionu, Alexis Negrea - Design, modeling, simulation of mechanical systems, using solid-works, cosmos-motion şi cosmos-works, Publishing Valahia University Press Târgovişte, 2008

[2] Cornel Marin - Strength of materials and components elasticity theory – Publishing Bibliotheca, Târgovişte 2006.

[3] Cornel Marin- Applications of the elasticity theory in engineering – Publishing Bibliotheca, Târgovişte 2007.

[4] Cornel Marin, Viviana Filip – Modern and classical mechanics – Publishing Valahia Univer


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Studies and mechanical tries regarding the cutting process by

punching of the package polyurethane-pad-protective paper,

components of a medical device (dressing)

Gheorghe Vasile (Corresponding author) & Alexis Negrea

Valahia University, Romania


Abstract

In this paper we analyzed in first part on a virtual model made in SolidWorks, mechanical stresses occurring in the mechanism for cutting the dressing, determining optimal cutting force and in second part, on physical model built I determined, using specialized measuring devices, cutting forces. This paper is intended as an analysis of the technical solutions adopted in virtual construction phase by the physical model based on achieved results.

Key Words: Mechanical tries, Package polyurethane-pad-protective paper, Medical devices

1. Introduction

The mechanism for cutting the dressing is a part of an equipment design to produce dressing of different sizes and shapes. It executes the last technological phase that means to cut the final product in different shapes and sizes.

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Figure 1. Positions of cutting die in work process.

The cutting die has construction from figure 1 and 2 and is made of: • Cutting die: base plate, the active plate, the column; • Package support-shaped knife; • Drive system: pneumopillows sets and separator plates.

Figure 2. Cutting Die

Cutting die of final product. Cut by stamping of final product on physical model developed asked a series of problems since the initial

tests, duet o the material of polyurethane film (polyurethane foam), the force to cut the package , that was determinate initial only theoretical, was not big enough for the knife to penetrate the hole package.

The composition and properties of polyurethane made it to stick to the knife of the cutting die, and made it difficult the material cutting, in the way material stretched and flow on knife, all leading to that desired contour cutting is incomplete and the whole package was not removed from the cutter.


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Figure 3. Knife crossing through polyurethane film.

Final product has different sizes and shapes: • Rectangular shape main dimensions from 75 mm to 220 mm; • anatomical: • sacrum; • heel.

Figure 4. Different anatomical shapes for dressings

The problem for cutting these shapes is complicated to apply a mathematical computing device. Uncertainties and variables in this case are many. The physical model developed, by determining, for each product type, the center of pressure, the only problem was to determine the cutting force. So, from functioning test made was found that it is not enough a single layer of pneumopillows, at the end for anatomical shapes and maximum rectangular shapes to be necessary 4 levels (figure 1 şi 2).

2. Virtual model, deformation and stress analysis from cutting die

For mechanical analysis of stress, the cutting die was made in SolidWorks (figure 5). The cutting knife (figure 6) was chosen for sacrum shape of dressing profile. I made a virtual analysis of stresses that occur in active plate in order to check its stability in the forces of pneumopillows system.


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Figure 5. Cutting die

Figure 6. Design of knife for sacrum shape.

Stress loading I made it on the knife perimeter (fig. 7).

Figure 7. Pressing forces on knife perimeter .

Following this analysis it shows the fact that from mechanical view, the cutting die in well dimensioned, main issue is the determination of optimal cutting force and also of pressure and number of pneumopillows required to develop this force.

Using the mechanism of force developed a system pneumopillows (figure 1 and 2), force is not constant throughout a cutting drives.


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That is why I tested, on physical model developed, with help of forces transmitter, what values obtain the force develop by the air bellow system. Trials were made with forces transmitter of 20 kN and 50 kN, used individually and together.

Transmitters are piezoelectric, the dates were taken with two different types of interface (figure 8).

Figure 8. Forces transmitter and two types of interfaces

Tests were made for a pressure of 8 bars and multiple configurations, with one pair of pneumopillows and with two pairs of pneumopillows. In both configurations were used the two types of transmitters of 20 kN and of 50 kN, individually and together. So, values that were determined varied in the following intervals:

a) on force transmitter of 50 kN and one pair of pneumopillows: 26,414 kN and 27,484 kN b) on force transmitter of 50 kN and two pairs of pneumopillows: 33,420 kN and 34,470 kN c) on force transmitter of 50 kN and one of 20kN and two pairs of pneumopillows: 16,616 kN and 16,864

kN

The recorded values of forces, depending on pressure variation applied in the two pneumopillows, readings can be seen in chart 1.


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Chart 1. Recorded values of forces depending on applied pressure

When using two pairs of pneumopillows but the determination of the forces have been made with a transmitter of 20 kN and taking only the part of the maximum pressure, readings can be seen in chart 2.

Values determined:

Number of readings Maximum force development [kN]

1 17.408 2 17.357 3 17.267 4 17.192 5 17.144 6 17.001 7 17.043 8 16.906 9 16.847 10 16.731 11 16.786 12 16.405

Maximum force development during maximum pressure p = 12 bars. Transmitter 20 kN


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For two pairs of pneumopillows but with an transmitter of 50 kN and taking only the part of the maximum pressure, readings can be seen in chart 3.

Maximum force development during maximum pressure p = 12 bars. Transmitter 50 kN

3. Conclusions

Using pneumopillows to achieve pressure force (stamping/cutting) does not lead to a force of constant pressure, it has some variation given by the way it swells and sits the pneumopillows, as it shows in charts, however, the maximum value obtained is enough for cutting the final product in good condition.

References

[1] Viviana Filip, Cornel Marin, Lucian Gruionu, Alexis Negrea - Design, modeling simulation of mechanical systems, using solid works, cosmos-motion and cosmos- works programs, Valahia University Publishing house Târgovişte, 2008

[2] Ion Florin Popa, Cornel Marin, Viviana Filip - Modelling and simulation of robotics systems, Publishing house Bibliotheca, Târgovişte 2005

[3] Cornel Marin, Anton Hadar, Florin Popa, Laurenţiu Albu - Modeling with finite element of mechanical structures - Publishing house Academy and AGIR Bucharest, 2002

[4] Cornel Marin - Materials and elements strength of elasticity theory – Publishing house BIBLIOTHECA, Târgovişte 2006.

[5] Cornel Marin - Elasticity theory applications in engineering – Publishing house BIBLIOTHECA, Târgovişte 2007


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Environmental Toxic Torts: The Need for Regulatory Change

Cliff Fisher

School of Management and Administration (GISMA), Assistant Dean and Academic Director for Undergraduate Programs Krannert School of Management, Purdue University

Accepted 14 August 2013 Abstract How should we regulate and to what extend should we regulate? Who should decide and how? It is difficult or in most cases impossible for courts using common law tort theories to distinguish between injuries and increased risk from environmental or non-environmental factors. The present tort system may be efficient and may promote the correct result in the vast majority of cases, but not in toxic torts. Therefore, this paper presents the government’s involvement, standards, regulatory approaches, and significant recommended modifications to the present toxic tort system. Key Words: Environmental Toxic Torts, Toxic Torts, Environmental Negligence, Environmental, Regulation,

Toxic Tort Liability

1. Introduction Richard Posner, in his book Economic Analysis of Law, discusses three possible regulatory techniques designed to control pollution.29 All four of these approaches involve alternatives that are designed to keep risks from toxins in the environment as low as reasonably achievable, given the limitations of scientific knowledge and economic resources. Alternatives will be discussed, including compensation of those who suffer increased risk, in spite of administrative agencies’ and risk-creators’ best efforts to protect them, by spreading the costs of the loss.30 The common law enforcement problem with respect to increased risk is similar to that of consumer fraud. The individual injury may be too slight to justify the expense of litigation to the victim, and hence the victim foregoes the right to sue.31 In other instances, there is an increased risk of injury or death, and that increased risk, caused by the risk-creator, cannot be justified or related to a specific firm under requirements of common law tort theory in order for the individual to be compensated. The principal transaction cost in this litigation is the attorney's time. Other costs include expert witnesses, court costs, non-productive lawsuits, costs to taxpayers (society) through the judicial system, and other direct and indirect costs. These expenses of money, time, and effort cause a negative impact on our gross domestic product in regard to non-productive inputs to society, whether there is a vindication of a meritorious claim or not. These transaction costs exceed the benefits that a market could otherwise confer, and therefore it is worthwhile to review the four regulatory techniques in order to limit the scope and nature of these litigation transaction costs.32 The economic and social aim is to minimize the sum of direct, indirect, and error costs associated with increased 29 RICHARD POSNER, ECONOMIC ANALYSIS OF LAW, 351-358, (1986). 30 E. Donald Elliott, Goal Analysis Verses Institutional Analysis of Toxic Compensation Systems, 73, GEO. L. J. 1363 (1985). 31 POSNER, supra note 1, at 352. 32 Charles L. Schultze, THE BROOKINGS INSTITUTION, The Public Use of Private Interest, in THE BROOKINGS INSTITUTION 33 (1977).

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environmental risk to individuals caused by risk-creators. One regulatory scheme is for an administrative agency to prescribe the specific measures that a risk-creator must take in order to avoid heavy legal penalties. This approach requires the agency to have significant amounts of information about the costs and benefits of alternative methods of controlling toxins. Unfortunately, specifying the particular method of toxic control discourages the search for the most efficient method. In hearings before the agencies, hearings which lead to the formulation of specific standards, the affected risk-creators have an incentive to propose the cheapest toxic control method, regardless of its efficiency, and to deny the existence of any more costly devices. Once the specified standard is adopted, the risk-creators have no incentive to develop a cleaner or better process, since in doing so they would provide the agency with the means to impose higher costs on them.33 A second approach would be to establish the level of toxins deemed tolerable by society and then to compel the risk-creators, under penalty of injunction or fine, not to exceed the established maximum level, but to leave the choice of the method up to the risk-creator. In this instance, risk-creators will minimize their costs of complying with the emission standards, but the standards may be inefficient; they may permit too many or too few toxins from an economic standpoint. The solution to this problem would be to use cost-benefit analysis to set the standard. This solution requires the administrative agency to have as much information about the costs of complying with various standards as the risk-creator has. It would eliminate the principle efficiency associated with specifying the permitted level of emissions, rather than specifying the specific toxic control that the risk-creator must use.34 A third approach is to control externalities by creating market-like incentives through tax and subsidy schemes that encourage firms and individuals to respond to marginal shifts in costs and benefits.35 A tax could be levied on toxins and adjusted in the same fashion that an auctioneer adjusts market prices. The auctioneer shouts out the tax-price of toxics. Risk-creators respond by stating how many toxins they will emit at that price, and victims respond by stating how much they would pay to reduce the toxins. If the victims are willing to pay more than the tax to reduce toxins, then the auctioneer raises the tax. The tax market equilibrates through a series of price and quantity adjustments.36 The auctioneer always adjusts prices so that social value increases, as measured by cost-benefit analysis. If government taxes risk-creators for the actual cost of the toxins, then taxes and prices converge toward efficiency under the usual competitive assumptions.37 This approach is significantly different than the approach in which the government simply taxes the amount of toxins emitted into or on the ground, air or water with no relationship to market factors. The government could print coupons and entitlements authorizing the owner to emit one unit of toxins per coupon. No one would be permitted to emit more than the risk-creator's coupons allowed. This would encourage competitive exchange of such toxic rights.38 These toxic rights would attract speculators, as well as risk-creators and victims, and could operate in the same way as the stock exchange. The state does not decide whom to entitle with these rights, but instead the risk-creator, victim, or speculator has an individual property right to sell or trade the entitlement. This approach is much different from the traditional regulation of environmental hazards in which a risk-creator's entitlement is inalienable to the extent that its transfer is not permitted between a willing buyer and a willing seller.39 The auctioneer approach is “protected by property rights to the extent that someone who [desires] to remove the entitlement from its holder must buy it from [the individual] in a voluntary transaction in which the value of the entitlement is agreed upon by the seller.”40 This form of entitlement “gives rise to [a small] amount of state intervention, [since] the state does not try to decide its value,” but it lets the parties decide “how much the

33 POSNER, supra note 1, at 352. 34 Id. 35 Rose-Ackerman, “Inalienability and the Theory of Property Rights, 85 COLUM. L. REV. 931, 938, (1985). 36 Robert Cooter, The Cost of Coase, J. LEG. STUD. 1, 5 (1982). 37 Id at 6. 38 Id at 9. 39 Guido Calabresi & A. Douglas Melamed, Property Rule, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972). 40 Id.


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entitlement is worth […] and gives the seller […] a right to veto if the buyer does not offer enough.41 There would not be eligibility requirements on this right to veto. Instead, the right of an individual to increase risk to others by releasing toxins or the right to forbid the release of toxins would be determined by market forces. This system of rights or toxic entitlements could come under attack from a number of different quarters, chiefly by those who believe that individuals have the right to some minimum level of satisfaction of basic wants, such as a right to a clean and safe environment.42 The right of alienation of these toxic entitlements, as part of the bundle of property rights, may be in opposition to the rights of possession and use.43 Problems with toxic entitlements arise whenever two parties interact. For example, suppose a manufacturer, a risk-creator, who pollutes a stream, and the water users, the victims downstream from the manufacturer, interact. Both parties, the risk-creator and the victim, are the "but for" cause of harm to the other party. The water user could have clean water if not for the polluter, and the polluter could spew forth pollutants without the cost of purchasing the toxic coupons if not for the victim.44 Both parties may argue that their rights have been violated. If the water user doesn't have the resources to purchase the toxic coupons, or the transaction costs are too high in relation to getting all downstream water users together, then the water users will be harmed, since they cannot secure the economic resources to outbid the polluter for the toxic coupons. Holdouts, free rider problems, and information costs may make these transactions practically impossible.45 Legal liability systems establish entitlements to determine which party will be deemed the legally responsible cause of harm. In economic terms, these legal rights rules force one producer to internalize the external costs they impose on others.46 Therefore, under a liability rule, if the polluter takes your right to clean water, the polluter must compensate you at a rate determined by the court and/or discontinue the polluting.47 “Protecting innocent victims from socially useful risks is one issue” while at the same time the “rationality of defining risks and balancing consequences is quite another.”48 Such consequences might include the present generation being able to withstand toxic levels with no serious health dangers, while “future generations may be faced with despoiled hazardous environmental condition[s]” they are unable to reverse.49 These toxic substances may vary in a number of different ways, including

1. the length of the typical latency period from exposure to the onset of disease; 2. the typical exposure route; 3. the state of scientific knowledge about the causal relationships between exposure and disease; 4. whether the disease involved is rare or common; 5. whether the disease involved has one primary cause or many; 6. the value of the substance for economic purposes and the availability of substitutes; 7. the availability of remedial therapies and/or control technologies.50

41 Id. 42 Guido Calabresi & Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L. J., 1073 (1972). 43 Richard A. Epstein, Why Restrain Alienation, 85 COLUM. L. REV., 970, 973 (1985). 44 Kelman, Consumption Theory, Production Theory, and Ideology in the Case Theorem 55 Southern California Law Review, 669 (1979). 45 Guido Calabresi & A. Douglas Melamed, Property Rule, Liability Rues, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1111 (1972). 46 Kelman, supra note 16, at 669. 47 Rose-Ackerman, Inalienablity and the Theory of Property Rights, 85 COLUM. L. REV. 932 (1985. 48 George P. Fletcher, Fairness and Utility in Tort Theory, 85 HARV. L. REV. 573 (1972). 49 Guido Calabresi and Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L. J. 1124 (1972). 50 Elliott, supra note 2, at 1369.


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Under the property rights rule, once the polluter purchases the toxic coupons, the polluter will have the right to pollute with no concern for the downstream users. The downstream users may contend that by selling toxic rights coupons, the government is unconstitutionally taking their property rights, and this action requires payment of compensation if the polluting deprives them of the use of their property. The government would have to determine if the payment of compensation would undermine the reasons for the auctioneer approach rule in the first place.51 In conjunction with the tax approach, some economists recommend tradable discharge licenses. With tradable discharge licenses, an agency could determine the total amount of emissions to be allowed in a region and then issue permits or licenses for these emissions. The permits would be bought and sold as a property right, like industrial property. Both of these mechanisms have an overwhelming advantage over our existing system in their ability to re-channel self-interest to correspond with society's best interest. Because permits are under control of the government in this system, emissions become costly to risk-creators. They result either in higher taxes or in tying up money in costly emissions permits.52 The government must create exactly the right number of toxic coupons in order to achieve efficiency and adjust the total quantity of toxic coupons. The problem is that the tax and property rights remedies will work only if the government agency behaves like an auctioneer. In fact, government officials have little incentive to mimic the market.53 “In general, to set up an appropriate tax scheme might require as much information on the part of the regulating agency as would be required for centralized decision-making.”54 Nobel Prize winning economist Herbert Simons contends that human beings and their institutions have only limited capability to perform “elaborate optimizing calculations; therefore, we make decisions by applying a few standardized routines or ‘standard operating procedures’ and determin[e] whether the results are satisfactory.”55 Developing a full, rigorous central-planning solution to this problem would be a tremendous task, requiring an overwhelming quantity of information and incredibly difficult calculations. Economist Wassily Leontief won the Nobel Prize in 1973 with an input-output analysis for an imaginary economy with only three outputs. If the information could be collected in a timely fashion, there is no computer system that could handle the several million equations that would have to be solved simultaneously to handle this centralized decision-making nightmare.56 2. The Cost of Environmental Regulation It is an accepted fact that some sort of regulation is critical to the preservation of our environment. The dispute between businesses and the environmental lobby arises, however, when a determination must be made about the extent to which regulation must be promulgated and enforced. At least as far as air quality is concerned, the courts have thus far, in suits filed by environmental groups against the EPA, decided to support the EPA's position of a standard for the emission of air pollutants. This standard reflects the degree of emissions limitation achievable through the application of the best system of emissions reduction (taking into account the cost of achieving such reduction) the administrator determines has been adequately demonstrated. However, because the law is ambiguous in several regards, it allows for litigation. Thus, many corporations have already contended that the regulations regarding ambient air quality under the Clean Air Act and its amendments are too stringent, and these litigants have enjoyed varying degrees of success. Therefore, the question concerning the extent to which the environment should be regulated is still somewhat unresolved. Businesses would argue that the only concrete fact is that the regulations imposed on them are costly to industry and ultimately to the consumer. Just how much are regulations like the Clean Air Act and its amendments costing the private sector? Although it is impossible to come up with accurate figures, businesses contend that the cost is extremely high. Congress estimated that the 1990 amendments to the Clean Air Act would cost private industry an estimated $25 billion in lost growth, and according to Lawrence Kudlow, a republican editorialist, the new regulations will cost

51 Rose-Ackerman, supra note 19, at 945. 52 STEVEN E. RHOADS, THE ECONOMIST’S VIEWS OF THE WORLD, GOVERNMENT, MARKETS, & PUBLIC POLICY 44, 44-45, (Cambridge Univ. Press 1990) (1985). 53 Robert D. Cooter, Law and the Imperialism of Economics: An Introduction to the Economic Analysis of Law and a Review of the Major Books, 29 UCLA L. REV. 13, 15 (1982). 54 Donald H. Regan, The Problem of Social Cost Revisited, 15 J.L. & Econ., 427, 436-37 (1972). 55 Elliott, supra note 2, at 1362. 56 WILLIAM J. BAUMOL & ALAN S. BLINDER, ECONOMICS, PRINCIPLES, AND POLICY, 586, (1988).


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as much as $100 million in forfeited growth.57 Kudlow goes even further to say that he believes regulations like the Clean Air Act are a major factors responsible for the recent growth decrease in the gross domestic product.58 Kudlow is not alone in his belief that environmental regulation is becoming too costly. The National Petroleum Council, for instance, believes that the costs of complying with new regulations “on clean air, waste disposal, water, and health and safety" will cost the petroleum refining industry approximately $37 billion. Offset against this figure, the combined $31 billion value of the petroleum-refining industry's facilities and the costs begin to seem exorbitant.59 From a business perspective, the cost of regulation for large firms is high, and the cost for small firms puts them at a substantial competitive disadvantage which could even drive them out of business. On the other hand, businesses also note the benefits of the Clean Air Act, which according to the EPA saved an estimated 79,000 lives in 1990 alone and saves $20 in medical costs for every $1 spent on pollution controls.60 Businesses also believe that cost should be given even more consideration in the promulgation of environmental legislation than is already given. Businesses contend that the effects of new legislation imposed in a non-gradual manner may be detrimental to our nation’s economic growth and output. Nonetheless, the private sector often looks through a very narrow scope and fails to realize the far reaching consequences deregulation may have on our environment. 3. The Need for Environmental Regulations Environmental regulations are needed to protect the health of humans and also to preserve the essential elements needed to survive. Regulating the amount and content of hazardous materials released into the atmosphere, materials such as sulfur dioxide, nitrogen oxides, carbon monoxides, ozone, particulates, radioactive particles, and lead, can increase our life span and save lives. All of these wastes can harm humans in a variety of ways. For example, particulates in the air produced by industries, cars, or gas mowers can produce asthma, respiratory disease, lung cancer, pneumonia, and bronchitis. A study completed at Loma Linda University compared the past 25 years of particulate air pollution and found that 106 of 3091 exposed individuals developed asthma.61 It has also been shown that 64,000 people may prematurely die each year due to current levels of particulates.62 Radioactive particles are also hazardous to humans in that neurovascular, gastrointestinal, and bone marrow damage can be caused by large doses of radiation.63 Radioactive particles in small doses and over the long term can include leukemia, breast, thyroid, and lung cancers. In areas of frequent exposure to radiation, the death rate averages 2 per 1000 people.64 The environment encompasses all components of the air, water, landscape, organisms, and topography. Among these components are elements necessary for living organisms to survive. For example, through photosynthesis, plants use chlorophyll, water, and carbon dioxide to produce oxygen, the main ingredient for human survival. Therefore, without photosynthetic plants, water, and carbon dioxide, no aerobic organisms would exist. Over-exploitation of current agricultural lands will lead to infertile soil. As a result, the human population will suffer in that there would be too little food to support the human population. When the population can no longer move to new food resources, starvation and disease will occur. With the depletion of essential elements, materials, and the environment, the world may not be able to sustain itself. The public would contend that a solution includes regulating the amount of matter entering into our environment, recycling materials being used, and reducing the intake of food and resources. A first step in protecting and sustaining our environment is through education. With knowledge of the situation and the importance of the environment, individuals, along with regulations, can help protect our environment. There is no easy solution to the debate between business and environmental interests, and there may never be a compromise that will make both sides happy. It appears that the values of foregone medical expenses and saved human lives are indeed great. The value of a human life will always be open to interpretation, differing from jury to jury. However, given our society's Constitutional foundations and our high valuation of life, liberty,

57 Lawrence Kudlow, Not-Growing Pains, NAT’L REV., Sept. 2, 1996, at 65. 58 Id. at 66. 59 Jonathan Tolman, Petroleum Industry Adapts to New Regulations, THE WORLD AND I, July 1996, at 107. 60 Peter Fairley, EPA Evaluates Air, Water Controls, CHEMICAL WK., June 5, 1996 at 1. 61 Jeff Johnson, Recent Health Studies Find Link, 30 ENVIL. SCI. & TECH. 280A (1996). 62 Id. 63 Boris Segerstahl, The Long Shadow of Soviet Plutonium, ENV’T, 17 Jan./Feb. 1997, at 12 & 17. 64 Id. at 17.


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and the pursuit of happiness, the public’s perspective is that deregulation of the environment would undermine these edicts. Thus, the issue of human life is at the core of the debate, and because of its importance, the continued regulation of the environment, considering cost to some extent, is necessary to the American way of life. The public seems to be of two minds concerning the government’s role in regulating environmental pollution. On the one hand, most people believe that limiting environmental pollution is a proper role for government. The market system is deficient in controlling pollutants because it is not profitable for those creating the pollution. On the other hand, there is growing skepticism concerning the efficiency of regulations in achieving society’s goals at the least cost. This assessment of regulation requires that we look at exactly what risks are faced from environmental pollution, the costs of reducing the pollution and the benefits if the regulation reduces the risks. Based on risk analysis, the performance of the EPA is extremely inefficient, and such inefficiency not only costs dollars; it can cost lives.65 Synthetic chemicals such as DDT cause less than one percent of all human cancer--far below actual public perception. Three of the major contributors to cancer include tobacco, inadequate diet, such as insufficient amounts of fruits and vegetables and an excess of animal fat and red meat, and consumption of alcohol. Neither toxicology nor epidemiology supports the idea that synthetic industrial chemicals are causing an epidemic of human cancer. Such thinking ignores the fact that most chemicals to which humans are exposed are naturally occurring and that the level of exposure to industrial pollution is extremely low.66 The perception is that lifestyle changes would be far more effective than the often costly regulation of synthetic chemical pollutants. 4. The Problems Associated with the Common Law Toxic Tort System The fourth approach is one that has not been referenced in the literature. The rationale for the first three approaches was to reduce the probability that individuals would suffer injury or death caused by environmental toxins. Even if these other approaches are used, the courts, under the common law doctrine of tort liability, will not compensate an individual or individuals in regard to the causal link of an environmental pollutant or toxin that causes an increased risk of injury or death, usually manifested as some form of cancer, unless the individual can demonstrate particular proof and unless the individual can show the probabilities that the particular individual was affected by the particular risk-creator are greater than fifty percent. This approach is simply the common law causation and burden of proof under tort law, which is extremely difficult to prove, and even if the plaintiff prevails, the defendant may be judgment proof. Common law toxic torts present major challenges to tort law and the judicial system. The typical toxic tort case involves an alleged personal injury and related harm resulting from exposure to a toxic substance, which is usually a chemical, but could also be a biological or radiological agent. Commonly in toxic torts, the injury is neither traumatic nor an acute toxic response, but produces consequences from genetic or biochemical disruption, whereby exposure is usually chronic and repeated, and the injury manifests itself after a latency period.67 Scientists who expect a link between an event (exposure) and an outcome (death or disability) have grown suspect of new theories that borrow selectively from fact and pay little attention to the quality of the factual material. The result has been a renewed interest in the scientific and legal requirements of causation.68 The courts have been reluctant to hold risk-creators liable until a statistically significant number of individuals have been injured or until science has had the time and resources to complete sophisticated laboratory studies of the toxins. A number of courts and tort scholars have suggested that as a matter of fairness and equity, the common law tort probability standard of fifty percent plus be relaxed when trying to prove causation.69 The traditional doctrines of causation in common law tort liability require a plaintiff to prove that, as indicated earlier, the defendant's conduct was more probably than not both the "but-for cause in fact" and the "proximate cause" of the 65 RISKS, COSTS, AND LIVES SAVED: GETTING BETTER RESULTS FROM REGULATION, 32-33 (Robert W. Hahn, ed., 1996). 66 Id. at 4. 67 Steve Gold, Causation in Toxic Tort: Burdens of Proof, Standards of Persuasion, and Statistical Evidence, 96 YALE L. J. 376 (1986). 68 E. Donald Elliott, Introduction to Richard A. Epstein, Two Fallacies in the Law of Joint Torts, 73 GEO. L. J. 1355 (1985). 69 Jack B. Weinstein & Eileen B. Hershenov, The Effect of Equity on Mass Tort Law, 99 ULL. L. REV. 269 (1991).


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plaintiff's injuries. Many lawyers who write about toxic torts conclude that the common law tort causation doctrine is one of the key elements that would have to be modified in order to facilitate recovery in toxic tort cases. Guido Calabresi indicates that if spreading of injury losses were the only goal of tort law, there would be no point at all in requiring, as a prerequisite to liability, a causal link between an act or activity and the injury. If spreading were the only goal of tort law, then a social insurance fund should be used.70 What social value does the common law tort liability further in the area of environmental increased risk? Does it advance desirable goals such as compensation to the injured victim, deterrence of the risk-creator, risk-distribution, or a minimization of accident costs?71 In the utilitarian model, the essential function of a tort system is efficient risk management in order to reduce the social costs of accidents, that is, the excess of accident-related costs over activity-related benefits which involves cost reduction by deterring accidents and spreading accident losses. The focus of a deterrence policy is essentially concentrated on the avoidance of unreasonable risks, not the avoidance of injury. When liability is imposed for actual injury arising out of unreasonable risk, the supposed effect is to deter the creation of the risk itself. The present all-or-nothing character to common law tort injury-based liability rules can distort deterrence. They can produce over-deterrence and in toxic cases under-deterrence where significant but not substantial risks to victims go uncompensated. The present proof of causation in toxic cases, with the emphasis on dominant causation under the "but-for" test and deterministic relationships, can lead to the under-deterrence of significant risks. The risks are masked by the confusion of multiple causal factors, which the court requires to be measured only in probabilistic terms. This problem is compounded for risks that do not manifest identifiable injury for long periods after exposure. Long lag effects escape deterrence because the errors are not detected and corrected by the risk-creator until long after they are made.72 The basic impossibility of proving individual causation distinguishes classic common law toxic tort cases from ordinary personal injury lawsuits. Population-based probability estimates do not speak to probability of causation in any one case, and the estimate of relative risk is a property of the studied population, not of an individual's case. In most instances, cancer and mutations provide no physical evidence of the inducing agent, so direct observation of individual victims provides little or no evidence of causation. Therefore, the risk-creator and victim must rely on epidemiological evidence, which may become the centerpiece of classic common law toxic tort litigation. Epidemiology is based on the study of populations, not individuals, and seeks to establish associations between alleged causes and effects by either comparing the incidence of exposure across sick and healthy populations or comparing the disease across exposed and unexposed populations. These scientific correlations lend great weight to an inference of causation. However, in an individual case, epidemiology cannot conclusively prove causation. It can only estimate certain probability that a randomly selected case of disease was one that would not have occurred without exposure or the increased risk of the exposed population.73 In an era of mass torts and multiple toxic agents, the link between an individual defendant's actions and a plaintiff's injuries is often difficult, if not impossible, to demonstrate.74 No matter what regulatory scheme is developed, civil injury or wrongful death suits will continue whether they involve pharmaceuticals, food additives, industrial compounds, pollutants, toxic wastes deposited in landfills, radiation, or some other effusion of modern technology. The causal linkages between toxic agents, exposure levels, and pathological symptoms will continue to accelerate, pressing against the frontiers of existing chemical, toxicological, and epidemiological knowledge. Yet, the system of regulatory controls that has been devised for dealing with many of these new risks is still very much in its infancy.75

70 Elliott, supra note 2, at 1364-65. 71 Fletcher, supra note 20, at 538. 72 Glen O. Robinson, Probabilistic Causation and Compensation for Tortious Risk, 14 J. L. STUD. 779 (1985). 73 Gold, supra note 39, at 379, 380, and 390. 74 E. Donald Elliot, Introduction to Richard A. Epstein, Two Fallacies in the Law of Joint Torts, 73 GEO. L. J. 1355 (1985). 75 PETER H. SCHUCK, AGENT ORANGE ON TRIAL: MASS TOXIC DISASTERS IN THE COURTS 13, (1986).


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For the common law to remain efficient, it must change as conditions change.76 Yet, it may be impossible to reverse past precedents when changing economic conditions warrant such a reversal. Precedents tend to weigh heavily upon courts even though rulings of a century ago, say on questions of pollution, may not be optimal today. If the bias imparted by precedents is too great, a change in precedent may be impossible.77 A similar kind of problem arises when the costs and benefits of a change in precedent are so widely diffused that no single party, or group of [individuals], has an interest in bringing a lawsuit designed to internalize those benefits or costs.”78 If we desire efficiency, there must be a reexamination of the structure of the legal process.79 Courts have the advantage of insulation from interest group politics, but this insulation comes at the cost of limited information and consequent bias in the development of rules. Legislatures and administrative agencies have the advantage with respect to identifying problems, researching them, and developing statutes or rules to bring social behavior into line with goals of efficiency, but this advantage comes at the cost of special interest pressures.80 Administrative agencies are superior to judges in making risk assessment decisions that turn on scientific and technical evidence. The case-by-case adjudication through the courts, chemical by individual chemical, is inefficient and expensive. A Rand Corporation 1983 study of asbestos litigation found that over 60 percent of total costs were expended for administrative costs, primarily attorneys' fees.81 A Rand Corporation 1992 study indicates that, since the federal Superfund law was enacted in 1980 to help clean toxic waste sites, insurers have spent an average of almost 90 percent of their Superfund related outlays on legal fees and related costs, not on cleanup.82 When a victim under our present common law tort system files a lawsuit, rather than obtaining swift justice, the victim often will wind up waiting years before the lawsuit is resolved. Whether the lawsuit is a toxic tort case or any other tort claim, the individual frequently will come away from the experience far more frustrated than satisfied. Even in a traditional tort lawsuit involving an automobile accident, the victim rarely can expect to recover directly from the risk-creator who injured him or her. Instead, the victim, if successful, will recover from an insurance company. Compounding matters even further is the amount that a victim recovers, if anything at all. The amount is unlikely to reflect what an objective individual would say the victim truly deserved. The relevant factors that determine the case outcome include primarily: the talent of the attorney the victim happens to have; the tenacity of the risk-creator or its insurance adjuster; whether the risk-creator happens to be a Fortune 500 corporation, a small family business, or a governmental entity; what type of witness the victim makes; what race the victim is; what state or community the victim lives in; how well one is able to hold out for a larger settlement; the whim of the jury; and whether the victim is lucky enough to have available acceptable evidence of the increased risk or injury. Therefore, our current common law tort system may not be considered a system of justice in many cases, but a lottery.83 Given the large number of exposed individuals, rapidly developing scientific knowledge, and varied and changing legal rules of common law tort liability, risk-creators can be subject to enormous unanticipated risks. Relatively few injured people get very large awards, while most receive little or nothing at all. This inconsistency is not only inequitable to the victim but is detrimental to society as a whole. Uncertain and unclear application of the law diminishes the incentive of risk-creators to act in a prudent manner when manufacturing, selling, or disposing of consumer products. In connection with the Agent Orange litigation, Judge Weinstein commented on the growing problem that confronts the petro-chemcial industry in its manufacturing of certain products that are of great social utility, but which may have adverse consequences in a very small number of cases. In addition to being slow, expensive, and likely to choose the wrong people to

76 Paul H. Rubin, Why is the Common Law Efficient?, 6 J. L. STUD. 51 (1977). 77 John C. Goodman, An Economic Theory of the Evolution of the Common Law, 7 J. LEG. STUD. 393, 405 (1978). 78 Id at 406. 79 Gillian K. Hadfield, Bias in the Evolution of Legal Rules, 80 GEO. L.J. 583, 585 (1992). 80 Id at 585. 81 E. Donald Elliott, Why Courts? Comment on Robinson, 14 J. LEG. STUD. 799, 802 (1985). 82 Edward Felsenthal, No Exit: Mass-Liability Suits Can Trap Minor Players That Prefer to Settle, WALL ST. J., Jan 4, 1993, at A1. 83 Stephen Sugarman, Serious Tort Law Reform, 24 SAN DIEGO L. REV. 796 & 802 (1987).


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compensate or to reject, the present common law toxic tort compensation system has the grave defect of inhibiting socially sound action by the threat of post hoc risk assessments that bear little relation to society's overall needs.84 Toxic tort litigation threatens industry with enormous, unpredictable liability that might well undermine economic motivation to engage in some socially beneficial activities. It threatens firms with retroactive liability for risks that organizations could not reasonably foresee.85 Not only is there post hoc risk assessment difficulty, but the transaction costs associated with common law toxic tort litigation have hidden costs. The complexity of the scientific issues causes a generalist court to spend both significant time and money to become educated on the issues, and thus other deserving cases are greatly delayed because of the judicial resources being devoted to toxic tort litigation. Costs are incurred in limited corporate productivity, since corporate officials and other staff are mired in litigation and unable to devote time to corporate business. There are increased liability insurance costs that translate into higher costs of doing business, and in many instances, because of the uncertainty of the liability risk, insurance companies may refuse to insure the organization. Societal costs are incurred as socially useful but hazardous substances are discontinued by organizations in the absence of available insurance or guarantees of limited liability.86 Wendy Wagner agrees that there are problems in the current common law toxic tort system, which she attributes the cause to a “science charade” that occurs as a result of agencies supplying false or inaccurate information to courts in order to defend their agenda. 87 To correct the problem, Wagner believes that a change in the rules that govern these agencies should be made to require them to conform to ordinary scientific standards. This change would be enacted by Congress, and would require these agencies to completely separate their policy decisions from potentially inaccurate scientific data. All policy decisions would be required to be on good standing scientific knowledge, and regulations would not stand if they were in any way based on a policy decision88. Upon analysis of this solution, it appears that, even though Wagner has identified a real problem in the system, and has made a reasonable recommendation for solution of the problem, she has missed the mark with that solution. Although her solution may seem logical and a good way to go about the problem, there are places in it that are flawed, and render it academic. For instance, involving Congress to the large extent and the manner in which she does is not feasible. Congress is chronically slow to act, and they tend not to act in a manner that will constrict the powers of the agencies. Also, if this difficulty in interpreting science exists as she says it does, it will be difficult for the courts to decide when an agency has overstepped its bounds under the new set of rules. For these and other reasons, Wagner’s proposal is good in theory, but not practical in nature. 5. The Proposed Move from Common Law Toxic Tort Liability to Strict Liability

Our present common law toxic tort system is characterized by several inefficiencies that present major obstacles to victims attempting to gain compensation for their harm. One of the main shortcomings is that the burden of proof rests with the victim who, in most cases, is unable and unprepared to generate the means or the data necessary to draw a causal link between their harm and the risk-creator’s actions. In order to mount an effective case for this type of trial, the victim must have significant assets or a law firm that is willing to front the tremendous cost that will be incurred. This system “is blind to the realities of scientific uncertainty and corporate behavior.”89 More lucidly stated, in addition to placing an unfair burden on the victim, the present system also creates a disincentive for risk-creators to act responsibly because it is not in their best economic interest to do so. What can be done to mitigate these inefficiencies? Can the present system be modified in a manner that will not only curtail its present problems, but will also serve to attain the goals of tort law? These are difficult questions with even more difficult answers. However, the proposed solution that will follow in this text is a move from the common law toxic tort liability system to a strict liability system.

84 Kenneth R. Feinberg, The Toxic Tort Litigation Crisis: Conceptual Problems and Proposed Solutions, 24 HOUS. L. REV. 155, 163 & 167 (1987). 85 David Rosenberg, Toxic Tort Litigation: Crisis or Chrysalis? A Comment on Feinberg's Conceptual Problems and Proposed Solutions, 24 HOUS. L. REV. 186 (1987). 86 Feinberg, supra note 56, at 166 & 167. 87 Wagner, supra note 8, at 1703-06. 88 Wagner, supra note 8, at 1703-06. 89 Margaret A. Berger, Eliminating General Causation: Notes Towards a New Theory of Justice and Toxic Torts, 97 COLUM. L. REV. 2117 (1997).


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Before the aspects of the proposed strict liability system are explored and the benefits of its implementation are detailed, the actual goals of tort law need to be identified. The objectives for which tort law have been put in place are as follows: First, tort law should establish the proper duties to be upheld by individuals and entities; second, when a breach of these duties occurs, tort law should then act to assure that the victims are appropriately compensated; and lastly, any tort law system in place should have as a by-product of its actions a deterrence on relevant risk-creators. The present common law toxic tort system fails to effectively attain these ends and thus, needs to be modified. Under a strict liability system, victims would only have to show, in some credible manner, that they experienced a certain harm that may have been causally related to the exposure of a toxic substance. Then, once causal relation has been established, it is up to the risk-creators in question to prove that they are not responsible. This change in the burden of proof will force the risk-creators, who can anticipate some hazards and guard against the recurrence of others, to take a pro-active role in their efforts to protect public interests. It is the risk-creators who are in the best position to generate the information necessary to allow appropriate compensation to occur; thus, an essential part of the change to a strict liability system would be to create a set of rules that require risk-creators to “develop and disclose information that is needed to assess serious latent risks.”90

This reversed burden of proving causation is not a completely new concept. In fact, Sheila Jasanoff, an attorney who has published several articles dealing with environmental tort law, cites Allen vs. United States91 as an example of this shift of burden of causation. In this case, plaintiffs “claimed to have developed cancer from federal facility nuclear fallout, a by-product of nuclear testing,” but the testing was “found to be covered by the doctrine of sovereign immunity on appeal.”92 Despite this, the judge ruled in favor of the plaintiffs, ordering that once plaintiffs could prove “they had been exposed to radiation during the period of atomic testing and that the available epidemiological evidence linked their particular form of cancer with radiation,”93 this was enough to conclude that radiation had been a substantial factor in increasing risk of plaintiffs’ cancer. The plaintiffs were awarded damages unless the government could prove plaintiffs’ cancer was not caused by the fallout.94 The judge, in fact, reversed the burden of proof in this case. Currently, risk creators are well aware of the difficulty potential plaintiffs have in attempting to prove any wrongdoing on their part. Thus, with the small probability of being held liable, they may continue to engage in acts that create potentially fatal risks for society. True, there is legislation such as the Clean Air and Water Acts already in place that force risk-creators to act more responsibly than they have in the past. However, more steps need to be taken, and a change in tort law needs to be implemented which will establish a “meaningful legal standard” concerning the risk creator’s activities that can result in harm to victims.95 These changes in tort law could make great strides towards curtailing some of the inefficiencies that presently exist under the common law toxic tort system. Tremendous transaction costs are one of the main inefficiencies that exist under the common law toxic tort system. This is due to both sides conducting multitudes of different scientific studies for each of their particular cases. However, if part of the new system includes a meaningful legal standard that risk-creators must adhere to, then the transaction costs and time that are presently being wasted under the current system can be trimmed immensely. These stipulations will force risk-creators to develop effective information gathering systems to assure that they are acting in compliance with the established guidelines.96 The chief objective of this proposal is to encourage risk-creators to engage in far more scientific research when it matters --not to win lawsuits, but to protect society against the risks created by their (risk-creators) actions.97 In addition, the hope is that these

90 Id. at 2117. 91 Allen v. United States, 588 F. Supp. 247 (D.C. Utah 1984). 92 Eileen Gay Jones, The Bar on Science, 30 LOY. L.A. L. REV. 801, 807-08 (1997) (reviewing SHEILA JASANOFF, SCIENCE AT THE BAR: LAW, SCIENCE, AND TECHNOLOGY IN AMERICA (1995). 93 Id. at 808. 94 Id. 95 Margaret A. Berger, Eliminating General Causation: Notes Towards a New Theory of Justice and Toxic Torts, 97 COLUM. L. REV. 2140 (1997(. 96 Id. at 2141. 97 Id., at 2152.


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systems will not only benefit both potential and actual victims, but will also assist risk-creators in their attempts to show that they acted in a socially responsible manner. These information gathering systems could also help to reduce court congestion, which is another peril currently faced by the common law toxic tort system. Unfortunately, many cases concerning common law toxic tort liability take years to make it to the courtroom, and others never make it because of the congestion that results when attempting to deal with trials of this type. With so much scientific evidence and various scientific studies involved, the establishment of any type of clarity takes a substantial amount of time. Thus, cases can span many years. The end result is very few victims having their cases heard and even less actually being compensated for their harm. However, with the implementation of the proposed information gathering systems, less time would have to be delegated to the hunting, gathering, and establishment of crucial case evidence because much of the relevant information would already be documented. Information gathering systems are not the only facet of a strict liability system that would work to alleviate transaction costs. Under a strict liability system, common law toxic tort cases would be handled through an administrative process as opposed to a litigation process.98 This would not only combat the peril of court congestion presented by the current common law toxic tort system, but would also alleviate the unnecessary burdens inflicted on judge and jury in their attempts to deal with scientific evidence. The use of an administrative process to handle common law toxic tort liability cases under a strict liability system would encompass the use of a panel of experts who would hear the cases. This would allow for cases to be heard more efficiently, which would also create the potential for more victims to receive compensation. The hope is that the use of this administrative process would not only eliminate the long, drawn out trial process, but that its use of the panel of experts would also allow for just verdicts. Presently, a lot of confusion exists when a typical judge and jury has to hear a case concerning common law toxic tort liability. These types of cases are filled with expert testimony and evidence that involve issues, facts, and language that make virtually no sense to those who play a major role in handing down the final judgment. Thus, this confusion not only adds to the tedious trial process, but it also presents the possibility of an inappropriate verdict. The proper focus of tort doctrine has been characterized as the adjustment of loss based on a fact specific, individualized determination of fault, causation, and harm.99 It is the opinion of the author that this “fair adjustment,” in common law toxic tort cases, would most likely be attained through the use of a panel of experts and an administrative process, under a strict liability system. The present common law toxic tort system is one of the world’s most costly and inefficient mechanisms for returning compensation to plaintiffs.100 High transaction costs in toxic tort liability: study of asbestos lawsuits by the Rand Institute of Civil Justice showed that from the early 1970s to 1982, every $1 paid to asbestos plaintiffs as compensation entailed an additional $1.71 in litigation expenses by plaintiffs, defendants, and their insurers. In other words, only 37% of the total expenditures were recovered by the victims.101 Limitations of case-by-case litigation in dealing with the complexities of mass accidents and disasters, so need to do something like translate the principles of tort liability into a quasi-administrative approach to compensation.102 Early in this discussion, the goals of tort law were emitted. The inefficiencies of the present common law toxic tort system hinders its ability to accomplish these objectives. It has already been discussed in detail how a move to a strict liability system would work to mitigate the high transaction costs, court congestion, inequitable compensation, and unnecessary burdens inflicted on judges and juries in their attempts to deal with scientific evidence that presently exist under common law toxic tort liability system.103 However, another goal of tort law, which the present system also fails to accomplish, is having as a by-product of its actions, deterrence on relevant risk-creators. A move to a strict liability system could work to alleviate this shortcoming as well. The installment of a strict liability system would make the possibility of risk-creators being held accountable for their actions much more certain. Thus, the hope is that this system would not only encourage risk-creators to be more conscious of how their actions affect society, but that they will actually make protecting society from potential harms one of their top priorities. Under the present common law toxic tort system, this is

98 Thomas A. Eaton & Susette M. Talarico, A Profile of Tort Litigation in Georgia and Reflections on Tort Reform, 30 GA. L. REV. 627, 674-675 (1996). 99 Id. at 680. 100 SHEILA JASANOFF, SCIENCE AT THE BAR 15 (1995). 101 Id. 102 Id. 103 Berger, supra note 67 at 2120.


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not the case because the risk-creators realize that the burden of proof does not rest with them. Also, it is extremely difficult for victims to prove that the risk-creator’s actions were the major causal link to the victim’s harm. Thus, risk-creators continue to engage in questionable practices because their perceived potential of being punished for their actions is not very likely. Hopefully, a strict liability system that places more responsibility on risk-creators to justify their actions will change the prevalence of the risk-creator’s reactive behavior to harms that have already occurred, to a proactive approach aimed at eliminating the potential risks that they may create. The proposed positive aspects of putting a strict liability system in place to deal with common law toxic tort cases has been detailed extensively. However, this proposal, like any other that represents considerable change to the way things have been done in the past, is not without its concerns. There are a few major concerns emitted when discussion on the workability of a strict liability system occurs. The first centers around the cost. Opponents argue that the strict liability system will be too costly because of the vast increase in the pool of potential claimants that would result from its implementation.104 However, those in favor of a strict liability system claim it will be less costly than our current common law toxic tort system because of the money saved through the move to an administrative process as opposed to a litigation process, which will greatly reduce transaction costs.

The second major criticism concerns the difficulty in defining the triggering mechanism that would be established to determine when a risk-creator’s actions should be considered inappropriate. Granted, this points has some merit, but the establishment of this triggering mechanism would be no more difficult than the perils faced by plaintiffs in their attempts to prove their case under the present system.

A third criticism involves the “wildly different ‘scientific conclusions’ reached by sister agencies or even sister departments of the same agency at the same time under the same administration concerning the carcinogenic potential of the same toxic substance.”105 Sometimes, “these inconsistencies can even include the decision about whether a substance presents a risk worth regulating at all.”106 Given these inconsistencies across the board in environmental agencies, it would obviously be difficult to assert consistency across the board in our courts with regard to the strict liability method for dealing with toxic torts. Although the move to a strict liability system does raise some concerns, it is the opinion of the author that its potential benefits outweigh any potential costs. The redressing of wrongs is one of the most important functions of tort law, and the current system that handles common law toxic torts not only fails in this regard, but it also falls short in its quest to perform its intended compensatory function. The present system’s inability to provide appropriate compensation for victims could be justified if it deterred a sufficient number of injuries.107 However, the current system in place fails to effectively accomplish either one of these ends, and, therefore, needs to be modified.

Sheila Jasanoff, who argues more toward the incrementalist side in regard to changing our toxic tort system would indicate that the adjudication of technical claims in a lay forum to compensate toxic tort victims has room for refinement, but she would say the system needs to be changed gradually, which “radical reformists:” “primarily scientists, industry representatives, and some academics, who advocate significant institutional changes in the handling of the scientific aspects of toxic tort cases”108 Indicating a need for more use of “special masters, blue-ribbon juries, expert advisory panels, consensus reports and manuals, and better technical training for judges.”109 Jasanoff states that “Courts often do appear uncertain about or resistant to quantitative methods and principles that scientists take for granted, such as concepts of causation, probability, and statistical significance. They seem even less systematically aware of modern science as a social institution, whose claims and credibility are produced through complicated negotiations within the community and with external institutions. Case-by-case adjudication leads to incoherent results in the evaluation of technical evidence, producing uncertainty for businesses and professional communities as well as for innocent victims. Judicial review provided inconsistent guidance in interpreting complex environmental statutes and exposed regulatory agencies to new crises of creditability. Tort law may well have exerted a negative impact on

104 Thomas A. Eaton & Susette M. Talarico, A Profile of Tort Litigation in Georgia and Reflections on Tort Reform, 30 GA. L. REV. 676 (1996). 105 Wendy E. Wagner, The Science Charade in Toxic Risk Regulation, 95 COLUM. L. REV. 1639 (1995). 106 Id. at 1639-40. 107 Eaton & Talarico, supra note 76, at 674. 108 SHEILA JASANOFF, supra note 72 at 136. 109 Id.


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technological innovation and risk taking, although corporate behavior is driven in these respects more often by perceptions of the liability system than by its actual performance.”110 Jasanoff’s response is that we can’t do without the courts or litigation, but we do need to decide “how litigation can be made to work better when confronted by problems with significant scientific or technical dimensions.”111 Most literature and reform measures that have been introduced have focused only on improving the compensatory function of the present system.112 However, these reforms not only had no significant impact on the current system’s ability to appropriately compensate the deserving number of victims, but also failed completely to address the other inefficiencies of the present common law toxic tort system. The transition to a strict liability system would work to combat the various inefficiencies of the present system and could also be made relatively smoothly by using the Workers’ Compensation system as a model. The employer tort liability system (Workers’ Compensation) has already been changed over to what can be considered a strict liability system. This move was met with some resistance at its conception but has proven to be quite successful. Thus, changing the environmental tort liability system from its present common law toxic tort liability system to a strict liability system could be aided greatly by incorporating the positive features of Workers’ Compensation. I suggest that a move could be made from common law toxic tort liability to a statutory strict liability for toxic torts. This move will provide industry with the opportunity to perform cost-benefit analysis decisions based on the cheapest cost avoider. Industry is better informed as to risks and alternatives than regulatory agencies, courts or the injured individuals. Strict liability has equitable distribution effects, involves cost spreading by the firms, and does not require that a governmental institution make a cost-benefit analysis.113 Under this scenario, the common law toxic tort system would be replaced by a strict liability administrative compensation scheme. As mentioned, a strict liability approach could use the approach of Workers' Compensation as recommended by Judge Jack Weinstein, the judge who decided the Agent Orange litigation. Workers’ Compensation could be used as a model, and its positive features could be incorporated into an Environmental Compensation program. In Stertz, the court explained the quid pro quo rationale of the compensation system as the exclusive remedy for on-the-job injuries: “[o]ur act came of a great compromise between employers and employed. Both had suffered under the old system, the employers by heavy judgments of which half was opposing lawyers' booty, the workmen through the old defenses or exhaustion in wasteful litigation. Both wanted peace. The master in exchange for limited liability was willing to pay on some claims in the future where in the past there had been no liability at all. The servant was willing not only to give up trial by jury, but to accept far less than he had often won in court, provided he was sure to get the small sum without having to fight for it. All agreed that the blood of the workman was a cost of production, that the industry should bear the charge.”114 Before Workers' Compensation, even if the worker won the suit, a substantial portion of the judgment went to the attorney who had accepted the case on a contingency basis. It was not unusual for the size of the attorney's fee to represent fifty to seventy-five percent of the amount of the judgment.115 Employer tort liability law has been changed to strict liability, and toxic or environmental liability could be similarly changed. Before Workers' Compensation, the doctrine of assumption of risk applied to the worker, in accepting employment, the worker voluntarily accepted the risks of the job. The assumption was that the employee was paid for such risks; therefore, no additional compensation should be paid for injuries. The common employment doctrine states that one's fellow workers are better judges of one's competence and fitness of fellow employees than the employer. Fellow workers discovering lapses of a fellow employee should notify the employer. “Should the employer not remedy the condition, these workers should resign […] and seek an employer who will heed their reports. In any case, the employer hardly can be held responsible for accidents caused by fellow workers.”116

The doctrine of assumption of risk asked questions in regard to whether the employer had the "right" to impose risk on the employee, questions which frequently made the doctrine circular.

110 Id. at 205. 111 Id. at 206. 112 Eaton & Talarico, supra note 76, at 674. 113 See generally Calabresi & Hirschoff, supra note 21. 114 Stertz v. Indus. Ins. Comm’n, 91 Wash. 588, 590-591 (1916). 115 EMMETT J. VAUGHAN, FUNDAMENTALS OF RISK AND INSURANCE, 331, (1989). 116 MEHR & CAMMACK, PRINCIPLES OF INSURANCE, 334 (6th ed. 1976).


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Emphasis was placed on knowledge and appreciation of the risk and the availability of alternatives. The cost-benefit analysis was left to the employee.117 In reality, the employer may be in a better position to evaluate the costs and benefits of a piece of equipment, given the likelihood of occasional employee negligence. The employer may know the propensity to negligent use and thus be better able to evaluate a substitute piece of equipment which cannot readily be negligently used. The move to strict liability in employer-employee relations was not based on responsibility or rights, but was similar to common law tort liability in expanding to respondent superior and ultra hazardous activity liability in the past, which was based, at least in part, on a desire to accomplish better primary accident cost reduction and an increased concern for the public welfare.118 The absoluteness of our language of responsibility or rights tends not only to erase the dimension of responsibility from our experience, but tends to erase the dimension of sociality. This erasure means that we have a weak language for the protection of what could be called the social environment, be it the workplace, neighborhoods, or communities.119 Assumptions similar to those made in early employer-employee relations have been made in relation to individuals who suffer increased risk because of the location of their homes. It has been argued that a home close to a polluting factory is less costly than a home further away from one; therefore, the individual has assumed the increased risk by voluntarily living closer to the factory. In addition, arguments have been made that the individual is the cheapest cost avoider. Yet, these arguments are difficult to justify since industry has better information as to the environmental risks and alternatives than individuals, and also because industry is better able to choose to avoid that risk by altering behavior.120 Rights-based philosophy emphasizes the integrity of the individual as central in any legitimate compromise between personal rights and societal needs, such as the right to a safe workplace.121 The right to a safe environment is similar to the right to a safe workplace. The right if violated causes the violator to be strictly liable. This right forces the violator to internalize the external costs he or she had imposed on others. The use of litigation to pursue social goals is well entrenched, and yet under the common law tort system, it does not provide victims with adequate protection against the increased risks to their health caused by environmental toxins.122 Claims for financial compensation for the deaths and diseases attributed to asbestos, Agent Orange, DES, and hazardous wastes have challenged established concepts about causation, liability, and compensation.123 The common law tort rule is based on the premise that it is unfair to require an individual or firm to pay for another's tragedy unless it is shown that it is more likely than not that the individual or firm caused it, but this principle no longer captures the community's intuitive sense of justice in cases involving toxic substances.124 The basic objectives of the tort law are better served if liability is based on risk of injury rather than being based solely on the actual occurrence of a harm.125 It has been the courts judgment whether to favor the interests of the individual or the interests of society. But there are some sacrifices of individual rights that persons cannot be expected to make for society. Proponents of tort liability might argue that those activities that maximize utility must be exempt from liability risks and therefore serve the interests of the community as a whole. Under tort liability, questions arise about whether the court should surrender the individual’s rights to the demands of maximizing utility or protect individual interests in the face of community needs. This choice does not have to be the only one. Protecting

117 Calabresi & Hirschoff, supra note 21, at 1073. 118 Id. at 1064, 1065, 1075. 119 James Boyd White, Looking at our Language: Glendon on Rights, 90 MICH. L. REV., 1267, 1271 (1992). 120 Calabresi & Hirschoff, supra note 21, at 1073. 121 John W. Heiderscheit, III, Nuclear Power Meets the War on Drugs: A Utilitarian and Neo-Kantian Perspective on the NRC's Fitness-For-Duty Rules, 23 LOY. L.A. L. REV. 1153, 1167 (1990). 122 Fletcher, supra note 20, at 571. 123 Elliot, supra note 2 at 1355. 124 E. Donald Elliott, Why Courts? Comment on Robinson, 14 J. LEG STUD. 800 (1985). 125 Glen O. Robinson, Probabilistic Causation and Compensation for Tortious Risk, 14 J. L. STUD. 783 (1985).


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the rights of the parties does not require that the community forego activities that serve its interests. The issue of liability could be decided on the grounds of fairness to both victim and risk-creator.126 We should ask, "What do we want from our legal system?" There has been major tension between the common law tort system's reliance on factual and scientific causation and society's desire that the tort system serve ends unrelated to scientific methods, including deterrence and the spreading of liability.127 Focusing on the problems of toxins in the environment and the increased risk to individuals should cause society to reevaluate what role compensation through the legal system should play in an overall social strategy in dealing with toxic substances, as well as which variety of institutions available to the legal system is best suited to deal with toxic compensation problems.128 The concept of strict liability goes back to Judge Traynor’s concerning opinion in the 1944, California Supreme Court case, Gladys Escola v. Coca Cola Bottling Company of Fresno.129 The argument was to move beyond res ipsa loquitur and look to public interest. The opinion indicates that it is a matter of public policy to protect the public from dangerous products placed on the market, irrespective of negligence. If a risk-creator causes a menace to the public, it should be a cost of doing business.130 The risk-creator is the cheapest cost avoider and the best spreader of the costs. The risk-creator has better access to information and in many cases may be the only cost avoider. Without this shifting of the burden to the risk-creator, there may be little incentive to improve past practices. Under strict liability, the cost of the deprivation of the rights of the individual would shift to the risk-creator that causes the increased risk. This shift insulates individual rights and interests against community demands by providing compensation for injuries exacted in the public interest. Strict liability can protect individual rights and autonomy, but it cannot prohibit socially useful activities. If promoting the general welfare is the criterion for rights and duties of compensation, then few individuals would suffer under strict liability.131 Thus, strict liability would be an equitable way to provide victims with the relief they deserve, while also rationally distributing the responsibility for the victims’ injuries among the risk-creators, rather than having the gaps in traditional tort doctrines that leave unprotected an entire class of victims whose real and substantial injuries were the product of the ever increasing complexity of modern society.132 Since liability is strict under Workers' Compensation, there is no requirement that the employee prove anything other than an injury or illness was sustained and that such injury or illness arose out of employment. 133 Under an Environmental Compensation program, the individual would be eligible for benefits if he or she suffered greater than de minimis injuries of a type that some credible scientific evidence suggests may be causally related to exposure to a toxic substance. The program could even work in situations in which evidence does not permit matching of particular illnesses to particular exposures. “In a world in which every victim is in fact exposed to multiple factors that tend to increase risks, the question of which one ‘really caused’ the injury may not be meaningful.”134 5.1. Claim Filing under Strict Liability Insurance Industry Involvement Under Strict Liability In order to make this Environmental Compensation program work, the individual would submit his or her claim of injury or illness to the insurance industry. The program would be set up similar to Workers' Compensation, and industry by statute would be required to buy insurance or self-insure the exposures. “Under present legal arrangements, payments for most torts are covered by liability insurance. Where they are not [covered], the loss must be borne by the victim and/or his or her own insurer or the government’s welfare programs.”135 Under the Environmental Compensation program, the insurance industry would spread the costs actuarially across industries. Insurance premiums would be assessed, based initially on estimates of the

126 Fletcher, supra note 20, at 556, 568 & 572. 127 Elliott, supra note 2, at 1355. 128 Elliott, supra note 2, at 1357. 129 Escola v. Coca Cola Bottling Co., 150 P.2d 436 (Cal. 1994). 130 Escola v. Coca Cola Bottling Co., 150 P. 2d at 441. 131 Fletcher, supra note 20, at 564 & 569. 132 Sindell v. Abbott Laboratories(In re DES Cases), 789 F. Supp. 548, 564 (E.D.N.Y. 1992). 133 GEORGE L. HEED & STEPHEN HORN II, 2 ESSENTIALS OF THE RISK MANAGEMENT PROCESS,14 ( Insurance Institute of America 1st ed. 1985). 134 Elliott, supra note 2, at 1359 and 1370. 135 Robinson, supra note 97, at 785.


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percentage of the total costs of increased risk of toxic harm attributable to exposures to a particular substance. The costs that cannot reasonably be attributed to any substance would have to be distributed throughout the toxic insurance premiums. There should be no significant regulatory or court intervention in this process; thus, transaction costs would remain low. Courts are constrained to reach decisions only on the basis of live cases and evidence before them, and these decisions come at the cost of limited information and consequent bias in the development of legal rules.136 This information restriction and the high transaction costs of courts are reasons why “fewer and fewer areas of law are characterized by a structure in which courts act on their own to make law in relative isolation.” 137 The court’s role should change as the result of the rise in a variety of other active lawmaking institutions. Yet, it seems strange that in the United States, it is up to individual courts to provide essentially ad hoc solutions to toxic increased risk disasters considering their social and economic repercussions. Three factors by default have left courts to handle these toxic issues: “the lack to date of an effective national administrative regulatory scheme capable of controlling undesirable conduct by manufacturers; the absence of a comprehensive social welfare medical scheme for compensating victims of [increased risk]; and the lack of adequate state or federal legislation controlling [toxic increased risk].”138 The market should regulate the cost of the insurance to industries. Since particular firms are better able to choose to avoid costly risks by altering their behavior, they can directly impact their cost of insurance. The deterrence of undesirable risks will be accomplished by increased premiums charged by insurance carriers to risk-creators. These changes will cause firms to do cost-benefit analysis in order to determine if the increased risks to society are outweighed by the benefits to the firm. This cost-spreading, risk-distribution, and cost-avoidance would provide an efficient model. It would indirectly, through the purchase of insurance, put the cost of the increased risk or accidents on the risk-creator, and when it is cheaper for the risk-creator to avoid the increased risk costs, the risk-creator would implement appropriate safety measures beyond those required by government.139

5.2. Regulatory Standards and Specific Coverage Under Strict Liability The regulation, through minimum health and safety standards set by administrative agencies, would be used to limit risks to socially acceptable levels. Standards would be based on the value of a life and would be precautionary, aimed at keeping risks as low as reasonably achievable, based on a balancing of the strength of scientific evidence that a substance may cause an increased risk of harm, the seriousness of the potential harm involved, and the cost of compliance. 140 Where multiple equitable concerns such as deterrence and compensation are to be accomplished, separate institutions such as regulatory agencies and insurance companies are desirable to perform the separate functions. “Each institution can then be tailored with a particular goal in mind, as opposed to trying to accomplish all the law's goals at once through a single institution.”141 Insurance companies would be required to pay compensation in the form of: (1) medical expenses; (2) medical monitoring; (3) total temporary disability; (4) partial temporary disability; (5) total permanent disability; (6) partial permanent disability; (7) survivors' death benefits; and (8) rehabilitation benefits.142 These benefits would be standardized by all participating insurance companies and would be the exclusive remedy available to claimants.143 Statutes would provide the percentage of the average weekly wage for disabilities. Because the effects of certain exposure to toxic substances will not be manifested for many years, and because early detection greatly increases the probability of successful treatment, there are many instances in which the periodic monitoring of the physical condition of a victim is beneficial. In Paoli Railroad Yard PCB

136 Gillian K. Hadfield, Bias in the Evolution of Legal Rules, 80, GEO. L. J. 585, 615 (1992). 137 Elliot, supra note 2, at 1357. 138 Weinstein & Hershenov, supra note 41, at 270. 139 Calabresi & Hirschoff, supra note 21, at 1057. 140 Elliott, supra note 2, at 1385. 141 Elliott, supra note 2, at 1365. 142 ARTHUR WILLIAMS, JR & RICHARD M. HEINS, RISK MANAGEMENT AND INSURANCE 423 (Kathleen L. Loy et al.eds., McGraw-Hill Book Co. 1989) (1964). 143 Id.


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Litigation, 144the court stated that, "the appropriate inquiry is not whether it is reasonably probable that plaintiffs will suffer harm in the future, but rather whether medical monitoring is, to a reasonable degree of medical certainty, necessary in order to diagnose properly the warning signs of disease." 145 The court further stated that a cause of action for medical monitoring may be established by proving that:

1. Plaintiff was significantly exposed to a proven hazardous substance through the negligent actions of the defendant. 2. As a proximate result of exposure, plaintiff suffers a significantly increased risk of contracting a serious latent disease. 3. That increased risk makes periodic diagnostic medical examinations reasonably necessary. 4. Monitoring and testing procedures exist which make the early detection and treatment of the disease possible and beneficial.146 In addition, under this system, a medical review panel would decide whether medical monitoring would

be appropriate. There would be coordination with other disability plans, whether private or social security, so that no more than a certain percentage of a worker's average monthly wage is paid from all sources in order to eliminate incentives for false claims.147 Under this program, there would be no awards for pain and suffering, which is presently the case in Worker's Compensation and no-fault automobile liability.148 Worker's Compensation came out of a clear bilateral system, with workers on one side and employers on the other. The no-fault automobile liability is not a bilateral system, since the entire public rides in automobiles.149 Environmental exposures are bilateral between the risk-creators, be they producers of industrial compounds, pollutants, food additives, pharmaceuticals or haulers of toxic wastes, and the victim. There are problems of causation associated with increased risk, whether they are the uncertainty about the risk-creator's identity, uncertainty about the victim's identity, or uncertainty about the efficient level of precaution. Uncertainty about the victim's identity can occur when a risk-creator increases the risk of a disease above the background level by negligently or intentionally discharging into the atmosphere a cancer causing chemical. The issue is whether or not a particular discharge was the cause of a particular victim's cancer.150 Whether it is benzene induced leukemia, pesticide induced aplastic anemia, radiation exposure, Agent Orange, Dalkon Shield contraceptive, diethylstilbestrol, bendectin, cadmium or asbestos, the causal connection might be complicated by multiple factors which cause individual attribution uncertainty. Since the confidence intervals from epidemiological studies are wide, scientists trying to prove a causal connection must rely on data from animal bioassays and short-term tests. Both of these types of evidence involve trans-scientific assumptions when applied to humans, and the evidence has individual attribution problems.151 This is why a scientific review board would be beneficial in the court room when trying to make rulings on scientific data. It would create standards, as well as a checks and balances system in the legal world.152 5.3. Implementation of a Medical Review Panel Rigid, simplistic rules would offer no solution to the problems of proving classic common law toxic tort causation. Only a flexible approach which fosters a case-by-case adaptation to the unique nature of the toxic, victim, and risk-creator is appropriate. A system with the ability to provide appropriate deterrents to harmful risk-creator conduct and to compensate victims is necessary. It is important that there be a fair forum, with known and consistent rules available for both the vindication of the victim and risk-creator’s rights. Also, 144 In re: Paoli Railroad Yard PCB Litig., 916 F.2d.829 (3rd Cir. 1990). 145 In re: Paoli Railroad Yard PCB Litg., 916 F.2d. at 851. 146 In re: Paoli Railroad Yard PCB Litg., 916 F.2d, at 852. 147 MARK S. DORFMAN,INTRODUCTION TO RISK MANAGEMENT AND INSURANCE, 449 (Keith Faivre ed., 1991). 148 Michael Horowitz, Let Drivers Opt Out of Auto Tort System, WALL ST. J., Sept. 23, 1992 at A15. 149 LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW, (2nd ed. 1985). 150 John Cirace, A Theory of Negligence and Products Liability, 66 ST. JOHN'S L. REV. 1, 42-43 (1992). 151 Troyen A. Brennan, Helping Courts with Toxic Torts: Some Proposals Regarding Alternative Methods for Presenting and Assessing Scientific Evidence in Common Law Courts, 51, U. PITT. L. REV. 1, 26 (1989). 152 Brandon L. Garrett and Peter J. Neufeld, Invalid Forensic Science Testimony and Wrongful Convictions, 95 VA. L. REV. 4, 5 (2009).


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administrative costs should be minimized and exorbitant expenses discouraged. 153 The Environmental Compensation program would be such a system. The premiums charged by insurance companies would function as a deterrent to risk-creators and a fair administrative forum would be created by statute. Just as the state of Indiana created under its Medical Malpractice Act a medical review panel, by statute, under the Environmental Compensation program, a medical review panel would be created. For this plan to work, there must be a coordination of experts who are familiar with more than only one discipline. This panel of experts must create trust, whether it is in the victim, risk-creators, government, or the insurance industry. When creating solutions, the panel members must reflect an understanding of and sensitivity to the likely reactions, the points of view, perspectives, and the difficulties involved in their decisions. This panel of experts would consist of scientists, such as epidemiologists and toxicologists, physicians, economists, and lawyers. This panel would consider the available evidence and reach a conclusion about the toxic increased risk connection. If a connection exists, the panel could recommend full compensation for the victim. If the connection is more uncertain, the panel could decrease the compensation available to the victims or tighten eligibility criteria. The compensation would be graded according to the width of the confidence intervals. The medical review panel would broaden the range of evidence accepted on causation issues. Since no evidence in toxic torts can speak directly to individual causation, the victim and risk-creator would be allowed to introduce many types of evidence, including animal and in vitro experiments, epidemiological data, and analogous medical cases, with the medical review panel members free to decide which of the many inferences urged on them were reasonable and free to reject truly irrelevant evidence.

In many toxic cases, all the evidence is indirect, making irrelevance extremely difficult to determine. The relevance requirement would not be used to exclude potentially useful evidence. The balancing of credibility of evidence is a uniquely appropriate role for fact finders such as a medical review panel on a case-by-case basis.154 Using this evidence, the medical review panel would specify exposure criteria, latency periods, and a list of diseases caused by particular substances. Using notions of attributable fractions from epidemiology and other evidence, the panel could develop fractions of total compensation based on the probability of increased risk.155 In Science at the Bar, Jasanoff warns against holding the views of “mainstream scientists” as supreme because, she argues, all scientists are influenced by external factors and it is therefore not really possible for them to make unbiased recommendations and judgments. She states that recommendations for “the formation of science courts. . .chronically overestimate the power of experts to rationalize moral and political choices about science and technology”156 However, my recommendation helps to ameliorate the problem she suggests would be faced with science courts because a variety of decision-makers don’t view any one group as the ultimate authority. Furthermore, this panel of scientists, such as epidemiologists and toxicologists, physicians, economists, and lawyers would be better-qualified to assess complicated evidence and make decisions that are in the best interests of society. Jasanoff discusses the biases of scientists, but this is also a problem that is faced when one considers those who are currently trusted to make decisions concerning these matters: jurors and judges. This seems to pose far more risks because there is less diversification of ideas and more of a chance for skewed perspectives. People randomly selected for jury duty would probably have far less knowledge concerning some of the technical matters and evidence presented in the courtroom and consequently have more problems making “correct” decisions and suggestions in relation to what the outcome of a case should be. As Sheila Jasanoff indicates, the relationship between legal process, scientific authority, and political culture deserve more systematic investigation. 157 While the cross-disciplinary analyses promise to expand the repertoire of credible public responses to changing knowledge and to reengage science and the law in mutually beneficial projects of reflection and self-criticism which is what is envisioned by this proposal.158

Allowing risk-based liability imposes loss bearing responsibility. The risk-creator is made to bear the burden of the expected losses; yet, once that risk has been identified with sufficient clarity to permit evaluation, the victim may choose to bear it because he or she is best able to monitor the risk and take appropriate steps to reduce its scope. The victim may choose to file an Environmental Compensation claim at any time after 153 Gold, supra note 39, at 393. 154 Id at 393 & 394. 155 Brennan, supra note 123, at 68-69. 156 JASANOFF, supra note 72 at 7. 157 JASANOFF, supra note 72 at 225. 158 JASANOFF, supra note 72 at 325-326.


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exposure, including the time of actual injury, with the statute of limitation running from the manifestation of the injury. Actions by victims would presumably be brought only by victims who perceive a significant advantage from filing early and who are content with probabilistic compensation. This plan would provide victims the opportunity to pursue recovery for risk if they prefer to wait and seek compensation for actual injury. Claims could be reviewed on the basis of evidence closer in time to the underlying events, and the longer the delay between filing the claim and the principal events, the greater the loss of evidence, and the higher the chance of error.159 The medical review panel would discount the compensation by the lack of probability that the disease was caused by the increased risk.

An example of the proportional liability approach could be a situation in which there is only a thirty percent probability that the victim's cancer was attributable to a particular product or exposure and only a forty-five percent chance that the risk-creator produced the product or exposure. If the victim, under the Environmental Compensation program, could show one hundred percent of the injury or increased risk was attributable to the particular product or exposure, then the compensation consisting of medical expenses, disability, rehabilitation, etc., would be worth $750,000. The compensation of benefits for this particular victim would be .30 X .45 X $750,000 = $101,250.160 “A smoker exposed to benzene and dying of lung cancer would recover less than an otherwise identical non-smoker. How much less would depend on the medical review panel’s overall evaluation of the case.”161 The medical review panel would provide a source of unbiased expert opinion that would assist the insurance industry in the consideration of increased risk toxic causation. 5.4. Replacing Common Law Causation with Proportional Liability

Proportional liability would replace the common law causation of greater than fifty percent. Proportional liability holds the risk-creator liable for the increased risk and for the losses of each victim of disease in the exposed population discounted by the probability that the risk-creator's hazardous activity was the cause. Proportional liability lessens fairness concerns because risk-creators only pay for the increased risk or injury their hazardous activity has caused. If the risk-creator, under conditions of uncertainty, were required to pay full compensation to victims, there would be an inequitable burden placed upon the risk-creator, since it would provide a windfall upon all victims by disregarding the chance that they either harmed themselves by smoking, drinking, or were harmed by some other background factor that the risk-creator is not responsible for.162 There will be degrees of uncertainty in regard to the effects of toxic exposures and background factors, but uncertainty is no reason to reject this proportional liability approach. Uncertainty can be taken into account by discounting the recovery according to the degree of confidence expressed in the estimates used by the medical review panel.163 Daniel Farber discusses a proportional recovery approach and provides the illustration that “if there was a thirty percent likelihood that the defendant caused the plaintiff’s cancer, the plaintiff would receive thirty percent of his total damages”.164 Under Farber’s most likely victim approach, “these plaintiffs whose injuries were least likely to have been caused by the defendant receive nothing, while those with the highest causation probabilities get full compensation.”165 This aspect of giving damages to the plaintiffs with the highest probabilities of being actual victims, and giving nothing to the remaining plaintiffs is Faber’s most likely victim approach.166 This approach in reality, doesn’t deviate much from common law tort liability.

In rejecting the all-or-nothing approach of common law tort liability, it is immaterial that the probability of causation for a given victim fails to exceed fifty percent. The change to proportional liability, with no threshold probability, will increase deterrence since it no longer will be possible for risk-creators to misuse toxic agents and still be exempted from responsibility for the harm they cause. There should be no threat of over deterrence from liability tailored strictly to the increased risk and injury caused by the risk-creator’s activity.167 159 Robinson, supra note 97, at 787- 788, 791. 160 Weinstein & Hershenov, supra note 110, at 311-12. 161 Gold, supra note 39, at 399. 162 Rosenberg, supra note 57, at 191, 192. 163 Id, at 193. 164 Daniel A. Farber, 71 MINN. L. REV., 1219 (1987). 165 Id at 1222. 166 Id. at 1248. 167 Rosenberg supra note 57 at 192.


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In market share liability cases, the courts have in some cases permitted the victim to recover for injuries without identifying the party who caused the harm. The adoption of probable causation served to balance the victim's burden of establishing causation-in-fact, while reducing the defendants' liability to only their calculated market shares. 168 The market share theory of liability originated in California in Sindell v. Abbott Laboratories. 169 The plaintiff, on behalf of herself and other women, similarly situated alleged personal injuries including cancer as a result of ingesting diethylstilbestrol (DES) but was unable to identify the manufacturer of the DES she had ingested. The court held that where all defendants produced a drug from an identical formula and the manufacturer of the DES who actually caused the plaintiff's injuries cannot be identified through no fault of the plaintiff, the plaintiff may proceed against all defendants. The market share liability theory applies only where a single product is alleged to have caused the plaintiff's injury and the plaintiff has sued a sufficient number of defendants who comprise a substantial share of a specific market. Under these circumstances, the burden of proof is shifted to the defendants to demonstrate that they could not have made the drug that injured the plaintiff.170 If that showing cannot be made, then the defendant shares in the industry's liability to the plaintiff on the basis of its market share. This case is similar to how the insurance industry under the Environmental Compensation program would determine premium charges for firms and for particular industries in relation to injuries or increased risk from toxins. Genuine mass toxic torts, such as the DES cases, possess some or all of the following features: (1) geographically widespread exposure to potentially harmful agents that (2) affects a large or indeterminate number of plaintiffs, (3) possibly over long time periods, even generations, (4) in different ways such that (5) there is difficulty in establishing a general theory of causation and (6) an inability to link a particular defendant's actions to a particular plaintiff's injuries or increase risk, as well as (7) difficulty in determining the number of potentially responsible defendants and (8) in determining their relative culpability, if any, which often results in (9) multiple litigations that burden the courts and cause huge transactional costs, including heavy legal fees, and (10) which threatens the financial ability of many companies or of whole industries to respond to traditional damage awards.171 Our political system has given primary responsibility to the courts and state legislatures to establish practicable and just rules for compensatory toxic tort victims. The federal and state courts have bent traditional substantive rules of tort law through doctrinal innovations such as market share liability, enterprise, and concerted action.172 Yet, many courts have flatly rejected the increased risk theory.173 An objection to recovery for risk is that it both over and under compensates real loss. If the future risk does not materialize, then the victim's recovery would be a windfall, but it would be one that accurately reflects the burden of risk. The windfall so created must be set against the windfall to the risk-creators under the present common law toxic tort system by escaping all liability for tortiously creating risks that did not result in injury. Under this system victims who recover probabilistic harms early on would not recover full damages once injury occurs, and it does not follow that no damages should be given to all victims for the uncertainty they must bear for the risk-creator’s conduct.174 “The imposition of liability on manufacturers of prescription drugs and other toxic substances based solely on epidemiological evidence of causal links between those products and the [victims'] injuries”175 was a shifting of costs of injury to those parties who were in a better position than the victim to absorb the loss.176 The market share liability is similar to the proposed Environmental Compensation program but is without all of the court-related transaction costs. 168 Kurt Zitzer & Marc D. Ginsberg, Illinois Rejects Market Share Liability: A Policy Based Analysis of Smith v. Eli Lilly & Co, 79 KY. L. J., 617, 636-637 (1990-91). 169 Sindell v. Abbott Laboratories, 607 P.2d 924 (9th Cir. 1980). 170 Sindell v. Abbott Laboratories, (In re DES Cases), 789 F. Supp. 548, 562 (E.D.N.Y. 1992). 171 Ashley v. Abbott Laboratories, (In re DES Cases) 789 F. Supp. 552, 562, (1992). 172 Id. 173 See e.g. Schweitzer v. Consolidated Rail Corp., 758 F.2d 936 (3rd Cir. 1985). Laswell v. Brown, 683 F.2d 261 (8th Cir. 1982); Anderson v. W.R. Grace & Co., 628 F. Supp. 1219 (1986). 174 Robinson, supra note 97, at 786. 175 Joseph Sanders, The Bendectin Litigation: A Case Study in the Life Cycle of Mass Torts, 43 HASTINGS L. J., 301, 303 (1992). 176 Zitzer & Ginsberg, supra note 140, at 637.


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A traditional common law toxic tort argument against an Environmental Compensation program would be the example of a driver who careens down a crowded street but does not hit anyone. The driver is subject to criminal prosecution but is not liable to a person who was not hit. This exposure of the possibility of being hit by the driver has ended, and there is no life threatening residue remaining. This one time contact with risk has no physical lingering effects on the individual's body, which is quite the opposite of exposure to toxins.177 6. Argument for Class Action Suits vs. Strict Liability System

The argument may be raised that if efficiency is a goal, then all toxic tort cases should be certified as class action lawsuits, rather than replacing the common law tort system for toxins in an Environmental Compensation program. Class actions have been used in catastrophic toxic tort cases, but in the normal case, toxicological effects relate to chronic exposure, and each cause of action contains different legal elements and requires proof of different facts by each individual victim. Trial rules for class actions require that common issues of law or fact must predominate over matters that are individual to each class member and that class treatment is the superior method of adjudicating the dispute in order to have a class certified.178 The party seeking to establish a class action bears the burden of proving that the elements necessary for class action certification exist. Those elements are set forth in Federal Trial Rule 23 and Indiana Rules of Court Trial Rule 23. The party seeking certification must satisfy all four of the requirements of Trial Rule 23(A): One or more members of a class may sue or be sued as representative parties on behalf of all only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. If all four of these elements are satisfied, the party seeking certification must additionally demonstrate the satisfaction of one or more of the sub-categories of Trial Rule 23(B): Class Actions Maintainable. An action may be maintained as a class action if the prerequisites of subdivision (A) are satisfied, and in addition: (1) the prosecution of separate actions by or against individual members of the class would create a risk of: (a) consistent or varying adjudications with respect to individual members of the class which would establish incompatible standard of conduct for the party opposing the class, or (b) adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interest of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests; or (2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or (3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.. 179 The primary basis on which plaintiffs in toxic tort cases have sought class action certification is Trial Rule 23(B)(3). Although a few such classes have been certified, most courts have refused to certify a plaintiff class, at least with respect to increased risk and personal injury. As a general proposition, the courts have held that class actions are generally not appropriate even in mass tort situations. The Federal Rules Advisory Committee stated in its notes on the 1966 amendments to Federal Rules of Civil Procedure 23: A 'mass accident' resulting in injuries to numerous persons is ordinarily not appropriate for class action because of the likelihood that significant questions, not only of damages but of liability and defenses to liability, would be present, affecting the individuals in different ways. In these circumstances actions conducted nominally as class actions would degenerate in practice into multiple lawsuits tried .180

177 Edward T. O'Donnell, Public Policy and the Burden of Proof in Enhanced Injury Litigation: A Case Study in the Dangers of Trends and Easy Assumptions, 17 W. ST. U. L. REV. 325, 348 (1990). 178 Gen. Tel. Co. of Southwest v. Falcon, 457 U.S. 147 (1982). 179 Fed. Trial R. 23. 180 Miller Studio, Inc. v. Pacific Import Co., 39 F.R.D. 62 (S.D.N.Y. 1965).


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Even where the relationship between exposure to a particular substance and the development of an adverse health effect causally related to that exposure is well established, the courts have been reluctant to certify plaintiff classes.181

In cases involving exposure to toxic substances released into the environment, the courts have generally denied class action status.182 Many of these cases involved claims of personal injury resulting from exposure to chemicals in various products or chemicals that were leaking from a landfill and are thus fairly typical of toxic tort cases. In most toxic tort cases, the purported class issues cannot be resolved without extensive inquiry into individualized, non-common factual and legal questions. Such proof would necessarily involve presentation of evidence by each member of the class. Such individualized presentations have little place in a class action lawsuit.183 The primary cases in which class action status was granted are In re Agent Orange Product Liability Litigation184 and In re Three Mile Island Litigation185. These cases are both somewhat unusual. The Three Mile Island Litigation involved a single incident with an identifiable source of exposure of a known, measured dangerous substance to an identifiable and geographically limited group of people. 186 Even with these certainties, the court that certified that class has indicated upon reconsideration that certification was really not appropriate.187 The Agent Orange litigation was recognized as extraordinary both by the trial court and the Second Circuit, which stated: "This action is ‘sui generis, and national in its proportions’ involving an extraordinary consultation of facts, parties, and pleadings.”188 One of the major factors on which the court based its decision to certify a class in the Agent Orange case was the fact that the primary defense in that litigation was the "government contract" defense. The defendants claimed that since the product was manufactured under contract to the government specifications, the private defendants were therefore relieved from liability. Even under these circumstances, the court noted that it was treating the case before it as an exception to the general rule that mass tort situations do not generally lend themselves to class action treatment. Courts have refused to certify classes in multiple claim product liability cases because the facts determining liability, causation, and damages differ from claimant to claimant.189 Individual proof and fact-finding are required to adjudicate each class member's claim. It is the individualized proof, involving exposure and background factors, required to determine if any given class member is entitled to recover, which differentiates the normal toxic case from the securities and single-event cases. If class actions for toxic torts were certified, the result would be a multitude of individual mini-trials, which render class treatment unmanageable and not the superior method for resolution of toxic disputes.190 Class action lawsuits can involve members of multi-states. There are substantial constitutional questions in asserting jurisdiction over class members from different states. The United States Supreme Court has held that even if initial questions of jurisdiction can be satisfied in the individual case, the forum state must ascertain and apply the choice of law and substantive law rules of the state having principal contact with each nonresident

181 Ryan v. Eli Lilly & Co., 84 F.R.D. 231 (D.S.C.1979). 182 See e.g. Brummett v. Skyline Corp., C 81-0103-L(B), Toxic Chemical Litigation Report. (Andrews) 3487 (W.D. Ky. 1985); Caruso v. Celsius Insulation Resources, Inc, 101 F.R.D. 530 (M.D. Pa. 1984); Delaney v. Borden, Inc., 99 F.R.D. 44 (E.D. Pa. 1983); Sanders v. Tailored Chemical Corp., 570 F. Supp. 1543 (1983); Askey v. Hooker Chemicals & Plastics Corp., Toxic Chemical Litigation Report. (Andrews) 213 (N.Y. Sup. Ct. June 6, 1983). 183 Breedlove v. Ohio Dep’t of Transp., 62 Ohio Misc. 2d 315 (1991). 184 In re Agent Orange Product Liability Litig. 745 F. 2d 161(2d Cir. 1984). 185 In re Three Mile Island Litig., 87 F.R.D. 433 (M.D. Pa. 1980). 186 In re Three Mile Island Litig., 87 F.R.D. at 433. 187 Kuhn v. Skyline Corp., C.A. 83-0942, Toxic Chemical Litigation Report. (Andrews) 2003 (M.D. Pa. August 3, 1984). 188 In Re Agent Orange Product Liability Litig., 745 F.2d at 161 (citing In re Agent Orange Product Liability Litigation). 189 Ryan v. Eli Lilly & Co., 84 F.R.D. 231, 233 (D.S.C. 1979). 190 Chestnut Fleet Rental, Inc. v. Hertz Corp., 72 F.R.D., 541, 550 (E.D. Pa. 1976).


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class member.191 This requirement means that if a court attempts to assert jurisdiction over nonresident class members, it may not apply one state’s law to all claims, but rather will have to ascertain and apply the law of each state to its own residents. It is apparent that this would be a difficult if not impossible task and is inconsistent with making class treatment a manageable endeavor or the superior method for resolving the dispute. It is very clear as a matter of law and common logic that class certification must accomplish some legally recognized benefit such as judicial economy or efficiency of resolution. Nothing of benefit would be accomplished by class certification under the circumstances of toxic claims, except for some single--even catastrophic--claims, because the adjudication of any representative claim would prove nothing as to whether or not any other class member was entitled to recover. Even if one or more of the named individual victims were found entitled to a recovery against the risk-creator, this would not mean that any other class member was entitled to recover. The right to recover can only be determined after the finder of fact hears the facts and ascertains the law applicable to the individual claimant. Since the facts which will determine the outcome of any claim differ from person to person as to both liability and causation, and the law to be applied to the facts is different from state to state, no legal or practical benefits occur as a result of class certification. In fact, the only potential benefit which could conceivably result would be generating fees for attorneys. I submit that creating opportunities for obtaining attorney fees is not justification for certifying a class. 7. Implementation at State Levels Both the foundation of our country and the Constitution emphasize the protection of individual rights.192 In recent years, Congress has poured forth a stream of consumer and environmental legislation designed to protect the rights of the individual.193 The relative strength of the states to protect individual rights has been slipping away as the federal government has extended power over more areas.194 This encroachment of central national power provides for consistent application of statutes but does not take into account the differences between citizens of individual states. The federal application of statutes does not provide the advantage gained when the states experiment with different methods and models of applying strict liability. Therefore, I recommend that the people of each state be responsible for the content of the rules of law and that the Environmental Compensation program be designed for the specific benefit of the people of each state, so long as it does not adversely impact the Commerce Clause. The statutory benefits will need to be reviewed by the legislatures on a regular basis so that they will provide realistic incentives to industry to evaluate costs and benefits and thus to continue to reduce risks to society. This compensation program will have lower administrative costs and should induce an increased number of claims, which is a correction of a misallocation caused by the higher administrative costs of the common law tort system.195 This proposal may appear to simply be another social program designed to impose additional costs on industry, but if designed correctly and coordinated with other programs, it should reduce duplication of compensation and costs associated with corporate and individual medical insurance programs, Medicare, Medicaid, Workers' Compensation, Social Security disability, private disability, and product liability insurance. There is growing support in Oregon and Kentucky for a 24-hour coverage, a concept in which health and workers' compensation insurance are combined to avoid duplication and save money. No state has implemented the comprehensive 24-hour coverage program, but some are experimenting with legislation that allows companies to use it. Oregon Insurance Commissioner Gary Weeks indicates that the “24-hour coverage would eliminate much of the litigation aimed at determining whether an injury occurred on the job.”196 The Environmental Compensation program would be similar to the proposed 24-hour coverage but would tie together

191 Phillips Petroleum Company v. Shutts, 472 U.S. 797, 811, 818 (1985). 192 1 ALFRED A. KELLY, ET AL., THE AMERICAN CONSTITUTION ITS ORIGINS AND DEVELOPMENT, 114 (7th ed. 1991). 193 KERMIT L. HALL, THE MAGIC MIRROR, 305 (1989). 194 LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW, 656-57 (2nd ed. 1985). 195 Elliott, supra note 96, at 804. 196 ’24 Hour Coverage’ Eyed Under Jones’ Health Care Proposal STATE JOURNAL (FRANKFORT), Oct. 12, 1992 AT 8B.


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all the different types of medical and disability programs into one, thus significantly reducing transaction costs, duplication, and fraud. 8. Conclusion The task of establishing causation is a particularly severe problem when it comes to toxic substances. Many types of diseases caused by a toxic material are also caused by other environmental or non-environmental factors. It is difficult, if not impossible, to distinguish chemical-related diseases from the natural background incidence of the same kind of disease or to determine whether the increased risk from exposure resulted in any adverse health impact. This difficulty raises the fundamental question of whether or not the common law tort system is equipped to decide cases involving claims of increased risk or disease allegedly caused by exposure to hazardous substances.197 The present common law tort system may be efficient and may promote the correct result in the vast majority of cases, but not in toxic tort cases. Toxic tort cases have furnished evidence that the present tort system is incapable of effecting justice in an efficient, streamlined manner, just like earlier in our country's history when the pace of advancing technology began to outstrip our cumbersome tripartite government's ability to keep up with it. At that time, a new type of government structure began to emerge: the administrative agency designed to specialize in a particular field. Just as the administrative agency emerged to keep pace with advancing technology, so should the Environmental Compensation program, since the common law tort concepts of compensation, deterrence, and retributive justice have not been effective in toxic tort cases and have been called into question by both plaintiffs and defendants.198 If the common law tort system can find no means to incorporate incentives for prudent behavior and care in toxic tort situations, a primary reason for applying common law tort to these cases vanishes. Assessing the changing nature of scientific knowledge and the variation in the state of the law, a system that is directed at providing incentives for care may not be as appropriate in toxic tort cases as it would be in automobile accident case or the slip and fall cases.199 The major arguments against the present common law toxic tort system are that traditional litigation for toxins is too expensive; it diverts compensation from victims to the attorneys, witnesses and others in the adversary system; it monopolizes court resources; worthy victims cannot recover for their increased risk or injury because of substantive and procedural obstacles such as state statutes of limitations and evidentiary rules bearing on causation; there is a major disparity between the award of damages associated with peculiarities of local law, the talents or deficiencies of trial counsel, and the luck of the draw in selecting a jury; there is a problem of delay, in which victims in immediate need of financial help and medical assistance may wait for years while technical issues of fault and responsibility are litigated in the courts; and traditional common law tort compensation systems are not equipped to decide cases involving claims of disease and increased risk allegedly caused by exposure to hazardous substances which have a latency period of decades.200 Another author, Wendy Wagner, has proposed a change to the common law toxic tort system. 201However, her change to the system would be impractical, and proves to be academic. Classic common law toxic tort causation has posed a challenge to the civil justice system, and the response to date has been inconsistent, inarticulate, and confused. The Environmental Compensation program would eliminate the problems of toxic tort causation, by using an administrative panel of scientists, physicians, economists and lawyers who would consider a broad range of evidence on a case-by-case basis, distinguish clearly between the statistical probability of the fact being proven, replacement of the fifty percent probability of causation, and allowing discounting for recoveries to reflect uncertainty.202 This program will minimize uncertainty for the risk-creator and the victim. This program would make it easier and more efficient for eligible victims to recover compensation swiftly, while simultaneously placing limitations on the nature and amount of the recovery awarded. There will be lower transaction costs in resolving disputes, and the dollars presently spent to pay attorneys' fees, court costs, and other expenses, would be spent compensating victims of toxins. The primary goal would be to develop this Environmental Compensation program which would deal efficiently and effectively with future toxic tort incidents. 197 Feinberg, supra note 271, at 160. 198 Id at 159. 199 Id at 164. 200 Id at 157. 201 Wagner, supra note 8, at 1613. 202 Gold, supra note 58, at 378, 379 & 401.


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I know that this program modeled on existing Workers' Compensation systems will be attacked as a political matter because of the vested interest of both defense and plaintiff attorneys.203 Risk-creators, in many instances, are large corporations and they pay massive sums of money to attorneys in the defense of toxic cases, and plaintiff attorneys are waiting for the multi-million dollar toxic cases to come their way. Just as the court stated in Stertz v. Industrial Insurance Commission, "our act came of a great compromise . . . Both had suffered under the old system, . . . by heavy judgments of which half was opposing lawyers' booty."204 Kenneth Feinberg, Special and Settlement Master in the Agent Orange litigation, in his article The Toxic Tort Litigation Crisis states that "many are asking whether the common law tort system that, according to one study, siphons off at least two-thirds of moneys paid by asbestos industry defendants before they reach the plaintiff, serves any interest other than those of the trial bar."205 The study Kenneth Feinberg refers to is a 1984 Rand Corporation study. Over most of our common law history, the situations that gave rise to tort liability took place on a very small scale. The actions tended to occur at one single location, the gap in time between the defendant's negligent action and plaintiff's injury was short, and the number of individuals involved was very few. In toxic tort cases, this is no longer the situation, and the activity may have occurred many years before a lawsuit is brought. The place of injury may be far removed from the location of the increased risk or injury, and the number of parties involved in the litigation may be extremely large. The extremely hard question is what measures allow the legal system to operate with tolerable accuracy in the face of high administrative costs and the huge evidentiary uncertainty that dominate toxic tort litigation. The aim of our law should be to minimize administrative costs, reduce errors--that is, holding someone liable for harm not done, or not holding someone liable for harm he or she did do--and to provide deterrence for activities that do not advance society's needs.206 Nothing limits our power to change the common law toxic tort system and create a system that functions in such a way as to maximize benefits to society. The choice is one of policy. The cost of providing compensation for toxic torts through the courts is too high when the cost of the transaction and the amount received by the victim seeking compensation are compared. Our present toxic tort system is too slow, and its post hoc risk assessment does not advance society's overall needs and inhibits socially useful action. Therefore, the critical issues are: who should pay for some of the larger costs of living in an industrial-technical society; how large awards should be; what standard of liability should be applied; “and how much compensation should be distributed.”207 Reference Allen v. United States, 588 F. Supp. 247 (D.C. Utah 1984). BAUMOL, WILLIAM J. & ALAN S. BLINDER, ECONOMICS, PRINCIPLES, AND POLICY, 586, (1988). Berger, Margaret A. Eliminating General Causation: Notes Towards a New Theory of Justice and Toxic Torts,

97 COLUM. L. REV. 2117 (1997). Breedlove v. Ohio Dep’t of Transp., 62 Ohio Misc. 2d 315 (1991). Calabresi, Guido & A. Douglas Melamed, Property Rule, Liability Rules, and Inalienability: One View of the

Cathedral, 85 HARV. L. REV. 1089, 1092 (1972). Calabresi, Guido & Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L. J., 1073 (1972). Chestnut Fleet Rental, Inc. v. Hertz Corp., 72 F.R.D., 541, 550 (E.D. Pa. 1976). Cirace, John. A Theory of Negligence and Products Liability, 66 ST. JOHN'S L. REV. 1, 42-43 (1992). Cooter, Robert. The Cost of Coase, J. LEG. STUD. 1, 5 (1982). Cooter, Robert D. Law and the Imperialism of Economics: An Introduction to the Economic Analysis of Law and

203 Feinberg, supra note 56, at 168-170 & 174. 204 Stertz v. Indus. Ins. Comm’n., 91 Wash. 588 (1916). 205 Feinberg, supra note 56, at 168-70 & 174. 206 Elliot, supra note 2, at 1377-79. 207 Jack B. Weinstein, The Role of the Court in Toxic Tort Litigation, 73 THE GEO. L. J. 1389 (1985).


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a Review of the Major Books, 29 UCLA L. REV. 13, 15 (1982). MARK S. DORFMAN,INTRODUCTION TO RISK MANAGEMENT AND INSURANCE, 449 (Keith Faivre

ed., 1991). Eaton, Thomas A. & Susette M. Talarico, A Profile of Tort Litigation in Georgia and Reflections on Tort Reform,

30 GA. L. REV. 627, 674-675 (1996). Elliott, E. Donald. Goal Analysis Verses Institutional Analysis of Toxic Compensation Systems, 73, GEO. L. J.

1363 (1985). Elliot, E. Donald. Introduction to Richard A. Epstein, Two Fallacies in the Law of Joint Torts, 73 GEO. L. J.

1355 (1985). Epstein, Richard A. Why Restrain Alienation, 85 COLUM. L. REV., 970, 973 (1985). Fairley, Peter. EPA Evaluates Air, Water Controls, CHEMICAL WK., June 5, 1996 at 1. Daniel A. Farber, 71 MINN. L. REV., 1219 (1987). Feinberg, Kenneth R. The Toxic Tort Litigation Crisis: Conceptual Problems and Proposed Solutions, 24

HOUS. L. REV. 155, 163 & 167 (1987). Fletcher, George P. Fairness and Utility in Tort Theory, 85 HARV. L. REV. 573 (1972). FRIEDMAN, LAWRENCE M. A HISTORY OF AMERICAN LAW, (2nd ed. 1985). Brandon L. Garrett and Peter J. Neufeld, Invalid Forensic Science Testimony and Wrongful Convictions, 95

VA. L. REV. 4, 5 (2009). Gold, Steve. Causation in Toxic Tort: Burdens of Proof, Standards of Persuasion, and Statistical Evidence, 96

YALE L. J. 376 (1986). HEED, GEORGE L. & STEPHEN HORN II, 2 ESSENTIALS OF THE RISK MANAGEMENT PROCESS,14

( Insurance Institute of America 1st ed. 1985). Hadfield, Gillian K.. Bias in the Evolution of Legal Rules, 80, GEO. L. J. 585, 615 (1992). Heiderscheit III, John W. Nuclear Power Meets the War on Drugs: A Utilitarian and Neo-Kantian Perspective

on the NRC's Fitness-For-Duty Rules, 23 LOY. L.A. L. REV. 1153, 1167 (1990). Michael Horowitz, Let Drivers Opt Out of Auto Tort System, WALL ST. J., Sept. 23, 1992 at A15 Johnson, Jeff. Recent Health Studies Find Link, 30 ENVIL. SCI. & TECH. 280A (1996). Jones, Eileen Gay. The Bar on Science, 30 LOY. L.A. L. REV. 801, 807-08 (1997) (reviewing SHEILA

JASANOFF, SCIENCE AT THE BAR: LAW, SCIENCE, AND TECHNOLOGY IN AMERICA (1995). Kelman, Consumption Theory, Production Theory, and Ideology in the Case Theorem 55 Southern California

Law Review, 669 (1979). Kudlow, Lawrence. Not-Growing Pains, NAT’L REV., Sept. 2, 1996, at 65. Kuhn v. Skyline Corp., C.A. 83-0942, Toxic Chemical Litigation Report. (Andrews) 2003 (M.D. Pa. August 3,

1984). MEHR & CAMMACK, PRINCIPLES OF INSURANCE, 334 (6th ed. 1976). Miller Studio, Inc. v. Pacific Import Co., 39 F.R.D. 62 (S.D.N.Y. 1965). O’Donnell, Edward T. Public Policy and the Burden of Proof in Enhanced Injury Litigation: A Case Study in

the Dangers of Trends and Easy Assumptions, 17 W. ST. U. L. REV. 325, 348 (1990). Phillips Petroleum Company v. Shutts, 472 U.S. 797, 811, 818 (1985). Posner, Richard. ECONOMIC ANALYSIS OF LAW, 351-358, (1986). Regan, Donald H. The Problem of Social Cost Revisited, 15 J.L. & Econ., 427, 436-37 (1972). RHOADS, STEVEN E. THE ECONOMIST’S VIEWS OF THE WORLD, GOVERNMENT, MARKETS, &

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and Proposed Solutions, 24 HOUS. L. REV. 186 (1987). Ryan v. Eli Lilly & Co., 84 F.R.D. 231 (D.S.C.1979). Rubin, Paul H. Why is the Common Law Efficient?, 6 J. L. STUD. 51 (1977). Sanders, Joseph. The Bendectin Litigation: A Case Study in the Life Cycle of Mass Torts, 43 HASTINGS L. J.,

301, 303 (1992). SCHUCK, PETER H. AGENT ORANGE ON TRIAL: MASS TOXIC DISASTERS IN THE COURTS 13,

(1986). Schultze, Charles L., THE BROOKINGS INSTITUTION, The Public Use of Private Interest, in THE

BROOKINGS INSTITUTION 33 (1977). Segerstahl, Boris. The Long Shadow of Soviet Plutonium, ENV’T, 17 Jan./Feb. 1997, at 12 & 17. Sindell v. Abbott Laboratories, 607 P.2d 924 (9th Cir. 1980). Stertz v. Indus. Ins. Comm’n, 91 Wash. 588, 590-591 (1916). Tolman, Jonathan. Petroleum Industry Adapts to New Regulations, THE WORLD AND I, July 1996, at 107. VAUGHAN, EMMETT J. FUNDAMENTALS OF RISK AND INSURANCE, 331, (1989). Weinstein, Jack B. & Eileen B. Hershenov, The Effect of Equity on Mass Tort Law, 99 ULL. L. REV. 269 (1991) Weinstein, Jack B. The Role of the Court in Toxic Tort Litigation, 73 THE GEO. L. J. 1389 (1985). White, James Boyd. Looking at our Language: Glendon on Rights, 90 MICH. L. REV., 1267, 1271 (1992). Zitzer, Kurt & Marc D. Ginsberg, Illinois Rejects Market Share Liability: A Policy Based Analysis of Smith v.

Eli Lilly & Co, 79 KY. L. J., 617, 636-637 (1990-91).


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Internal Marketing: A Spreading Tool within Organizations

1Haritz Gorostidi Martinez (Corresponding author) & 2Xue Lu Wang

1. Glorious Sun School of Business & Management, Donghua University, 1882 Yan’an Road West, Shanghai 200051, China

2. Shanghai First Maternity and Infant Hospital,536 Changle Road Jing’an, Shanghai 200040, China


Abstract Internal Marketing is an important but still an under researched aspect of service marketing about customer-consciousness of frontline employees. As it is gradually getting more attention from researchers and practitioners, this study reviews the internal marketing (IM) literature throughout different industries. Papers were retrieved from all databases of ISI Web of Knowledge during years 1950-2013. Main highlighted areas in the IM topic include; health care industry (with a 48% of the retrieved records), service industry (21%), technology industry (8%), education industry (6%) and financial industry (4%). Other individual sectors (13%) have also tried to implement internal marketing schemes within their organizations. Well motivated and committed employees, with a clear vision about the service imply customers being well served. Results in the literature also show that a good internal marketing strategy depends on the affection and commitment towards the organization by their members. Hence, it’s important to understand the staffs’ needs and expectations. Recent research on internal marketing includes broader concepts as happiness in workplace and total service quality for customers. We find research gaps in this matter and provide directions for further investigation. Key Words: Literature review, Internal marketing, Service marketing, Internal customers, Strategic marketing, Health care

1. Introduction

Literature on marketing, services marketing, total quality management, operations management, human resource management, corporate strategy and organizational development revealed a body of work referring to an internal marketing concept or internal customer concept. This seems to have grown out of an organizational internal communications perspective with the notion of an ''inner market'' in the organization, comprising what is called ''internal customers'' (Varey, 1995).

One theme that has emerged consistently in the recent services marketing literature is the importance of frontline employees in service delivery. Internal marketing concept is based on the belief that a firm's internal market/employees can be motivated to strive for customer-consciousness with a market orientation and a sales-mindedness through the application of accepted external marketing approaches (Boshoff & Tait, 1996).

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Negative staff attitudes affect quality of care, and at the same time patient and staff negative word of mouth affects the effects of marketing campaigns (Cooper & Cronin, 2000). Internal marketing embraces the notion of where the employees of the firm become internal customers. As with external customers these too have requirements that need satisfying. Thus, through management satisfying the needs of internal customers, employees become more motivated and committed to the cause, which at the same time leads to external customers being well served (Barnes, Fox, & Morris, 2004).

Such a marketing concept challenges traditional marketing methods, which focus on serving external customers only. At the same time, internal marketing should promote job performance (C.-S. Chang & Chang, 2007). Influence of internal marketing on frontline employees' performance depends on their affection and commitment to their own organization, as well as their job satisfaction (Wang, Cong, & Yan, 2008). Mendoza, Hernandez and Tabernero performed a literature review analyzing the orientation to the so called internal clients as a central element of internal marketing but differentiating it from the market orientation (Mendoza Moheno, Hernandez Calzada, & Tabernero Urbieta, 2011). Among other industries, a specially significant amount of health care organizations have been researching the benefits and the applicability of internal marketing (C.-S. Chang & Chang, 2007; C. S. Chang & Chang, 2009; Cooper & Cronin, 2000; Hafer & Joiner, 1984; P. Lee, Gombeski, & Doremus, 1991; J. W. Peltier, Boyt, & Westfall, 1997; Tsai & Tang, 2008). 2. Literature review 2.1. Service employee internal marketing

Initial internal marketing investigation studied transaction cost perspectives, of how internal marketing can be measured and whether it is a necessary concept or not (Pitt & Foreman, 1999). It was found that there are at least two types of existing internal customer within the firm, and they use different criteria to evaluate the quality of the service which they receive from their internal suppliers (Brooks, Lings, & Botschen, 1999). The concept and the tool of internal marketing schematic (IMS) comes from tried and tested management tools identifying process that deliver quality services internally and externally providing for measurements of the service quality. These measures are used to develop and improve targets within all groups of an organization (Lings, 1999). Internal marketing theory is continuously expanding its application in enterprise internal management (J. Huang & Wang, 2003).

There are significant issues with the way a total quality management (TQM) is being implemented due to the negative feelings and a reduced level of interest that can arise. It is claimed that TQM has lost its way (Longbottom, Osseo-Asare, Chourides, & Murphy, 2006). Service employees are reported to influence negatively in the development of a market orientation, making difficult the service company's effort to become a more customer centric organization. A way to overcome this barrier would be the implementation of the mentioned internal marketing strategy. Nevertheless, the extent literature reports that the number of companies practicing marketing internally is disproportionally small comparing to the number of companies trying to adopt the market orientation strategy only (Gounaris, 2008).

As a proposal for a broadened internal marketing concept is the incorporation of happiness in the workplace (HWP) it’s a wider concept than the internal marketing concept (IMC). Given the nature and meaning of work for human beings, it should be treated as a channel where people could improve their self-esteem and could fulfill themselves through their tasks on the job as well as feel happy (Vasconcelos, 2008). Internal marketing is also seen fundamentally as a process in which leaders instill into followers a sense of oneness with the organization, formally known as the "organizational identification" (OI), both employees' and sales managers' OI are positively related to their business units' financial performance (Wieseke, Ahearne, Lam, & van Dick, 2009). Wu & Cheng developed a conceptual model to evaluate the optimal internal marketing


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strategy in services under open economy, verifying the effect of this kind of marketing strategy on the satisfaction of marketing channel members (W.-Y. Wu & Cheng, 2009). Service companies have tend to use friendly flexible working practices in large proportions, but there is a small negative relationship between unfriendly practices and service quality suggesting that some service organizations tend to create more supportive environments offering flexible work arrangements (Podnar & Golob, 2010). Paliaga and Marco researched the characteristics of internal marketing of companies working in the Croatian market researching the implementation degree of its principles and the internal marketing concepts (Paliaga & Strunje, 2011). 2.2. Financial sector internal marketing

Internal marketing initiatives in UK retail banks showed that, although internal marketing attempts to function as a culture change mechanism, result rather than being homogenous and united around the imagery of the consumer and service quality, show ambiguity and differentiation throughout the several organizational stakeholders (Kelemen & Papasolomou-Doukakis, 2004).

In a study of non-life insurance in Taiwan results showed significant correlations among internal marketing, organizational culture, job satisfaction, and performance of non-life insurers (Shiu & Yu, 2010). 2.3. Technological organization internal marketing

The need for more flexible short term type of organizations in high technology has resulted in an increase of use of teams and project groups using their special know how and their experience in marketing activities. The handling of these intra organizational relationships between the different units in industrial high tech companies is a key prerequisite for the successful management of their customer relationships. The development of these internal marketing units, the establishment of good communications between them as well as the coordination of their activities present big challenges (Moller & Rajala, 1999). From a study of 238 telecom companies, environmental quality positively impact interactive quality and interactive quality positively impact outcome quality. As the intermediate variable, the concept of trust has a positive influence on work satisfaction and commitment, and therefore it affects internal customer/employees’ loyalty (P. Huang, Huang, & Chen, 2008). Internal marketing, job satisfaction and service attitude all have significant and positive effects on job performance. In other words, efforts in any of these key aspects can help improve the overall performance of a high-tech organization (M.-Y. Wu & Lee, 2011). A study of a publicly owned power company in Taiwan also showed that internal marketing has a positive effect on organizational citizenship behavior (OCB) (C.-C. Chang, Tseng, & Chen, 2012). 2.4. Health care organization internal marketing

Hafer & Joiner (1984) addresses the role conflict and image problems that nurses have with role partners, discussing that if those problems were corrected, nurses could be valuable assets in a “team selling” effort to help hospitals build their images.

A first internal marketing communication model was discussed to identify factors and relationships influencing the internal diffusion and implementation for innovative services. It presented an opportunity to apply the marketing concept to the implementation of innovative services and meanwhile helping the organization achieve good external market position (Hassan & Foltz, 1990). In order to take good care of the employees, offering health care programs hospitals could develop and improve several offerings and at the same time help the health care cost for a country (Busbin & Self, 1991). 2.4.1. Not taking advantage enough of internal marketing

An increasing pressure on health care providers from health care industry resulted in reduced revenues. It was found that health care marketers and public relations managers should reassess their internal marketing


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efforts due to a public opinion study suggesting that health care provider organizations are not taking advantage of several important public relations and internal marketing channels to educate the public through their employees (P. Lee, et al., 1991). Furthermore, hospitals seeking to become more aggressive often introduce programs prematurely neglecting internal marketing and not ensuring internal coordination prior to introduction of a service product (Thomas, Farmer, & Wallace, 1991). Thus, to maximize internal marketing quality, services, as well as services added in the office and the increase of the understanding of the needs of patients should be emphasized (Nacht, 1993).

For pediatric dentists, making a commitment to an internal marketing program that projects a positive image to patients and accomplish some practice benefits as; higher patient retention, lower staff turn-over and higher fee-for service, pediatric dentist would have greater potential for profit and an improvement on the total job satisfaction (Nacht & Trupkin, 1993).

As we said, to attain organizations’ goals, organizations must not only apply the marketing concept to external targets but also plan and control internal facets of their operations, this is to say a Total Service Quality (TSQ) based on an Internal Marketing Approach (IMA) (Shank & Gilbert, 1993). Managerial recommendations were offered regarding to ensure effective employee support and participation in a total quality management (TQM) applications, improving internal communication and the effective application of modern internal marketing tools and methods (Karasa, Akinci, EsatoElu, Parsons, & Sarp, 2007). Health care managers should also understand that an intense focus on internal marketing factors would lead to a quality experience for employees that will ultimately have a positive effect on the patient experiences (Masri, Oetjen, & Rotarius, 2011).

There are significant positive relationships between internal marketing practices and service quality. Training programs have also a strong association with service quality. There is no relationship of performance incentives with service quality. Consequently, to deliver excellence service to patients, hospitals must provide training programs and establish a clear vision about service excellence to nurses (Tsai & Tang, 2008). Designing internal marketing strategies with strong emotional appeal is the key to attracting more cosmetic patients. Like this, dentists who use cost-effective and highly targeted internal marketing strategies would appeal to a broader range of patients (Levin, 2007). 2.4.2. Promoting job loyalty, commitment and job satisfaction

Some of the early studies in this matter show that to promote physicians’ loyalty, one approach management can take to reduce turnover, is by treating employees as an important customer segment through a more developed internal marketing orientation (J. W. Peltier, et al., 1997). Nurse loyalty and retention are critical in healthcare industry. A lack of continuity in nursing staff affects quality of care, resulting in high costs and leading to patient concern about the facility. On the other hand, with motivated and committed nursing staff there is a solid foundation for implementing initiatives and improve healthcare quality enhancing nurse loyalty through internal marketing efforts. Financial, social and structural bonds with employees have also significant although different impacts on nurse loyalty (J. Peltier, Nill, & Schibrowsky, 2003).

Job satisfaction has positive effects on organizational commitment and at the same time, nurse perceptions of internal marketing can have positive effects on job satisfaction. Finally nurse perception of internal marketing has positive effects on organizational commitment (C.-S. Chang & Chang, 2007; Pantouvakis, 2012). Internal marketing has also an impact on both, organizational commitment and service quality and organizational commitment acts as the mediator between internal marketing and service quality (Tsai & Wu, 2011). As we have pointed out, one of the most critical problems facing worldwide health care industry is the shortage of qualified nurses. Organizational structural bonding, social bonding, and financial bonding activities should be analyzed.


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Quality of care affects how well nurses are satisfied with their job and their commitment to the organization. Quality of care is what most impact nurse satisfaction and loyalty, followed by structural, social, and financial bonds (James W. Peltier, Pointer, & Schibrowsky, 2008). As other authors found, internal marketing is associated with increased organizational commitment. The concept of communication management has the greatest influence on organizational commitment and external activity concept has the smallest impact on organizational commitment. So it can be said that the best way to retain outstanding nurses and reduce turnover costs and personnel problems, is for employers to understand the needs and expectations of their nursing staff (C. S. Chang & Chang, 2009).

In northern Greece, internal marketing was found to have positive effect on the job satisfaction of hospital staff. Doctors and male personnel showed higher levels of job satisfaction showing that staff with time-defined work contracts with the hospital are more satisfied than permanent staff, and as the staff grew older there is only a slight decline in job satisfaction (Iliopoulos & Priporas, 2011). Organization commitment, job stress control, as well as internal marketing concept play important roles in the turnover intention of nurses. other managerial interventions reducing nurses' turnover intention would imply; a career development system as an organization commitment management strategy, an innovative promotion policy to change conservative organizational climates and a balance of effort-reward (H. Lee, Kim, & Yoon, 2011). Internal marketing significantly influences market orientation (Tsai, Wu, & Chang, 2012). Internal marketing was found to have an influence on relationship quality and patient loyalty through the mediation of market orientation. In order to enhance relationship quality and patient loyalty, hospital managers should focus their efforts improving employees' market orientation and reducing patients' perceptual market orientation gap (Tsai, et al., 2012). 2.4.3. Other related health care researches

There is other internal marketing literature related with health care organizations, for example a system wide geriatric care marketing initiative (Barron & Jackson, 1988). An outline plan for the introduction of an internal marketing program within an hospital trust was proposed, identifying those individuals and departments who should be involved in the planning and implementation of the program (Hallums, 1994).

Employee satisfaction is also influenced by the design and equipment used in the facilities and the efficiency of initiating vocational rehabilitation (VR) services. (James W. Peltier & Scovotti, 2004). 2.6. Education sector internal marketing

There are potential losses as well as gains to be made from an internal market (Maguire, Ball, & Macrae, 2001). Job involvement and job satisfaction play partial mediating roles in the relationship between internal marketing and organizational commitment and must not neglect the effect of job involvement and job satisfaction in explaining the relationship between school organization's internal marketing and teachers' organizational commitment (Ting, 2011). Those in charge of primary schools need to emphasize internal marketing strategies and realize the effect and effectiveness of job satisfaction and its relationship with internal marketing strategies (Hung, 2012). 2.7. Internal marketing in other industries

Management can provide motivation through the use of compensation schemes and development of internal marketing. Profit sharing compensation schemes that reward employees for achieving customer service objectives should be shared with all employees, and optimal effort should be spent on internal marketing. Prasad and Steffes relate their analysis to a successful scheme implemented by Continental Airlines (Prasad & Steffes,


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2002). A case study exploratory research of a medium sized UK consultancy which provided project management,

quantity surveying and contractual advice to engineering industries was done. The research draws on literature from internal relationship marketing and service quality fields, investigating the impact of internal marketing on service quality perceived among employees (Barnes, et al., 2004). Examination of internal marketing relationships and their influence on salesperson attitudes and behaviors in retail store environments investigated the moderating role of customer complaining behavior on the nature of these relationships (Bell, Menguc, & Stefani, 2004). Internal marketing efforts, as manifested by frontline employees' valuation of internal job product, internal price, internal place, and internal promotion, have significant effect on employees' perceptions of performance. The influence of internal marketing on frontline hotel employees' performance depends on their affection towards and commitment to their organization, as well as their job satisfaction (Wang, et al., 2008). In 2009 a research revealed a range of reasons as; monotonous work, stressful work environment, adverse working conditions, lack of career development opportunities and better job opportunities elsewhere emerging as key causes of increase tiring rates in an Indian call center industry (Budhwar, Varma, Malhotra, & Mukherjee, 2009).

To establish long term relationships with Avis car rental employees, improving internal communication between managers and employees, promoting mutual respect, trust and concern were proven to be key issue (Roberts-Lombard, 2010). There is also research examining the use of sponsorship linked to internal marketing to conceptualize, communicate and implement corporate identity development and employee performance, helping foster at the same time a collaborative culture (Roberts-Lombard, 2010). 3. Methodology

This research review findings from all available research articles of ISI Web of Knowledge mentioning the internal marketing term within the publication period of 1950-2013. After a general literature research, “internal marketing” phrase was used to find articles directly related with enterprise internal marketing implementation cases. It was avoided using other terms than internal marketing. Specific search was created by the use of limiting and refining search criteria. Limiting criteria: ISI Web of Knowledge, all databases and “internal marketing”. Refining criteria included: academic articles as document types and sorted by relevance. Data group folders were created about key focus areas using Endnote 4x software. After reading the titles, abstracts and conclusions, 55 articles were included in the review; from a timespan of 63 years and from the databases of Web of Science, Inspec, Derwent Innovations Index, Chinese Science Citation Database and Medline, all those mentioning directly the internal marketing term in their title. 4. Findings and discussion

The current review includes 55 papers published between 1984 and 2013 from Web of Science, Medline and Chinese citation databases including a wide range of areas. Year 2008, 2009 and 2011 show the highest publication rates in internal marketing. Year 2010 shows a slight drop before a sudden increase again on the amount of published internal marketing records (Appendix a). Main found areas among the internal marketing researches include (from highest to lowest); health care (with a 48% of the retrieved records), service (21%), technological (8%), educational (6%) and financial industries (4%) (Appendix b). Other industries (13%) have also tried to apply successful schemes as; spending optimal efforts on internal marketing, using other management practices as profit sharing compensation, trying to find ways to establish tong term relationships with employees or finding key causes for increasing tiring rates.

According to the above, authors claim that internal marketing is in general a continuously spreading application in organizations’ internal management. Several fields have revealed a body of work referring to the


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concept of “inner market” or “internal customers” inside organizations enhancing the importance of frontline employees working with customer-consciousness. As employees become internal customers, they have also requirements that need satisfying. If management makes employees well motivated and committed to the cause, this will lead to external customers being well served. However, the influence of a good internal marketing strategy depends on the affection and commitment to the organization as well as job satisfaction from the employees. A good internal marketing strategy should boost a sense of oneness with the organization, more formally known as “organizational identification”, having also a positive effect on the organizational citizenship behavior.

There are authors also claiming that the number of companies practicing internal marketing is in general disproportionately small comparing to the companies adopting the market orientation strategy. Service companies tend to use friendly working practices in large proportions, however there is a study too concluding that there is small relative relationship between unfriendly work practices and service quality, suggesting that some service organizations tend to create more supportive environments offering flexible work arrangements. In health care organizations, some studies found organizations not taking advantage enough from important public relations and internal marketing channels to educate the public through employees. Nurses for example are valuable assets in “team selling” to help hospitals build their images. To maximize internal marketing quality as well as service, the increase of understanding of the needs of patients should be emphasized as well as providing good training programs to establish clear vision about service excellence. As authors point out, hospitals often introduce programs prematurely neglecting internal marketing and not ensuring internal coordination prior to introduction of a service product. Organizations should not only focus on the use of marketing externally applying the marketing concept to external targets but also controlling internal facets of their operations, this is to say, a total service quality based on an internal marketing approach. This would ultimately have positive effects on patient experiences. The best way to retain staff is for employers to understand their needs and expectations. Organization commitment, job stress control, as well as internal marketing concept play important roles in the turnover intention of workers; other helpful managerial interventions would include career development systems, innovative promotion policy and a balanced effort-reward.

Internal marketing, job satisfaction and service attitude do have significant positive effects in job performance, at least in high-tech organizations, but handling the challenging intra organizational relationships establishing good communication between different units is a key prerequisite. Studies on financial companies showed significant correlation among job satisfaction, internal marketing, and organizational culture, but also differences among organization stakeholders’ view wen trying to building a good imagery around consumer and service quality through internal marketing. There are new studies talking about the incorporation of happiness in the workplace, as a more extensive concept than internal marketing. There is still room for investigation in internal marketing area, as to figure out the right amount of investment for internal marketing strategies in each case. Finally point out that, internal marketing issue appears to get gradually more attention from all levels within organizations. Appendix a) Internal Marketing: Year Wise


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b) Internal Marketing: Literature Review

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Stock Market Reforms and Its Impact on FPI in Pakistan

Dr. Rashid Saeed, Muhammad Arshad, Rab Nawaz Lodhi, Zeeshan Fareed (Corresponding author) COMSATS Institute of Information Technology, Sahiwal, Pakistan


Abstract In this paper, the impact of stock market reforms is analyzed on foreign portfolio investment. Time series data is collected on these variables and correlation and regression test is applied on this data. E-views version 7 is used to analyze the data. Correlation shows positive relationship between variable which suggest that reforms are deriving factors of foreign investment. Results show the positive relationship between SMR and FPI. Key Words: Foreign Portfolio Investment, Correlation, Stock Market Reforms 1. Introduction

Stock exchange is a physical location where buying and selling of share takes place. Stock exchange is a place where different companies list their stock and provide the facility to liquidate investments (Pankow, 2005). Stock markets make available the mechanism where people who want to purchase stock can buy stock from other people who already possessed them. Stock market is not only a place to match sellers and buyers but also to agree them at one price. Stock market is not place to buy stock direct from the company but from the investors who already owned them. That’s why stock market is a place where investors liquidate their investment by selling them to other at stock market. (J.Angel, 2002)

In past role of stock exchanges was only limited to rules issues and clarification of existing framework aspects. But with the passage of time regulatory functions were shared between stock exchanges and supervisory agencies of capital markets. In addition to these improvements in corporate governance and obedience of different legislations is also monitored by stock exchanges. (Koldertsova & Alissa, 2009) In this paper study is made to observe the impact of stock market reforms on foreign portfolio investment in Pakistan. Reforms that were implemented in different periods are considered to attract foreign investors .whether these reforms brought desired results depends upon two situations. First when these reforms implemented then to what extent these reforms where followed up and monitored to achieve expected results. Second there also some other factors which have also direct effect on FPI. These factors effect positively and negatively to FPI. So it may happen that reforms have not so distinct influence on FPI but the factors like GDP and Government stability are attractive indicators for foreign investors to invest in stock market. But in opposite context it may also happen that stock market reforms have played an important role to incline for investment but the factors like exchange rate and government instability are hurdle for investor to make investments. But from past studies it is cleared that stock market reforms ever had vital role to bring foreign investment. Particularly in the era of globalization and competition it is not only compulsory for developing countries to make attention of investors to their stock markets but also have same importance for developed countries to introduce various reforms

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regarding capital markets to retain and attract more investors. 1.1 Problem Statement Stock market reforms are very important source of motivation for investors. Study regarding the stock market reforms and its impact on foreign portfolio investment is not conducted yet in Pakistan. So there is need to explore the relationship between stock market reforms and FPI. 1.2 Objectives of the Study

• To check the relationship between stock market reforms and foreign portfolio investment • To examine the role of stock market for foreign investment

2. Literature Review The Securities and Exchange Commission of Pakistan (SECP) issued a fresh directive for reducing a

number of directors of stock exchanges which was a vital step towards demutualization. It is worldwide realization that for efficiency and transparency of operations of bourses stock exchange demutualization is of basic importance. According to SECP directive 13th August 2002 all stock exchanges must possess eight directors who will be elected four from the members by stock exchange general body other fours will be placed from amongst professionals by the Commission. A director will be the MD of stock exchange. Chairman of the board of directors will be elected from non- member directors by the board were a major change.

Prior the directive an exchange was consisted of 17 directors, seven nominated by SECP and remaining by the members. MD was in addition to these who were allocated by the board. The dominancy of brokers with vested interests decline to much extent and most welcomed by small brokers who had little share in previous brokers’ dominancy role. These were the measures which attract independent institutional investors and Asian Development Bank toward Pakistani’s capital market. Along with the protection of interests of members Regulator also protects the interests of capital issuers and investors that’s why Code of Corporate Governance was made a part of listing by Regulator. (Rizvi, 2002)

Stock market that is well-managed attracts the investment from foreign in country. Investigations have shown that there is positive relation between FDI and stock market reforms. (Raza, Iqbal, & Ahmad, 2012) What would be done to attract investment in developing countries there was need to take major steps. In 1980’s and 1990’s steps regarding stock market liberalization were taken by developing countries. Due to this in emerging markets market capitalization was increased by 1007% as compared to developed markets 253%. (Qayyum & Husain, 2005)

Dual listing means listing of securities on more than on stock exchange. Dual listing play prominent role in stock investment. If dual listing happened before market segmentation and there is unique security that is dually listed would lessen the market segmentation with the improvement in risk sharing. (Serra, 1999) Cross listing means that listing of securities on stock exchange in foreign country along with domestic country. Cross listing is more important than dual listing as it generate more foreign n investment than dual listing. Investors’ awareness and liquidity both can be improved by listing on foreign stock exchange. Firms can obtain incentive of cross listing by lowering capital cost. (Serra, 1999)

Cross listing has lot of benefits for any country. Advantages like development needs, diversification of wealth, greater efficiency, low cost capital cost, enhance market access for small size stock markets and lessen the effect of outflows of foreign investment in the shallow markets. (Adelegan, 2008) Pakistan’s stock market indicated a reasonable spirit in the background of stout economic growth. However political instability resulted in low. A floating stock market can be recognized in the continuity of macroeconomic policies by government and apex regulator the Securities and Exchange Commission of Pakistan implement stock market reforms. A record maker Karachi Stock Exchange became 6th best performer among the emerging stock exchanges in year 2007. 652 companies with paid up capital of amount Rs.690.1 billion were


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listed on 30th March 2008. During May-July 2007-08 political and economic events played a significant role in settlement of investors’ sentiments positively and negatively in local bourses. (Servey, 2008) Market friendly actions were taken in 1990’s that include privatization on state owned enterprises and commercial banks, industrial sanctions deregulations, permission for private sector to establish commercial & investment banks and allowing foreign investors to trade shares openly at stock market with facility of repatriation, foreigners have equal access for borrowing from local banks and permission to have ownership up to 100% shares in a venture, disinvestment proceed and to remit dividend. These all steps act as catalyst in stimulating the confidence of foreign investors in country’s stock market. Within in interim of four years (1990-91 to 1993-94) price index of Karachi raised by 48.3% along with aggregate market capitalization uplift from 68.4 to 404.6 billion rupees, increase in number of listed companies from on Karachi Stock Exchange from 542 to 724 and total turnover in shares from 0.4 to 2.2 billion . In next four years 1994 to 1998 several international and domestic adverse factors dominated stock markets in Pakistan. (Statistics, 2002) To resolve these adverse factors a number of structural initiatives were taken to make improvement of workings and depth regarding Pakistan’s stock market. Furthermore infrastructural facilities were strengthened by restructuring the Corporate Law Authority (presently Security and Exchange Commission of Pakistan) and promoting free market environment. Overseas Pakistanis and foreigners were permitted to bring new investments with no any prior approval by exemption of some specified industries. For the encouragement of small savers to participate in stock market they were given fiscal incentives. In 1995-1996 out dated Capital Issue Act 1947 was abolished for improvement in self-regulatory character of stock exchange in Pakistan. Other steps that were taken included tax exemption on capital gains, on bonus shares and on fixed income securities for foreigners’ investments. As per expectation however all these incentives could not be helpful to restore the confidence of investors in response to all positive measures that were taken. The salient developments of Pakistan’s capital markets were a) establishment of Central Depository System b) trade automation in all three stock exchanges c) establishment of Credit Rating Agencies. To bring transparency in stock market, a proper system was introduced for the inspection of records and books of brokers. Failure to compliance with regulations one had to face penal action. (Statistics, 2002) 3. Theoretical Framework 3.1 Model of the study Figure 1 3.2 Measurement of dependent and independent variables In this study stock market reforms (SMR) is our independent variable and foreign portfolio investment (FPI) is dependent variable. 3.3 Hypothesis Ho=There is no positive relationship between SMR and FPI H1= There is positive relationship between SMR and FPI

4. Methodology This study is conducted for a country of Pakistan. Series data is collected that covers the period of twenty seven years from 1985 to 2011 that enable to evaluate the impact of stock market reforms on foreign portfolio investment. The data source is International monetary fund (IMF) supplemented with International Financial Statistic and World Development Indicator. The study is conducted by using tables, graphs and statistical techniques specially using correlation analysis and regression test with the help of software (E-views version 7). FPI = 𝛃𝐨+ 𝛃1SMR + 𝛆 SMR=Stock Market Reforms FPI=Foreign Portfolio Investment


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𝛃𝐨=Represents the Intercept 𝛃1=Coefficient of Stock Market Reforms 𝛆=Error term Table 1 Figure 2 Table 2 5. Results Table 3 shows the P value .07 which is less than .1 so, our null hypothesis is rejected and our alternative hypothesis is accepted. The beta co-efficient is 39.72 which explained the dependent variable 39.72%. The R-squared value is .12 which shows the goodness of fit of our model and this value shows that our model is not good enough and also Durbin-Watson has less value than 2 which is not consider statistically good and this is due to less number of observation.Table 3 6. Conclusion The time series data that is collected about stock market reforms and foreign portfolio investment is tested by applying analysis of regression and correlation. Results show that there is positive correlation between variables which indicates that stock market reforms derive foreign portfolio investment in Pakistan. So it means that reforms implemented by Security and Exchange Commission of Pakistan (SECP) and government of Pakistan induced investments in all three stock exchanges namely; Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE) and Islamabad Stock Exchange(ISE). 7. Recommendations This study suggests that stock markets reforms play vital role in attracting foreign investment in any country. So when any stock market in is introduced then there must be proper check and balance on it and its post evaluation results be carefully monitored. Reforms should be flexible so that these can be restructured by considering the feedback and responses of investors. Management of stock exchanges and government are key player that can not only introduce different reforms in stock market but also can monitor these reforms. 8. Limitation of the study

Due to less number of observations the results are not more significant that can be improved by increasing the number of observations. The above model may be influenced by some other control variables like GDP and exchange rate so; model can also be improved with the help of control variables.

9. References Pankow, D. (2005). Understanding stocks and stock markets. FE-605 -4. J.Angel, J. (2002). Market Mechanics. 24. Koldertsova, & Alissa, H. C. (2009). The Role of Stock Exchanges in Corporate Goveranve. Rizvi, S. A. (2002). STOCK MARKET REFORMS. Islamabad: Pakistan Economist. Raza, A., Iqbal, N., & Ahmad, Z. (2012). The Role of FDI on Stock Market Development: 4. No.1, pp.26-33. Qayyum, A., & Husain, F. (2005, March). Stock Market Liberalizations:. Serra, A. P. (1999). Dual-listing on international Exchanges. 5, No.2, 165-202. Adelegan, O. (2008). Can Regional Cross-listings Accelerate Stock Market Development. WP/08/281. Servey, E. (2008). CAPITAL MARKETS. Islamabad. Statistics, G. (2002). Capital Market. Islamabad. Figure 1: Model of Study

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Sr. No.

Year Stock Market Reforms Symbols FPI $ millions

1 1985 Stock market liberalization Lib 110.35

2 1991-94 Repatriation,100% ownership in venture and disinvestment

Rep

92.49 to 1,471.36

3 1992 Cross listing & Dual listing CL & DL

371.94

4 1994 Trade automation TA

1,471.36

5 1994 Establishment of Credit Rating Agency CRA 1,471.36

6 1995-96 Abolishment of outdated Capital Issue Act 1947

CIA

3.68 to 260.86

7 1997 Establishment Central Depository System CDS 279.00 8 1998 No prior approval for investment AI 19.00

9 1998 Promotion of free market environment FME

19.00

10 1998 Restructuring of corporate law authority CLA 19.00 11 2001 Online internet based trading IBT 192.00

12 2002 Demutualization of stock exchanges Dem

722.00

13 2007 Floating stock market FSM

2,086.00

Table 1: Stock Market Reform Summary Sr. No. Year SMR FPI Sr. No. Year SMR FPI

1 1985 1 110.35 15 1999 10 120.00 2 1986 1 83.42 16 2000 10 9.00 3 1987 1 132.35 17 2001 11 192.00 4 1988 1 126.90 18 2002 12 722.00


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5 1989 1 15.50 19 2003 12 276.00 6 1990 1 87.35 20 2004 12 246.03 7 1991 2 92.49 21 2005 12 770.00 8 1992 3 371.94 22 2006 12 1969.00 9 1993 3 293.05 23 2007 13 2086.00 10 1994 5 1471.36 24 2008 13 269.00 11 1995 6 3.68 25 2009 13 608.00 12 1996 6 260.86 26 2010 13 108.00 13 1997 7 279.00 27 2011 13 118.00 14 1998 10 19.00

Source: International Monetary Fund Table 2: Time Series Data on SMR and FPI Dependent Variable: FPI Method: Least Squares Date: 05/27/13 Time: 07:52 Sample: 1985 2011 Included observations: 27 Variable Coefficient Std. Error t-Statistic Prob. C 101.3798 193.9746 0.522645 0.6058 SMR 39.72071 21.68702 1.831543 0.0790 R-squared 0.118307 Mean dependent var 401.4919 Adjusted R-squared 0.083040 S.D. dependent var 563.3172 S.E. of regression 539.4216 Akaike info criterion 15.49006 Sum squared resid 7274392. Schwarz criterion 15.58605 Log likelihood -207.1158 Hannan-Quinn criter. 15.51860 F-statistic 3.354549 Durbin-Watson stat 1.325694 Prob(F-statistic) 0.078962


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Impact of Liquidity on Capital Structure of Textile

Sector of Pakistan

Yaser Pervaiz (Corresponding Author), Asad Zaman, Sadia Abdul Salam, Muhammad Bilal

MBA/MS (Banking & Finance), GC University Faisalabad, Pakistan


Abstract This paper explores the impact of liquidity on capital structure. The firms which have more liquid equity enjoys a lower cost of equity and may be motivated to have more equity and less debt in their capital structure. Study shows that asset liquidity increases the debt capacity of the firms or organization when bond covenants restrict the disposition of the asset. The results demonstrate that liquidity has least impact on capital structure but not the significant impact on capital structure of the firm. Liquidity must be taken into account when the companies want to get the additional capital from the outsiders. The easiest way to increase the capital is to issue the long term bonds because companies have ample time to return the amount of bond along with interest. When the firms increase the inventory level, this will lead to increase in leverage. When the firms increase the cash in hand and other current assets, this will lead to reduction in the short term and long term debts. Key Words: Liquidity, Capital Structure, Textile 1. Introduction

The textile sector has great importance since it is involved in the production of yarn which is the most important to the whole procedure of making clothes. Textile products play an important role in meeting the basic needs. The clothing industry is where the majority of textile are produced and used. However, textile sector is important in our lives from birth to death.

Obviously, textile sector of Pakistan participate an active role for the economic development of Pakistan. Pakistan is at 8th position in Asian countries for the export of textile merchandise. The contribution in GDP of textile sector is 9.5% in 2012 and 15 million population availing employment opportunities from this particular sector which is 30% of the total employed people of Pakistan. Participation of Pakistan in international trade is less than 1 percent which is approximately 18 trillion dollars. After independence, in initial decades Pakistan produces quality products. In present, Pakistan produces all types of textile products at global level as well as at small and medium businesses. Pakistan is very prominent in the production of cotton and has 4th place and due to high usage of cotton Pakistan hold 3rd position all over the world. The textile division has been the backbone for the economy of Pakistan in the terms of foreign exchange and providing job opportunities for the last 5 decades. There is no

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alternate industry that can provide potential benefits to the economy with foreign earnings and job opportunities. The textile sector will be beneficial for the growth of the country in the future. Liquidity means the point at which a security and assets can be purchased or sold easily without recourse to the court of law. Most companies adopt debt financing strategy rather than equity financing and that’s why most of the banks prefer lending more willingly than investing. Liquidity is important if a person or a company needs access funds in short time frame or to pay for expense. Capital Formation means how much proportion of capital comes from equity financing and how much comes from debt financing. The stakeholders of the companies have much interest in the debt to equity ratio of the company which shows the credit standing of that company. Capital accumulation describes that how a corporation funding its assets. Capital comes in a company into two forms which are as follows, Equity Capital. This portion shows money owing by the shareholders. Debt Capital. This refers to the borrowed money that use by the business. The long term bonds are usually the secure form of debt. 1.2 Problem Statement

As the textile industry is growing, liquidity has major impact on capital structure decision making. When financial institutions want to provide finance in a particular company, they analyze the liquidity of that company in which they are investing. 1.3 Research Question What is the impact of liquidity on capital accumulation of textile sector? 1.4 Research Objective The main objectives of conducting the research are, 1. To evaluate that how much liquidity affect the capital structure of textile sector. 2. To evaluate that how much liquidity is important for any organization. 3. How much current ratio has significant impact on organization. 1.5 Limitation of the study

In this study only one sector has been taken. The span of time is limited only five years from 2007 to 2012. The total number of companies taken as sample is 10. The results were affected due to the lack of reliability of data. The results were also bounded because the duration is also limited. That was the dilemma in this study. The rest of the paper explains next sections in the following manner. Next Section explains literature review of other studies related to this topic from all over the world. Section 2 chase the next section explain the data and research methodology while section 4 reveal the results & discussions and after it in sections 5 describe the conclusion and recommendations. Lastly, reference list is given. 2. Literature Review

Morellec (2001) examined that the asset liquidity has major impact on firm’s securities and its decision for financing. He investigated in his research by using the model of asset price that production capacity of a firm did not affect due to change in the demand of the goods. He demonstrated that credit spreads enhance with the change in unsecured debt and it will reduce favorable leverage. He concluded in his another model that the asset liquidity has a hefty impact on capital accumulation preference of the corporation.

Marmor and Valentincic (2003) investigated that creditors of small enterprises interested in short term liquidity because any cash deficiency can result in delayed payment. He concluded with the help of nave model that once a firm experience liquidity difficulty or problem of delayed payment in any period by reason of inadequate bank balance then the corporation will consistently have the same problem in the preceding year unless the company restructures. He also examined by using the financial ratios that ratios convey additional


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information about potential liquidity of very small private companies. He suggested in his research that possibly creditors of very small private companies will trust on financial indicators if the information regarding liquidity will be readily available to public.

Edmans, Fand and Zur (2011) argued that stock liquidity affected the block holder’s choice of governance mechanism as hedge funds are unconstrained by legal restriction. The result told that liquidity does not restrict block holders from governing. He examined in his research with the help of correlation coefficients that to draw the attention of huge stakeholders of an corporation or to administer them successfully then the liquidity of the enterprise should be effective and it will be constructive.

Sarlija and Harc (2012) investigated that the capital accumulation has been affected by liquidity. He argued in some countries, the liquid firms financed by their own capital rather than outsiders and they were less leveraged. He demonstrated that increasing the level of inventory leads to an increase in debt of the company and increasing level of cash in current assets leads to decrease in debt long term as well as short term. He examined in his research with the help of Pearson correlation coefficient that there is negative relationship between liquidity and capital structure. He also concluded that the share of retained earning s as well as equity to capital is not correlated with equity.

Uremadu and Efobi (2012) analyzed the importance of capital structure to corporate financial stability, growth and adequate returns and liquidity cannot be undermined. He concluded in his research with the help of multiple regression model that increasing proportion of both short term debt and long term debt on the overall liability of the firm reduces corporate profitability. He also revealed that profitability and performance of firm depend on proper management and composition of their capital structure.

Sibilkov (2009) examined that asset liquidity has major influence on capital formation. He concluded in his research with the help of multiple regression model that liquidity of assets has been positive relation with leverage. He demonstrated that lower assets liquidity reduces the cost of debt and for that reason companies use more debt. He also concluded that his research showed some relations about secured and unsecured debt. He gave details that the relation between secured debt and asset liquidity is safe and positive while the unsecured debt is negatively correlated with firm’s liquidity.

Faulkender and Petersen (2004) analyzed that in previous years the firm can get capital only due to its characteristics. However, market frictions that make capital structure may be associated with a firm’s source of capital. He concluded in his research with the help of regression model that the firms which could not get financing from the public are less versatile and that firm will be more affected than others. He also found that large firm’s capital structure decisions are constrained by the capital market.

Driffield, Mahambare and Pal (2007) analyzed that the cash flow system and capital accumulation system depend on management control and it should be separate from the other systems. The management acted to control the capital structure and assure the investor’s protection. He investigated in his research with the help of Tobin’s Q that family owned business had higher control on their cash flows and management and their business has not been performed well as non family owned business.

Udomsirikul, jumreornvong and jiraporn (2011) examined that the firm which have equity composition that is more liquid get the benefit of lower cost equity. These corporations also encouraged to have more equity rather than debt in their capital. He concluded in his research that Thailand is an rising economy and move towards achievements has a banking system which provides debt and has high absorption of commercial ownership.

Weston (2005) analyzed that the fees charged by investment bank are lesser for those who have more liquid stock. He concluded in his research that when the company who desire to lift up equity through outsiders then


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issuance cost should be kept in mind and are an implicit expenditure of external equity. Shivdassani and stefanscu (2010) analyzed the capital structure implication defined benefit corporate

pension plan. He concluded in his research with the help of regression model that the organizations settle their leverage ratio to judge the firm pension asset. He also found that discouraging pension policies in capital structures test have the risk and it is most important and it is related to business features.

In conclusion, it should come to the knowledge that there is a strong relation between liquidity and capital formation and leverage is positively related to asset liquidity. The last but not least is that to control the enterprise more efficiently and effectively liquidity can be helpful and it will also enabling them to invite more stakeholders and to improve the performance. 3. Data And Methodology

Methodology is an organized technique which provides guidelines which provide guidelines to the researcher how to deduct the solution of a problem. It is a arrange system which includes the guideline or rules, measure, method to explore the particular problems in that arena. Methodology is very important area of research because researcher picks the most suitable type of methods to solve and regain particular information so that they easily make the correct decision. An authentic research design is verified that the conducted research is valid and also evaluate that the hypothesis and variables. Methodology notifies that data is consistent and not irrelevant.

Data means raw facts and figures. The word data is very wide in its meaning and come from a Latin word datum which means to “give something”. Data is the vital source and without it nothing can be find or possible to do research. Information is also play vital role in research. Researcher collects data from the financial statement of different textile firms. a) Data Sample

Data mean accumulation of raw statistics, numbers, amounts and features to analyze these for decision making. There is availability of two types of data collection sources through primary source and secondary source. In this research our area of focus for data is secondary sources in which we analyses the articles and different research papers. Another medium for data collection is the use of web sites of banks to find their financial statements information. I collect date of the time period which is most recent i.e. 2007, 2008, 2009, 2010 and 2011. The data is reliable and verified from Karachi Stock Exchange.

Researcher chooses the textile sector and there are 101 companies listed in Karachi Stock Exchange and select only 10 corporation of the textile sector and all are listed in Karachi Stock Exchange. The Karachi Stock Exchange was established in 1947. The firms which have highest market capitalization and market share are listed in top hundred companies which structure the 100 index. Karachi Stock Exchange is most leading exchange in Pakistan. The KSE are operating through electronic system which has linked with other market of the world. There are 34 sectors in KSE and every sector includes a wide range of companies. b) Sampling Technique

Researcher uses the fish bowl sampling technique in my research. It is also called lottery sampling. It is the most commonly used method in the research. In this method, there is a need for a complete listing of the members of population. Then the names or codes of all members are written on a piece of paper cards and placed on a container. The researcher draws the desired number of sample from the container. This process is relatively easy for small population but relatively difficult and also time consuming for large population. c) Result Analysis Techniques

Descriptive Statistics briefly summarizes a given data, which represent the entire population. Two approaches are used to investigate the data i.e. measure of central tendency and measure of dispersion. Measure


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of central tendency consists of mean, median and mode whereas the measure of dispersion comprises of standard deviation, minimum and maximum, kurtosis and skewness. It provides simple summaries about the sample. It helps to simplify the large amounts of data in rational way. It reduces lots of data. Correlation is a statistical approach which represent the relationship of variables either they move in same direction or not. Correlation is very helpful for large scale investment portfolio. A negative movement suggests that one variable consistently moves up while the other moves down. A positive interpretation suggests that there is a tendency for the pair of markets move in the same direction.

Regression analysis is a statistical approach used to explain the relationship between variables. It comprises of many techniques for analyzing several variables, and the focus is on the link between dependent variable with independent variable. There are two types of regression which are linear regression and multiple regression. To demonstrate the result by using one independent variable we use linear regression whereas multiple regression operate with two or more variables to foretell the outcome. The common form of regression is, Linear Regression A = β0 + βB + u Multiple Regression A = β0 + β1B1 + β2B2 + β3B3 +........ + βtBt + μ Where, A= the variable we are trying to forecast B= the variable that we are using to calculate A β0= the intercept β= the slope μ = error term d) Empirical Models ICR= β0+β1ART1+ β2CCC2+ β3CR3+ β4CRA4+ β5ITR5+μ DR= β0+β1ART1+ β2CCC2+ β3CR3+ β4CRA4+ β5ITR5+μ DER= β0+β1ART1+ β2CCC2+ β3CR3+ β4CRA4+ β5ITR5+μ Here, ICR represents the Interest Coverage Ratio DR represents the Debt Ratio DER represents the Debt Equity Ratio ART represents the Account Receivable Turnover Ratio CCC represents the Cash Conversion Cycle CR represents the Current Ratio CRA represents the Cash Ratio ITR represents the Inventory Turnover Ratio e) Variable Definitions Current Ratio Current Ratio demonstrates the proportion of current assets and current liabilities of a company. The equation is as follows,

………………………………..……………1

1. Cash Ratio


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Cash Ratio represent the strengthen of cash in hand of a corporation. Cash Ratio is the improved form of the Quick Ratio and is more conservative approach. It describes that how quickly a company can write off its short term debt. The formula is as under,

……………………...…………….………..2

2. Account Receivable Turnover Ratio

Account receivable turnover is the ratio of net credit sales to average account receivables. It is an activity ratio and it measure that how many times a company collect its receivables during a period. It can be calculated as under,

…….………3

3. Inventory Turnover Ratio Inventory turnover ratio is the ratio of cost of goods sold to average stock. It quantify that how many times a business sell and replace its inventory in a year.

…………………..……..…..4

1. Cash Conversion Cycle Cash conversion cycle is the process where the company purchases inventory, sell the stock on credit as an

account receivable and then collect the receivables and revolve it into cash. The company needs cash to pay its payables. It is favorable to have shorter cycle than long cash conversion cycle. Formula,

……………………5

1. Debt Equity Ratio This ratio differentiate that how much an organization is dependent on debt and how much depend on equity.

This equation depicts the relationship between long term liability and shareholder’s fund.

………………………….………….6

2. Debt Ratio A measurement representing the percentage of a corporation's assets which are financed with loan more than

one year. Formula,

………………………………….…………7


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3. Interest Coverage Ratio The Interest coverage ratio explains the number of times a company could make the interest payment from its earning before its tax and interest. The formula of is as under,

………….……….8

f) Hypothesis Ho= The liquidity ratios has no significant impact on capital structure ratios. H1= The liquidity ratios has significant impact on capital structure ratios. Ho= There is no significant relationship between current ratio and capital structure ratios. H1= There is significant relationship between current ratio and capital structure ratios. g) Results And Discussion

Researcher use three technique descriptive statistics, correlation and regression. Table 1 shows the result of descriptive statistics of data of 10 companies of textile sector which is sample size of research. Mean shows the average of all the values of both dependent and independent variables. In which the mean, median, Minimum, Maximum, Standard deviation, skewness, kurtosis, probability and Jarque-Bera are find from the all variables of the panel data consists of 50 observations. Mean shows the average of all the values of both dependent and independent variables. Mean of Account Receivable Turnover Ratio (ART) is 12.399 Times which is most supportive. On the other hand, Cash Conversion Cycle (CCC) shows a less favorable mean as compared to Account Receivable Turnover Ratio (ART). Mean of Current Ratio (CR) is 1.026 Times which show positive result is also. Mean of Cash Ratio (CRA) is 2.1596% which is suitable. Debt Equity Ratio (DER) having the mean that is 2.1546 Times this is significant. Mean of Debt Ratio (DR) is 0.648 Times which shows that total asset is greater than total liability. Mean of Interest Coverage Ratio (ICR) is 1.844 Times which is very favorable. Mean of Inventory Turnover Ratio (ITR) is 6.1398 Times which is also favorable.

The standard deviation means the variability or deviation in the value of mean. Account Receivable Turnover Ratio (ART) has the highest Standard Deviation that is 9.416. It means that its value vary too much that is not significant. Inventory Turnover Ratio (ITR) has less Standard Deviation than the Account Receivable Turnover Ratio which is 6.506 that is also not significant. Standard Deviation of Cash Ratio (CRA) is 2.168 which is significant than the Account Receivable Turnover Ratio (ART) and Inventory Turnover Ratio (ITR). Debt Equity Ratio (DER) and Time interest earned have the Standard Deviation 1.038 and 1.042 which is also significant. Current Ratio (CR) has the lowest Standard Deviation that is 0.28 which shows that Current Ratio (CR) less deviate than all the variables.

The skewness for a normal distribution should be zero and for a symmetric is must be near to zero. The perfect evidence for perfectly symmetrical is if the skewness = 0, but in real world skewness of exact zero is quite distinctive. The following are the idea to understand this concept: If the skewness is between -−½ and +½, the distribution should be consider approximately symmetric. If the skewness is between -1 or bigger than +1, the distribution should be consider highly skewed. If the skewness is between -1 and −½ or between +½ and +1, the distribution should be consider moderately skewed.

The variables which have positive skewness are Account Receivable Turnover Ratio (ART), Cash Conversion Cycle (CCC), Current Ratio (CR), Cash Ratio (CRA), Debt Equity Ratio (DER), Interest Coverage Ratio (ICR) and Inventory Turnover Ratio (ITR). And the variable which has negative skewness is only one variable that is Debt Ratio (DR) which has skewness -0.54532.


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A normal distribution with a kurtosis >3 is called as leptokurtic by which it mean that as compare to normal distribution its central peak is sharper and higher& its tails are fatter and longer. The variables which have kurtosis more than 3 are Account Receivable Turnover Ratio (ART) which is 7.124, Cash Conversion Cycle (CCC) that is 13.457, Current Ratio (CR) which has kurtosis of 5.527, Cash Ratio (CRA) 13.698, Times Interest Earned 4.196, and Inventory Turnover Ratio (ITR) 38.0211. A normal distribution with a kurtosis <3 is known as playkurtic by which it mean that as compare to normal distribution its central peak broader and lower & its tails are shorter and thinner like Debt Ratio (DR) and Debt Equity Ratio (DER) which has kurtosis 2.4874 and 2.5587 respectively.

Table2 shows the correlation matrix of the independent variables .Correlation shows the degree to which two or more variable has tendency to vary together. Correlation is positive when the values move in same direction but when they move in opposite direction correlation is negative. In this matrix Account Receivable Turnover is positively correlated with Cash Ratio (CRA) and Inventory Turnover (ITR) and negatively correlated with Cash Conversion Cycle (CCC) and Current Ratio (CR). Cash Conversion Cycle (CCC) is positively associated with CR and negatively associated with ART, CRA and ITR. Current Ratio (CR) has positive correlation only with CCC and has negative correlation with the remaining independent variables. Cash Ratio (CRA) has positive correlation with CRA only. The last variable Inventory Turnover Ratio (ITR) is positively correlated with ART and has negatively correlated with CCC, CR and CRA. The table 3 shows the regression results of dependent variables which are Interest Coverage Ratio (ICR), Debt Ratio (DR) and Debt Equity Ratio (DER). The first piece represents the coefficient for each independent variable that is showing the strength of influence. Second column represents the T-Statistics values which are showing the significance of the regression results. T-Statistics shows the relationship between dependent variables and independent variable.

Interest Coverage Ratio (ICR) has positive coefficient with Account Receivable Turnover Ratio (ART), Current Ratio (CR) and Cash Ratio (CRA) and negative coefficient with Cash Conversion Cycle (CCC) and Inventory Turnover Ratio (ITR). Debt Ratio (DR) has positive coefficient with Account Receivable Turnover Ratio (ART) and Cash Conversion Cycle (CCC) and negative coefficient with Current Ratio (CR), Cash Ratio (CRA) and Inventory Turnover Ratio (ITR). The last but not least dependent variable Debt Equity Ratio (DER) has positive Coefficient with Account Receivable Turnover Ratio (ART) and Cash Conversion Cycle (CCC) and negative coefficient with Current Ratio (CR), Cash Ratio (CRA) and Inventory Turnover Ratio (ITR).

The significance level of T-Statistics is 2. If the T-Statistics is greater than 2, it means that it actually shows relationship. In the above table, dependent variable Interest Coverage Ratio (ICR) has positive relationship with Current Ratio and negative relation with Cash Conversion Cycle. Debt Ratio show affirmative relationship with Cash Conversion Cycle and pessimistic relationship with Current Ratio. The last dependent variable Debt Equity Ratio show positive relationship with Cash Conversion Cycle and negative relationship with Current Ratio and the remaining independent variables are not showing any relationship because their T-Statistics is less than 2. R-Square of Interest Coverage Ratio (ICR) is 0.58051 which is favorable and it means that 58% samples describe Interest Coverage Ratio (ICR). The remaining 42% variation in Interest Coverage Ratio (ICR) is unexplained by the independent variable. F-Statistics of Interest Coverage Ratio (ICR) is 12.1778 which shows the fitness of the model, and that is significant.

R-Square of Debt Ratio (DR) is 0.46377 which is also favorable and it means that 46% samples describe Debt Ratio (DR). The remaining 54% variation in Debt Ratio (DR) is unexplained by the independent variable. F-Statistics of Debt Ratio (DR) is 7.6108 which is also favorable. R-Square of Debt Equity Ratio (DER) is 0.361298 which is significant and it means 36% sample describe Debt


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Equity Ratio (DER). The remaining 64% variation in Debt Equity Ratio (DER) is unexplained by the independent variable. F- Statistics of Debt Equity Ratio (DER) is 4.9779 which also demonstrate that it is favorable. h) Conclusions And Recommendations

The main theme of this research or purpose of conducting the research is to evaluate the impact of liquidity on capital structure. Researcher has taken 10 companies which are listed in Karachi Stock Exchange of textile sector. The result shows that liquidity has impact on capital accumulation but it has not significant impact on capital structure. Cash Conversion Cycle and Current Ratio has significant impact on capital structure variables i.e. Interest Coverage Ratio, Debt Ratio and Debt Equity Ratio. The regression model reveals that the fitness of overall model is very good. So as the Cash Conversion Cycle will be lesser, it will show the positive result to textile sector. On the other hand Current Ratio should lie between 2:1. If it exceeds that limit, it shows that the company’s current assets are higher and they are not utilizing them properly and just they are adding in their assets and are not getting profit from these assets. Cash Conversion Cycle should be lower as possible. Account Receivable Turnover Ratio does not show significant relationship with the liquidity variables because they are not recovering their receivables timely and it will also affect the payable turnover ratio.

On the other hand, the opposite scenario is that if as much as their Account Receivable Turnover Ratio is lesser, it will be positive for the company and a positive point when investors evaluate the liquidity. Cash Ratio also does not show positive relationship with the liquidity because the company has more cash in their hand and banks and they are not utilizing them properly and are not using the cash in some other investments. The company should have cash in hand and in banks as lower as possible and utilize them in some other source and get profit to stabilize them. Inventory Turnover Ratio has negative relationship with the liquidity because the company does not pay their debts properly or their cost of goods sold is higher.

The liquidity has least impact on capital structure of textile sector because the particular sector is not performing well due to shortage of electricity, gas shortage, poor economic conditions, unemployment etc. The Govt. impose additional restrictions, increase the tariffs and taxes on income and sales, it overall effect the company performance. When the company needs additional capital for expanding their business or for purchase of a plant which can enhance the productivity, the investor analyze the liquidity of that particular company and also consider the sector to which they are providing investment. If the condition of a particular sector is well and liquidity of the company is good, then the investors invest in that particular sector. On the other hand, if the condition of the sector is not well and they have the problem of electricity shortage, gas shortage etc. as the current situation, the liquidity will automatically be unfavorable and the investors will not invest in that company. So liquidity has some impact on capital structure because investors focus on liquidity as well as the condition of the sector and also consider the reputation of that company. Recommendations

If the liquidity of the company is very good and favorable then it will get additional capital easily and maintain their capital structure as they want. The liquidity of the organizations which are reflected in an ongoing ability of meeting the financial obligations affect’s the firm capital structure. The companies should keep in mind the importance and role of money in the liquidity. In order to maintain liquidity and thereby influence on capital structure, the companies must be aware of importance of managing liquid assets. Reference 1. Morellec, E. (2001). Asset liquidity, capital structure, and secured debt. Journal of 2. Financial Economics, 61, 173–206. 3. Mramor, D., & Valentincic, A. (2003). Forecasting the liquidity of very small private companies . Journal


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of Business Venturing, 18, 745–771. 4. Ofumbia, S. U., & Uchenna, R, E. (2012). The Impact of Capital Structure and Liquidity on Corporate

Returns in Nigeria: Evidence from Manufacturing Firms. International Journal of Academic Research in Accounting, Finance and Management Sciences.2, ( 3),1-16.

5. Natasa, S., & Martina, H. (2012). The impact of liquidity on the capital structure: a case study of Croatian firms. Business Systems Research, 3(1), 30-36.

6. Driffield, N., Vidya, M., & Sarmistha, P. (2007). How does ownership structure affect capital structure and firm value? : Recent evidence from East Asia. Economics of Transition, 15(3), 535–573.

7. Sibilkov, V. (2009). Asset Liquidity and Capital Structure. Journal of financial and quantitative analysis , 44( 5), 1173–1196.

8. Udomsirikula, P., umreornvongb, S ., & Jirapornb, P.(2011).Liquidity and capital structure: The case of Thailand. Journal of Multinational Financial Management, 21,106–117.

9. Shivdasani, A., & Stefanescu, I. (2010).How Do Pensions Affect Corporate Capital Structure Decisions?. The Review of Financial Studies ,23( 3 ),1288-1333.

10. Lipson, L. M., & Mortal, S. (2012). The impact of liquidity on the capital structure: a Case study of Croatian firms. Journal of Financial Markets, 12(4), 611-6

Table 1: Descriptive Statistics

ART

CCC

CR

CRA

DER

DR

ICR

ITR

Mean 12.39946 138.7188 1.0268 2.1596 2.1546 0.648 1.8442 6.1398

Median 9.940326 87.59223 0.99 1.68 1.905 0.655 1.47 4.85

Maximum 47.52604 924.5372 2.07 13.02 4.68 0.82 5.16 48.66

Minimum 0.460638 13.18103 0.61 0.19 0.72 0.42 0.47 1.73

Std. Dev. 9.415998 185.5326 0.280032 2.168065 1.038866 0.114268 1.042113 6.506264

Skewness 1.873221 3.365216 1.312616 2.739795 0.617724 -0.54532 1.365559 5.729604

Kurtosis 7.124387 13.45764 5.52717 13.69873 2.558717 2.487456 4.19663 38.02112

Probability 0 0 0.000001 0 0.166497 0.220314 0.000095 0

Sum 619.9729 6935.941 51.34 107.98 107.73 32.4 92.21 306.99

Sum Sq. Dev. 4344.39 1686695 3.842488 230.3248 52.88284 0.6398 53.21402 2074.242

Observations 50 50 50 50 50 50 50 50

Table 2 Correlation

ART CCC CR

CRA

ITR

ART 1 - -

-

CCC -0.45082 1 -

-

-

CR -0.04479 0.463231 1

-

-

CRA 0.104536 -0.22181 -0.08603 1

-

ITR 0.21504 -0.26339 -0.04508 -0.06959 1


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Table 3: Regression


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Challenges in the Adoption and Utilization of Information and

Communication Technology in Public Secondary Schools in Molo

Sub-County, Kenya

Bernard Komu Waweru (Corresponding author) & Cyrus Muigai Kihara

Jomo Kenyatta University of Agriculture and Technology P. O. Box 62000-00200, Nairobi, Kenya

Accepted 26 September 26, 2013

Abstract The study sought to determine the challenges that influence adoption and utilization of Information and Communication Technology in public secondary schools in Kenya. The study adopted a descripto-explanatory research design covering a stratified sample of 84 respondents drawn from 30 public secondary schools in Molo Sub-County. Data was collected by use of questionnaires and was later analyzed using descriptive and inferential statistical analysis tools. According to the study findings, financial limitations (91.1%) was found to be the most important factor influencing ICT adoption and utilization with a correlation coefficient of 0.53 at 0.000 significance level. The study recommends that, the Government should allocate specific budget for ICT Integration in schools, initiate liberalization of telecommunications policies, lower taxes as well as encourage multi-partnership that involves donors, private companies (usually ICT based), NGOs and religious bodies to work together to garner resources and set priorities for ICT in education projects.

Key Words: Information and Communication Technology, financial limitations, liberalization, budget.

1. Introduction

Computer utilization in education setting has evolved over a long period since computers were first invented in the 1960s. According to Smith and Smith (1966), the vision of educational computing has run through several independent phases since its inception. although computer use and computer application have rapidly spread to many developing countries’ classrooms, and despite the many learning tools that have been developed for these computers, their impact and changes to learning are much smaller than expected, yet the potential for change is great. In this respect therefore, we tried to assess why the changes are so small, and what challenges mar the efforts towards computer adoption and integration for learning particularly in the Kenyan context.

It is the opinion of many researchers that reshaping the delivery of instruction is supposed to be in a scenario where ICT alters the learning environment and the learners (Heppell 2000), this however is not the case in Kenya where many schools remain highly handicapped when it comes to application of ICTs to manage the quality of output, or to raise teacher productivity owing to a myriad of challenges facing most schools with regard to adoption of ICTs in educational management. This has not only resulted in a slow rate of adoption of ICT despite its promise and potential for use in educational management, but has also led to adoption of computer

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related learning as technical subject as opposed to integration of its use in the entire teaching and learning process.

Further still, financial difficulties due to underperforming economies also makes investment in ICT a nightmare in many public schools. Whereas funding strategies adopted in implementing ICT in schools largely depend on the education policy of a country (Pelgrum & Law, 2003); specific models of implementation adopted are generally dictated by the nature of the education system.

In Kenya, funding strategy has largely remained the traditional public-private partnership (PPP) initiatives with partnership between Ministry of Education (MOE) and Computer for Schools-Kenya (CFSK), Kenya ICT Trust Fund, and the New Partnership for African Development (NEPAD) e-schools initiative, remaining the major efforts towards funding infrastructure development. Whereas these efforts are commendable, a lot needs to be done as currently many public schools lack the basic ICT infrastructure due to poor funding as a result of large number of schools. There are currently over 4000 public secondary schools in Kenya and the recent massive increase in primary school enrolment occasioned by free primary education is putting pressure on the demand for and access to secondary schools (Republic of Kenya, 2007). As such, many public secondary schools remains concerned with the quality of education which is characterized by poor performance in core subjects such as Mathematics and Sciences. There are thus, obvious benefits for integrating computers into secondary schools as students at this age need to focus on subject-specific content, greater critical thinking skills, scientific inquiry, Mathematics, science and languages. Students will greatly benefit from the analytical, creative, and collaborative power of computers to map out and analyze assumptions, present ideas, and participate in projects with peers from around the country and the entire world via the internet.

1.1 Problem statement

Despite the proliferation of computer based-application in the public sector, the implementation of the same has remained a significant issue especially in public schools. ICT infrastructure even where available particularly in public secondary schools, is underutilized and they do not meet their potential or fail to be used at all. This is attributable to many challenges in adopting ICTs, Most important of which, is the challenge of leadership, financial limitations, teaching capability, content development, lack of technical support and the concern that ICT literacy among school managers is very low especially to those that live in the rural or remote areas part of Kenya (Yang, 2003). Indeed, for ICT integration programs to be effective and sustainable in Kenyan Schools, administrators themselves must be competent in the use of the technology, and they must have a broader understanding of the technical, curricular, administrative, financial, and social dimensions of ICT use in education.

Despite having little or no training in ICT, school leaders and teachers find themselves in a situation that requires them to understand and undertake some of these challenges. Failure to meet the challenges means that many schools would not be able to effectively implement ICT in their teaching and learning activities, leading to further widening knowledge gap and deepening existing economic and social inequalities between those who have access to and control of technology, and those who do not (Mingaine, 2013). These inequalities are clearly manifested in Kenya today as digital divide that exist between the rural and urban areas.

1.2 Purpose of the Study

The general objective of the study was to determine the challenges in the adoption, and utilization of Information and Communication Technologies (ICT) within the secondary education context in Molo Sub-county, Kenya. As a result, the following specific objective was pursued: To establish the influence of financial capacity on ICT adoption and utilization in public secondary schools in Molo Sub-county, Kenya.


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2. Literature review

Developing countries often have financial disadvantage due to underperforming economies and as such cannot afford huge investments that comes with ICTs’ technology implementation. Without financial support, ICT’s infrastructure will not be able to grow and play its role as backbone to improve the learning environment. Rajesh (2003) pointed out that economy is one of the critical difficulties that prevent developing countries to implement ICT in education. This fact was also observed by Richardson (2010), in the case study of Cambodia, where institutes were observed to require more computers and power supply in order to organize effective ICT courses. According to him, when implementation comes with money pressure and stress of changing, it will face high chance of being rejected. Further, a survey of Turkish schools by Yalin, Karadeniz and Sahin (2007), revealed that nearly 80% of principals and teachers claimed that lack of training and supporting hardware is a barrier to implementing ICT in their schools.

Accordingly, Implementation of ICT in schools largely depends on the education policy of a country. According to Pelgrum and Law (2003) Education policies could be broadly categorized as centralized or decentralized (which may involve state and district levels). Singapore and Hong Kong have centralized education system and both have a detailed ICT master plan that prescribes clear strategies, target, timelines and budget allocations (Singapore Ministry of Education, 1997). Other countries such as Japan, Korea, New Zealand and Chinese Taipei that have adopted centralized education system in terms of curriculum and education policies, funding and implementation support are delegated to the local, regional or district levels. In the USA popular strategy used entails the provision of incentives programmes by the central government; here specific implementation is left to the school and the district concerned, while the federal government only provides a small percentage of their funding (Anderson & Dexter, 2003). In India, the central government has adopted a strategy of not directly exerting influence on schools other than establishing ICT policies and strategies to government schools, which then act as models for disseminating knowledge to other schools nationwide ( Mallik , 2003) .

Another strategy that may find greater application in many developing countries is the use of pilot projects to develop prototypes for implementation as well as to act as role models for non-pilot schools, example of such projects are the pilot school in Hong Kong (law, Yuen, & Wong, 2001), Headlight projects in the USA, and the Smart schools in Malaysia (Smart School Project Team, 1997). For sub-Saharan African countries, The most well-known portable computing initiative is the One Laptop per Child (OLPC) scheme initiated by Nicholas Negroponte at the MIT Media Lab in 2005, the scheme was embraced by various countries such as Rwanda, Nigeria, Ethiopia and Ghana with varied level of success in implementation, for the case of Rwanda the schemes has achieved a high success rate after an initial trial in October/November 2007 in which 106 laptops were deployed in one primary class, followed by a pilot project involving 5000 laptops that was commissioned a year later (Nugroho & Lonsdale, 2009).

3. Methodology

This study adopted a descripto-explanatory research design. This design provides an accurate account of characteristics of a particular individual event or group in real life situation, (Kothari, 2004; Mugenda, 2008) it also allows explanation of the relationships that exist amongst variables under study (Saunders et al., 2009). The design is appropriate as it may be used for purposes of developing theories, identifying problems with current practice, making judgments’ or determining what others in similar situations are doing (Sekaran, 2008). Further, Quantitative data was analyzed using descriptive and inferential statistical analysis tools; mean and Spearman’s rank correlation to determine the relationship between variables under study while analysis of qualitative data involved organization of data into themes, as guided by the study objectives.


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4. Results and Analysis

The study targeted a total population of 84 respondents, however due to study limitations; the study gathered a total of 72 responses which represents 85.7 % response rate of which 81.9 % were male and 18.1% were female. 66.7 % of the respondents were Teachers while 33.3% were Administrators. Further, 77.8 % of the respondents had been employed for 0 to 5 years and 13.9 % between 5-10 years, while 8.3% have been teachers for more than 10 years.

Table 4. 1: Financial capacity Perception

FINANCIAL CAPACITY Mean N Std. Deviation

STRONGLY AGREE 2.48 9 .000

AGREE 2.65 12 .577

DISAGREE 3.44 30 .734

STRONGLY DISAGREE 3.00 21 . 643

Total 2.96 72 .763

According to the research findings, budget insufficiency of the school as the main obstacle to ICT integration had an overall mean of 2.96. (Table 4.1) With those disagreeing (91.1%) that their school had a budget provision for acquiring ICT posting a mean of 3.44 against 4.00 and a standard deviation of 0.734.

Table 4. 2: Correlation

FC A&U

Spearman's rho

FC

Correlation Coefficient

1.000 .528**

Sig. (2-tailed) . .000

N 72 72

A&U


.528** 1.000

. Sig. (2-tailed) .000

N 72 72

**. Correlation is significant at the 0.01 level (2-tailed).

FC: Financial capacity

A&U: Adoption and Utilization

Further, there is a positive relationship between financial capacity of a school and its ability to adopt and use ICTs as indicated by a positive correlation coefficient of 0.528 at 0.000 significance level (Table 4.2). This indicates that financial capacity of a school has a very significant effect on its ability to adopt and use ICTs. Accordingly, the main obstacle for the integration of the ICT in schools was the insufficient budget allocated to ICT. This finding is consistent with several studies emphasizing the negative effects of this shortcoming (Dawes


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1999; Galanouli & McNair 2001; Tearle 2003). It can therefore be argued that a budget is required to update the systems which had been set previously and also, to purchase new technologies and expendable materials. When the ICT budget lacks the required funds, the ICT programme could be hindered influencing ICT adoption.

5. Conclusions

Public Secondary Schools in Molo Sub-County have not embraced information and communication technologies as indicated by low levels of adoption (79.2% rate their institution’s adoption and utilization of ICT as low). This low adoption and utilization of ICTs was linked to financial limitation with 91.1% of respondents agreeing that their schools do not have budget allocation for ICTs implementation. Financial limitation correlated highly with adoption and utilization (0.528) at p-value of 0.000 indicating that it is significant in influencing ICT adoption and utilization.

6. Recommendations

To overcome the challenge of financial limitation, the study recommends that the Government should allocate specific budget for ICT Integration in schools. At the broadest level, multi-partnership that involves donors, private companies (usually ICT based), NGOs, community based organizations (CBOs) and religious bodies should be encouraged to work together to garner resources and set priorities for ICT in education projects. Bodies that can spearhead this initiative are the Kenya ICT Trust Fund and Computers for Schools Kenya. Still, further liberalization of telecommunications policies and lowering of taxes by the Government will enable more competition and diversity of service providers in the industry; this will have the effect of lowering the cost of access to information and telecommunication infrastructure.

Reference

Anderson, R.; Dexter, S. (2003). “United States. Trends in educational ICT”. In; Anderson, R.; Plomp, T.; Law, N.; Quale, A. (Eds), Cross-national information and Communication technology policies and practices in education. Greenwich,Information AgeInc.

Dawes, L. (1999).. First Connections: Teachers and the National Grid for Learning. Computers & Education 33 (1999) 235-252

Galanouli, D. and McNair, V. (2001). Students’ perceptions of ICT-related support in teaching placements. Journal of Computer Assisted Learning (2001) 17, 396-408.

Heppell, S. 2000. How might elearning really change educational policy and practice? Ultralab. http://www.ultralab.ac.uk/papers/elearning.

Kothari, C. (2004). Research methodology. Methods and techniques (2nd Edition): New Age International Publishers.

Law, N.; Yuen, H.K., Wong, K.C. (2001). Preliminary study on reviewing the progress and Evaluating the information technology in education (ITEd) projects (December 2000-August 2001) [Final Report]. CITE, University of HongKong. Retrieved February 10-2013 from http://resources.ed.gov.hk/iteducation/finalReport_v3.0_web.html.

Mallik, U. (2003). “National policies and practices on ICT in education: India”. In:

Anderson,R.; Plomp, T. Law, N.; Quale, A. (Eds), Cross-national information and communication technology policies and practices in education. Greenwich, CT: Information Age Publishing Inc.

Mingaine, L. (2013), Leadership challenges in implementation of ICT in public secondary School, Kenya,

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Mugenda, A. (2008). Social science research: Theory and principles. Applied research and Training Services. African Center for Technology Studies: Nairobi.

Nugroho, D. and Lonsdale, M. (2009). Evaluation of OLPC programs globally: A literature. Review (Version 2): Australian Council for Educational Research.

Pelgrum, W., LAW, N. (2003).ICT in education around the world: trends, problems and Prospects. Retrieved 23 February 2013from www.unesco.org/iiep

Rajesh, M. (2003). Study of the problems associated with ICT adaptability in developing Countries in the context of distance education. Turkish Online Journal of Distance Education, 4(2). Anadolu University.

Republic of Kenya , (2007) Kenya vision 2030,

Richardson, J. W. (2010). Case study of technology integration in Cambodia. Educational Technology in Practice: Research and Practical Case Studies from the Field, p.113-124. Information Age Publishing.

Saunders, M., Lewis, P., Thornhill, A., (2009).Research Methods for Business Students (5th Edit.) Prentice Hall,UK.

Sekaran, U. (2008). Research methods for Business. A skill building approach. New York: John Willey and Sons,Inc.

School project Team. (1997). The Malaysia smart school: an MSC flagship application. A conceptual blueprint. Kuala Lumpur: Ministry of Education, Malaysia.

Singapore ministry of education. (1997). Master plan for IT in education: Retrieved 23 march 2013

Smith, Karl U. and Margaret Foltz Smith (1966). Cybernetic Principles of Learning and Educational Design. New York: Holt Rinehart andWinston.

Tearle, P. (2003). ICT implementation: what makes the difference? British Journal of Educational Technology Vol 34 No 5 2003 567–583

Yalin, H. I., Karadeniz, S. & Sahin, S. (2007). Barriers to ICT integration into Elementary Schools in Turkey. Journal of Applied science. volume II.

Yang, S. (2003). Teachers’ Perception of Use of Student Performance Information: Technology Acceptance Model. An Unpublished Thesis. The University of Texas at Austin. Retrieved 14th March 2006 from www.lib.utexas.edu/etd/d/2003/yangsk03/yangsk03.pdf#page=3.


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Impact of Physical Evidence on Perception of Service Quality in

the Banking Industry: A case of Transnational Bank, Nakuru

Esther Nyambugi Thuku Jomo Kenyatta University of Agriculture & Technology, Kenya

Accepted 26 September 2013

Abstract This research project sought to analyse the impact of physical evidence on the service quality perceptions in Transnational Bank. Physical evidence was explored in two dimensions both interior and exterior environment in a facility. Service quality on the other hand was explored in terms of: reliability, responsiveness, assurance and empathy. The study was conducted at Transnational bank, Nakuru by collecting views from its customers. Out of the customer polulation of 2073 a sample of 95 was selected using simple random sampling technique, and questionnaire administered seeking their perception on physical evidence and service quality. Data was then analysed using mean, mode frequencies percentages and spearman correlation. The study established that there was a significant relationship between ambient conditions in the banking hall and customers perceptions on service quality offered by the bank. The relationship between special layout and customers perceptions on service quality was significant and the relationship between customers rating on the signage, symbols and artifacts and their perceptions on service quality was also significant. Therefore physical evidence influence customer’s perceptions on service quality. However further studies should be done to establish the factors considered by customers in the choice of banks for provision of banking services and also to determine the factors to consider when designing the layout of banking facilities considerate for optimum customer satisfaction. Key Words: Physical Evidence, Perception of Service Quality, Banking Industry, Transnational Bank, Nakuru 1. Introduction In the banking sector, it is of the essence to understand the added pressure on the service providers to satisfy the needs of the customers. These days, there is a tendency of consumers to be more demanding and tough in relation to the service or product that they would like to purchase. Partly because of that, but also because of the continually increasing competition, companies are trying to differentiate themselves amongst others by putting forward something innovative and inventive. In this context and according to some researchers, physical evidence can be seen as an effective tool for being competitive, under such circumstances. Kotler (2007), for example, had no doubts that rather than the product on its own, the place can actually be even more significant and influential. The term servicescape, indeed, and its importance was popularized by Bitner (1992), whose contribution and

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conclusion made servicescape an ever-increasing subject of interest for many other researchers and practitioners. He continued to argue that servicescape is very helpful for positioning, segmenting and overall differentiating a particular company from its core competitors. Servicescope affects customers' perceptions of the service experience. The main elements of service scope according to Bitner (1992) are; Ambient Condition which refers to the condition surrounding employees and customers that can be sensed through a human's five senses (i.e. eyes, ears, nose, tongue, and skin).Spatial Layout and Functionality Spatial Layout - the seamless layout of furnishing which is used to achieve maximum productivity in the most efficient and effective manners. Signs, Symbols, Artifacts and Branding are the icons or signals that amplify the message from the buyer to the intended customers. Other additional elements include Virtual Servicescape where the employees or the customers are not in the same physical area, but they are interacting via an electronic media - the Internet. Sex of service provider - a certain sex of the service provider of a certain type of industry will be dominated by a certain sex. The banking industry in Kenya has been facing some turbulent times. Central Bank has constantly been raising its borrowing rates to commercial banks forcing them to in turn increase their interest rates. The weakening of the Kenya shilling against other currencies forces commercial banks to increase their exchange rates. Also, stiff competition between commercial banks makes them engage in price wars in regard to interest rates. The banking industry has to cope with such pressures and the increased insistence on greater service quality in order to maintain a competitive advantage. Reaching service quality without distinguishing the important dimensions of quality becoming is impossible. Services cape is very helpful for positioning, segmenting and overall differentiating a particular company from its core competitors. Therefore the gap between management’s perception of customers’ expectations and development of customer driven service designs and standards has to be filled. Customers have certain expectations about what to expect when they walk into the banking hall and this translates to what they perceive as quality service. Therefore the study sought to identify whether customers perception on physical evidence translates to perception on quality service. The main objective was to determine the impact of physical evidence on customer’s perception on service quality in the banking industry. 1. To determine the influence of spartial layout on customer perception on service quality at Transnational Bank, Nakuru. 2. To establish the influence of ambient conditions in the banking hall on customers perceptions on service quality at Transnational Bank, Nakuru. 3. To assess the influence of signage and artifacts on customers perceptions on service quality. H01: Spartial layout in the bank does not influence customers, perception on service quality at Transnational Bank. H02: Ambient conditions in the banking hall do not influence customers’ perceptions on service quality at Transnational Bank. H03: Signage and artifacts in the bank do not influence customers’ perceptions on service quality at Transnational Bank. Transnational bank has 16 branches and one of the branches is in Nakuru town. The research was carried out in Nakuru branch. The targeted respondents were customers in the branch with samples taken from each category of the customers that is corporate, retail and even students. 2. Literature review According to Ziethaml (2006) physical evidence means tangible cues included in Quality service. They include


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all aspects of the banks physical facility (servicesape) and all other forms of tangible communication. Service quality consists of tangible and intangible aspects visualized on a tangible spectrum. Services are usually intangible and the tangible aspects are used to evaluate the services. Tangibles are the appearance of physical facilities, equipment personnel and communication materials. He continues to define Servicescape as an organizations physical facility. The authors say elements that affect the customers include facility exterior and facility interior. It also includes where the service is actually provided. Services are deeds, processes and performances. Services and the service sector of the economy have been defined in subtle different ways. Services include all those economic activities whose output is not a physical product or construction. He defines service quality as a focused evaluation that reflects the customer’s perception of reliability responsiveness assurance, Empathy and tangibles. Hutton and Richardson (1995) found that the physical environment in a service provider setting has a significant effect on customer satisfaction, perceived service quality, intention to repatronise and willingness to recommend. Physical evidence is important in the delivery of a service as this can close the gap between what the customer expects and the delivery of the service Wilson, Zeithaml, Bitner and Gremler, (2008). The role of physical evidence in services can be seen in the following; when closing the gap between the customers’ expectations and perceptions the consistent physical evidence must be compatible with the organisations goals. According to Zeithaml,(2006),physical evidence is the tangible cues to evaluate the service before its purchase and to assess their satisfaction with the service during and after making use of the service. In fact the servicescape is frequently one of the most important elements used in positioning a service organization. There are worthwhile lessons to be learned from the way in which users divert and subvert the planned design of physical support. Servicescape acts on users in order to achieve marketing goals Aubert-Gamet, (1997). The servicescape influences the consumer’s behavior. He states clearly that the consumer is a co-builder of the servicescape. The servicescape and other elements of physical evidence essentially‘’wrap’’ the service and convey to customers the external image of what is‘’inside’’the bank and is used for positioning the service. It is a visual metaphor for the intangible service Zeithaml, (2006). The physical surroundings offer the bank the opportunity to convey an image in a way not unlike the way an individual chooses to dress for success. The servicescape is not only a cue for the expected service quality, but also influences customers’ evaluation of other factors determining perceived service quality Reimer and Kuehn, (2005). The servicescape can also serve as a facilitator in aiding the per fo rmances of persons in a particular environmental setting like a bank. The design can enhance or inhibit the efficient flow of activities in the service setting, making it harder or easier for the customers and employees to accomplish their goals. A well-designed functional facility can make the service a pleasure to experience from the customers and employee’s point of view Zeithaml, (2006). The design of the physical facility can differentiate a bank from its competitors and signal the market segment that the service is intended for. He indicates that given the power as a differentiator, changes in the physical environment can be used to reposition a bank and then to attract a new market segment. Servicescape usage is regarded as very complex. In different circumstances it affects different people as people experience circumstances in the way they are feeling that day and depending on their different needs Lawson,et al. (2002). Zeithaml, et al (2006) argues that in banks the main interaction is interpersonal and therefore the service becomes interpersonal and makes servicescape even more important to set the milieu for positive interaction. The Servicescape is defined as the environment in which service in an organization is assembled and in which the seller and customer interact, combined with tangible commodities that facilitate performance or


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communication of the service. Bitner (1992) says that service setting plays a major role in the shaping of expectations, differentiating service firms, facilitating customer and employee customer goals, and influencing the nature of customer experiences. Customers seek evidence of the eventual ‘quality’ of the intangible service from observing the tangible elements – that is, the servicescape (Berry and Parasuraman,1991). It is important for service organizations, including banks to manipulate the servicescape effectively to enhance customer satisfaction and increase repeat business (Namasivayam and Lin, 2008). (Bitner 1990; Harrell, Hutt, and Anderson, 1980) suggests that the physical setting can influence the customer's ultimate satisfaction with the service. Also research in organizational behavior suggests that the physical setting can influence employee satisfaction, productivity, and motivation (Becker, 1981; Davis, 1984; Steele, 1986; Sundstrom and Altman 1989; Sundstrom and Sundstrom, 1986). 2.1 Ambient Conditions Ambient conditions have been found to influence perceptions of and human responses to the environment by several authors (Baker, 1987; Baker, Berry and Parasuraman, 1988; Becker 1981; Darley and Gilbert, 1985; Russell and Snodgrass, 1987; Sundstrom & Sundstrom 1986; Wineman, 1982).Ambient conditions include background characteristics of the environment such as temperature, lighting, noise, music, and scent. As a general rule, ambient conditions affect the five senses. However, sometimes such dimensions may be totally imperceptible (gases, chemicals, infrasound), yet may have profound effects (Russell and Snodgrass 1987), particularly on employees who spend long hours in the environment. A very limited number of empirical studies in consumer research confirm that ambient factors may influence customer responses. For example, in studies of restaurants and supermarkets, it has been illustrated that music tempo can affect pace of shopping, length of stay, and amount of money spent (Milliman,1982, 1986). In another study, familiarity of music played perceptions of how long they spent shopping; when the music was unfamiliar to subjects, they believed they had spent more time shopping (Yalch and Spangenberg, 1988). Hundreds of studies of the workplace spanning in a department store setting was found to affect shopper’s. Other researchers have found out that lighting, temperature, noise, music, and color can all influence employee performance and job satisfaction (Sundstrom and Sundstrom, 1986). It is often recognised that when a customer visits a bank, he would like an enviroment ,which would make him feel comfortable, safe and relaxed during the duration of his stay. Temperature can be a factor, which can be unpleasant if not controlled adequately in a banking hall. Extreme hot or cold can produce negative emotional states in customers. Thus it is an important part of the ambience. The type of lighting in an environment directly influences an individual’s perception of the definition and quality of the space, influencing his or her awareness of physical, emotional, psychological, and spiritual aspects of the space (Kurtich and Eakin, 1993). 2.2 Spatial layout and functionality Because service encounter environments are purposeful environments, spatial layout and functionality of the physical surroundings are particularly important. Spatial layout refers to the ways in which machinery, equipment, and furnishings are arranged, the size and shape of those items, and the spatial relationships among them. Functionality refers to the ability of the same items to facilitate performance and the accomplishment of goals. Much of the empirical research in organizational behavior and psychology has illustrated effects of the spatial layout and functionality dimension, always from the employee's point of view (Davis 1984; Sundstrom and Sundstrom 1986; Wineman, 1982, 1986). Previous research has also indicated that a sense of belonging influences the spatial layout of customers within the environment and identification with a service provider (Tombs and McColl-Kennedy, 2003). Logic suggests that spatial layout and functionality of the environment are


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highly salient to customers in self-service environments where they must perform on their own and cannot rely on employees to assist them. Similarly, if the tasks to be performed are very complex, efficiency of layout and functionality will be more important than when the tasks are mundane or simple. When either the employees or customers are under time pressure, they will also be highly conscious of the relative ease with which they can perform their tasks in the environment. The furnishing in a servicescape links the space with its occupants and conveys the personality of the servicescape through form, line, color, texture, and scale. The furniture placement may convey a sense of enclosure, define spatial movement, function as walls, and communicate visible or invisible boundaries. Recognizable changes in ceiling heights affect spatial perception more than a similar change in room width or length. High ceilings convey feelings of spaciousness, whereas low ceilings are associated with coziness and intimacy (Ching, 1996). All of these elements help individuals form a mental picture prior to affective response and judgments toward a specific servicescape. The amount of space between rows of seats is also an important dimension, in that it affects the ease with which customers may exit their seats to use ancillary service areas (that is restrooms, concession areas. Furthermore, when rows are too narrow other customers are frequently forced to stand or shift in their seats to let other customers pass by. 2.3 Signs, symbols, and artifacts Many items in the physical environment serve as explicit or implicit signals that communicate about the place to its users (Becker, 1977, 1981; Davis, 1984; Wener, 1985; Wineman, 1982). Signs displayed on the exterior and interior of a structure are examples of explicit communicators. They can be used as labels (for example name of company, name of department), for directional purposes (for instance entrances, exits), and to communicate rules of behavior (e.g., no smoking, children must be accompanied by an adult). Signage can play an important part in communicating firm image. Signs have even been found to reduce perceived crowding and stress in a jail lobby setting (Wener and Kaminoff, 1982). Other environmental objects may communicate less directly than signs, giving implicit cues to users about the meaning of the place and norms and expectations for behavior in the place. Quality of materials used in construction, artwork, presence of certificates and photographs on walls, floor coverings, and personal objects displayed in the environment can all communicate symbolic meaning and create an overall aesthetic impression. Restaurant managers, for example, know that white table cloths and subdued lighting symbolically convey full service and relatively high prices, whereas counter service, plastic furnishings, and bright lighting symbolize the opposite. In office environments, certain cues such as desk size and placement symbolize status and may be used to reinforce professional image (Davis, 1984; McCaskey, 1979; Peters, 1978; Pfeiffer, 1981; Sundstrom & Sundstrom, 1986). Studies of faculty office design indicate that desk placement; presence of diplomas on the wall, and tidiness of the office can influence students' beliefs about the person occupying the office (Campbell, 1979; Morrow and McElroy, 1981). In another study of faculty offices, certain environmental cues were found to be symbolically associated with personality traits of the faculty member believed to occupy the office (Ward, Bitner, and Gossett, 1989). Such symbolic and aesthetic communication is extremely complex—it maybe intentionally conveyed or it may be accidental, it may be subject to multiple interpretations, and it may have intended and unintended consequences (Becker,1977; Davis, 1984). 2.4 Service Quality Without any doubt, service quality is very important component in any business related activity. This is especially so, to market era customer’s evaluation of service quality and the resulting level of satisfaction are


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perceived to affect bottom line measures of business success. Customer expectations are beliefs about a service that serve as standards against which service performance is judged Zeithaml(1993); which customer thinks a service provider should offer, rather than on what might be on offer (Parasuram etal.,1988).To some, service quality can also be defined as the difference between customer’s expectations for the service encounter and the perceptions of the service received. According to the service quality theory (Oliver,1980),it is predicted that customers will judge that quality as` low` if performance does not meet their expectations and quality as `high` when performance exceeds expectations. Closing this gap might require toning down the expectations or heightening the perception of what has actually been received by the customer (Parasuramanetal.,1985).Perceived quality of a given service is the result of an evaluation process since consumers often make comparison between the services they expect with perceptions of the services that they receive. He concluded that the quality of service is dependent on two variables: Expected service and Perceived service. Quality spells superiority or excellence Zeithaml,(1988) , or, as the consumer’s overall impression of the relative inferiority/superiority of the organization and its services. Consumer behavioural intentions are also influenced by the standards of service quality (Bitner,1990; Cronin and Taylor, (1992,1994). Customer satisfaction and service quality are inter-related. The higher the service quality, the higher is the customer satisfaction. Many agree that in the banking sector there are not recognized standard scales to measure the perceived quality of a banks service. Customer satisfaction and service quality are interrelated. The higher the service quality the higher the customer satisfaction. 3. Research gaps There is lack of a standardized scale of examining the physical evidence in service organizations especially in the banking sector, and its impact in influencing customers perception on the expected service quality. Therefore more research needs to be done on the minimum acceptable standards of the physical evidence that needs to be available in banks. This would provide a measure from which one can assess whether a banks physical evidence meets the minimum standards sufficient to influence customers perception on service quality. 4. Methodology This research was descriptive in nature adopting a survey research design. The study particularly was conducted by means of a survey that made use of semi structured questionnaire which were completed by corporate, retail customers and even that bank with TNB. The study population comprised of all customers of Transnational Bank, Nakuru Branch. They were sourced randomly from TNB’s Customer database. Random sampling technique was used to select the sample size of 95 out of the population. A survey questionnaire was used as the data gathering instruments. It was a semi-structured questionnaire developed as a measurement instrument to capture views of Customers on the impact of Physical evidence on service quality. Customer opinions were measured on a 5 point Likert scale with highly disagree and highly agree at the opposite end. The researcher made some effort to ensure that the questionnaire was constructed using simple language to the benefit of respondents. Effort were also made to ensure that the questionnaire is clear without any ambiguity. In order to ensure that the questionnaire was consistent, an initial draft was tested to selected respondents within TNB in order to establish the level and content of the questions. Consultations were closely done with research supervisors from JKUAT to enhance on the validity of the research. The first part of analysis involved ensuring that all responses received w e r e in good content quality and those who did not were carefully adjusted. Descriptive statistics, and inferential statistics were then used to


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analyse the data. Descriptive statistics used included: mean, mode, frequencies and percentages. Inferential statistics used on the other hand were spearman correlation analysis. 5. Findings and discussions 5.1Influence of Ambient Conditions on Customers Perceptions on Service Quality While judging the ambience of the banking environment, majority of the customers surveyed rated the bank highly on beauty in the design, air conditioning. The Noise in the banking hall was also rated as minimal by majority of the customers. Similarly, colors used to brand the bank were also identified as pleasant and welcoming by majority of the customers. The music was however not rated highly as smooth and relaxing. Ranking the determinants of ambient conditions in the banking hall, noise control was ranked best at a mean = 4.24, followed by the choice of colors, mean = 4.13, beauty in the design of the bank and the banking hall, mean = 4.02, air conditioning at a mean = 3.75, and the music in the banking hall was ranked least at a mean = 3.34. This generally implied that ambience in the air condition was good. Upon testing the hypothesis that ambient conditions in the banking hall do not influence customers’ perceptions on service quality at Transnational Bank, results of the correlation tests indicated that there was a strong positive correlation between customers rating on ambient environment in the banking hall and customers perception on service quality rs = 0.668, P = 0.027. 5.2Influence of Spartial Layout on Customer Perception on Service Quality Customers rating on the spartial layout in the bank was that; generally the layout was good. The service points easily accessible by customers according, customers were provided with ample space for parking cars which makes it convenient for customers to conduct their businesses. The bank also provides adequate and comfortable space for waiting for persons accompanying customers although this was rated poorly by majority of customers surveyed. The queuing system was well organized to allow for quick service and finally the layout of the security features such as security personnel fire equipments and surveillance cameras was rated moderately high by customers these features give reassurance to customers on the security in the banking hall. Hypothesis testing was also done on whether spartial layout in the bank does not influence customers, perception on service quality at Transnational Banks. This was tested using spearman correlation where the test results indicated that there was a strong positive correlation between customers rating on banks spartial layout and customers perception on service quality rs = 0.659, P = 0.041. This implies that the layout of the banking facility influenced customers on their perception on the quality of services offered. 5.3 Influence of Signage, Symbols and Artifacts on Customers Perceptions on Service Quality The third objective was on the influence of signage, symbols and artifacts on customers’ perceptions on service quality. According to majority of customers the signage to the bank such as bill boards and signboards were clear and easily attracted customers. The décor was identified as quality though not by many customers. The display of recognition awards and symbols of quality accreditations on the banking halls were rated moderately high and that they created a quality of service perspective. He many was also rated high on the clarity of indicated markings and directions to direct customers on where to access services in the bank. The uniformity in hall branding and the staff uniforms also reflected an organized service delivery. A comparative ranking of the signage, artifacts and the symbols in the bank implied that, the signage to the bank was the highest ranked at a mean of M=4.06 followed by the signboards in the bank M=4.00, décor in the bank M = 3.77, and display of recognition awards M = 3.66. The least ranked element of signage was uniformity between wall branding and staff uniforms M= 3.41. Spearman correlation tests indicated that there was a strong positive correlation between customers rating on the signage, symbols and artifacts and customers perception on service quality rs = 0.510, P = 0.041, implying that these influenced customers perceptions on service quality.


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6. Conclusions and recommendations The study therefore concluded that, the ambience in the banking environment highly influenced customers’ perceptions on the quality of service delivered the organization. Key elements of ambience included the air conditions, ventilation, oduor, air circulations, the colors used in paining walls, noise in the banking hall, and beauty in general. These elements around the service area which play with the customers psychology and influence their thinking on what to expect in terms of quality of service. The layout and utilization of space in the bank also influence customers perceptions on the expected quality of service. Some of the key elements of spartial layout include the layout of buildings with provision of car packing space. Layout of the service points in the banking hall with considerations for all customers needs including provision of facilities for special needs customers, and the queuing systems for different service points. This tells a lot on the organization in service delivery and due consideration of customer needs. The signs, symbols and artifacts displayed also tell a lot about the quality of service offered. For instance display of awards and award certificates, licenses, permits, membership certificates and customers service charter tell the customer more about the ability of the banks history in quality service delivery and their ability as recognized by others. The signage which include bill boards also tell the customer on what to expect in the banks. Banks should ensure they create adequate space for serving the customers, well designed with ambience considerations, controlled noise and pleasant color combination. The space size should conform to the customer base to enable provision of clean air and enhance comfort as customers cue for service. This could boost their perception on the quality of service offered. The layout of space in the banking hall and outside should also take into account the needs of all customers such as walk in, drive in and persons with special needs. This gives the customer assurance of the bank’s ability to provide quality services and care for customer needs. Banks should consider to display as much of recognition awards, membership certificates, quality certification certificates and licenses as they assure the customer on the confidence others have on the banks products and services. It also enables the customer to understand the legal conformations and compliance which restores customer confidence on the expected quality of service. References 1. Aubert-Gamet,V.(1997).Twisting servicescape: diversion of the physical environment in a re-appropriation

process. International journal of service Industry management.8 (1):26 2. Baker, J. (1987), “The Role of the Environment in Marketing Services: The Consumer Perspective," In The

Services Challenge: Integrating for Competitive Advantage, JohnA. Czepiel, Carole A. Congram, and James Shanahan, eds.Chicago: American Marketing Association, pp 79-84.

3. Becker, F. (1981).Workspace. New York: Praeger Publishers. 4. Becker, F. (1977), Housing Messages, New York: Praeger Publishers. 5. Berry, L. and Parasuraman, A. (1911).Marketing services: Competing through quality. New York: Free

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of marketing.56 (2):57-72 8. Campbell, D. (1979), “Interior Office Design and Visitor Response”, Journal of Applied Psychology, 64,

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10. Cronin, J. and Taylor,S.A(1994),SERVPERF versus SERQUAL .Reconciling Performance-based and. Journal of marketing 58(1):125-132

11. Cronin,J. and Taylor,S.(1992).Measuring service quality: a reexamination and extension. Journal of marketing.56 (3):55-68

12. Davis, T. (1984), “The Influence of the Physical Environment in Offices”, Academy of Management Review 9, 271-83.

13. Harrell, G., Hutt, M. and Anderson, J. (1980), “Path Analysis of Buyer Behavior under Conditions of Crowding. Journal of Marketing Research”, 45 -51.

14. Hutton,J.and Richardson,L.(1995). Health Scapes: The role of the facility and physical environment on customer’s attitudes, satisfaction, quality assessments, and behaviours. Healthcare Management Review

15. Kotler. (2007), Atmospherics as a marketing tool, journal of retailing, Vol.49, No.4, 48-64 16. Kurtich, J., and Eakin, G. (1993). Interior Architecture. New York: Van Nostrand Reinhold Publishers. 17. Milliman, R. (1986),“The influence of background music on the behavior of restaurant patrons”, Journal of

Consumer Research 286–289. 18. Morrow, P. and McElroy, J. (1981), “Interior Office Design and Visitor Response: A Constructive

Replocation”, Journal of Applied Psychology. 66 (5), 646-50. 19. Namasivyam, K. and Lin, I. (2008), “The servicescape”, in Jones, P. (Ed.), The handbook of Hospitality

Operation and IT .New York: Elsevier Publishers. 20. Oliver,R..,(1980).Acognitive model of the antecedents and consequences of satisfaction decisions. Journal

of Marketing Research 17,460-469 21. Parasuraman, A., Berry, L. and Zeithaml,V. (1985),Aconceptual model of service quality and its

implications for future research, Journal of marketing,49(3)41-50 22. Reimer, A, and Kuehn, R, (2005), the impact of servicescape on quality perception, European journal of

marketing, 39(7/8)785-808 23. Russell, J. and Snodgrass, D. (1987), “Emotion and the Environment”, in Handbook of Environmental

Psychology, Daniel Stokols and Irwin Altman, eds. New York: John Wiley & Sons, Inc., pp.245-81. 24. Steele, F. (1986), Making and Managing High-Quality Workplaces, New York: Teachers college Press. 25. Sundstrom, E. and Altman, I. (1989), “Physical Environments and Work-Group Effectiveness”, Research in

Organizational Behavior 11, 175-209. 26. Sundstrom, E. and Sundstrom, M. (1986), Work Places. Cambridge, UK: Cambridge University Press. 27. Tombs, A., and McColl-Kennedy, J., (2003), “Customers as Spatial and Social Influencers on other

customers in the social-servicescape”, in Kennedy, R. (Ed.). Proceedings of the Australian and New Zealand Marketing Academy Conference, Adelaide: University of South Australia.

28. Ward, J., Bitner M., Barnes, J., and Gossett, D. (1989), “SEEM: Measuring the Meaning of Service Environments” in De-signing a Winning Service Strategy, Mary Jo Bitner and Lawrence A. Crosby, eds. Chicago: American Marketing Association, pp. 34-39.

29. Wener, R.. (1985), “The Environmental Psychology of Service Encounters”, in The Service Encounter, John Czepiel, Michael Solomon, and Carol Surprenant, eds.Lexington, MA: Lexington Books, pp.101-12.

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32. Yalch, R. and Spangenberg, E. (1988), “An Environmental Psychological Study of Foreground and Background Music as Retail Atmospheric Factors”, in Efficiency and Effectiveness in Marketing AMA Educators' Proceedings, Gary Frazier et al., eds. Chicago: American Marketing Association, pp.106-110.

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An Assessment of the role of financial literacy on Performance of

Small and Micro Enterprises: Case of Equity Group Foundation

Training Program on SMES in Njoro district, Kenya

Jacqueline Siekei (Corresponding author), Juma Wagoki & Aquilars Kalio Jomo Kenyatta University of Agriculture and Technology, Kenya


Abstract The purpose of this study was to assess the effects of the financial literacy education on performance of small and micro enterprises in Njoro District where the program was implemented since 2011. The study investigated the financial literacy skills imparted, and their role on performance of small scale enterprises. Specific objectives of the study were: to establish how book keeping skills influence performance of MSEs under that EGF financial literacy programme in Njoro District, to establish the effects of credit management skills on performance of SMEs under EGF financial literacy programme in Njoro District and to find out how budgeting skills affect performance of SMEs under that EGF financial literacy programme in Njoro District. Descriptive survey research design was used to guide the study. The target population for the study was 467 beneficiaries of equity group foundation project in Njoro District. A sample size of 82 was selected random sampling technique. Primary data was obtained using questionnaires administered to the selected program beneficiaries. Data collected was then organized, coded and entered in the computer for analysis. Analysis was done using frequency counts, percentages, means and standard deviation, t-test was used to analyses the difference in performance before and after training. The study found out that: the program emphasized on budgeting, financial analysis, credit management and book keeping skills; indeed there was a significant improvement in revenue performance of small enterprises whose managers had attended the financial literacy programme. Credit management skills obtained through the financial literacy programme enhanced performance through acquisition of credit financing, and management of loan portfolios to ensure that loan liability was minimized and interest expenses minimized. Budgeting skills significant roles in growing sales, profits and ensuring smooth running of the business. The impact of this programme is evident in enhancing business performance. The government should therefore fund the mainstreaming financial literacy training programmes throughout the country as a strategy for enhancing small and micro enterprise performance. Key Words: The role of financial literacy, Performance of Small and Micro Enterprises, Equity Group Foundation Training Program, SMES, Njoro district 1. Introduction

Micro Small and Medium Enterprises (MSMEs) form more than 99% of all enterprises in the world (Capital Markets Authority, 2010). Small and Micro Enterprises (SMEs) allow the rural poor, including some of the



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most marginalized and vulnerable people such as rural women, youth, and the landless to diversify their incomes, create new sources of economic growth and generate additional employment (including self-employment) in rural areas. The same strata may also be reached through SME support to small-scale local entrepreneurs, whose business expansion can create new jobs for the rural poor (IFAD, 2008). Therefore the global economy is heavily dependent on the success of the MSME sector. The significance of Kenya’s micro and small enterprises (SME) activity in developing Kenya’s economy has continued to grow since the sector was first brought to the limelight by the International Labour Organization (1972). ILO provided the basis for the study of MSE in Kenya under the informal sector. It is now widely recognized that the promotion of the SME sector is a viable and dynamic strategy for achieving national goals, including employment creation, poverty alleviation and the balanced development between sectors and sub-sectors. The findings of the 1993 SME Baseline Survey underscored the important role that SMEs play in Kenya’s development process, particularly in the context of generating employment and income opportunities for majority of poor people throughout the country.

Indeed, the MSE sector provides employment for substantially more people than does the formal sector. It is estimated that there are 7.5 million SMEs in Kenya, providing employment and income generation opportunities to low income sectors of the economy (CMA, 2010). The sector’s contribution to the Gross Domestic Product (GDP) has also grown from 13.8 per cent in 1993 to about 40 per cent in 2008 and the sector continues to grown to date. The latest Economic Survey (2012) indicates that the informal sector which comprises of the SMEs has contributed 80.8 per cent of total employment created (KNBS, 2012). The potential associated with the SME sector has been positively adopted by the government and other development partners in economic development, increasing wealth creation and fight against poverty and in employment creation.

The economic pillar of Kenya’s Vision 2030 identifies SME development as a key strategy to propelling the country to a middle income economy by the year 2030 through equity and poverty elimination to reduce the number of people living in absolute poverty to the tiniest proportion of the total population. Other development involved includes the United States Agency for International Development, International Fund for Agricultural development (IFAD), Germany Technical Institution (GTZ), commercial banks, and Microfinance institutions. In order to overcome some of the constraints associated with financial management in the SME sector, the government and other relevant stakeholders have designed programmes and policies that are market driven and market non-distorting to support SMEs. Government has, for example, created stable macroeconomic conditions, liberalized the economy, and encouraged the growth of micro-financing business. The SME Act (2011) was also enacted to guide especially in the provision of credit, and capacity development for micro small and medium enterprises in the country going forward to attaining vision 2030 (Republic of Kenya, 2012) In response to the financial challenges affecting micro and small enterprises, the Equity group foundation (EGF) financial literacy program was born. Equity Group Foundation was founded in 2009 with its main purpose being to develop and grow initiatives with significant social impact by harnessing Equity Group‘s banking capabilities and capacities and through effective partnerships. EGF‘s overall goal was to transform the socio-economic status of 50 million people in Africa over the next five years.

One of these initiatives by the EGF is to provide financial education and entrepreneurship training to low income people groups across the country. Equity Bank has been providing financial education to youth and women micro entrepreneurs in their Group Lending Program (GLP) thereby mainstreaming it to cover groups that were not part of the group lending programme (Equity group Foundation, 2009).

Financial literacy provides is knowledge and understanding of financial concepts and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range


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of financial contexts and to improve the financial well-being of MSEs (Hogarth, 2002). The programme has been implemented since 2009 providing basic financial information with a view to enabling them address the financial challenges, provide a platform for enterprise performance, growth, and sustainability.

Micro, Small and Medium enterprises form the backbone of global economy as they form 99% of all the enterprises in the world (Capital Markets Authority, 2010). In Kenya, MSEs contribute over 80% of the country’s employment and over 40% of the country’s GDP (KNBS, 2012). The sector, however, is characterized by a number of challenges related to access to financial resources which translate to impediments in enterprise growth. Despite the role played by the sector, it been characterized by a number of challenges. Wanjohi (2011) cites lack of adequate business skills as a major challenge in the development and growth of Micro and small enterprises in Kenya which is mainly attributed to low levels of education. The CMA (2010) has also identified that SMEs in Kenya suffer from constraints that lower their resilience to risk and prevent them from growing and attaining economies of scale. Challenges associated with access to financial resources are constrained by both internal and external factors.

Internally, most SMEs lack creditworthiness and management capacity, so they have trouble securing funds for their business activities such as procuring raw materials and products, and investing in plant and equipment. From the external perspective, SMEs are regarded as insecure and costly businesses to deal with because they lack required collateral and have the capacity to absorb only small amount of funds from financial institutions. So they are rationed out in their access to credit because of high intermediation costs, including the cost of monitoring and enforcement of loan contracts.

A number of initiatives have also been advanced by the government, NGOs, and the private sector aiming at increasing access to affordable credit, and financial management to enable MSEs efficiently manage finances in their businesses. However, it is not clear whether these initiatives on financial literacy education have translated to better management of finances among MSEs, improved enterprise performance and improved access to loan capital. The EGF financial literacy program is relatively new and its effects need to be examined. In light of this, the current study seeks to assess the effects of the financial literacy education on access to credit by MSEs trained under the equity group foundation financial literacy program in Njoro District. The general objective of the study was to assess the role of the financial literacy education on performance of SMEs under the equity group foundation financial literacy program in Njoro District. The study was guided by the following specific objectives: a) To establish how book keeping skills influence perfomance of MSEs under that EGF financial literacy programme in Njoro District. b) To establish the effects of credit management skills on perfomance of SMEs under EGF financial literacy programme in Njoro District . c) To find out how budgeting skills affect perfomance of SMEs under that EGF financial literacy programme in Njoro District. 2. Literature review

Financial Literacy Theory Financial literacy theory argues that the behavior of people with a high level of financial literacy might

depend on the prevalence of the two thinking styles according to dual-process theories: intuition and cognition. Dual-process theories (Evans 2008) embrace the idea that decisions can be driven by both intuitive and cognitive processes. Dual-process theories have been studied and applied to many different fields, e.g., reasoning and social cognition (Evans 2008).

Financial literacy remains an interesting issue in both developed and developing economies, and has elicited


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much interest in the recent past with the rapid change in the finance landscape. Atkinson and Messy (2005) define financial literacy as the combination of consumers’/investors’ understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being (Miller et al., 2009). Financial literacy helps in empowering and educating investors so that they are knowledgeable about finance in a way that is relevant to their business and enables them to use this knowledge to evaluate products and make informed decisions. It is widely expected that greater financial knowledge would help overcome recent difficulties in advanced credit markets. Financial literacy prepares investors for tough financial times, through strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance.

Financial literacy facilitates the decision making processes such as payment of bills on time, proper debt management which improves the credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems, and poverty reduction. It also provides greater control of one’s financial future, more effective use of financial products and services, and reduced vulnerability to overzealous retailers or fraudulent schemes. Facing an educated lot, financial regulators are forced to improve the efficiency and quality of financial services. This is because financially literate investors create competitive pressures on financial institutions to offer more appropriately priced and transparent services, by comparing options, asking the right questions, and negotiating more effectively. Investors on their part are able to evaluate and compare financial products, such as bank accounts, saving products, credit and loan options, payment instruments, investments, insurance coverage, so as to make optimal decisions (Miller et al., 2009).

Greenspan (2002) argues that financial literacy helps to inculcate individuals with the financial knowledge necessary to create household budgets, initiate savings plans, and make strategic investment decisions. Proper application of that knowledge helps investors to meet their financial obligations through wise planning, and resource allocation so as to derive maximum utility. Hilgert et al., (2003) asserts that financial knowledge appears to be directly correlated with self-beneficial financial behavior. Equity bank (2012) in an article dubbed Equity Bank steps up its Kshs 1 Billion bid to boost financial literacy has details on a project carried out by Equity Group Foundation in conjunction with The MasterCard Foundation that was started to impart personal and business finance skills to more than 1million Kenyans particularly the youth. The training project dubbed Financial Knowledge for Africa (FIKA) exposes participants to basic economic concepts and helps them to gain an understanding of how to use a range of financial services - such as savings, insurance and credit products. The program builds their financial capacity through a comprehensive 12-week financial education program - covering budgeting, savings, debt management, financial negotiations and banking services. This programme pioneered by Equity Group Foundation is aimed at ensuring that the community appreciates the dynamics of finances particularly now that immense resources are being channeled to youth, women and even SMEs.

PNB (2011), in a corporate social responsibility report on realizing the objective of achieving “financially inclusive growth”, they say that the biggest challenge is improving financial literacy so that borrowers could take informed decisions. Bank's extensive financial literacy programmes overcomes this problem by reaching thousands of customers and small entrepreneurs. As per the RBI guidelines, each Lead Bank is expected to open a Financial Literacy and Credit Counseling Centre (FLCCCs) in every district where it has lead responsibility. Financial counseling through face-to-face interaction with interested individuals is provided at these centres. Financial education imparted includes importance of responsible borrowing, financial planning and information about various financial products and services. Besides, debt counseling is provided for amelioration of


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debt-related distress of any individual. G20 Seoul Summit (2010) states that information asymmetry arising from SMEs’ lack of accounting records,

inadequate financial statements or business plans also makes it difficult for creditors to assess the creditworthiness of potential SME proposals. As the lack of financial literacy, operational skills, including accounting and finance and business planning represents formidable challenge for MSE borrowers, we have, on August 1, 2012, advised banks to play a more proactive role in the affairs of their SME clients by providing them with financial literacy and consultancy support. For this, banks could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. We have also stated that the bank staff should be trained through customized training programs to meet the specific needs of the sector.

Berry (2006) said that although the external environment presents some of the key challenges in SME financing, such businesses’ internal resources must not be overlooked. Of these, perhaps the most important is the knowledge and social capital that exists within each business. It is important to remember that while levels of education often influence entrepreneurial ambition – with the more educated likely to have a higher desire to start a business – this ambition does not translate to higher levels of education among the actual business owners, as education improves their employment prospects (Zwan et al., 2010). In fact, formal enterprise or management training is rare among business owners, creating a significant skills gap common in both developed and less developed economies.

This skills gap invariably affects owners’ ability to obtain finance – from knowing how to present a business plan and being able to navigate through the available financial products, to knowing how to apply business skills and acumen to manage and develop their business with a strategic approach to its operations, and ultimately finance. There is a significant role for the accountancy profession in addressing this challenge. Applying their broad-based knowledge in accounting and business, accountants are perfectly placed to work with governments and other relevant institutions, such as SME bodies, to provide financial literacy and management training for owner-managers. ACCA already has a good track record in organizing its members to run financial clinics, and in many part of the world this grassroots engagement is the most authentic and effective means by which the skills of the SME sector can be improved. The Forum urges international organizations to work with national governments to encourage much wider use of such initiatives to raise the level of skills, with a particular emphasis on working with the existing SME intermediaries to enable reliable access to the sector.

George (2008) state that when clients borrow multiple loans from multiple sources, that is, MFIs and other formal and informal providers, juggling repayment schedules, and making sure that the credit is used to its best advantage adds a level of complexity that can be very challenging to manage. Under such circumstances, forward looking financial strategies are necessary, and these require specific knowledge, skills and attitudes about financial management. Here comes the role of financial education. Most people learn to manage personal and household finances by trial and error. Financial education teaches the Knowledge, Skills and Attitudes (KSA) that are required for adopting good money management practices associated with spending, earning, saving, borrowing and investing money. Anticipated outcomes include changes in client behaviors and practices in money management such as saving regularly, making a budget, and working towards a financial goal. The changes lead to increased savings, reduced debt and less financial stress. The aim of the Financial Literacy is to increase the members’ assets, reduce liabilities and therefore increase their net-worth.

Lack of business and management skills can magnify financial barriers for SMEs. Low levels of financial literacy can prevent SMEs from adequately assessing and understanding different financing options, and from navigating complex loan application procedures. Similarly, the fact that SMEs’ accounting and financial


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statements are often not transparent makes them risky borrowers and thus less attractive to lenders. Capacity building of SMEs in terms of preparing financial statements and business plans, as well as improving their financial literacy and management training, is shown to have positive impact on SME development. Furthermore, strengthening the horizontal linkages with other SMEs and vertical linkages with larger firms would improve SMEs’ market access. (Hogarth et al., 2002).

Book Keeping in SMEs Many new business owners are daunted by the mere idea of bookkeeping and accounting. But in reality,

both are pretty simple. Bookkeeping and accounting share two basic goals: to keep track of income and expenses, this improves chances of making a profit, and to collect the financial information necessary for filing various tax returns. There is no requirement that records be kept in any particular way. As long as your records accurately reflect the business’s income and expenses.

There is a requirement, however, that some businesses use a certain method of crediting their accounts: the cash method or accrual method. Depending on the size of the business and amount of sales, one can create own ledgers and reports, or rely on accounting (Williams et al., 1993). An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. Financial transaction flows encompass primarily inflows on account of incomes and outflows on account of expenses. Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups i.e. assets, liabilities, and equity. Within these primary groups each distinctive asset, liability, income and expense is represented by respective “account”. An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they represent only the inflows and outflows absorbed in the financial-position elements on completion of the time period (Williams et al., 2008).

There are account types that include real accounts which represent physically tangible things in the real world and certain intangible things not having any physical existence. Examples of tangible things are: plant and machinery, furniture and fixtures, computers and information

Financial Analysis SMEs are a large contributor to global economies and their importance is noted in every country. SMEs

make a substantial contribution to the economy in terms of job creation, GDP, investment and social welfare (Nieman, 2006). According to the African Development Bank (2005), SMEs contribute more than 55% of total employment and 22% of the Gross Domestic Product in South Africa. Since they are so important to the economy, their creation is very important as it a positive move towards economic growth. However there is a need to keep these SMEs in operation and avoid failure. Lack of skills has been a major challenge to the SMEs (Smith and Perks, 2006) and skills acquisition through training can provide a long lasting solution to the survival battle of the SMEs.

Due to various reasons, some SMEs end up closing down business at an early stage. This could result from the view that the entrepreneur miscalculated the opportunity, and unforeseen threats that are too big for the business to overturn, lack of essential information on running the business and lack of proper funding of the business(Chimucheka and Rungani, 2011; Monk, 2000). There are a lot of other issues that may appear insignificant when the business is launched but will overpowering the business at the end, and eventually leading to its downfall. Seemingly there is a lot that needs to be done in all fields that may prevent the loss of jobs, revenue and increase of poverty in the communities by preventing failure in the SMEs. Apart from the financial problems that may affect the businesses, the input of the owner and the business skills (Smith and Perks, 2006) are very important in keeping the business afloat. There is therefore a need for a study that provides a rigorous


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and systematic analysis of entrepreneurial and business skills and training needs in the Plastic Manufacturing Industry in the Eastern Cape Province of South Africa.

The purpose of this study is to examine the important financial analysis skills including financial risks management. This study will help new SMEs in the industry to be able to survive and keep growing finances, thus benefiting the province in development, employment and the country in revenues. These skills do not only promote business and manufacturing efficiency success but also efficiency and benefit the country at large. Therefore, it is, of great importance to assess and specify success factors that promote efficiency and survival of SMEs that could serve as benchmarks for emerging SMEs. It goes further to assess whether training can play role in the acquisition of these skills by entrepreneurs.

Credit Management Idowu (2010) claim that a major barrier to rapid development of the small and medium enterprises sector is

a shortage of both debt and equity financing. Accessing finance has been identified as a key element for small and medium enterprises to succeed in their drive to build productive capacity, to compete, to create jobs and to contribute to poverty alleviation in developing countries. Small business especially in Africa can rarely meet the conditions set by financial institutions, which see small and medium enterprises as a risk because of poor guarantees and lack of information about their ability to repay loans Idowu (2010). Without finance, small and medium enterprises cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger firms Idowu (2010). According to Cork and Nisxon (2000), poor management and accounting practices are hampering the ability of smaller enterprises to raise finance. This is coupled with the fact that small businesses are mostly owned by individuals whose personal lifestyle may have far reaching effects on the operations and sustainability of such businesses according to (Idowu, 2010).

Given the myriad of challenges faced by SMEs and the central role played by their managers, who are often the owners of the business, having a sound credit management skills cannot be over emphasized. A number of researchers such as García (2005) and Pansiri and Temtime (2008) have found that a lack of appropriate skills for SME owner managers is one of the main causes of failure for SMEs. Fatoki and Odeyemi (2010a) define managerial competencies as sets of skills, attitudes, behaviours and knowledge that contribute to the effectiveness of an individual. According to these two authors, managerial skills play a key role in the success of small enterprises as they determine its growth. Likewise, (Fatoki and Asah, 2011) point out that lack of managerial skills, personal qualities and skills are major contributors to the failure of firms. Lack of managerial competence reduces the ability to develop sound plans and strategies for effective management of SMEs. Fatoki and Odeyemi (2010a) explain that managerial skills influence business planning as well as the ability of the firm to obtain knowledge regarding sources of finance and means of obtaining it. As such, managerial skills do affect access by new small firms to financing. 3. Methodology

Research Design The research design adopted was a descriptive survey. This study sought to understand whether financial

literacy education translates to better finance management and access to credit for business expansion. It only intended to analyze the opinions from financial literacy education beneficiaries solicited by use of questionnaires before generalizing the findings.

Target Population

The study population for this study was all the 467 beneficiaries of equity group foundation through financial literacy education. This district was chosen because currently it has a large number of beneficiaries


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some of whom have successfully undergone the literacy education while others are ongoing. The area also encompasses enterprises from varied economic sectors such as agriculture, trading, manufacturing and even microcredit schemes.

Sample and Sampling Technique The sample size was 82 beneficiaries of EGF financial literacy program, in Njoro district. Stratified random

sampling technique was used in selecting respondents into the study sample. This was important especially in ensuring equal representation of women owned, and youth owned enterprises. The three strata to be included are the women owned enterprises, youth owned enterprises and the men owned enterprises.

Data Collection Instruments The study relied on primary data obtained from SMEs owners. Their opinions were sought using structured

questionnaires. The questionnaire sought information on the financial literacy skills imparted to SME owners, the level of application of these skills and their effects on financial performance of the business. All these were contained in separate sections. Questionnaires were preferred in this study because they allow investigation with an ease of accumulation of data in a highly economical way

Data Collection Procedure In collecting data, the researcher first obtained an introductory letter from the Graduate school of Jomo

Kenyatta University of Agriculture and Technology, Nakuru. The researcher then sought permission from the EGF financial literacy programme coordinator in Nakuru to seek guidance and introduction to the trainers and programme beneficiaries. The researcher then personally paid a field pre-visit to the study site, Njoro District, to familiarize with the study area. Sampling was then done and questionnaires administered to the selected respondents.

Data Analysis Data was analyzed using descriptive statistics such as frequency counts, percentages, means and standard

deviation. T-test analysis was then used to establish the difference in performance of businesses before and after the training. 4. Findings

Summary of Findings Book Keeping Skills in Performance of SMEs

The study established that, the book keeping skills acquired through the EGFFL programme were average in all the skills explored. The skill that is mastered the most was in the general establishment of business records followed by analysis to establish the business performance. On the other hand, the least rated skill acquired was on the setting up of financial controls system from the record system majority and accuracy in transaction recording, with slightly above half of the respondents indicating that they had implemented the book keeping skills acquired. Again this could be an indicator of lack of practicability of the skills obtained or EGF and low level of follow – up to ensure that the skills were well implemented. However those who implemented these skills found some notable improvement in business performance resulting from improved ability to better track of business events from the record systems. Financial analysis skills in Performance of SMEs

After proper record system is put in place, businesses require proper analysis to ensure that business performance is tracked on an ongoing process and that the business is on track, if not, informed decisions are made. The general self rating on the financial analysis skills among the beneficiaries of EGFFL training was low and this is evident in that, most rated themselves below average in all the financial analysis skills. The highest rated skill was on the analysis of cash outflows, preparation of income statements, and statements of liabilities


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and assets of the business which essentially refer to balance sheets preparation. The least was on filing of tax returns. This raises concerns especially in the current business world where the government has implemented stringent measures on tax compliance and introduced taxes in all sectors of the economy. Despite the provision for training on financial analysis which is a crucial skill in business, majority of the trainees did not understand the concepts behind financial analysis, therefore could not translate them into full use. Proper financial analysis enabled SMEs in Njoro to make accurate decisions that would help them grow their business better. The ability to analyze the financial performance enables the business owner to make more viable business decisions that enhance performance and growth of the business. Credit management skills in Performance of SMEs

Various credit management concepts were taught at the EGFFL training programme. Key among them being the calculations on interest rates, loan portfolio management and improving access to finance. On the side of beneficiaries, they found rated themselves highly on the skills acquired on loan utilization and how to enhance access bigger credit facilities and credit analysis and essential loan records management. However skills obtained on calculation of loan interests and legal issues ranked low. This implies that although the credit management skills offered through the EGFFL programme provides the basic information on credit management, and omits essential credit management knowledge such as assessment of interest rates. These have a longterm effects on the financial performance of these businesses. Also it can be observed that the financial analysis skills could have focused more on individual finances and omitted business finances.

The skills on credit management assisted SMEs acquire loan facilities for their businesses after the training. Already, majority of the SMEs have obtained credit facilities from Micro credit schemes, micro finance institutions and banks to boost their business finances. As a result of the credit management skills, SMEs have acquired credit for the purchase of assets for their businesses. The credit management skills also assisted SMEs to manage loan portfolios, cutting down the amount they paid as interest rates by which translated to better profitability for their businesses. Budgeting Skills Performance of SMEs

Budgeting skills were highly emphasized in all financial literacy training, and all beneficiaries had acquired the skill. However, on the level of skill acquired, generally the beneficiaries rated themselves at an average. Beneficiaries were key on acquiring skills on profit planning, planning for business financing and cash flow. The moderately low level of budgeting skills imply that, although the skills are emphasized during the training, the content may not be sufficient in handling the planning aspects in SMEs, or the focus was more on personal budgeting rather than business. Budgeting skills acquired however played a key role in enhancing the performance of SMEs. Majority of the beneficiaries identified that the budgeting skills assisted them in increasing sales. They also assisted in growing their business profitability by providing a basis of establishing performance targets. Budgeting also contributed towards ensuring smooth running of the business Effects of the Financial Literacy Skills on Performance of SMEs

After attending the financial literacy programs, businesses earning revenues of Ksh 8999 and below declined, while those earning Ksh 9,000 and above increased. For instance, before training, 45.2% earned Ksh 3000 – 5999 while after training, 19.2% earned the same amount of revenues. Before training 20.6% earned Ksh 12,000 and above while after training the number increased to 37.0%. Paired t-test was done on revenues before training and revenues after training, to establish whether financial literacy training had any significant impact. The test results are shown on the table below.


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Table 4.1: Paired Samples Test on revenues before and after financial literacy training

The test results shows that there was a significant change in revenues with t(72) = 3.325, P < 0.01.

Revenues improved significantly after training. Therefore H0 is rejected and H1 adopted. Financial literacy training led to a significant improvement in financial performance of SMEs especially on revenues. 5. Conclusion and recommendations

The study therefore makes the following conclusions: Financial literacy skills acquired through the EGF contributed a lot in enhancing performance of SMEs who were part of the program. There is also a significant improvement in revenues for SMEs whose owner managers attended the training. Although the level of skills acquired in book keeping was not high, the skills obtained influenced performance of SMEs, by providing them with mechanisms for tracking performance, and accurate decision making. Financial analysis skills obtained was slightly lower perhaps due to the difficulty in financial concepts underlying financial analysis in business. Proper financial; analysis enabled the SME owner managers to make informed decisions on their business especially on growth strategies. Credit management skills obtained through EGFFL played key roles in enhancing performance of SMEs through facilitation to acquire credit financing, and management of loan portfolios to ensure that loan liability was minimized and interest expenses minimized. Budgeting skills taught through financial literacy programmes also played significant roles in growing sales, profits and ensuring smooth running of the business Therefore the study recommends the following: Owing to the success of the EGF financial literacy training programme, equity group foundation should mainstream the programme to enhance the financial literacy training programme in geographical coverage since it plays a key role in enhancing performance and growth of SMEs which are key drives to economic development in Kenya. The design of financial literacy programme and the mode of delivery are not comprehensive enough. This presents an impediment towards full mastery of the financial concepts for proper implementation. Therefore, the financial concepts should be broken further, and more effective methodologies adopted in delivery. The impact of this programme is evident in enhancing business performance. The geographical coverage of EGF in implementing the programme may be limited by the financial capacity of the company as this is implemented as a CSR activity. The government should therefore fund the mainstreaming financial literacy training programmes throughout the country as a strategy for enhancing SME perfomance.

Paired Differences

T df Sig.

(2-tailed) Mean Std. Deviation

Std. Error Mean

95% Confidence Interval of the Difference Lower Upper

Pair 1

monthly revenues after training - Monthly revenues before training

0.56164 1.44324 .16892 .22491 .89838 3.325 72 .001


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Factors Affecting Effective Management of the procurement

Function at Nakuru North Sub-County

Arbe Bashuna Jomo Kenyatta University of Agriculture and Technology


Abstract Procurement function plays a pivotal role in the performance of the public sectors in Kenya. However, it is worth noting that for the function to realise its aims properly it has to be effectively managed. Past studies show that the management of the procurement function is affected by a myriad of factors. The purpose of this study was to assess selected factors affecting effective management of the procurement function at Nakuru North Sub County Procurement Unit. This study carried out a census in the procurement units among departmental heads from all the 30 Ministry departments. The specific objectives guiding the study involved finding out how project financing, accountability, ICT adoption, internal processes and internal control system affect the procurement function at Nakuru North Sub County Procurement Unit The design involved a process of collecting data in order to answer questionnaires concerning the current status of the subjects which include behaviour, attitudes, values and characteristics in a study. Data was collected from the departmental heads of all Ministry departments using questionnaires containing structured and unstructured questions administered personally by the researcher. Data collected were analyzed for descriptive statistics mainly frequencies and percentages; and Pearson Product Moment Correlation using the Statistical Package for Social Sciences. The findings were presented in the form of tables. The study findings show that the management of the procurement function was found to be slightly effective. This was greatly attributed to Project financing, Accountability, ICT adoption and the internal control system as applied in departments. The study thus, recommends that the Government should consider reviewing its policy in respect to project financing especially on funds adequacy and timeliness. Consideration should also be made on improving on ICT adoption and strengthening the internal control system Key Words: Effective Management of the procurement Function, Nakuru North Sub-County 1. Introduction

Procurement is a key function of any organisation, public or private and in an era of globalisation with the advent of entrepreneurial organisations, management of purchasing and supply in private as well as in public sectors has gained more prominence. All procurements regardless of their value or complexity follow a standard sequence of actions, which need to be effectively managed to realise the objectives of the procurement function. Effective management of the function prevents the possibility of poor performance and when attributed to non-adherence to proper procurement processes and procedures; is an indicator of poor management of the

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procurement function (Knight, Harland, Telgen, Thai, Callender, and Mcken, 2007 cited in Kakwezi and Nyeko, 2010).

Andreasen (2012) in a study by on case companies in Denmark, concludes that the management of the procurement function is quite involving since, procurement processes are complex, given the fact that they involve the completion of a series of activities, such as qualifying new suppliers, procuring different types of inputs, and monitoring supplier performance, that cut across both functional boundaries and organisational boundaries. This is also the case across the world, more so, in developing countries, especially in Africa where the management of the procurement function is dynamic. The dynamic explosion of technology, the shifting demands of consumers, and the new structures of markets combine to convert the world of purchasing into one of change and innovation. The purchasing agent of today is a specialist, a technologist, and above all, a skilled and competent manager. He/she must understand the complexity and change which surround this task (Andreasen, 2012).

Procurement encompasses the whole process of acquiring property and/or services. It begins when an agency has identified a need and decided on its procurement requirement. Procurement continues through the processes of risk assessment, seeking and evaluating alternative solutions, contract award, delivery of and payment for the property and/or services and, where relevant, the ongoing management of a contract and consideration of options related to the contract. Procurement also extends to the ultimate disposal of property at the end of its useful life (Waters, 2004).

Public procurement systems are central to the effectiveness of development expenditure. Budgets get translated into services largely through the governments’ purchases of goods, services and works. It is estimated that 18.42% of the world’s Gross Domestic Product (GDP) is spent through public procurement (Mahmood, 2010). It is further estimated that public procurement accounts for 9%–13% of the GDP of the economies of developing countries. In Angola, public procurement accounts for 58%, it accounts for 70% of public spending (Thai, 2001), 40% in Malawi, , 58% in Angola, 70% of Uganda’s public spending (Basheka and Bisangabasaija, 2010), and 60% in Kenya (Akech, 2005). But the area of procurement is increasingly prone to internal factors (Trionfetti, 2000). The study aims at evaluating the factors affecting effective management of the procurement function in public sector with specific reference to Nakuru North sub County, Kenya.

In the past decades, the public procurement system in Kenya has undergone significant developments. From being a system with no regulations in the 1960s, and a system regulated by Treasury Circulars in the 1970s, 1980s and 1990s, the introduction of the Public Procurement and Disposal Act (PPDA) of 2005 and the Procurement Regulations of 2006 has introduced new standards for public procurement in Kenya. Like any other system, the procurement system has inputs, a process referring the procurement cycle and outputs. The factors investigated in this study are considered to affect various levels of the procurement function; the operationalization of the procurement system.

Procuring Entities are responsible for carrying out all the procedures pertaining to the complete procurement cycle. It is important to be familiar with the complete procurement cycle and to ensure that there are effective management procedures in place to properly manage each step (Public Procurement Oversight Authority, (PPOA) 2009). The complete procurement cycle shall include: preparation of procurement plans; preparation of procurement specifications and initiation of the procurement process; preparation of pre-qualification/tender/bid documents; advertisement/initiation of bids; receiving and opening bids; evaluation of bids; adjudication and contract award; notification of contract award; negotiations in areas where applicable; preparation and signing of procurement contract; contract administration; receipt inspection and acceptance of goods, works, services and consulting services; and Storage and Inventory Management (PPOA, 2009).


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According to the PPOA all steps of the procurement cycle must be properly documented with each step being approved by the designated authority. PPOA also ensures that all procurement documentation is properly filed.

The management of public procurement function is vested in the hands of all stakeholders involved throughout the implementation of the procurement cycle (PPOA, 2009). These stakeholders include: Supply chain management officers, Authority to Incur Expenditure (AIE) holders, Suppliers, Finance, Audit, Development Officers and Technical Support Staff. Effective management of the function would require joint / collaborative efforts of all of these stakeholders. This study will be evaluating the factors facing these stakeholders in the management of the procurement function. This study focuses on Nakuru North Sub County in Nakuru County, curved out of Nakuru District in the year 2007. The area has been characterised by cases of incomplete and stalled projects; unutilised funds returned to Treasury; and poorly done projects. These situations are linked to various factors which need to be investigated.

Effective management of the procurement function is a precursor to the performance of the system in achieving its intended objectives in both the public and the private sector. Different procurement functions and responsibilities such as selection, quantification, product specification, pre-selection of suppliers and adjudication of tenders should be properly managed for the function to realise its objectives (Mendoza, 2008). Procurement should be planned properly and procurement performance should be monitored regularly; monitoring should include an annual external audit. A reliable management information system (MIS) is one of the most important elements in planning and managing procurement. Lack of a functioning MIS or the inability to use it appropriately is a key cause of programme failure. There are reports of stalled and abandoned projects, poorly implemented works, and returns of unutilised project funds in various parts of the country. This trend shows that there are factors affecting the management of the procurement function. A Properly constituted and managed procurement should be able to detect the possibility of such occurrences and prevent them. These challenges have also been reported in Nakuru North Sub County, and thus raising a research dilemma to the existence of management challenges faced by the procurement officers.

Research studies mention factors such as accountability ICT adoption, internal operating procedures and internal control system as likely factors to impede or promote the management of the procurement function in the public sector. On the same note, Ngugi and Mugo, (2010) established that that the performance of public procurement function in Kenya is affected by these factor. However, their study did not bring out clearly the issue of how these factors affected effective management of the procurement function. It should be noted that these factors present themselves differently under different operational managerial environment. Given that the management team responsible for manning the procurement function at Nakuru North Sub County operates under a distinct operational environment and has distinct composition, it is important to understand how these factors affect the effective management of the procurement function in this area.

The general objective of this study was to evaluate the factors affecting effective management of the procurement function at Nakuru North Sub-County. To determine how project financing influences the effective management of the procurement function at Nakuru North Sub-County. 1) To assess the effect of accountability on the effective management of the procurement function at Nakuru North Sub-County. 2) To examine how Information Communication Technology adoption affects the effective management of the procurement function at Nakuru North Sub-County. 3) To establish how internal control system influences the effective management of the procurement function at Nakuru North Sub-County.


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How does project financing influence the effective management of the procurement function at Nakuru North Sub-County? What is the role of accountability on the effective management of the procurement function at Nakuru North Sub-County? How does Information Communication Technology adoption contribute to the effective management of the procurement function at Nakuru North Sub-County? How does internal control system influence the effective management of the procurement function at Nakuru North Sub-County?

The procurement function has not been given the recognition it deserves in developing countries, in most public entities, regardless of the effort by the partners like the World Bank, the International Trade Organisation, the United Nations Conference on Trade and Development, the World Trade Organisation and, others (Basheka and Bisangabasaija, 2010). This could be deliberate or sheer ignorance on the value the procurement function could contribute to any Organization. In Kenya a lot of state resources are channeled towards procurement of goods and services, with an aim of ensuring that the full cycle is completed efficiently (Akech, 2005). However, there reports of dissatisfaction with the whole or part of the process of procurement, which are said to subsequently impede successful implementation of government projects. Arguably this failure is widely blamed on the inefficient management of the procurement function. This study established the factors affecting the effective management of the procurement function. Information obtained from the study will be useful to the Government, all procurement units at the Ministry offices and other interested stakeholders for guidance in coming up with a comprehensive policy that is supportive to effective management of the procurement function. The findings may also be useful as reference materials guiding future studies. The study was carried out in the procurement unit at the Nakuru North Sub-County offices among the Heads of Departments from the select user / Ministry departments. These key persons were used for the study given that they were the Authority to Incur Expenditure (AIE) holders; and thus were in a strategic position to provide information sought in the study. The study was expected to be completed within nine months covering the period from January 2013 to September 2013. Some of the respondents were reluctant to provide information sought due to its sensitivity; that is especially, on policy and implementation issues. To overcome this limitation the respondents were assured of confidentiality of information provided and informed of the purpose of the study, which in this case was purely for academic purpose. 2. Literature review

The chapter presents a review of past research studies and publications conducted regarding the effect of Government Finance Policy on the procurement cycle at the procurement units, in the advent of the devolved government system. The chapter contains an overview of Procurement System; Procurement Process; Procurement Cycle 2.1Theoretical Review

This section presents the theoretical framework and conceptual framework guiding the study. This study is supported by the principal agent theory and the general systems theory which are explained below. 2.1.1The Principal-Agent Theory

This study will be guided by “The Agency Theory” as initially put across by Jensen and Meckling, (1976) and later expounded on by Sarens and Abdolmohammadi, (2010). The principal-agent theory is an agency model developed by economists that deals with situations in which the principal is in position to induce the agent, to perform some task in the principal’s interest, but not necessarily the agent’s (Health and Norman, 2004) Donahue,


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(1989) explains that procurement managers including all civil servants concerned with public procurement must play the agent role for elected representatives. This theory will help us to investigate whether procurement managers adhere to the procurement policy that guides the flow in the procurement cycle. The factors affecting effective management of the procurement function present as obstacles to the principal agent relationship that exists between the procurement managers and the stakeholders they represent: the clients and the appointing authority. 2.1.2The General Systems Theory

The most widely employed conceptual framework in the policy sciences is the systems model (Easton, 1953; 1965; Dye 1966), which may be seen as an application of general system theory (von Bertalanffy, 1968) to public policy. For many social science applications, this model is referred to as an “open systems” model, which reflects the idea that all elements of the model are open to influences from the external environment. Thus, outputs and feedback are functions not only of the conversion element, but of other environmental factors as well. In this study, the procurement system is considered to be influenced by factors which include: project financing, accountability, ICT adoption, operating procedures, and internal control system. Thai (2000) adapts the systems model to capture “the whole scope of public procurement” (p. 17). He is particularly concerned to portray the core elements of any procurement system and the relationships between and among them. Thai places the policy-making function with management executives at the top level of a procurement system. This has the effect of discounting the importance of policy roles that may be played in other elements of his model, for example, his “regulations” element or his “operations” element. 2.1.3 Overview of Procurement System

In all countries, governments are significant buyers of goods and services. The value of the contestable government procurement the world over was estimated at $2000 billion in 1998 (OECD Report 2001). Odhiambo and Kamau (2003) points out that this is equivalent to 7% of the world GDP and 30% of the world merchandise. In East Africa, the public procurement market of Kenya and Tanzania reflect a situation in line with the international average. The stakes are therefore very high for the optimal utilisation of public funds in Uganda and indeed the rest of the world. Global effort towards opening up public procurement markets is not a new phenomenon. The GATT negotiations of 1947 rejected subjecting government procurement to GATT guidelines. The arguments were mainly based on ‘nationalistic’ tendencies. The Tokyo Round of 1979 was not successful either. Only a Code on Government Procurement was achieved with only few countries agreeing to be bound. Despite this importance derived from the procurement function most countries in the developing world seem to ignore this fact and fail to monitor the functioning of the procurement system.

After several years of discussion the Uruguay Round, which gave birth to the Agreement on Government Procurement (GPA), is so far the most successful as far as efforts towards opening up government procurement markets are concerned. Assented to by various parties in 1996, the GPA is a plurilateral agreement, requiring its member states to abide by the obligations set out in its framework. The obligations set out in GPA have two dimensions; substantial and procedural. Under the substantial obligations, member countries are required to impress upon the covered purchasing agencies not to give price and other preferences to domestic producers and also not to discriminate against foreign suppliers. That is, transactions that are based on other criteria rather than best value for money should be avoided. Under the procedural obligations member countries are required to put in place a procurement system that is transparent and encourages open competition. The current membership of GPA is 28 (Zanamwe, 2003) most of them developed countries and none from Africa.

Osei- Tutu, Mensah, and Ameyaw, (2011) argue that increasing the effectiveness, efficiency and transparency of procurement systems is an on-going concern of governments and the international development


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community. Performance of the procurement function is measured through its efficiency and effectiveness in meeting procurement aims. All countries have recognized that increasing the effectiveness of the use of public funds, including funds provided through official development assistance (ODA) requires the existence of an adequate national procurement system that meets international standards and that operates as intended. Public procurement is the process whereby public sector organisations acquire goods, services and works from third parties. It includes much that supports the work of government and ranges from routine items (e.g. stationery, temporary office staff, furniture or printed forms), to complex spend areas (e.g. construction, Private Finance Initiative projects, aircraft carriers or support to major change initiatives). It also includes a growing spend where the private and third sectors provide key services directly to citizens in areas such as welfare-to-work, further education, social care and health. Such services may also be provided by the public sector directly, and in some cases even this public provision can be handled through procurement mechanisms. A public body may bid for government work against private sector firms through a formal competitive process (Office of Government Commerce, United Kingdom, 2012). 2.1.4 Procurement Process

Procurement encompasses the whole process of acquiring property and/or services. It begins when an agency has identified a need and decided on its procurement requirement. Procurement continues through the processes of risk assessment, seeking and evaluating alternative solutions, contract award, delivery of and payment for the property and/or services and, where relevant, the ongoing management of a contract and consideration of options related to the contract. Procurement also extends to the ultimate disposal of property at the end of its useful life (Waters, 2004). An effective procurement process ensures the availability of the right goods and services in the right quantities, available at the right time, for the right customers and at reasonable prices, and at recognizable standards of quality (WHO, 2007). Sound public procurement policies and practices are among the essential elements of good governance (KIPPRA, 2006). Otieno (2004) notes the irregular procurement activities in public institutions provide the biggest loophole through which public resources are misappropriated. According to Thai (2001), the basic principles of good procurement practice include accountability, where effective mechanisms must be in place in order to enable procuring entities spend the limited resources carefully, knowing clearly that they are accountable to members of the public; competitive supply, which requires the procurement be carried out by competition unless there are convincing reasons for single sourcing; and consistency, which emphasizes the equal treatment of all bidders irrespective of race, nationality or political affiliation. 2.1.5 Procurement Cycle

All procurements regardless of their value or complexity follow a standard sequence of actions. This is known as the procurement cycle. The cycle involves a series of steps that must take place to supply a production line or to replenish stock in a distribution center. Identifying the items that must be procured and determining the necessary quantities is the first step. This information is used to generate a requisition which is sent to the purchasing department. The assigned buyer requests bids and awards the purchase order to a vendor. When the ordered items arrive, they are entered into the inventory system. The parameters for a procurement cycle may be set by a known production schedule or vary based on consumer demand or other factors. The procurement cycle occurs at the manufacturer/supplier interface and includes all processes necessary to ensure that materials are available for manufacturing to occur according to schedule (Sunil and Meindl, 2004). During the procurement cycle, the manufacturer order components from suppliers that replenish the component inventories. The relationship is quite similar to that between a distributor and manufacturer with one significant difference. Whereas retailer/distributor orders are triggered by uncertain customer demand, component orders


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can be determined precisely once the manufacturer has decided what the production schedule will be. Component orders depend on the production schedule. Thus it is important that suppliers be linked to the manufacturer‘s production schedule. Of course, if a supplier’s lead times are long, the supplier has to produce to forecast because the manufacturer’s production schedule may not be fixed that far in advance. 2.1.6 Procurement Function

Most major companies and even some government organizations have a purchasing or procurement department as part of everyday operations. These departments provide a service that is the backbone of many manufacturing, retail, military and other industrial organizations (Alexis, 2013). Not long ago, purchase function was seen to be a desk job, monotonous paper work, dull and passive and more of an administrative function. The purchase managements were the most affected group whose only aim was to keep feeding shop floor and avoiding stock out situation. Today the situation has changed totally. Procurement function is considered to be a strategic initiative and seen to be adding value to entire business process. Profile of the procurement managers has changed and expectations from these managers are different.

Modern day procurement managers manage procurement and sourcing function both at strategic and operational levels. They are proactively engaged in building supplier networks, estimating, controlling and reducing costs besides performing other functions and ensuring service levels. Their job functions are increasingly becoming cross functional together with supply chain and manufacturing functions. According to KPMG, (2012), the main functions are: to ensure the consistent and optimised management of the purchasing processes; to analyze and provide the necessary business information for decision-making; to implement e-procurement procedures and systems integration with suppliers; to manage the vendor selection and evaluation systems; and to promote innovation in the procurement function.

Procurement function as explained above is one part of the sourcing function. In the Public Sector enabled environment, procurement function consists of detailed indenting process, procurement budget management, purchase order release, shipment schedule planning with seller coupled with ensuring compliance with documentation and system updating processes. Procurement function deals not only with procurement of raw materials and components, but also with capital equipments, project procurement, spare parts procurement for after market, managing rejections, defective returns, warranty replacement process with suppliers too. Vendor development is a key function in procurement. Sourcing and vendor development are some of the skill sets required to be developed by Procurement team. Procurement function works closely with procurement logistics or inbound supply chain. A procurement professional needs to have operational knowledge of logistical activities in supply chain network, the various agencies, knowledge of policies, customs rules, Taxation, commercial, logistical and customs documentation besides knowledge of commercial trade rules and terms (KPMG, 2012). 2.2 Conceptual Framework

The study conceptualises that effective management of the procurement function, the dependent variable, which is measured in terms of project financing, accountability, ICT adoption, internal processes, and internal control system; the independent variables, have an effect on the procurement function. Project financing is measured though adequacy and reliability, while project funds disbursement is measured through aspects like timeliness. Arguably when funds are disbursed late they make the procurement cycle lengthy. The researcher also conceptualises that the soundness of the internal control system has an effect on the effectiveness and reliability of the project cycles. Figure 2.1 presents the conceptual framework.


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Figure 2. 1: Conceptual Framework showing the factors affecting effective management of the procurement function 2.2.1 Project financing and the Procurement Function

Government officials and elected leaders have increasingly come to realize that public agencies must utilize ICT in order to enhance the procurement processes in the public sector. Faced with tight budgets and a retiring workforce, today’s government agencies are operating in an environment defined by the need to ‘do more with less’. Public authorities are expected to provide excellent service to their constituents in an effective and transparent manner, all the while working under constant resource constraints by adopting ICT (Hagén, and Zeed, 2005). This requirement means that if this aspect is underfunded the support it is expected to offer to the procurement cycle will not be realised.

Country Procurement Assessment Report (CPAR), prepared by a team of Government officials, World Bank and donor staff, and national consultants, reveals substantial inefficiency in public procurement and concludes that the principle of “value for money” is not achieved. This is true for both governments financed and donor financed procurement. The main findings of the 2002 Country Portfolio Performance Review of World Bank projects also reviewed slow project implementation and disbursement among other factors due to, a large extent of inadequate procurement planning, non-transparent procurement procedures and poor contract management. Inadequate procurement planning leads to challenges such as insufficient funding and subsequently poor performance of the procurement function.

A review in 2002 of 132 works contracts which constitute an important part of public expenditure indicated that about 84% incurred cost-overruns of up to 30% of the initial amount (World Bank, 2003). Similar findings of public procurement weaknesses attributed to poor financing were recorded in the 1996 Country Procurement

ICT Adoption

Effective management of the Procurement function

Project Financing

Accountability

Public Procurement and Disposal Act

Internal processes Internal Control System

Dependent Variable

Independent Variables

Intervening Variable


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Assessment Report (World Bank, 1996). In Kenya, there have been cases of stalled and incomplete projects due to delayed financing from the Government or insufficient funding linked to lack of foresight. However, there seems to little research on this aspect in the case of public procurement. There is still a knowledge gap on how the procurement process can contribute to improved performance of the procurement function in developing countries. Purchasing efficiency and purchasing effectiveness represent different competencies and capabilities for the purchasing function. CIPS Australia (2005) presents the differences between efficiency and effectiveness. Efficiency reflects that the organisation is “doing things right” whereas effectiveness relates to the organisation “doing the right thing”. This means an Organisation can be effective and fail to be efficient, the challenge being to balance between the two.

Issues to do with timeliness in the disbursement of funds to the government units help in improving the process of procurement. The procurement unit needs to be assured of funds availability before preparing procurement plans and entering into negotiations with the suppliers. This literature fails to recognise delays in financing project as a possible aspect of this factor. A funding mechanism is necessary to maintain a system that, due to the volume and complexities of public procurement, will invariably consume time and resources. Yet, funding from the same source that funds the awards committees will render the distinction between the two irrelevant. 2.2.2 Accountability and the Procurement Function

Public procurement means purchasing of goods, services or public works contracts by the contracting authorities that have been defined in the procurement law. Public procurement must follow the procedures that are stated in the law. Accountability is government's obligation to demonstrate effectiveness in carrying out goals and producing the types of services that the public wants and needs (Segal and Summers, 2002). Public procurement functions’ efficacy thrives on accountability.

Lack of accountability creates opportunities for corruption. Brinkerhoff (2004) identifies three key components of accountability, including the measurement of goals and results, the justification or explanation of those results to internal or external monitors, and punishment or sanctions for non-performance or corrupt behavior. Strategies to help increase accountability include information systems which measure how inputs are used to produce outputs; watchdog organizations, health boards or other civic organizations to demand explanation of results; performance incentives to reward good performance; and sanctions for poor performance. For In South Africa, a district health planning and reporting system was used to improve management control and hold government agents accountable for their decisions. By combining financial and service data, the reporting system drew attention to clinics and programmes that had unusual indicators, and helped officials to explore root causes for performance differences, including possible corruption (Vian and Collins, 2006).

Accountability shows how the public interest has been protected in the expenditure of public funds. Maintaining integrity in public procurement is one of the most important pillars of modern national procurement systems (Barrett, 2000). Ensuring the accountability of procurement officials is perhaps the most essential aspect of this goal. The accountability of procurement officials is not only important from a public or administrative law perspective, but also has economic implications. Transparency in public procurement is about information. The access to key procurement information by civil society, the media and other stakeholders, and the ways in which these actors can use the information, directly affects accountability. Furthermore, transparency is considered a highly cost-effective way of achieving greater accountability (Schapper, 2008).

Accountability constitutes a central pillar of any public procurement system. Without transparent and accountable systems enabling governments and citizens to engage in a mutually responsive way, the vast


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resources channelled through public procurement systems run the danger of increased corruption and misuse of funds. Even in a system with low levels of corruption, public and civic oversight can help identify inefficiencies, thereby increasing procurement efficiency and effectiveness for the benefit of improved service delivery and ultimately citizens. According to Grierson and Needham, (2006) argue that demonstrated accountability and transparency reduces the likelihood of unethical behaviour, reassures the community and instils confidence in all stakeholders concerning the integrity of decisions. According to Wee (2002) ethics are the moral principles or values that guide officials in all aspects of their work. Ethical behaviour encompasses the concepts of honesty, integrity, probity, diligence, fairness, trust, respect and consistency. Ethical behavior includes avoiding conflicts of interest, and not making improper use of an individual's position. Ethical behavior is important in public procurement as it involves the expenditure of public money, and is subject to public scrutiny. Public officials should always behave ethically and fairly, including in their business undertakings.

Ethical behavior supports openness and accountability in a procurement process and gives suppliers confidence to participate in the Government marketplace. Ethical behavior can also reduce the cost of managing risks associated with fraud, theft, corruption, and other improper behavior; and enhance confidence in public administration (Wee, 2002). An important and effective way to maintain ethics awareness in agencies is to provide training for employees (Amos and Weathington, 2008). Ethics training and seminars can be provided, along with training in more specific areas, such as procurement procedures, record keeping, records management, and accountability and administrative law. Regular reviews or audits of procurement processes can be done to ensure probity is being considered and achieved (Amos and Weathington, 2008). Ethics is all about what is morally right and morally wrong, so procurement ethics is concerned with what is morally right in procurement as profession, (Wood, 1995). This is very important in procurement management because procurement staffs deal with suppliers represents the whole organization and that will determine the face of the organization towards the suppliers which may create goodwill or destroy it. 2.2.3 Information and Communication Technology (ICT) Adoption

Government officials and elected leaders have increasingly come to realize that public agencies must utilize ICT in order to enhance the procurement processes in the public sector. Faced with tight budgets and a retiring workforce, today’s government agencies are operating in an environment defined by the need to ‘do more with less’. Public authorities are expected to provide excellent service to their constituents in an effective and transparent manner, all the while working under constant resource constraints by adopting ICT (Hagén, and Zeed, 2005). In order to meet today’s operating challenges, regional and local governments are turning to ICT to enhance the services for residents, businesses and visitors, and improve internal efficiencies by lowering costs and increasing productivity. Public authorities are implementing scalable communication infrastructures to promote economic development, attract new businesses and residents, and above all, provide excellent service to constituents (Abouzeedan and Busler, 2002).

According Kirungu, (2011) in Kenya, manual systems are a source of major inefficiencies in regulation and operations of the function. ICT needs to be adopted to ensure proper functioning of the procurement system. This does not only involve computerization of the system but scaling communication technology. E-procurement system is a product of the new world order where everybody is going digital. With globalization and internet connectivity, there is need to upscale the function in Kenya. The old way of doing business consists of buyers managing forecasts and communicating requirements to suppliers via phone, fax and e-mail. Spreadsheets and manual reports are passed between the trading partners. These manual processes are slow and cumbersome. They cannot support today’s demand-driven enterprises.


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Supply chain procurement professionals spend too much time “putting out fires” and reacting to daily problems (Thomson and Jackson, 2007). They cannot seem to find the time to develop strategic relationships with suppliers and deploy improved business processes that eliminate shortages. Factors that hinders ICT growth in developing nations are Infrastructure, business environment (financial, legal), social factors (such as poverty, illiteracy, urbanization level), educational factors and cultural environment.

Procurement of goods, works, and services through Internet - based information technologies (e-procurement) is emerging worldwide with the potential to reform processes, improve market access, and promote integrity in public procurement”. However, rather than a technical solution, e-procurement should be considered part of procurement reform in general (Schapper, 2008). Studies in other countries show that ICT is a precursor to quality performance of the procurement system. For instance, Kramer, Jenkins, and Katz , (2007) report that the Government of Chile is using ICTs to facilitate the procurement from small businesses using a new business model and this has positively effected on the functioning of the procurement system especially, since the integration of online services in the system. Information access has been improved tremendously due to this. The system in Kenya if properly strengthened through integration of ICT can also yield these benefits.

E-procurement can take many forms, from uploading select information such as tender notices to a website to very comprehensive systems including the entire procurement process. Whatever complexity an e-procurement system might display, using the Internet creates an immediate potential for making information public and widely available and thereby enhance transparency. Still, introducing e-procurement is not without risks. The integrity and security of an Internet - based system can be compromised and there is a risk that erroneous information be uploaded. Further, implementing e-procurement is often seen as the main solution to systemic procurement challenges, but a public procurement system will still require a solid legal and regulatory framework, qualified procurement officers, and an oversight mechanism among others to be well-functioning. 2.2.4 Internal Control System (ICS) and the Procurement Function

Internal controls refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft and misuse of organization resources. Internal Controls are processes designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of the a system such as the procurement system, effectiveness and efficiency of operations and compliance with applicable laws and regulations (Mwindi, 2008).

According to Hayes et al., 2005 internal control comprises five components; the control environment, the entity’s risk assessment process, the information and communication systems, control activities and the monitoring of controls. The likelihood of achievement of the procurement system aims is affected by limitations inherent in all systems of internal control” (Hayes et al., 2005). It therefore important the procurement function is subjected to an effective internal control system. This can be strengthened by organizing seminars to enhance the capacity of procurement staff on compliance to the Procurement standards.

Internal audit provides for purchasing audit. Purchasing audit is a management tool used in assessing how goals and objectives are being met while utilizing organisational limited resources (Van Weele, 2006). The resources are inputs (personnel, budgets, time, and equipment) that need to be used effectively and efficiently in fulfilling different goals and objectives. Effective performance of the procurement function is facilitated by proper planning and budgeting by proper controls, though, this cannot be proved by the research results. The public sector the major “push” is on reducing costs, this focus has consequences on performance. Effective


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procurement function is one that is cost effective and this can be achieved when there are effective internal controls in place. Experience shows that when organisations focus on reducing costs, the quality of goods and services procured suffers, and when organisations focus on quality, costs come down. Seminega (2012) reports that in most developing countries, the Procurement Officers are provided with procurement guidelines, manuals or a handbook which he argues must be complied. A good system will provide room for an effective internal control system subjected to periodic checks. Such a system should include issues related to: organizational structure; record keeping; division and segregation of duties; authorizations and approvals; internal checks; and competency of the staff. He asserts that in order to prevent bad practices in public procurement and contract management and take corrective measures if they happen, the Chief Budget Manager should ensure that the internal control system is in place and communicated to all concerned with public procurement operations. The value of the ICS is emphasised since, the survival and efficacy of the procurement unit and function depends on it. In his survey on the role of ICS on the performance of Rwanda public procurement units, he further, postulates that the internal control system in a procurement unit should ensure the balance between quick decision making and risk control. It should also provide updated information on the respect of standards in order to take appropriate measures. As it emerges in this section it is therefore, important to note that internal control system strengthen the functioning of the procurement system and its omission in the system would compromise the performance of the entire function at the unit. There is however, a gap in literature in respect to the role of ICS in the performance of the Public Procurement function in Kenya (Seminega, 2012).

Tan, Chong and Uchenna, (2009) argue that public procurement has, for long, been overshadowed with inefficiency, corruption and disregard of fundamental "value for money" considerations. This has adversely impacted the rate and quality of progress in realizing the objectives of national development, especially in developing and transition countries (Tan et al., 2009).

Employees may neither engage in, nor give the appearance of engaging in, dishonest or unethical actions. Both are injurious to the public’s perception of honest government. As a government employee, you might have access to procurement and other nonpublic information that could affect a contract bid or the award process (Wymer and Regan, 2005). Improper disclosure of such protected information could violate numerous laws, as well as ethics rules. It also could subject you to administrative actions, as well as civil or criminal penalties. Management in contracting authorities should ensure that there is an appropriate focus on good practice in purchasing and, where there is a significant procurement function that procedures are in place to ensure compliance with all relevant guidelines. Procurement staff, departmental heads and all related stakeholders will need training, particularly in how to resolve dilemmas and competing priorities. Useful monitoring and due diligence tools include Supplier Engagement Forums and supplier questionnaires during tendering and at other stages of the relationship such as contract renewal. Public officials should not accept benefits of any kind from a third party which might reasonably be seen to compromise their personal judgment or integrity. Thomson and Jackson (2007) established that the actions of public officials must be above suspicion and not give rise to any actual or potential conflict of interest and their dealings with commercial and other interests should bear the closest possible scrutiny. Officials involved in procurement must not make improper use of their position (Tan et al., 2009). Officials may have access to very confidential and/or market sensitive information. It is unethical to use inside information provided to the agency as part of a tender process, either for the material benefit of the official or for another person. Criminal sanctions apply to such behaviour. The public procurement system is also influenced by culture and technology. In a culture where giving gifts is a


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common public relation practice, it is difficult to distinguish between gifts and bribes. Moreover, rapidly advanced technology has forced public procurement to (a) adopt new procurement methods, such as the use of e-signature and purchase cards; and (b) be knowledgeable in many aspects and considerations of how to procure information technology. Internal processes need to be properly streamlined and coordinated to function well to generate required objectives. Choosing the supplier, product or subcontractor has an essential role in the potential growth of turnover. How the organisation’s brand is perceived in the market affects the sales numbers. Sometimes the buyer can feel that they are receiving a better product because of a good brand image. This means that the supplier can actually have a positive impact on the decision made by the buyer. It’s important not to forget the power of word of mouth marketing. It’s a factor that can determine whether your product gets chosen over the competitor’s one (Iloranta 2008).

Procurement has direct and indirect costs that clearly affect the effectiveness. The organisational structure, division of work and operation efficiency; are components that modify the effectiveness of procurement function. The procurement processes and procedures have a close relation to other functions on the organisation and on their efficiency as well. 2.2.5 Public Procurement and Disposal Act of Kenya

The public procurement system in Kenya has evolved to an orderly and legally regulated system governed by the PPDA, 2005. Prior to this, in Central Government it was governed by Treasury Circulars from 1969, then the Supplies Manual of 1978, before the promulgation of the Exchequer and Audit (Public Procurement) Regulations, 2001.The PPDA, effective as of 1st January 2007, applies to all procurement of goods, works and services, as well as the disposal of assets by public entities. The Public procurement processes is a complex issue because of the multiple interests and objectives it strives to achieve simultaneously coupled by the multiple regulatory policies and bodes it has to adhere to (Kagendo, 2012).

The public procurement system in Kenya has therefore evolved from a crude system to an orderly regulated, legal and constitutional regime. Kenya’s public procurement system can be traced back to 1955 during the colonial days (Public Procurement Oversight Authority, 2009). As a country therefore, Kenya has largely failed to effectively harness the spirit and letter of Public Procurement and Disposal Act of 2005 and other related enabling legislations in delivering transparency, accountability, and good governance in public procurement sector. The law as it exists today has not been able to eradicate corruption and related challenges in this sector as anticipated. This therefore, makes it difficult for procurement managers to effectively play their role.

Public Procurement and Disposal Act of Kenya is an ACT of Parliament to establish procedures for efficient public procurement and for the disposal of unserviceable, obsolete or surplus stores, assets and equipment by public entities and to provide for other related matters. This Act applies with respect to: (a) procurement by a public entity; (b) contract management; (c) supply chain management, including inventory and distribution; and (d) disposal by a public entity of stores and equipment that are unserviceable, obsolete or surplus. In an environment whereby the stakeholders are not aware of the provisions and implications of the Act, they are likely to work against it, thus affecting effective implementation of the procurement function. 2.3 Critique of the Existing Literature

CIPS Australia (2005) presents the differences between efficiency and effectiveness and mentions the importance of timeliness of disbursement of funds to a project’s procurement function. However, the study fails to link this aspect to effective management of the procurement function. The Literature above indicates that purchasing efficiency and purchasing effectiveness represent different competencies and capabilities for the purchasing function, but does not clearly demonstrate the link between this management function and project


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financing. Grierson and Needham (2006) argue that that demonstrated accountability and transparency reduces the likelihood of unethical behaviour, reassures the community and instils confidence in all stakeholders concerning the integrity of decisions. This is not the case in Kenya, where demonstrated accountability does not always match the reduction of unethical behaviour. For instance, recent scandals such as the Anglo-Leasing security contracts, maize importation, Free Primary Education (FPE) funds, sale of Grand Regency Hotel to Libyan investors without following the due process of law, Triton Oil importation scam, sale of Kenya’s Embassy in Japan and many other scandals which relate to corruption in public procurement is worrying (Mars Group, 2011). The Mars Group estimates that recent major grand corruption scandals have cost Kenya over KSh700bn (£5bn). It has reached a point where the citizenry are frustrated by the corruption and impunity exhibited by state officials in collaboration with other actors who misuse public resources despite the tightening legal regime. With these happenings in the public sector, there is need to establish whether accountability contributes to effective management of the procurement function.

Literature on ICT adoption shows that the public procurement systems that have adopted ICT have effective management systems that support the procurement function (Kramer, Jenkins, and Katz, 2007). However, this cannot be generalised to all cases, for instance in Kenya, where public procurement is not fully ICT compliant, thus it remains unclear how this omission is affecting effective management of the procurement function. Literature review shows the important role of the ICS in the management of the procurement function. An efficiently upheld ICS would mean adherence to the PPDA in Kenya and compliance to set internal policy guidelines. The literature however, falls short of the ICS effectiveness and its effect on the management of the public procurement in Kenya. This is because past studies have in most cases been centred in the developed world, since public procurement is a new concept in developing countries such as Kenya. 2.4 Summary

Procurement reform is a protracted process and there are many obstacles along the way and therefore needs to be effectively managed. This chapter has presented literature on selected factors that influence the procurement function. These factors are: project financing, accountability, Information and Communication Technology adoption and internal control system. The overriding objective of a state’s public procurement system is to deliver efficiency and “value for money” in the use of public funds. The literature review in the above sections shows that this objective can be achieved effectively, if factors such as project financing, accountability throughout the procurement system; efficiencies in the internal processes and a functioning and effective internal control system are paid attention. 2.5 Research Gaps

Developing countries have need for a well-functioning public procurement system. This is particularly true for developing countries, where procurement usually accounts for a high proportion of total expenditure. Kenya is committed to improving efficiency in the public procurement system at every opportunity for the purpose of enhancing: accountability in decision-making structures; responsiveness to citizens of the country; professionalism to improve performance; transparency in the procedures and policies; and appeal rights to redress meritorious grievances of suppliers. However, this can only be achieved with a full understanding of the factors influencing the management of the procurement function at the basic level. There is lack of sufficient information on these variables, locally to enable the government fulfill its commitment. Existing literature in Kenya fails to capture the influence of these factors on the effective management of the Procurement function at Sub-County level. This study will evaluate the factors affecting effective management of the procurement


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function at Nakuru North Sub County. 3. Research Methodology 3.1 Introduction

This chapter discusses the methodological procedures that will be used in data collection and analysis. Discussed in details are the research design; the location of the study; population of the study; sampling procedure and sample size; instrumentation; data collection, data analysis and the method used by the study in analyzing data collected. 3.2 Research Design

The study adopted descriptive survey research design in examining the factors affecting the effective management of Procurement function in Nakuru North Sub-County’s procurement unit. The descriptive survey design method was appropriate and useful in exploring how internal factors affect the performance of the procurement function in the study area. This research design was used because it is an efficient approach of collecting descriptive data regarding characteristics of a sample of a population, current practices, conditions or needs. 3.3 Population

The target population of the study was the procurement units the procurement units at the Nakuru North Sub-County offices form which heads of departments of all Ministry departments were interviewed. There are 30 heads of department in Nakuru North County each representing a Ministry. These were used for the study given that they are the Authority to Incur Expenditure (AIE) holders; and thus are in a strategic position to provide information sought in this study. 3.4 Census

The study employed a census technique in determination of the size of the population to be used for the study. In this study the technique is considered ideal, since individual Government Ministries have distinct characteristics; and the study was keen in collecting information from all the Ministries for comparison of arising attributes of variables of the phenomenon under study (Currivan, 2013). A census was, thus, conducted on all the Authority to Incur Expenditure (AIE) holders; one in each of the 30 Government Ministries at the Nakuru North Sub-County. 3.5 Research Instruments

Data was collected from heads of department of all user / Ministry departments using questionnaires containing structured and unstructured questionnaires. The questionnaires were prepared thematically on the basis of the research questions. The questionnaire is divided into five sections. The first section; Section A, captures personal information of the respondents, while Section B to E captures information in addressing research questions (i) to (iv). Prior to use the research instruments were validated and subjected to reliability analysis as presented in the sections below. 3.6 Validity and Reliability of Instruments

According to Mutai (2000), an instrument can be validated by proving that its items or Content and construct validity was established to determine if the items are a representative sample of the skills and traits that comprise the area to be measured. A pilot study was carried out in the procurement units within Nakuru town. The supervisors provided guidance on the content of the instruments; that is ensuring that all the research objectives are addressed by the questions or information sought in the instruments. The manner of construction of the questionnaires was also checked to ensure that the questions were not misinterpreted and only relevant information is obtained. According to Cohen, Manion and Keith (2007), Validity is ensured by; choosing an appropriate scale, ensuring that there are adequate resources for the required research to be undertaken, selecting


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an appropriate methodology for ensuring the research questions, avoiding having too long or too short an interval between pretest and post-test, ensuring standardized procedures for gathering data or for information administering tests, and tailoring the instruments to the concentration span of the respondents.

Mugenda and Mugenda (2003) defined reliability as a measure of the degree to which a research instrument yields consistent results or data after repeated trials. Piloting was done at Rongai Sub County using 3 AIE holders; representing 10% of the population to test the reliability of the instrument. The respondents were given the measuring instruments. The procurement units for piloting were outside the study area. A reliability coefficient of 0.7 or over was assumed to reflect the internal reliability of the instruments (Mugenda and Mugenda, 2003). Cronbach’s alpha is an index of reliability associated with the variation accounted for by the true scores of the underlying construct. Construct is the hypothetical variable that is being measured. 3.7 Data Processing and Analysis

The data collected from the field was coded and entered into the computer for analysis using the Statistical Package for Social Sciences (SPSS) version 20 for windows. Both qualitative and quantitative data were analyzed. Qualitative data was analyzed by reading the questionnaire. Descriptive statistics (frequencies and percentages) were computed for all the five objectives. Quantitative data was computed for inferential statistics (Pearson Moment Correlations) with a 0.05 test significance level. According to Kabiru and Njenga (2009) Pearson correlation method is used to compare the variables, where two sets of variables were compared to see the extent to which they were related and if they were used to predict each other. The correlation between two sets of variables was indicated by means of correlation coefficients which were positive. A positive coefficient ranges from 0 to 1.0 while a negative coefficient ranges from -0 to- 1.0. 1 was a perfect correlation and 0 indicates that there was no correlation between two sets of variables. 4. Research findings and discussion 4.1 Introduction

This chapter presents the findings of the study analyzed using the research methodology discussed in Chapter 3. The findings are presented thematically under the subheadings namely: general characteristics of the respondents; Effect of Project financing on the effective management of the procurement function; the role of accountability on the effective management of the procurement function; Contribution of adoption of Information Communication Technology to the effective management of the procurement function and Influence of internal control system on the effective management of the procurement function. 4.1.1Response Rate

The research study was a census of 30 heads of departments at Nakuru North Sub County. Out of the 30 questionnaires distributed, 25 were re-collected which translated to a response rate of 83.33%. 4.2 General Information of the Respondents

This section describes the general characteristics of the respondents such as gender, age, educational level, years of service and their designation. 4.2.1Gender of the respondents

The respondents were asked to indicate their gender. The result was then cross tabulated against their designation and the result was as given in Table 4.1


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Table 4. 2: Gender of the respondents

Designation

Head of department / unit/ division Assistant Head S.P.H.O Medical

superintendent

Gender Male F 8 4 2 1

% 47.1% 80.0% 100.0% 100.0%

Female F 9 1 0 0

% 52.9% 20.0% .0% .0%

Total F 17 5 2 1

% 100.0% 100.0% 100.0% 100.0%

The findings show that 47.1% of the male respondents were heads of Departments, 80% of the Assistant

heads of Department were male, all the S.P.H.O and the medical superintendent was a male while the rest in each category of designation were female. It emerges thus that a sizeable percentage of 52.9% were female working as heads of Department. This was bound to influence their perception of the phenomenon under investigation as well as enable the public sector to deliver better quality public services effectively. According to the Gender Equality Duty, (2012) Guidance for Great Britain, incorporating gender equality into procurement will enable the public sector to deliver better quality public services. The gender equality duty will mean that public bodies will have to ensure that the works, goods or services they buy are responsive to and genuinely meet the needs of both men and women – thereby increasing the quality of the service they are providing. This therefore means that management of procurement function in Nakuru North Sub County was poised to yield good results due to the gender mix in departmental headship. 4.2.2 Age of the respondents

Age of the respondents was considered in this study to influence the respondents’ perception of effective management of the procurement function. The result was cross tabulated against years of service in their departments and was as shown in Table 4.2 Table 4. 3: Age of the respondents

Years of service/ working period

1-5 years 6-10 years Over 10 years

Age 25 - 30 Years F 2 0 0

% 50.0% .0% .0%

35 – 40 years F 1 0 0


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% 25.0% .0% .0%

41 – 44 years F 1 2 4

% 25.0% 66.7% 22.2%

45 – 50 years F 0 1 9

% .0% 33.3% 50.0%

Over 51 years F 0 0 5

% .0% .0% 27.8%

Total F 4 3 18

% 100.0% 100.0% 100.0%

The findings show that 50% of the employed in the departments for a period of 1 to 5 years were aged 25 to

30 years, 25% of those who had for the same period (1 to 5years) were aged between 35 to 40 years and 25% of those in service for that period were of 41-44 years. It is also established that 66.7% of those who had served for a period of 6 to 10 years were in age of 41-44 years, 33.3% of those who had served for a period of 6 to 10 years belong to 45-50 years of age. The findings further show that 22.2% of those who served for a period of over 10 years were aged between 41 and 44 years, 50.0% of the respondents who had served for a period of over 10 years were of 45-50 years of age and 27.8% of those who had served for a period of over 10 years were aged over 51 years. This implied that most persons involved in the procurement function had an experience of over 10 years and were above 45 years of age. This also shows that there was less involvement of the youth in public procurement. 4.2.3 Level of Education

Level of education, in this case was in reference to the academic level of education attained. That is K.C.P.E at primary school level, KCSE at secondary school level, professional certificate and Diplomas at college level and the Bachelors or Masters Degree level at the University .The responses to the level of Education attained were as provided in Table 4.3. Table 4. 4: Level of Education

Response Frequency Percentage

K.C.S.E 1 4.0

College 13 52.0

Bachelors' degree 10 40.0

Masters 1 4.0

Total 25 100.0


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The findings show that 52% of the respondents indicated that their highest attained level was college level,

40% indicated Bachelors Degree, 4% indicated masters level, while 4% indicated KSCE level was their highest attained level. This implied that most persons had attained a level sufficient to influence favorably their comprehension of antecedents to effective management of the procurement function. 4.3 Effect of Project financing on the procurement function This section contains the findings in respect to objective 1 which sought to examine the effect of Project financing on the effective management of the procurement function at Nakuru North Sub-County. 4.3.1 Extent of effect of project financing on the procurement process

The respondents were asked to indicate the extent to which project financing affected the procurement process of supplies in the public and the result was as given in Table 4.4. Table 4. 5: Extent of effect of project financing on the procurement process


Not at all

Small extent

0

1

.0

4.0

Moderate extent 3 12.0

Great extent 12 48.0

Very great extent 9 36.0

Total 25 100.0

The findings show that 48% of the respondents indicated that project finance affected procurement process

to a great extent, 36% indicated to a very great extent, 12% to a moderate extent and 4% to a small extent. This implied that according to most of the respondents’ project financing affected the procurement process of supplies in the public sector. There was therefore possibility that some projects were underfunded and experienced inadequacies when funds were required. This was likely to affect project performance. This is in agreement with Hagén, and Zeed, (2005) who argues that when the project is underfunded the support it is expected to offer to the procurement cycle will not be realized. 4.3.2 Effect of project finance aspects on the procurement function

The respondents were asked to indicate the extent to which select aspect of project financing affected the management of procurement function and the response was as provided in this section, they were asked to indicate the level of extent to which the following project financing aspects affect the effectiveness of the procurement management on a scale of 1-5, where 1 represented Very Great Extent while 5 represented „Not at All‟. As shown in Table 4.5 Table 4. 6: Effect of Project Finance Aspects on the Procurement Process

N Minimum Maximum Mean Std. Deviation

Inadequate project financing 25 1.00 4.00 1.6000 .95743


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Timely disbursement of funds 25 1.00 5.00 1.8800 1.20139

Flexibility of procurement

budgets

25 1.00 4.00 1.9200 .99666

Bureaucratic bottlenecks in time

of payments

25 1.00 5.00 2.2000 1.32288

Public Procurement and

Disposal Act ( contract

management and procurement

procedures

25 1.00 5.00 2.5800 1.24231

Valid N (listwise) 25

The findings indicated that inadequate project financing influence the procurement function to a very great extent, great extent or moderate extent, all the outlined aspects of project financing affected the effective management of the procurement function as indicated by mean scores of less than 2.5 with the exception of Public Procurement and Disposal Act which had a mean score of 2.58. This is not healthy, since an effective procurement process ensures the availability of the right goods and services in the right quantities, available at the right time, for the right customers and at reasonable prices, and at recognizable standards of quality. This view is also supported by a report by WHO, (2007). Table 4.6 below presents the Effects of Project Financing on procurement of Supplies Table 4. 7: Descriptive Statistics on Effects of Project financing on procurement of Supplies

Statement N Minimum Maximum Mean Std.

Deviation

Project funds are always released on time, thus

making management of the project easy

25 1.00 5.00 3.3200 1.24900

Most stalled projects are due to inadequate

funding

25 1.00 5.00 2.5600 1.75784

It is difficult to relocate unutilized votes for

other poorly financed areas

25 1.00 4.00 1.6400 1.03602

It takes time to get approvals / authorizations

for procurement of required items

25 1.00 5.00 2.0400 1.46856


Table 4.6 shows that according to most of the respondents, it is difficult to relocate unutilized votes for other


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poorly financed areas recording a mean score of 1.64. It is also established that it takes time to get approvals / authorizations for procurement of required items with a mean score of 2.04. This is below the mid mean score mark of 2.5, implying that these aspects were affecting the procurement of Supplies negatively. It is important to note that findings also show that most stalled projects are due to inadequate funding with dispersion higher than the moderate extent (2.56), Implying also that there was a high possibility that most of the stalled projects could be linked to inadequate funding. Project funds are not always released on time, thus making management of the project difficult as shown by mean score of 3.32 for a reverse assertion. 4.4 The effect of accountability on the procurement function

This section contains the findings in respect to objective 2 which sought to assess the role of accountability on the effective management of the procurement function at Nakuru North Sub-County. Accountability constitutes a central pillar of any public procurement system. Without transparent and accountable systems enabling governments and citizens to engage in a mutually responsive way, the vast resources channelled through public procurement systems run the danger of increased corruption and misuse of funds. Even in a system with low levels of corruption, public and civic oversight can help identify inefficiencies, thereby increasing procurement efficiency and effectiveness for the benefit of improved service delivery and ultimately citizens. 4.4.1 Extent to which accountability affects procurement process of supplies The respondents were asked to indicate the extent to which key components of accountability affected management of their procurement function and the response was as provided in Table 4.7 Table 4. 8: Extent of effect accountability on the procurement process of supplies




Small extent 1 4.0

Not at all 9 36.0

Total 25 100.0

The findings show 20% of the respondents indicated that accountability affected procurement process of supplies in the public sector to a very great extent, 40% indicated that it was a moderate extent, 4% indicated that the effect was to a small extent, while 4% indicated not at all. This implied that accountability did affect procurement process of supplies in the public sector greatly as indicated by most of the respondents. 4.4.2 Effect of Key components of accountability on the procurement function The respondents were asked to indicate the extent to which key components of accountability affected management of their procurement function and the response was as provided in Table 4.8 Table 4. 9: Effect of accountability on the procurement function

Statement N Minimum Maximum Mean

The measurement of goals and results 25 1.00 5.00 2.3600

The justification or explanation of those results to internal or

external monitors

25 1.00 5.00 2.7200


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Punishment or sanctions for non-performance or corrupt

behavior

25 1.00 5.00 2.8800


The mean scores for the effects of key components of accountability on the management of the procurement

function were as follows: the measurement of goals and results (2.36); the justification or explanation of those results to internal or external monitors (2.72); and punishment or sanctions for non-performance or corrupt behavior (2.88). Though the scores are above the mid mean mark of 2.5, the scores are below 3.0 which represent the moderate extent as per the likert scale used in this study. This implied that all the three aspects were above moderate extent and thus affected the procurement of supplies in most Ministry departments. This finding is is in agreement with a study by Vian and Collins (2006) who posits that lack of accountability can lead to project failure since, it precipitates corruption. 4.4.3 The Influence of Accountability on the Procurement Function

The influence of accountability on the management of procurement function was also assessed through select statements to which they agreed with their assertion. The response was as presented in Table 4.9 Table 4. 10: The Influence of Accountability on the Procurement Function

Statement N Minimum Maximum Mean Accountability is government's obligation to demonstrate effectiveness in carrying out goals and producing the types of services that the public wants and needs

25 1.00 5.00 1.8000

Lack of accountability creates opportunities for corruption. 25 1.00 5.00 1.3200 Government officials use discretion to license and accredit facilities, providers, services and products, opening risk of abuse of power and use of resources.

25 1.00 5.00 2.4000

High amounts of discretion without adequate controls can create opportunities for corruption.

25 1.00 5.00 1.7600

Valid N (listwise) 25 Accountability is government's obligation to demonstrate effectiveness in carrying out goals and producing the types of services that the public wants and needs (1.8); Lack of accountability creates opportunities for corruption (1.32); Government officials use discretion to license and accredit facilities, providers, services and products, opening risk of abuse of power and use of resources (2.4); High amounts of discretion without adequate controls can create opportunities for corruption (1.76). All these scores are above the mid mark of 2.5, implying that they were aspects that could not be ignored since; they affected the effectiveness of the procurement function. 4.5 Contribution of ICT Adoption to the Procurement Function This section contains the findings in respect to objective 3 which sought to assess the contribution of Information Communication Technology adoption to the effective management of the procurement function at Nakuru North Sub-County. 4.5.1 Effect of ICT Adoption on procurement of suppliers in the Public sector The respondents were asked to what extent ICT adoption affected procurement of suppliers in the public sector and the response was as provided in Table 4.10


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Table 4. 11: Effect of ICT Adoption on procurement of suppliers in the Public sector



Great extent 3 12.0


Small extent 6 24.0

Not at all 5 20.0

Total 25 100.0

The findings show that 28% of the respondents indicated that ICT adoption affected procurement of

suppliers in the public sector to a very great extent, 24% indicated that it did affect to a great extent, 20% indicated that there was no effect at all, 16% indicated that the effect was to a moderate extent, while 24% indicated that the effect was to a small extent, The implication here is that ICT adoption was an important factor affecting the procurement function according to most of the respondents. 4.5.2 Effect of Key components of ICT adoption on the procurement function

The respondents were asked to indicate their level of agreement with the following statements that relate to the effect of ICT adoption on management of your procurement function. To this they responded as provided in Table 4.11 Table 4. 12: Effect of Key components of ICT adoption on the procurement function

Statement N Minimum Maximum Mean Government officials and elected leaders have increasingly come to realize that public agencies must utilize ICT in order to enhance the procurement processes in the public sector.

25 1.00 5.00 1.9200

Public authorities are expected to provide excellent service to their constituents in an effective and transparent manner

25 1.00 4.00 1.7200

In order to meet today’s operating challenges, regional and local governments are turning to ICT to enhance the services by lowering costs and increasing productivity

25 1.00 4.00 1.6400

Public authorities are implementing scalable communication infrastructures to promote economic development

25 1.00 4.00 2.0400

African nations are lagging severely in ICT adoptions despite the benefits from ICT experienced by others

25 1.00 5.00 3.0400


According to findings, Government officials and elected leaders have increasingly come to realize that public agencies must utilize ICT in order to enhance the procurement processes in the public sector. This is true as it is evidenced by the mean score of 1.92. Most of the respondents upheld the view that public authorities are expected to provide excellent service to their constituents in an effective and transparent manner and this assertion scored a mean of 1.72. With a mean score of 1.64, it is suffices that according to most departmental


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representatives, it was evident that in order to meet today’s operating challenges, regional and local governments are turning to ICT to enhance the services by lowering costs and increasing productivity. The statement that purports that public authorities are implementing scalable communication infrastructures to promote economic development recorded an mean score of 2.04, while he view that African nations are lagging severely in ICT adoptions despite the benefits from ICT experienced by others score a mean of 3.04. it can be argued that these respondents had realized the value attached to ICT and believed that Africa was averagely on the right path. This implied that most respondents appreciated the importance of ICT as a factor positively influencing procurement function. These findings are in agreement with Hagén, and Zeed, (2005) who postulates that in order to meet today’s operating challenges, regional and local governments are turning to ICT to enhance the services for residents, businesses and visitors, and improve internal efficiencies by lowering costs and increasing productivity. This is also in support to the view held by Kirungu, (2011) in Kenyan study, who argues that manual systems are a source of major inefficiencies in regulation and operations of the function. ICT needs to be adopted to ensure proper functioning of the procurement system. 4.6 Influence of Internal Control System on the Procurement Function This section contains the findings in respect to objective 4 which sought to assess the influence of internal control system on the effective management of the procurement function at Nakuru North Sub-County. 4.6.1 Effect of Internal Processes on Procurement of Supplies The respondents were asked to indicate the extent to which internal processes affects procurement of supplies in the public sector and the response was as provided in Table 4.12 Table 4. 13: Effect of Internal Processes on Procurement of Supplies.



Great extent 5 20.0


Small extent 6 24.0

Not at all 3 12.0

Total 25 100.0

The findings 44% of the respondents indicated that internal processes affected procurement of suppliers in the public sector to a great extent, 20% indicated that the effect was to a moderate extent, 24% indicated a small extent, and 12% not at all .This implied that according to most of the respondents internal processes had an influence on the procurement of supplies and thus this could not be ignored. 4.6.2 Effect of Internal Processes on the procurement function

The respondents were asked to indicate their level of agreement with the following statements that relate to the effect of internal processes on management of your procurement function. To this they responded as provided in Table 4.13


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Table 4. 14: Effect of Internal Processes on the procurement function Statement N Minimum Maximum Mean

Professional and job-related responsibilities are placed before

personal gain and individual interest

25 1.00 5.00 2.1200

Employees may neither engage in, nor give the appearance of

engaging in, dishonest or unethical actions

25 1.00 5.00 2.1200

Value for money is the core principle underpinning public

procurement, incorporating ethical behavior and the ethical use

of resources.

25 1.00 5.00 2.2000

Officials involved in procurement must not make improper use

of their position

25 1.00 5.00 1.6000


Table 4.13 presents the results showing the mean scores for the effect of Key components of internal

processes on the management of their procurement function as follows: professional and job-related responsibilities are placed before personal gain and individual interest (2.12); employees may neither engage in, nor give the appearance of engaging in, dishonest or unethical actions (2.12); value for money is the core principle underpinning public procurement, incorporating ethical behavior and the ethical use of resources (2.20); and officials involved in procurement must not make improper use of their position (1.60). This implied that all the components of internal processes in the table above were affecting the procurement function in most of the departments. 4.6.3 Effect of Internal Control System on the Procurement Function

The respondents were asked to indicate their level of agreement with the following key components of Internal Control System affected management of their procurement function. To this they responded as provided in Table 4.14 Table 4. 15: Effect of Internal Control System on the Procurement Function

Statement N Minimum Maximum Mean

Organizational structure; 25 1.00 5.00 1.8400

Record keeping; 25 1.00 5.00 1.8000

Division and segregation of duties; 25 1.00 5.00 1.8400


287

Authorizations and approvals; 25 1.00 5.00 1.9600

Internal checks; 25 1.00 5.00 2.0000

Competency of the staff 25 1.00 5.00 2.0000


The mean scores for the effect of key components of Internal Control System on management of your procurement function are as follows: organizational structure (1.84); record keeping (1.80); division and segregation of duties (1.84); authorizations and approvals (1.96); internal checks (2.0); and competency of the staff (2.0). The findings show most of the departmental heads were in agreement with the fact that components of Internal Control System positively affected the procurement function. This is agreement with Seminega (2012) who reported that internal controls play a pivotal role towards ensuring effective management of the procurement function. It means thus, that with proper application of these controls enhance the effectiveness of the management process. 4.7 Relationship between Effective management of procurement and independent variables

A Pearson Correlation was computed between the independent variables (Project financing, Accountability, ICT adoption and internal processes) and (Dependent Variable) Effective management of procurement with the aim of establishing whether there was a causal relationship between these study variables. The results were as presented in Table 4.15 Table 4. 16: Relationship between Effective management of procurement and independent variables VARIABLES EMOPF PF A ICT IP

EMOPF R 1 .324 .306 .416(*) .336 Sig. (2-tailed) . .114 .136 .039 .101 N 25 25 25 25 25

PF R .324 1 .263 .242 -.083 Sig. (2-tailed) .114 . .204 .244 .694

N 25 25 25 25 25

A R .306 .263 1 .693(**) .157 Sig. (2-tailed) .136 .204 . .000 .454 N 25 25 25 25 25

ICT

R .416(*) .242 .693(**) 1 .387 Sig. (2-tailed) .039 .244 .000 . .056 N 25 25 25 25 25

IP R .336 -.083 .157 .387 1 Sig. (2-tailed) .101 .694 .454 .056 . N 25 25 25 25 25

* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). EMOPF: Effective Management of Procurement Function


288

PF: Project Financing A: Accountability ICT: Adoption of Information Communication Technology IP: Internal Processes R = Correlation value

The findings show that that there is a positive correlation between the dependent variable (effective management of procurement function) and independent variables (Project financing, Accountability, ICT adoption and internal processes). This implies that the independent variables are responsible for the current level of the effectiveness in managing the procurement function. Project financing is positively correlated with effective management of procurement function at 0.324 at 0.114 significance level; Accountability at 0.306 at 0.136 significance level, ICT adoption at 0.416 at 0.039 significance level; and Internal processes at 0.336 at 0.101. All these values were above the test significance level at 0.05, this implying that the independent variables negatively affected the effective management of procurement function. 5. Summary of findings, conclusions and recommendations 5.1 Introduction

This chapter presents a summary of research findings, conclusions, and recommendations drawn from conclusions. The purpose of this study was to evaluate the factors affecting effective management of the procurement function at Nakuru North Sub-County. In this study, data was collected using questionnaires heads of departments of all user / Ministry departments. Analysis of data was conducted with the aid of the Statistical Package for Social Sciences (SPSS) version 21.0 for windows. The analysis entailed computation of descriptive statistics (frequencies and percentages). 5.2 Summary of Findings

The study findings show that project financing had an influence on effective management of the procurement function at Nakuru North Sub-County. This was evidenced by 84% of the respondents, who indicated project financing affected the procurement process of supplies in the public sector. However, it is worth noting that timely disbursement of funds, flexibility of procurement budgets, and bureaucratic bottlenecks in time of payments did not affect the procurement function in this sub county. The respondents appear to almost unanimously agree that Public Procurement and Disposal Act (contract management and procurement procedures) affected the management of the procurement function.

Accountability had an influence on the effective management of the procurement function at Nakuru North Sub-County. It is noted that as embraced at the sub county, it did not affect the procurement function. Measurement of goals and results, justification or explanation of those results to internal or external monitors and punishment or sanctions for non-performance or corrupt behavior appear to be meticulously done in such a way that it favoured the procurement function.

Information Communication Technology adoption contributed to the effective management of the procurement function at Nakuru North Sub-County. However, it emerges that the level of adoption was still low as according to most respondents, the Government officials and elected leaders still had not lived to the realization that public agencies must utilize ICT in order to enhance the procurement processes in the public sector. Internal control system influenced the effective management of the procurement function at Nakuru North Sub-County. According to most of the respondents internal processes had an influence on the procurement of supplies. According to most respondents professionalism was not fully embraced and this was bound to affect the procurement function and most of the respondents engaged in dishonesty or unethical actions. However, most


289

respondents showed that organizational structure, record keeping, division and segregation of duties, authorizations and approvals, internal checks and competency of the staff as adopted and / or implemented was sufficient to steer effective management of the procurement function. 5.3 Conclusions and recommendations

Based on the summary of findings, the following conclusions were made: Project financing had an influence on effective management of the procurement function. Procurement process can contribute to improved performance of the procurement function if the process is timely financed. Delayed disbursement and project funding inadequacies appear to be one of the main reasons behind stalled projects. Hagén, and Zeed, (2005) posits that the procurement unit needs to be assured of availability funds before preparing procurement plans and entering into negotiations with the suppliers.

Accountability had an influence on the effective management of the procurement function at Nakuru North Sub-County. Accountability shows how the public interest has been protected in the expenditure of public funds. Maintaining integrity in public procurement is one of the most important pillars of modern national procurement systems (Barrett, 2000). Ensuring the accountability of procurement officials is perhaps the most essential aspect of this goal. The accountability of procurement officials is not only important from a public or administrative law perspective, but also has economic implications. Information Communication Technology adoption contributed to the effective management of the procurement function at Nakuru North Sub-County. The old way of doing business consists of buyers managing forecasts and communicating requirements to suppliers via phone, fax and email. Spreadsheets and manual reports are passed between the trading partners. These manual processes are slow and cumbersome. They cannot support today’s demand-driven enterprises. Supply chain procurement professionals spend too much time “putting out fires” and reacting to daily problems (Thomson and Jackson, 2007).The study thus concludes that ICT adoption affected procurement process at Kenya government ministries to a great extent. ICT adoption enhanced the process of effective tendering through advertising,sourcing reviews, prequalification, potential for cost savings and greater awareness of new development. Adopting ICT enabled Kenya government ministries to provide excellent service to their suppliers in an effective and transparent manner. Internal control system influenced the effective management of the procurement function at Nakuru North Sub-County. According to Thomson and Jackson, (2007), the actions of public officials must be above suspicion and not give rise to any actual or potential conflict of interest and their dealings with commercial and other interests should bear the closest possible scrutiny. It is not possible to give guidelines for every conceivable situation that may arise but if a doubt arises about a particular situation line management should be consulted. This study concludes that the study concludes that operating procedures affected procurement process at Kenya government ministries to a very great extent. Based on the findings and conclusions of the study, the following recommendations were made: The Government of Kenya should consider examination and evaluation of offers is made effective. Accountability and measurement of goals and results need to be considered since they affect procurement process at Kenya government ministries.Also,Procurement results need to be reported to internal or external monitors since this affects procurement process at Kenya government ministries.The government officials need to be encouraged to use discretion to license and accreditfacilities,providers,services and products to reduce opening risk of abuse of power and use of resources. Thirdly, adequate controls should be put in place reducing opportunities for corruption. Performance incentives need to be offered to employees to reward good performance. This will help to increase accountability. Kenya government ministries should adopt ICT. This will enhance the process of effective tendering


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through advertising, sourcing reviews, prequalification, potential for cost savings and greater awareness of new development. It will also enable Kenya government ministries to provide excellent service to their suppliers in an effective and transparent manner. As regards internal processes, they should be enhanced in order to avoid conflict of interest in the work processes. Separation of key functions will contribute to professionalism, accountability and an efficient procurement system. References Alexis, W. (2013). What Are the Functions of a Purchasing Department in an Organization? Available at http://smallbusiness.chron.com/functions-purchasing-department-organization-158.html accessed on 20th April, 2013. Andreasen, P. (2012). The Dynamics of Procurement Management: A Complexity Approach. Frederiksberg: Copenhagen Business School [Phd]. (PhD Series; No. 1.2012). Basheka, B. and Bisangabasaija, E., (2010). Determinants of Unethical Public Procurement in local Government Systems of Uganda: a case study. Int. J. Procurement Management, 3(1), 91–104: Makerere University: Kampala. Currivan, D. (2013). Sampling Frame: available at http://srmo.sagepub.com/view/the-sage-encyclopedia-of-social-science-research-methods/n884.xml Accessed on 5th April 2013: Thousand Oaks, CA: SAGE Publications, Inc. Grierson, M., and Needham, R. (2006). Ethics, Probity and Accountability in Procurement: Queensland Purchasing, Department of Public Works: Crime and Misconduct Commission: Commonwealth of Australia, Queensland, Hagén, H., and Zeed, J. (2005). Does ICT Use Matter for Firm Productivity? Yearbook on Productivity 2005, Statistics Sweden, Stockholm. Health, J. and Norman, W. (2004). Stakeholder Theory, Corporate Governance and Public Management. Journal of Business Ethics, 53, 247-265, Kluver Academic Press, Netherlands. Kagendo, M., (2012). Effects of Public Procurement and Disposal Act on Procurement in Parastatals in Kenya: University of Nairobi Press, Nairobi. Kakwezi, P and Nyeko, S., (2010).Procurement Processes and Performance: Efficiency and Effectiveness of the Procurement Function: Makerere University Press, Kampala. Knight, L. A., Harland, C. M., Telgen, J., Thai, K. V. andCallender, G. (2008), Public Procurement: International Cases and Commentary, Journal of Public Procurement, Volume 8, Issue 3, 303-322, Amsterdam. KPMG, (2012). The Power of Procurement: A global survey of Procurement functions: 2012 KPMG International Cooperative: Oxford, UK available at http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Advisory/the-power-of-procurement-a-global-survey-of-procurement-functions.pdf retrieved on 5th April 2013 Kramer, J., Jenkins, B., and Katz S., (2007). The Role of the Information and Communications Technology Sector in Expanding Economic Opportunity: The Fellows of Harvard College: Harvard. Mahmood, S. A. I. (2010). Public Procurement and Corruption in Bangladesh. Confronting the Challenges and Opportunities: Journal of public administration and policy research, 2(6), 103-111: University of Maine, Orono. Mendoza, O., (2008). Procurement - Challenges Facing Procurement Organizations: Published: June 02, 2008 in Knowledge@Wharton: BioMed Central Ltd, Mexico. Mugenda, O.M. and Mugenda, A.G. (2003): revised. Research Methods; Quantitative Qualitative Approaches: ACTS Press, Nairobi. Osei- Tutu E, Mensah S., and Ameyaw C., (2011).The Level of Compliance with the Public Procurement Act

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(Act 663) In Ghana: Kumasi. PPA (2007), “Public Procurement Authority (PPA) Annual Report pp.18”, Government Printers: Kumasi. Public Procurement Oversight Authority, (2007). Assessment of the Procurement System in Kenya: PPOA, Nairobi. Schapper, P. (2008). The Impact of e-procurement on Corruption: The potential of e-procurement for curbing Corruption Risks. In: ADB/OECD (2008) Fighting Bribery in Public Procurement in Asia and the Pacific. Proceedings of the 7th Regional Seminar on making international anti-corruption standards operational, Indonesia 2007. Seminega, (2012). Internal Control Systems for Public Procurement in Rwanda: Rwanda Public Procurement Authority – RPPA: accessed on 5th April 2013; available at http://www.rppa.gov.rw/fileadmin/files/docs. Sunil, C., and Meindl P. (2004). Supply Chain Management: 2nd edition. Upper Saddle River: Pearson Prentice Hall Publishers, New Jersey. Tan, K.S., Chong, S.C., Uchenna, C.E. (2009). "Factors influencing the Adoption of internet-based ICTs: evidence from Malaysian SMEs: International Journal of Management and Enterprise Development : IBIMA Publishing, Malacca. Thomson, J., Jackson, T. (2007). "Sustainable Procurement in Practice: Lessons from Local Government", Journal of Environmental Planning and Management, Vol. 50 No.3, pp.421-44. Retrieved on 5th April 2013: available at http://www.sustainablelifestyles.ac.uk/publications. Trionfetti, F. (2000). "Discriminatory public procurement and international trade", World Economy, Vol. 23 No.1, pp.57-76: Blackwell Publishers: Oxford, london. Van Weele, A. J. (2006). Purchasing and Supply Chain Management: Analysis, Strategy, Planning and Practice (4th Ed.) Australia Thomson. Waters, D. (2004). .Introduction To Supply Chain Management, (2rd Edition), Pal grave Macmillan, London. Wee, H. (2002). "Corporate Ethics: right makes might", Business Week, (quoting Stuart Gilman on Enron), No.11 April, New York. World Health Organization (2007). .Development Effectiveness Achieving Development Outcomes: The Millennium Challenge Report, WHO, Geneva. World Bank (1996), “Ghana 1996 Country Procurement Assessment Report”, Washington, D.C.:


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Effects of Weak Legislation on the Performance of Nonlife

Insurance Companies in Kenya

Joseph Nyongesa Amambia (Corresponding author) & Joseph Githinji Kanai Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000-00200, Nairobi, Kenya


Abstract The paper asses how weak legislation in the insurance sector affects the performance of nonlife insurance companies in Kenya. The Insurance Regulatory Authority is a State Corporation established under the Insurance Act (Amendment) 2006, CAP 487 Laws of Kenya whose roles are to regulate, supervise and develop the insurance industry in Kenya with overall aim of ensuring financial stability of insurance firms. The study adopted descriptive research design covering a stratified sample of 108 respondents drawn from 27 Nonlife insurance companies in Kenya. Data was collected by use of questionnaires and was later analyzed using descriptive and inferential statistical analysis tools. According to the study findings there was a negative correlation between weak legislation in the insurance sector and insurance sector performance with correlation coefficient of -0.264 at 0.01 level of significance. The study recommended that insurance regulator needs to reduce the menace of under pricing by effectively administering the existing insurance legislation. Key words; Solvency Margin, Technical insolvency, Under pricing 1. Introduction

The Insurance Regulatory Authority is a statutory government agency established under the Insurance Act (Amendment) 2006, CAP 487 of the Laws of Kenya to regulate, supervise and develop the insurance industry. It is governed by a Board of Directors which is vested with the fiduciary responsibility overseeing operations of the Authority and ensuring that they are consistent with provisions of the Insurance Act. The Authority deploys significant resources in monitoring market behaviors, compliance and solvency issues (IRA 2012). According to the National Insurance commission of Ghana insurance premium is the actual amount of money charged by insurance companies for the indemnifying a risk. An insurance premium for the same service can vary widely among insurance providers, which is why experts strongly recommend getting several quotes before committing to an insurance policy. Insurance agents or brokers will normally take the basic information and calculate an estimated insurance premium based on needs and other risk factors. The lowest quoted price on an insurance premium may be the better bargain, but the level of coverage may also be lower.

According to PWC (2013), on key issues facing the insurance sector in Kenya, There are several legislative and taxation changes made in recent years that have had an impact on the Kenyan insurance industry. These include increase in the minimum capital requirements for insurers, increase in the solvency margin for



293

long term insurers, introduction of ‘cash and carry’ rules which will require that insurers shall assume risk upon receipt of the premium, relaxation of investment limits for general insurers, introduction of penalties on late settled claims, change in the rules on taxation of long term insurance business and taxation of dividend income earned by a financial institution

Wahome (2013), argues that cut-throat competition in the motor insurance business is resulting in under-pricing tactics, thereby affecting performance of the firms as they have to squeeze thin the margins from their deals.This is happening even as the regulator, the Insurance Regulatory Authority (IRA), says supervision of the industry will get tighter through a shift from compliance-based to risk-based supervision, starting this year.“Competition in the insurance industry has gone to pricing and the issues of undercutting are coming up. When the undercutting gets severe, it can go down with many,” said Mr Robert Kuloba, the policy, research and development manager at IRA.

Melbourne (2013), argues that poor pricing strategies can lead to short-term business expansion at the expense of sustainable financial positions. Under pricing, for one, leads to negative business margins. The problem is compounded if poor pricing also leads to poor estimations of reserving needs, or if it compromises an insurer's capacity to reserve adequately for future claims. Poor policy design and pricing is the root of the issue, which are often by-products of insufficient experience in a particular business line and exacerbated by competitive pressures.

Year 2010 Insurance Regulatory Authority (IRA) issued motor insurance rates guidelines in an attempt to stem out stiff competition in the insurance sector . The recommended rate for private motor insurance was set at 7.5% of the sum insured. The rate was to be charged in the first year of insurance contract to the insured and an yearly discount of 10% was to be awarded every year if the client had no claim record in the previous year. This noble idea was to reduce the challenge of undercutting that had been practiced in the past years and reduce stiff competition resulting into a profitable motor insurance business (Wahome,2013).This noble idea was not sustainable due to interplay between competition law and regulation in the insurance sector in Kenya as the players engage in to massive insurance rates undercutting in order to attract more business. There is interplay between competition, law and regulation of the insurance sector in Kenya. The regulation of the insurance industry in Kenya is inherently weak thus failing to stimulate competition in the industry (Kerubo, 2011). Most nonlife insurance companies are technically insolvent since IRA does not recognize debtors as assets when assessing the solvency margin of an insurer. Compromising cash and carry rules has led to insurers accumulating non performing debts thus rendering the companies technically insolvent (Mukiri, 2011). Relaxation of investment limits for general insurers which require insurer to invest their idle cash in liquid assets than illiquid ones as it will be easier for the insurer to liquidate the investments and settle claims as they arise (Namaemba,2010). By not collecting premium on time leads to poor performance by insurers due to reduced investment income. Kenyan insurance companies generally report high loss ratios. Between 2004 and 2007, the loss ratios for the industry as a whole ranged between 56% and 60%. Insurers have traditionally relied on investment income to act as a cushion for their underwriting results (AKI 2007) The main aim of this study was to understand how weak insurance legislation affects the performance of nonlife insurance companies in Kenya. As a result, the following specific objective was pursued: To establish how under pricing by insurers’ impact on overall organization performance. 2. Literature review

According to consumer Federation of America (2005) One of the reasons for regulation is to prevent competition that routinely causes insurers to go out of business, leaving consumers unable to collect on claims. Insolvency regulation has historically been a primary focus of insurance regulation. After several insolvencies in


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the 1980s, state regulators and the National Association of Insurance Commissioners (NAIC) enacted risk-based capital standards and implemented an accreditation program to help identify and prevent future insolvencies. As far fewer insolvencies occurred in the 1990s.

There are various characteristics of insurance business which single it out from other industries for special treatment such as; insurance contacts are promissory in nature in that at the time of the sale, the insurer undertake to make a payment to, or on behalf of the policy holder upon the occurrence of a specified future event or at a future date (Mungara, 2009). There is interplay between competition law and regulation of the insurance sector in Kenya. The regulation of the insurance industry in Kenya is inherently weak thus failing to stimulate competition in the industry. There is need to establish a regulatory framework in the insurance industry that is efficient and able to stimulate competition in the industry in a manner that will stir growth (Matara, 2011).

Insurers have blamed their losses on consumer apathy and rampant price under-cutting arising from unhealthy competition in the industry. This is as a combination of fraudulent claims and low penetration of products took a toll on their earnings. (Okoth, 2013). Munaita,( 2006) urges that Insurance premiums for public service and commercial vehicles have fallen by a tenth following the success of reforms in the road transport sector initiated two years ago. But the premiums could slide further because of fierce competition in the industry that has seen some players charge up to 40 per cent less than the monthly installments that have been filed with the Commissioner of Insurance. 3. Methodology

The study adopted the descriptive survey design. Kombo and Tromp (2006) state that the major purpose of descriptive research is description of state of affairs as it exists. The design was chosen because the researcher was fairly knowledgeable about the aspects of the phenomenon, but little knowledge was available regarding their characteristic, nature or details. , Quantitative data was analyzed using descriptive and inferential statistical analysis tools; percentages and Pearson correlation to determine the relationship between variables under study while analysis of qualitative data involved organization of data into themes, as guided by the study objectives. 4. Results and Analysis

The study targeted a total population of 108 respondents, however due to study limitations; the study gathered a total of 104 responses which represents 96.3% response rate of which 69.3% were male and 30.7% were female. The study also targeted main decision makers in respective insurance companies 25 % of the respondents were finance managers, 25% risk and compliance managers, 25% underwriting managers and 25% were claims manager Table 4.1: Summary of Insurance legislation in Kenya

Interaction Quality SD(%) D(%) A(%) SA(%)

IRA closely monitors motor insurance premium rates charged by insurers 82.3 4.7 9.1 3.9

IRA conducts regular audits in your organization to ensure insurance

legislation are followed.

79.2 14.2 5.2 1.4

IRA imposes stiff penalties to insurers for deviating the regulators

guidelines.

65.2 17.3 9.8 7.7

Key: SD-Strongly Disagree; D- Disagree; N-Neutral; A- Agree; SA- Strongly agree According to the research findings as shown in table 4.1 above, 87% of the respondents disagreed that IRA monitors’ rates charged by insurers while 13% of the respondents agreed with this statement. On the issue of


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conducting regular audits to ensure the issued underwriting guidelines are followed 93.4 % of the respondents disagreed while 6.6% agreed. On the aspect of IRA penalizing insurance companies that deviate from regulators guidelines 82.5% of the respondents disagreed while 17.5% of the respondents disagreed. Table 4.2: Summary of Insurance companies’ performance

Interaction Quality SD(%) D(%) A(%) SA(%)

Adequate legislation leads to profitable insurance firms 3.5 2.5 7.6 86.4

Adherence to insurance legislation improves service quality 2.9 9.1 12.2 75.8

Effective legislation improves insurers liquidity 2.8 4.3 10.5 82.4

Key: SD-Strongly Disagree; D- Disagree; N-Neutral; A- Agree; SA- Strongly agree As shown in Table 4.2 above 94% of the respondents agreed that adequate legislation in the insurance sector leads to profitable insurance firms while 6% disagreed. On the aspect of adherence to insurance legislation improving service quality 88% of the respondents agreed while 12% disagreed. Regarding the issue of effective legislation improving insurers’ liquidity 92.9% of the respondents agreed while 7.1% disagreed on this issue. Table 4. 2: Correlation

IL IP

Pearson correlation

IL


1 . -.264**

Sig. (2-tailed) . .007

N 104 104

IP


. -.264** 1

. Sig. (2-tailed) .007

N 104 104

**. Correlation is significant at the 0.01 level (2-tailed).

IL: Insurance Legislation

IP: Insurers` Performance

Further, there is a negative relationship between Weak legislation in the insurance sector and Insurance performance as indicated in Table 4.3 above with a correlation coefficient of -0.0264 at 0.01 significance level. This means that the two variables move in opposite direction and this implies that the weaker the legislation in the sector, the higher the chances that an insurer will perform poorly. These results are consistent with other studies that have shown a significant and negative correlation between Weak legislation in the insurance sector and optimal insurers performance (Thirima, 2010) 5. Conclusions and recommendations

Nonlife insurance companies in Kenya engage in massive under pricing due to laxity of the insurance regulator as indicated that 87% of the respondents disagreed that IRA monitors’ rates charged by insurers while 13% of the respondents agreed with this statement. On the issue of conducting regular audits to ensure the issued underwriting guidelines are followed 93.4 % of the respondents disagreed with this statement while 6.6% agreed.


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On the aspect of IRA penalizing insurance companies that deviate from regulators guidelines 82.5% of the respondents disagreed while 17.5% of the respondents disagreed. Effective and adequate legislation is also important for the insurers to boast their financial performance. Insurer`s performance and weak legislation also indicated a negative correlation with Pearson Correlation coefficient of -0.264 at 0.01 level of significance implying that weak legislation affects insurers performance negatively.

To ensure that insurance legislation in Kenya is effectively administered IRA need to come up with drastic measures to cap the menace of under pricing. This include regular auditing of nonlife insurance companies to ensure adherence to the regulators guidelines in underwriting , imposing stiff penalties to companies that deviate from the guidelines and educating the insurers on the repercussions of charging unsustainable insurance premium on regular basis. Reference AKI(2007), Insurance Industry Annual Report , Nairobi Consumer Federation Of America November, 2005; Florida Statement Why is Regulation of Insurance Necessary.pdf; Task force on long term solutions for Frolida`s hurricane Insurance Market http://www.myfloridacfo.com/hurricaneinsurancetaskforce/TaskforceRS2/Appendix5/9 Insurance Regulatory Authority Kenya; Insurance industry report January – December 2012 Page 1 Jackson Okoth 2013 . http://www.standardmedia.co.ke/?articleID=2000091975&story_title=nine-insurance-firms-swim-in-losses-on-back-of-under-cutting. Kerubo, ( 2011) Competition aspects in regulation of the insurance industry in Kenya, Published MBA Thesis, University of Nairobi . Kombo, D.K. & Tromp, D.L. (2006). Proposal writing and thesis proposal: An introduction. Paulines Publications, Africa: Nairobi Kumbai Pauline Mukiri (2011) ,X-efficiency of insurance companies in Kenya, Published MBA Thesis University of Nairobi . Maryanne, W Mung`ara, (2009) An Exploratory Study of capital Requirement for Kenyan Life insurance Companies, Published MBA Dissertation. Strathmore Business School Michael J Vine, Melbourne ; ( 2013); What May Cause Insurance Companies To Fail.pdf pg 8 .And How This Influences Our Criteria http://www.standardandpoors.com/spf/upload/Ratings_EMEA/2013-06-13 Mwaniki Wahome (2013) “Under Pricing Main Threat to Insures” Daily Nation Tuesday 20 August 2013page 8 smart company. http://property.n-soko.com/mortgage-insurance/insurers-turn-to-under-pricing-for-survival/ Namaemba,(2010).Underwriting challenges facing public service vehicles insurance in Kenya, University of Nairobi, Kenya. National insurance Commission of Ghana http://www.ibrokerghana.com/news-and-market-information/5-local/451-insurance-industry-under-threat-from-premium-undercutting updated on 5th January 2012. Peter Munaita, the Eastafrican, 31 January 2006; http://allafrica.com/stories/200601310801.html PWC 2013Key issues facing the insurance sector in Kenya http://www.pwc.com/ke/en/industries/insurance-issues.jhtml Thirima, (2010) Strategic responses to challenges of insurance regulation in Kenya by the Insurance Regulatory Authority, A published MBA Thesis University of Nairobi.

http://www.standardmedia.co.ke/?articleID=2000091975&story_title=nine-insurance-firms-swim-in-losses-on-back-of-under-cutting

http://www.standardmedia.co.ke/?articleID=2000091975&story_title=nine-insurance-firms-swim-in-losses-on-back-of-under-cutting

http://www.standardandpoors.com/spf/upload/Ratings_EMEA/2013-06-13

http://property.n-soko.com/mortgage-insurance/insurers-turn-to-under-pricing-for-survival/

http://www.ibrokerghana.com/news-and-market-information/5-local/451-insurance-industry-under-threat-from-premium-undercutting

http://www.ibrokerghana.com/news-and-market-information/5-local/451-insurance-industry-under-threat-from-premium-undercutting

http://allafrica.com/stories/200601310801.html

http://www.pwc.com/ke/en/industries/insurance-issues.jhtml


297

Impact of Professional Bodies in Training and Development in

Nation Media Group

Mercy Gakii Ben (Corresponding author), Grace Neema Kariba, Titus Muhoro Njuguna Nation Media Group, P.O box 2792, Nakuru 20100, Kenya


Abstract It is through training and development programs that an organization can expand both the knowledge and skill base of their employees, and also improve chances for people to build a career path in their professions. For an employee, training gives them better abilities to perform their job, through building their confidence, and helping them learn how to engage new technologies to ease their jobs. This kind of training gives better output for a company, as their employees develop a loyal attitude, and as well come up with new ideas which can improve their work experiences. Key Words: Impact of Professional Bodies, Training and Development, Nation Media Group 1. Introduction Human development has, in recent years, become the focus of attention for planners, policy makers and administrators (Gupta, 2003). Human resource development can be defined as the process of increasing knowledge, skills and capacity of people through training. It is important not only for an organization but also for the nation. Training is an organized procedure by which people learn knowledge and skills for a particular purpose. The purpose of training is mainly to bridge the gap between job requirements and the present competencies of an employee. Professional bodies are one of the most effective ways to improve employees’ professional skills and make them more effective organizational members. Organizations require the practice of professional management principles and practices, since Management is one of the key pillars in any organization for its survival, growth and expansion, (Nelson, 2010.) A profession arises when any trade or occupation transforms itself through the development of formal qualifications based upon education and examinations, the emergence of regulatory bodies with powers to admit and discipline members, and some degree of monopoly rights. The roles of these professional associations include maintaining control or oversight of the legitimate practice of the occupation, safeguarding the public interest, and representing the interests of the professional practitioners. Profession- It is a vocation founded upon specialised educational training, the purpose of which is to supply disinterested counsel and service to others, for a direct and definite compensation wholly, apart from expectation of other business gain.



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Professional Bodies- These are organizations that set certain educational and professional standards as qualification for membership and practice. NMG- Nation Media Group KIM- Kenya Institute of Management ICPAK- Institute of Certified Public Accountants of Kenya LSK- Law Society of Kenya MSK-Marketing Society of Kenya 2. Literature review This part covers various theories of learning, training and development. 2.1 Social Learning Theory Bandura’s theory explains human behaviour in terms of a continuous reciprocal interaction between cognitive, behavioral, and environmental determinants. Learning takes place both as a result of experienced responses i.e operant view of learning and vicariously through observing the effects on the social environment of other people's behaviour. Social learning theory plays an important role in training and development. Employees are more likely to imitate their superiors than their peers because of their status, experience and reward power. Second, modeling has a considerable role to play in implementing a self-managed approach through self-observation and self-monitoring (Davis & Luthans, 1980). Third, for improving the effectiveness of training, a vicarious or modeling principle has been proposed to be used in four stages, namely presentation of models displaying the desired behaviors, imitation or rehearsal by the observer of the modeling behaviors; social reinforcement or favorable recognition for adoption of the modeled behaviors by the observer; and transfer of training to encourage the use of learned behaviors back on the job (Goldstein & Sorcher, 1974; Manz & Sims, 1981). 2.2 Constructivism Constructivism is recognized as a unique learning theory in itself. Behaviorism and cognitivism both support the practice of analyzing a task and breaking it down into manageable chunks, establishing objectives, and measuring performance based on those objectives. Constructivism, on the other hand, promotes a more open-ended learning experience where the methods and results of learning are not easily measured and may not be the same for each learner. Constructivists believe that all humans have the ability to construct knowledge in their own minds through a process of discovery and problem solving. The extent to which this process can take place naturally without structure and teaching is the defining factors amongst those who advocate this learning theory. Jean Piaget (1970), a Swiss psychologist, observed human development as a progressive stage of cognitive development. His four stages, which commence at infancy and progress into adulthood, characterize the cognitive abilities necessary at each stage to construct meaning of ones environment. In this sense, Piaget’s theory is similar to other constructivists’ perspectives of learning. Under the theory of constructivism, trainers can focus on making connections between facts and fostering new understanding in trainees. Trainers can tailor their strategies to the trainee’s responses and encourage trainees to analyze, interpret, and predict information. 2.3 Justification Employees selected for a job might lack the qualifications required to perform the job effectively. New, inexperienced employees require detailed instruction for effective performance of the job. This is a function well performed by professional bodies because management may lack the required time and expertise to train these new employees, (Ishwar, 1970). In order to survive and grow, an organization must continually adopt itself to the changing environment. With


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increasing economic liberalization and globalization, business firms are experiencing expansion, growth and diversification. In order to face international competition, firms must upgrade their capabilities. Existing employees need refresher training to keep them abreast of new knowledge. The external view brought in by professional bodies proves very viable (Vogan,1989). Training becomes necessary when an employee moves from one job to another due to promotion and transfer. Employees chosen for higher level jobs need to be trained before they are tasked with higher responsibilities. For example, in the media the junior position is that of a correspondent, then one is promoted to sub-editorial job or to a full editorial position. There is thus an ever present need for involving professional bodies in training people so that new and changed techniques may be taken advantage of, and improvements on old methods implemented. (Emily,2010). Technology is changing very fast. Automation and mechanization are increasingly applied in offices, and in the service sector. Increasing use of fast-changing techniques requires training into new technology. This technology comes with emerging ethical issues and challenges to various professions. For instance, the use of social networking sites has been adapted by the media as a means to relay breaking news, as well as a forum of discussion for various articles and current events. This has posed a major challenge for journalists, who have no prior knowledge on ethics of handling this type of media. Thus, professional bodies need to come in to train journalists on issues of handling integrity and ethics within the social networking media. (Brosseau,2000). 2.4 Professional bodies in Kenya In Kenya alone, there are a number of professional bodies that have nurtured their professionals to achieve better qualifications. For instance, Kenya Institute of Management has a program that brings together Managers from various professions. In August of this year, they held a leadership and governance program that saw former presidents and other prominent leaders from all over Africa meet in Mombasa to discuss issues that affect leadership in the continent. People from all backgrounds were invited, and this way, coaching and mentorships offered to younger professionals (Kibe,2011). Another professional body is the association of accountants, ICPAK. This body ensures that all practicing accountants in the country have been certified for professional qualification. Through ICPAK, the global best practices in the profession are highly encouraged. According to their website, the body offers constant updates for their members through offering new trainings to keep them at par with the emerging trends in the world. Every quarter, the body provides seminars, workshops and other opportunities for members to meet and exchange ideas. These forums are ideal for networking, thus giving attendees a chance to learn of the latest trends in the market. The body has practices the right to bar any professional from practicing if such a person has been found to be acting contrary to the ethical requirements of the profession (Kibe,2011). Another professional training body is The Institute of Capacity Development, the executive training arm of KCA University. The institute targets professionals and aims at enhancing their skills and keeping them abreast with the ever changing dynamics in the business environment. The Institute provides executive training to senior managers and as well extends tailor-made training to various institutions in Kenya and around Africa. The institute has been a major training partner for the Government of Kenya and Government of South Sudan. ICAD specializes in short courses, seminars, workshops, conferences and partners with high profile organizations including the Center for Corporate Governance (CCG), Institute of Internal Auditors (IIA), Association of Certified Chartered Accountants (ACCA) and the Institute of Certified Public Accountants of Kenya (ICPAK), (Wachira, 2011). The same is true of Kenya Law Society, LSK, which nurtures the interests of its members. The LSK has continual trainings for their employees under the Continuing Legal Education Program, known as CLE. The CLE


300

program rolls out an annual calendar which covers different law topics in the format of seminars and lectures. The sessions are carried out in various towns in the country and advocates and non-advocates experts in various professional fields volunteer to present at the sessions. The CLE Calendar has over sixty sessions in fifteen towns in Kenya. The CLE program also rolls out supplementary free programs throughout the year, many of which are organized in partnership with development partners (Githu, 2008). According to the LSK website, Regulation 11 of the Advocates Act on Continuing Legal Education Regulation, 2004 states that every applicant for an annual practicing certificate shall be accompanied by proof that the applicant has secured five units of continuing legal education during each practicing year. Qualification for journalism practice, just like any other profession, should be based on a standard academic and professional training. For example, setting a minimum qualification of possessing either a Diploma or Bachelor’s degree in Journalism and Mass Communication from a recognized training institution. For Kenyan journalists however, there is a problem that practicing journalists grapple daily with; there is no regulating body, or professional organization that journalists can work with to hone their professional skills. According to an article published in the Standard newspaper of 9 February 2010, the profession has been raided by all manner of professionals, and quacks who gate-crash in the name of having talent and good looks (Fred,2010). In Nation Media Group, journalists are employed mainly using their past training efforts, got through colleges, or universities. However, once a journalist has entered the profession, there are no efforts on the part of the employer to ensure that these journalists get continuous professional training. Another problem is that there are no professional bodies that journalists can identify with, or that can help keep professionalism within the journalism career. A third challenge is the lack of training needs analysis within the company. (James,2010). This is where even if there arises an opportunity for training, only those who are in good standing with their seniors are given the opportunity to attend, leaving out other professionals who actually need this training. According to Keith as cited in The Info Journal, (2008) the company also lacks information on the existing professional bodies which have not marketed their services to the company, there are various professionals working in various departments. There are financial experts such as accountants, human resource practitioners, Information Technology experts, journalists, and marketers. Most of these groups have professional bodies to which they belong, such as MSK, IHRM and ICPAK. Professional bodies play a critical role in supplying the market and the general public service with people who can meet the minimum requirement of Chapter six of the new constitution of Kenya. This chapter puts emphasis on leadership and integrity, and provides guiding principles of leadership and integrity which include Selection on the basis of personal integrity, competence and suitability, objectivity and impartiality in decision making and in ensuring that decisions are not influenced by nepotism, favoritism, other improper motives or corruption, selfless service solely based on the public interest. Another is accountability to public for decisions and actions and discipline and commitment to service to the people (Constitution of Kenya,2010). However, in the media fraternity, there are no professional bodies designed to regulate and train the practitioners in their day to day work. There are no methods of monitoring the ethics and procedures that the media practitioners follow in delivery of their duties, comments the writer who is also a lecturer in Communication writing in the Standard newspaper of 9 February 2010. Other professionals who work within NMG include marketers who are regularly appraised by the MSK, their professional body. Through MSK, they are invited to networking seminars, coffee outings and other forums that enable them to network with people from other fields.


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There is no recognition of members who have joined any professional body by the company, thus deflating morale of journalists. 2.5 Challenges of training and development through professional bodies in NMG There are no policies that have been laid down by NMG in order to facilitate training of journalists through professional bodies. In other organizations, there is a clearly laid down requirement that for a professional to join the body, the person must be a registered member of this professional body. Even though line managers find the need for training their junior employees, the bureaucratic procedure that the ideas have to go through before getting approved is too long, and thus discouraging to middle level management. There is no clear career path set by NMG for journalists to follow in growing within the profession; thus even if the company took them for training, it may end up being wasted due to the nature of contracts that many of the journalists are employed under. The media field is also popular for taking in very young professionals who may not be settled in their careers, and therefore keep moving jobs and professions. In the minutes of the company's meeting in year 2009, over 20 young professionals who had joined the company in the last two years as fresh graduates left for more lucrative jobs in the market. The company is challenged to select particular professional bodies, since there are many professionals within the company, such as accountants, human resource professionals, thus the company may not see money sense to invest in enrolling their employees in professional bodies. 3. Conclusion and recommendations The media practitioners should establish a professional body for regulating, improving and ensuring that professionals are ready and equipped to cope with changes in the media. The same body should ensure that there are continual trainings on the job for employees and all practitioners to keep them advancing and improve their professional standards. The various media houses need to conduct regular training needs analysis among their employees so as to find out the areas of need that should be taken care of through training. There should be a requirement for all media practitioners to belong to a professional body, and without which one should not join the world of work. The future of professional bodies in Kenya is leaning more toward standardization in professionalism. What is now emerging is that an overwhelming majority of practitioners are strongly in favour of reorganizing current professional bodies. This is so that they can have sufficient authority, power and legitimacy to legislate rules and regulations on behalf of practitioners and perform the functions necessary to promote and protect the wellbeing and reputation of the profession.

REFERENCE Alberto, P. and Troutman, A.C. (2003) Applied behavioral Analysis for Teachers (6th ed) Upper Saddler River, NJ: Merrill, Prentice Hall Argyris, C. (1976) Increased leadership effectiveness. New York; Wiley Argyris, C. (1978) Organizational Learning: A Theory of action perspective. Reading MA: Addison-Wesley Publishing Company (Schon, D.A) Argyris, C. (1993) On organizational Learning, Cambridge, MA: Blackwell Bandura, A. (1969). Principles of Behavior Modification, NY: Holt, Rinehart and Winston. Bandura, A. (1976) "Effective Change through Participant Modeling", In J.D. Krumboltz and C.E Thoresen (Eds), Counseling Methods, New York: Holt, Rinehart andWinston Bandura, A. (1977) Social Learning Theory. New Jersey, Prentice Hall Inc. Belkin, G.S. and Gray, J.L. (1977) Educational Psychology: An Introduction. Dubuque Iowawm. C. Brown


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Publishers Bender, A.K., Cunningham, D, Duffy, T.M. and Perry, J.P. (1995) Theory into practice: How do we link? In G. J. Anglin (Ed), Instructional technology: past, present and future (2nd Ed.) Englewood, CO: Libraries Unlimited. Bigge, M.L. (1964) Learning Theories of Teachers: New York, Harper and Row Bruner, J. (1986) Actual minds, possible worlds. Cambridge, MA: Harvard University Bruner, J. (1990), Acts of meaning. Cambridge, MA: Harvard University Press Burns, R. (1995) The Adult learner at work, Business and professional Publishing, Sydney. Brosseau, J.M. Media training in Africa.Pauline's Publications.Nairobi. CIPD (2005) Learning Styles, Fact sheet, Chartered Institute of Personnel and Development, London. Comer, R. J. (2004) Abnormal Psychology (5th ed); Worth Publishers, New York. Constitution of Kenya,2010. Davis, T.W. and Luthans, F.A. (1980) “A social Learning Approach to Organization Behavior”, Academy of management Review 5, 281-90. Dayal, Ishwar. (1970).Management training in organizations. Prentice Hall, New Delhi. Dembo, M.H. (1994), Applying educational; psychology (5th edition), White Plains, NY: Longman Publishing Group Elly Wamari,"Professional bodies and the need for training" Daily Nation, 24 June 2011, page 13. Ertner, P.A. and Newby, T.J. (1993) “Behaviorism, cognitivism, constructivism: Comparing critical features from an instructional design perspective” Performance Improvement quarterly, 6(4), 50-70 Fred Isahakia, "Journalists too need professionalism" Standard newspaper,9 February 2010,page 34. Good, T.L, and Brophy, J.E. (1990) Educational Psychology: A realistic approach (4th Ed) White Plains, NY: Longman Goldstein, A.P. and Sorcher, M. (1974). Changing Supervisor Behavior, New York, Pergamon. Gupta, C.B. (2003) Human Resource Management. Sultan Chand & sons, New Delhi. Kibe, Peter, 2011, Future of journalism in Kenya, in Daily Nation, 26 June 2011 page 34. Kingori, James,(2008), "Importance of training," in MJ Thiongo, Accountant Journal:ICPAK,Nairobi. Minutes, 2009, NMG, third quarter meeting. Hergenhahn, B.R. (1976) An Introduction to Theories of Learning, New Jersey, Prentice hall, Inc Hilgard, E.R. and Bower, G.H. (1975) Theories of Learning (4th Ed) Englewood Cliffs, New Jersey; Prentice Hall Hill, W.F. Learning (1963) A Survey of Psychological Interpretations, Sanfrancisco, and Chandler. 1963 Njoroge, Nelson, (2010), Professionalism in the world of work, In CK Kimutai, Management Magazine. Nyamweya, Emily, 2010. The need for professional bodies in training and development in organizations. MA dissertation Egerton University. Shikwati, John, (2010), "Professional bodies matter", in CK Kimutai, Management Magazine: KIM, Nairobi. Vogan, V.A. Training in Industry: The management of learning. Tavistock, London. Wachira, James (2011) Improving your accounting career, in Accountant Magazine.


303

The impact of solar radiation on the human body

Saridi Maria (Corresponding author) Papakonstantinou Elpida & Rekleiti Maria

General Hospital of Korinthos, Greece, 33 Sina str, GR-20100, Korinthos, Greece


Abstract Exposure to solar radiation can have positive effects on the human body, but it can also cause damages and melanoma is the most significant among those. The aim of the present study was to gather information about the effects of solar radiation on the human body and to update available knowledge in accordance with new international data. A systematic literature review took place and included both Greek and international books, articles, studies and related papers on the internet (PubMed, Cinahl, Scopus and Iatrotek databases), published from 1998 to this day. Dissertations and “gray literature” (e.g. conference proceedings) were not included in this study. The following terms (“Ultraviolet radiation, skin cancer, sun, sun exposure, electromagnetic spectrum, conjunctiva, cataract, squamous cell cancer , basal cell cancer, cutaneous melanoma”) were used as key-words. UVR may have an impact on the human body according to wavelength. UVA and UVB exposure may cause photoaging and sunburns, and UVC may induce DNA mutations leading to skin cancer. Ozone is the main protective mechanism since it absorbs most of UVR. Ozone layer depletion in the last decades has lead to increased rates of sun-related damages. Most significant damages include cataract and skin damages such as photoaging and skin cancers. Among skin cancers, melanoma has the highest incidence in ever younger ages reducing life expectancy. A good part of the international literature focuses on primary prevention measures and interventions that include mole monitoring. Key Words: Ultraviolet radiation, skin cancer, sun, sun exposure, electromagnetic spectrum, melanoma 1. Introduction Solar radiation can have both positive and negative effects on the human body. Several essential procedures such as vitamin D synthesis are triggered by solar radiation. Also sun exposure can have beneficial effects on several diseases (Gies et al, 1998a). Both UVA and UVB are important for human health. Low levels of solar radiation are crucial for the synthesis of vitamin D, while overexposure may lead to acute and chronic damage to the skin, the eyes or the immune system (Zepp et al, 2011a; Lemus-Deschamps & Makin, 2012a). Ozone layer depletion has lead to increased UVB radiation-induced damages to humans, animals, deep-sea organisms and plants. It has been estimated that a further 10% depletion of the ozone layer in the following years could cause 300 000 new skin cancer cases (squamous and basal cell cancer), 4 500 new melanomas and 1.6-1.75 million cases of cataract each year worldwide (Tourpali et al, 2009a; Aucamp et al, 2010a). Aim: The aim of the present study was to gather information about the effects of solar radiation on the human body and to update available knowledge in accordance with new international findings.

Journal of Health Science (JHS) SEPTEMBER 2013 VOL.1, No.7


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2. Literature review A comprehensive literature review took place by using Greek and international databases (PubMed, Cinahl, Scopus, Ιatrotek), relevant books and other relevant sources (WHO, CDC). The survey of the related literature included material published between 1998-2012, and the following key-words were used: Ultraviolet radiation, skin cancer, sun, sun exposure, ozon, electromagnetic spectrum, conjunctiva, cataracts, Squamous cell cancer, Basal cell cancer and melanoma. All related literature includes an abundance of research findings from all over the world regarding the effects of solar radiation on humans. Australia, USA and New Zealand, due to high incidence of sun-related health conditions have launched health education programs that stand as an example for other countries (including Greece) to follow. 2.1 Ultraviolet radiation (UVR) The Sun is a star in our galaxy that emits energy in the form of electromagnetic radiation, and has a surface temperature of about 6000 degrees Celsius. The electromagnetic radiation emitted by the photosphere ranges from very short wavelengths (gamma rays) to long wavelengths and for the most part it reaches the external layers of the Earth's atmosphere. The radiations that have an effect on human skin are just a fraction of the solar spectrum. Those radiations are the Infra-Red radiation, visible light, Ultra Violet radiation, gamma and X rays, radio waves and microwaves (Gies et al, 1998b). Ultraviolet radiation is a fraction of the electromagnetic spectrum and it has three sub-types (UVC, UVB, UVA), (Table 1) according to wavelengths (in nanometers) and effects on human skin. UVC rays (wavelength 100 - 280 nm) are absorbed by ozone, oxygen and carbon dioxide, while UVA (wavelength 315 - 400 nm) and 10% of UVB (wavelength 280 - 315 nm) reach the surface of the Earth, but not in the same degree, because rays are absorbed at different rates by the Earth's atmosphere (Zepp et al, 2011b). 2.2 Natural Factors affecting Solar Radiation There are several factors affecting the intensity of solar radiation (Table 2) (Gies et al, 1998c). The UVR intensity reaches its peak at noon rather than in the morning, in the summer rather than the winter, and in equatorial countries rather than Europe (Tourpali et al, 2009b; Aucamp et al, 2010b; Lemus-Deschamps & Makin, 2012b). UVR is more intense when the sky is clear. Clouds generally decrease the UVR intensity, but that depends mainly on the clouds' thickness and type. Thin and scattered clouds decrease UVR intensity by a mere 10%, while low and thick clouds reflect UVR significantly (almost by 80%). When the solar disc is visible, then UVR reflection is almost negligible. UVR becomes more intense the farther away from the sea level one moves, since the atmospheric elements that absorb most of it decrease by height. It has been estimated that 1000 meters from the ground, UVR increases by 10%. Almost 95% of UVR can penetrate water (e.g. the sea) and almost 50% of it can reach a depth of about 3 meters. Consequently when one swims their body is just a few centimeters above sea surface; hence they are virtually unprotected against UVR. When the sky is clear, UVR is more intense at noon rather than in the morning or afternoon. When the Sun is at its peak, radiation is also more intense (because solar rays reach the Earth directly). This is why solar radiation is more intense in the summer rather than the winter (Zerefos et al, 2000a; Lemus-Deschamps & Makin, 2012c). An object or an individual receives solar radiation directly (from the sky) and indirectly (radiation reflected on the ground). The amount of the reflected radiation depends on the type of the surface. Trees, grass and water reflect less than 10% of UVR; on the other hand, fresh snow reflects up to 80% of UVR and dry sand almost 20% of solar radiation. Consequently, those who are in snowy areas or sandy beaches receive more solar radiation. Some reflection levels according to the surface type: Grass reflects a mere 3%, sea water 5%, sand


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17% and snow 85% (Table 3). Clouds absorb 30-80% of solar radiation (according to height, thickness, etc) but not all of it (Aucamp et al, 2011c; Lemus-Deschamps & Makin, 2012d). 2.3 Ozone as a Protective Mechanism against Solar Radiation 12-15 km above the surface of the Earth, namely in the stratosphere, a thick layer of ozone exists, a gas that its molecule consists of three oxygen atoms. Ozone is formed by atmospheric oxygen and ultraviolet radiation from the Sun. The ozone layer virtually shields the Earth from the damaging effects of solar radiation (Zerefos et al, 2000b; Garane et al, 2006a). Ozone absorbs the solar radiation and transforms it to heat. Solar light gets filtered while traveling through the atmosphere and dangerous wavelengths (cosmic radiation, gamma and X rays, UVC) are blocked. Should this protection mechanism cease to exist, life as we know it (flora, fauna, bacteria and viruses), would perish (Isaksen et al, 2005a). The role of ozone is twofold: (a) It absorbs part of UVR and transforms it to heat; and (b) It blocks the dangerous types of UVR that otherwise would have had a devastating impact on the ecosystem. The depletion of the ozone layer mainly because of chemical agents such as chlorofluorocarbons (CFCs) in the last decades of the 20th century is a globally acknowledged problem that has alarmed scientists, governments and the public. It has been estimated that when ozone decreases by 1% and UVB increases by 2%, squamous and basal cell cancers and melanomas increase by 1-3% (Zerefos et al, 2000c; Isaksen et al, 2005b; Garane et al, 2006b). The ozone hole in the southern hemisphere increases every years, although its size varies according to season. It has been estimated that in the winter ozone decreases by 10% every ten years. Ozone generally increases in the summer because of higher temperatures that speed up chemical reactions involving volatile hydrocarbons and nitrogen oxides from factories and cars that help increase the amount of ozone. On the other hand, lower temperatures slow down the chemical reactions and thus the photochemical smog is a rare incidence. Thus, the synthesis of tropospheric ozone is favoured during the warmer months of the year (late spring and summer) (Isaksen et al, 2005c; Garane et al, 2006c). Ozone levels in Greece, according to daily measurements from November 1978 to April 1993, have increased –mainly in late winter and early spring. On the contrary no significant increase has been established for summer months. Nevertheless, in Greece overall ozone levels have not changed dramatically, as in other countries such as Australia or New Zealand, a fact that could explain also the lower skin cancer incidence in Greece compared to those countries (Varotsos, 1998; NASA's TOMS, 2005). 2.4 Biological Effects of Solar Radiation The organs most exposed to sun rays are the skin and the eyes. Exposure to solar radiation could result in direct or chronic disorders of the skin, the eyes and the immune system (Haake & Holbrook, 1999a; Lagerlund et al, 2002). Exposure to solar radiation may have sunburns or photokeratitis as a direct impact. Cancer and premature skin aging are among the chronic effects. UVA affects the subcutaneous tissue and can alter collagen and elastin structure. Cataract, pterygium and keratopathy are also among chronic conditions due to exposure to solar radiation. UVR can lead to the restructuring of DNA, something that can lead to mutations. The ability of the human body to heal and restore solar radiation-induced damages decreases by age. As a rule of thumb, the shorter the wavelength, the higher the risks associated with UVR exposure (Haake & Holbrook, 1999b). 2.5 The Beneficial Effects of Solar Radiation


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Moderate sun exposure can have several positive effects on the human health and mood. The sun is vital for life on Earth. It activates provitamin D3, which exists on the skin, to vitamin D3 which regulates calcium and phosphorus metabolism; D3 deficiency can cause rickets, especially in children. Solar radiation can also ameliorate some skin diseases, such as psoriasis and acne, and it also activates the synthesis of melanin, a procedure that thickens the keratin layer and consequently is seen as the most important protection mechanism against sunburns (Haake & Holbrook, 1999c). Sun exposure can also affect in a positive way the autonomic nervous system by activating several vitamins, hormones and enzymes. It stimulates blood circulation, boosts hemoglobin synthesis and lowers blood pressure. It also makes the body less prone to some bacterial and fungal infections because of its drying effects on the skin. Moderate sun exposure improves mood and creates positive and optimistic feelings (Gies et al, 1998d; Zepp et al, 2011a). The sun is also a well-known heat source and an exploitable source of energy; it also is a key-factor for photosynthesis, a process vital for plants and animals and for the water cycle the procedure responsible for the continuous movement of water on the Earth and provides fresh water to rivers, lakes and underground water reservoirs. Consequently, running water can be used as a source of hydroelectric energy, and solar radiation may be used as a sustainable alternative source of energy (photovoltaic systems) (Zepp et al, 2011b). 2.6 Adverse effects of solar radiation 2,6,1 Effects of Solar Radiation on the Eyes Ultraviolet radiation can lead to several eye conditions. More than 99% of UVR is absorbed by the outer eye layers and only a fraction can reach the photo-sensitive retina (Haake & Holbrook, 1999d; Lucas, 2010a; Zepp et al, 2011c). Prolonged exposure to UVR can damage the eye and even lead to sight loss. Scientific findings have established that everyone, both children and adults, are susceptible to such risks. UVA can also damage the retina, since it penetrates much deeper into the eye although it has lower energy. Increased exposure of the eye to the sun increases the risk of sun-related eye damage. Persons that are exposed to the sun for long periods of time because of their profession or other activities are running a higher risk of eye damage (Fitzpatrick et al, 2003a; Lucas, 2010b). The most significant harmful effects of solar radiation on the eye are the following: Cataract is one of the most important causes of poor eye sight and sight loss worldwide. Laboratory studies have shown that UVR can cause cataract. Macular degeneration is the main cause of poor eye sight in people over 55 years of age. Laboratory experiments have shown that exposure to UVR and visible spectrum radiation can cause damage to the retina. Pterygium is a tissue-like formation on the white of the eye that extends to the cornea and can hinder eye-sight. It usually affects people that work outside and are exposed to the sun; its presence is related to the amount of ultraviolet radiation a person has been exposed to. It can be surgically removed but it frequently recurs and could cause sight loss if not properly treated. Photokeratitis is in essence a burn of the cornea which is caused because of excessive UVB exposure. It is reversible and treatable. It usually affects people who spend much time at the beach or in snowy areas without protecting their eyes. It can cause acute pain for 1-2 days and temporary sight loss. 2.6.2 Effects of Solar Radiation on the Skin The skin protects the human body from damaging factors. The skin’s surface performs two main functions: keratinopoiesis and melanogenesis. Keratinopoiesis is the formation of the hard keratin layer, and melanogenesis is the synthesis of the skin pigment, melanin. Melanin not only sets the skin colour but it also protects the cells by absorbing UVR. When the skin is under exposure to the sun, melanin production increases and the skin colour gets darker (Lucas, 2006 & 2010c).


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The reactions of the skin after prolonged sun exposure are acute or chronic. Acute or direct effects are noticeable within hours or days after exposure; chronic effects are usually the result sun exposure for prolonged periods of time (Berg & Allan, 2001). Skin redness is usually a short-term, temporary skin condition. It is caused by expansion of the skin capillaries and becomes apparent 2-3 hours after sun exposure, reaching its peak 12-14 hours later. More intense redness accompanied by pain, itchiness, swelling, blisters or even fever and nausea is considered to be a sunburn. Sunburn is an acute temporary skin inflammatory reaction due to exposure to solar radiation or non-natural sunlight (solarium). It causes damage on the ‘gatekeepers’ of the skin, the squamous layer cells. It is a temporary condition that leaves no scars and at the final stages leads to skin resurfacing. Simple redness that is no longer exposed to the sun disappears after 24-36 hours, while more serious sunburns may take 4-8 days to heal. The existence of at least one serious sunburn during childhood or adolescence is a risk factor for skin cancer later in life. Solar dermopathy – Photo-ageing. A recurrent skin damage due to the sun over many years can lead to a syndrome called solar dermopathy. It is the result of excessive or prolonged sun exposure over many years. This syndrome is in fact the result of the cumulative results of sun exposure. Thin and deep wrinkles appear mainly around the mouth, above the upper lip, the cheeks and the neck. The skin appears to be yellow actinic elastosis. Solar lentigo. These are benign brown to black blemishes in white people. There are three types of such localized blemishes: freckles, juvenile lentigo and solar lentigo. Sun exposure may increase their number and cause them to become darker. If there is no sun exposure, they become lighter and in the winter they may disappear altogether. Juvenile lentigo appears in childhood; the spots do not increase in number, they do not change size or get darker after sun exposure. Actinic Hyperkeratosis is a premalignant condition and is usually the result of lont-term sun exposure. Actinic keratosis usually appears in groups in people of fair complexion. Fair complexion and long-term sun exposure are the main risk factors for actinic keratosis. The lesions appear usually on the face, the arms, the hands, the skin of the head, and rarely on the shoulder blade, the shoulders, the legs and the feet. Clinically, actinic keratosis appears as a ragged, thick lesion covered by yellow wing-like formations. Melanocytic nevi (Moles). These benign lesions are so common that no white person without even one nevus exists. Apart from the common nevi, there are also several clinical-histological varieties. Since melanocytic nevi can change into a melanoma, correct diagnosis is substantial for a person’s life. Some nevi have a greater risk of changing into a melanoma. Dysplastic nevi (atypical moles) are among those that carry a high risk of changing into a melanoma. Studies have shown that both genetic and environmental factors (e.g. solar radiation) are involved in these cases. It has been suggested that the existence of a large number of moles can increase the risk of melanoma. Estimates vary but the risk increases by 10-60 times (Habif, 2002a; Alexandrescu, 2009a). Not all changes in the appearance of a mole indicate a malignant condition. But a thorough examination by an experienced pshysician is necessary. The ABCD rule is a well-established method to monitor melanocytic nevi (Table 4).

Basal Cell Carcinoma (BCC). BCC is a malign skin tumor that damages and penetrates locally the skin, rarely metastasizes, and is considered to be the most common skin cancer in white people. It usually affects adults and it appears on the skin excluding palms and sole. BCCs are generally considered to be more benign than SCCs since they develop slowly and are localized. BCC incidence in males is higher than that of females, although in the last decades females have increasing incidence rates as well. Annual BCC incidence in the USA is 146 cases out of 100 000 persons, and in Europe 132 cases per 100 000 persons. Worldwide there are significant fluctuations in BCC incidence rates (Haake & Holbrook, 1999e; Lemus-Deschamps & Makin, 2012e). In recent


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years, BCC frequency has increased considerably in Europe, Australia (5%) and the US (4.5%). Data from Greece have shown a similar trend. BCCs usually develop after the age of 40 and their frequency increases by age. In recent years BCCs have been shown to increase alarmingly in younger ages too (Armstrong & Kricker, 2001; Lucas, 2010d). Although solar radiation has been assumed to be the main factor for the development of BCCs, the causal relation between them remains rather vague compared to the one between solar radiation and SCCs. It seems that after an upper limit of accumulated radiation, further sun exposure does not increase the risk for the development of BCCs (Habif, 2002b; Alexandrescu, 2009b). Squamous Cell Carcinoma (SCC). SCCs develop due to a malign growth of skin keratocytes, affecting both the skin and the mucous membrane. Consequently, SCCs can affect the mouth (tongue, palate, mouth angle, and inner buccal surface), the genitals and the anus. Its most common site is the lower lip semi-mucous membrane (Zepp et al, 2011d). In the USA alone, more than 1.000.000 persons are affected by some kind of skin cancer every year. The frequency of SCC varies considerably from country to country. Its highest rate is in Australia with an incidence of 250 cases per 100.000 people. It is noteworthy that within five years SCC incidence went up by 50% and males doubled SCC frequency compared to females. The risk of SCCs has been linked to the accumulated solar radiation over the years and a person’s phototype (Habif, 2002c; Alexandrescu, 2009c). Thus, people of fair complexion who have freckles, ginger or blond hair, blue eyes and do not tan, but sunburn easily are considered to be skin cancer-prone. People that are exposed to the sun because of their profession (e.g. farmers, sailors) and fail to take sun-protection measures are in dramatically higher risk of developing SCC (English et al, 1998a; Karagas et al, 1999a; American Cancer Society, 2002). Malign Melanoma (MM). Epidemiological studies focus regularly on melanomas because of their exceptional interest. The fact that melanoma affects more and more white persons and its relation to solar radiation, has attracted scientific interest. According to epidemiological studies, melanoma is an extraordinary neoplasm, of rapidly increasing incidence in Western countries, and some authors suggest that it is an epidemiological phenomenon. The most common risk factors for melanoma are: fair complexion with many moles or dysplastic moles, excesive and prolonged dun exposure and esxesive exposure during childhood or adolescence (Siegel et al, 2012). It has been observed that cases of melanoma have been increasing for all age-groups and both genders, although this increase is higher for people 20 to 40 years old. In Europe, almost 26.000 men and 33.300 women are diagnosed every year with melanoma and almost 8.300 men and 7.600 women die from it. The highest incidence rates are in Northern and Western Europe, although mortality rates do not show any significant variations (English et al, 1998b; Karagas et al, 1999b). In Greece, melanoma-related studies are scarce. Moreover, a well-coordinated record of all diagnosed cases is virtually nonexistent (Karagas et al, 1999c; Downard et al, 2007). Since 2000, when Greece joined the European campaign 'Euromelanoma', public information programs have been launched and also all newly diagnosed skin cancer cases are being recorded (Gies et al, 1998e; de Vries et al, 2003). Between 2000 and 2004, 2.723 persons had been examined, the majority being less than 50 years old and females (59%) (MacKie et al, 2002;

Roussaki-Schulze et al, 2005). Most of the participants (76%) had had phototypes II and III. 47% of the participants reported at least one sunburn during childhood, while 5% had had individual or family history of melanoma. The clinical examination showed actinic keratosis (14.45%), dysplastic nevi (31.2%), and possiple skin cancer other than melanoma in 6.4% of the participants. Melanoma is an aggressive tumor that metastasizes early, being characterized by an uncontrollable increase in the number of the melanocytes. It can appear suddenly on its own, or at the site of an old mole. Its clinical appearance may vary since it can develop on the face, on the upper surface of arms and on the shank (Fitzpatrick et al, 2003b). The lesion is characteristically multicoloured,


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ranging from dark brown or black to reddish or purple. It develops slowly and the lesion does not have well-defined borders (WHO, 2003). Melanomas that arise in pre-existing moles are also quite common. Some basic diagnostic criteria for melanomas include: a lesion that changes size; skin adjacent to the mole becomes brown; the lesion is multi-coloured; local infiltration; itchiness; the existence of a surrounding inflammatory halo; pain; ulceration (Table 4) (CDC, 2003). 3. Conclusions It is evident that the most substantial way to prevent skin cancer is to avoid sun exposure as much as possible. Since this is not always a realistic option, protection measures, such as sunscreen, staying in the shade and appropriate clothing, are essential. The general population should be kept continuously informed about skin cancer prevention and early detection methods, so that any lesion can be examined or diagnosed as early as possible. Besides primary and secondary prevention campaigns, health education programs and the adoption of healthier behaviours from an early age are also absolutely necessary. References Alexandrescu, D.T. (2009) “Melanoma costs: a dynamic model comparing estimated overall costs of various clinical stages”. Dermatology Online Journal 15 (11) article 1. American Cancer Society. Cancer Facts and Figures. Available from: http://www.cancer.org/docroot/stt/content/stt_1x_cancer_facts__figures_2002.asp [March 2003] Armstrong, B.K., Kricker, A. (2001) “The epidemiology of UV induced skin cancer”. Journal of Photochemistry and Photobiology B, 63 (1–3) 8–18. Aucamp, P.J., Björn, L.O., Lucas, R. (2011) “Questions and answers about the environmental effects of ozone depletion and its interactions with climate change: 2010 assessment”. Photochem Photobiol Sci 10 (2) 301-16. Berg, A.O., D. Allan, J.D. U.S. (2001) “Preventive Services Task Force. Screening for skin cancer; recommendations and rationale”. Am J Prev Med 20 (3S) 44–46. CDC. (2003) “Counseling to prevent skin cancer: recommendations and rationale of the US Preventive Services Task Force”. MMWR 52 (No.RR-15) 13–17. De Vries, E., Tyczynski, J.E, D. Parkin D.M. (2003) “Cutaneous Malignant Melanoma in Europe”. ENCR Cancer fact sheets No. 4. Downard, C.D., Rapkin, L.B., Gow, K.W. (2007) “Melanoma in children and adolescents”. Surg Oncol 16 (3), 215–220. English, D., Armstrong, B., Kricker, A., Winter, M., Heenan, P., Randell, P. (1998) “Case control study of sun exposure and squamous cell carcinoma of the skin”. International Journal of Cancer (77) 347-53. Fitzpatrick, T., Johnson, R., Wolf, K., Suurmond, D. (2003) Dermatology Clinic, Greek Edition Andreas Katsampas, Athens, 181-275. Garane, K., Bais, A., Tourpali, K., Meleti, C., Zerefos, C., Kazadzis, S. (2005) “Variability of spectral UV irradiance at Thessaloniki, Greece, from 15 years measurements,” In Ultraviolet Ground- and Space-based Measurements, Models and Effects V, G. Bernhard, J.R. Slusser, J.R. Herman, and W. Gao, Eds., vol. 5886 of Proceedings of SPIE, San Diego, Calif, USA. Gies, P.H., Roy, C.R., Toomey, S., McLennan, A. (1998) “Protection against solar UV radiation”. Mutat Res 422 (1) 15–22. Haake, A.R., Holbrook, K. (1999) The structure and development of skin. Ch.7, In Fitzpatrick’s Dermatology in General Medicine, 5th ed., Edited by I.Freedberg et al, Mc Graw-Hill, 70-114. Habif T.P. (2002) Skin Diseases. Diagnosis and Treatment. Greek Edition Andreas Katsampas, Athens, 298-321,

http://www.cancer.org/docroot/stt/content/stt_1x_cancer_facts__figures_2002.asp


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360-397, 398-421. Isaksen, S.A., Zerefos, C., Kourtidis, K., Meleti, C., Dalsøren, S.B., Sundet, J.K., et al. (2005) “Tropospheric ozone changes at unpolluted and semipolluted regions induced by stratospheric ozone changes”. Journal of Geophysical Research D 110 (2) 1–15. Karagas, M.R., Greenberg, E.R., Spencer, S.K., Stukel, T.A., Mott, L.A. (1999) “Increase in incidence rates of basal cell and squamous cell skin cancer in New Hampshire, USA. New Hampshire Skin Cancer Study Group”. Int J Cancer 81 (4) 555–559. Lagerlund, M., Dixon, H.G., Simpson, J.A., Spittal, M., Taylor, H.R., Dobbinson, S.J. (2006) Observed use of sunglasses in public outdoor settings around Melbourne, Australia: 1993 to 2002”. Prev Med 42 (4) 291-6. Lemus-Deschamps, L., Makin, J.K. (2012) “Fifty years of changes in UV Index and implications for skin cancer in Australia”. Int J Biometeorol 56 (4) 727-735. Lucas, R.M., McMichael, A., Smith, W., Armstrong, B. (2006) Solar Ultraviolet Radiation: Global Burden of Disease from Solar Ultraviolet Radiation, Environmental Burden of Disease Series 13, World Health Organization, Geneva, Switzerland. Lucas, R.M. (2010) Solar Ultraviolet Radiation: Assessing the Environmental Burden of Disease at National and Local Levels, Environmental Burden of Disease Series 17, World Health Organization, Geneva, Switzerland. MacKie, R.M., Bray, C.A., Hole, D.J., Morris, A., Nicolson, M., Evans, A., et al (2002) “Incidence of and survival from malignant melanoma in Scotland: an epidemiological study”. Lancet 360 (9333) 587-591. NASA's Total Ozone Mapping Spectrometer, TOMS, 2005. Available from: http://eospso.gsfc.nasa.gov/missions/total-ozone-mapping-spectrometer-earth-probe [Aug 2011] Purdue, M.P., Freeman, L.E.B., Anderson, W.F., Tucker, M.A. (2008) “Recent trends in incidence of cutaneous melanoma among US caucasian young adults”. Journal of Investigative Dermatolog 128 (12) 2905–2908. Roussaki-Schulze, A.V., Rammos, C., Rallis, E., Terzis, A., Archontonis, N., Sarmanta, A., et al. (2005) “Increasing incidence of melanoma in central Greece: a retrospective epidemiological study”. Int J Tissue React 27 (4) 173-9. Siegel, R., Naishadham, D., Jemal, A. (2012) “Cancer statistics, 2012,” CA: A Cancer Journal for Clinicians 62 (1) 10–29. Tourpali, K., Bais, A.F., Kazantzidis, A., Zerefos, C.S., Akiyoshi, H., Austin J., et al (2009) “Clear sky UV simulations for the 21st century based on ozone and temperature projections from Chemistry-Climate Models”. Atmos Chem Phys 9 1165-1172. Varotsos, C.A. (1998) “Total ozone depletion over Greece as deduced from satellite Observations”. Laboratory of Meteorology, Department of Applied Physics, University of Athens, Greece. World Health Organization. Sun Protection and Schools: How to Make a Difference. Geneva: World Health Organization, 2003. Available from: http://www.who.int/phe/uv [Oct 2012] Zepp, R.G., Erickson, D.J.3rd., Paul, N.D., Sulzberger, B. (2011) “Effects of solar UV radiation and climate change on biogeochemical cycling: interactionsand feedbacks”. Photochem Photobiol Sci 10 (2) 261-79. Zerefos, C.S., Meleti, C., Balis, D.S., Bais, A.F., Gillotay, D. (2000) “On changes of spectral UV-B in the 90's in Europe”. Advances in Space Research 26 (12) 1971–1978. Appendix Table 1. UVR types (Source: Armstrong, B.K.et. al.)

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Type Wavelength Characteristics

UVA (400 - 320 nm) Long wavelength, low energy radiation. It can infiltrate human skin and reach the dermis. It can damage the collagen tissues and reduce skin elasticity and cause skin-ageing.

UVA (320 - 290 nm) Short wavelength, high energy radiation. It increases in the summer, reaching its peak at noon. It reaches the epidermis. Can cause sunburns and skin lesions.

UVC (290 - 200 nm)

Short wavelength, high energy radiation. Can cause chemical and genetic changes in living organisms. Absorbed by stratospheric ozone.

Table 2. Factors affecting solar radiation intensity FACTORS AFFECTING SOLAR RADIATION 1. Latitude 2. Season of the year 3. Time of the day (direct or abundant sun light) 4. Altitude 5. Reflection (sand, snow, water) 6. Skin phototype 7. Weather conditions (smog, clouds, humidity) 8. Transport of radiation in the atmosphere Table 3. Surface Reflection Coefficient

Type of surface Reflection coefficient

Fresh snow 0.87

Dry sand 0.18

Wet sand 0.09

Conifer forest 0.05

New Cement 0.33

Old cement 0.23

Table 4. The ABCD Rule (Source: Gies,et al)

ABCD rule

A (Asymmetry) Asymmetrical lesion. If divided in the middle, the two halves are not identical.

B (Border irregular) Not well-defined lesion borders. They may be elevated, vague, blurry, irregular; adjacent skin may turn brown.

C (Color Varied) Multi-coloured lesion. There are several shades of black, brown, even areas coloured white, grey, red, pink or blue.

D (Diameter >6 mm) Usually the lesion diameter is over 6 mm. The lesion has changed its size, usually becomes bigger.


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