Artigo 1 - The Innovation Process Under The Perspective of Stakeholders A Sustainable Development Point of View PDF

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Auburn University
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Department of Computer Science
Southern Illinois University at Carbondale
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Virginia Tech, Virginia University
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Dr. Abdurrahman Arslanyilmaz
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Dr. R.K. Dixit (HON.)

M.Sc., Ph.D., FICCT
Chief Author, India
Email: authorind@computerresearch.org
Vivek Dubey(HON.)
MS (Industrial Engineering),
MS (Mechanical Engineering)
University of Wisconsin
FICCT
Editor-in-Chief, USA
editorusa@computerresearch.org
Sangita Dixit
M.Sc., FICCT
Dean and Publisher, India
deanind@computerresearch.org
Er. Suyog Dixit

BE (HONS. in Computer Science),
FICCT
SAP Certified Consultant
Technical Dean, India
Website: www.suyogdixit.com
Email:suyog@suyogdixit.com,
dean@computerresearch.org
i.
ii.
iii.
iv.
v.
vi.
Copyright Notice
Editorial Board Members
Chief Author and Dean
Table of Contents
From the Chief Editors Desk
Research and Review Papers
1. Venture Capital Financing In India: Path of Differential Diffusion Trajectory A
Comparison with the USA 2-10
2. Modelling Armed Robbery Crime Insurance Claims in Nigeria 11-20
3. Promoting an Emerging Tourism Destination 21-28
4. Are the Global Stock Markets Inter-linked? Evidence from the Literature 29-40
5. Critical Service Encounters: The Employees Viewpoint (A Study on Restaurant
Services in Dhaka City) 41-47
6. Reliability and Availability Based Hybrid Flow Shop Scheduling Using Fuzzy
Logic 48-55
7. Financial Liberalisation Policy for Fostering Credit to the Private Sector in
Nigeria for Economic Growth 56-65
8. Oil Politics and the Crisis of Development in the Niger Delta 66-73
9. Eccentric Turnover Behavior among the Working Students of Pakistan 74-80
10. Impact of Brand Placement in Films- A Viewers Perception 81-87
11. Regulating Bank Systemic Risk: New Principles in Macroprudential
Management 88-96
12.Clinical Trials: A Branding Opportunity? 97-103
13. Strategies to Increase E-Government Take-Up: Looking Beneath Statistics 104114
14. The Innovation Process under the View 115-122
15. Knowledge Management: Promises and Premises 123-131
16. The Role of Life Skills Training on Self-Efficacy, Self Esteem, Life Interest, and
Role Behavior for Unemployed Youth 132-139
17. Assessing of the SMEs Financial Competitiveness 140-147
18. A Study of the Integrity of Internet Financial Reporting: Empirical Evidence of
Emerging Economy 148-158
19. Brand Decisions and Brand Influence: A Comparison of Rural and Urban
Consumers 159-171
20. Management of the Modernization Projects from the Technical-Economic

Systems 172-175
21. Sensitivity and Uncertainty Analysis: Applications to Small-land Scale
Agriculture Systems in Nigeria 176-183
vii.
viii.
ix.
x.
Auxiliary Memberships
Process of Submission of Research Paper
Preferred Author Guidelines
Index
P a g e |1 Vol. 10 Issue 1 (Ver 1.0), January2010
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Vol. 10 Issue 1 (Ver 1.0), Febuary 2010 P a g e | 2
Venture Capital Financing In India: Path of

Differential Diffusion Trajectory A Comparison
with the USA
Dr. Chimun Kumar Nath Lecturer, Department of Commerce,Dibrugarh University.nathchimun@yahoo.com
Dr. A. SahaReader,Department of Commerce,Dibrugarh University.saha.a@mailcity.coma_sahadib@yahoo.co.in
Abstract-Purpose- To compare between the recent US ventures
capital financing (VCF) to that of Indian VCF. The paper also
attempts to extract perceptional differences between the FIs
towards VCF operating in the country.
Design/methodology/approach- A comparison of VCF
between US operations and Indian operations in this context
has been pursued. 2 Indian states i.e. Karnataka and Assam
have been studied on various aspects of VCF, followed by
comparing the findings there from with that of US findings
between the periods ranging from 1990 to 2006.
Findings- It is observed that convergence of VCF maturity
in US and acceleration of growth of Indian VCF has been
attained during 1990s. Despite a discernible growth of VCF in
India since 2000 onwards, venture capital investments in
enterprises both in the early and the expansion stages has been
significantly less diffusive than that of the US.
Research Limitations/ Implications- the study has
considered 6 VCFs and 12 VCFs from Assam and Karnataka
respectively out of 56 VCF entities in India recognized by
SEBI.
Originality/Value- the paper signifies the operational
differences in US and India in the context of VCF. The input
from US study however, can be used to improve the modalities
of operation in India.
Paper Type- Review of literatures and field survey.
Keywords- venture capital, Venture Capital Financing

(VCF), equity investment, India, United States, Karnataka,
Assam
I
PROLOGUE
here are many definitions of venture capital. However,

the present researchers accept the simple definition that
states Venture capital as the risky capital collected through
different sources to invest alongside management in rapidly
growing industries. Venture capital is often referred to as a
prerequisite for productivity and employment growth. In
line with the American tradition, as an experienced
intermediary, the venture capitalist, understands venture
capital as offering financial means to young high-technology
enterprises in combination with management support for
these enterprises. Investments by a venture capital fund can
take the form of either equity participation, or a combination
of equity participation and debt obligation - often with
convertible debt instruments that become equity if a certain
level of risk is exceeded. In most cases, the venture
capitalist becomes part owner of the new venture. Some
investments are structured as debt to equity participation often reserved by covenant for a future buyout. Venture
capital investment criteria usually include a planned exit
event (an IPO or acquisition), normally within three to seven

years.
The role of venture capital in facilitating employment and
productivity growth has made venture capital a major target
of financial market policies by the government of India.
They attempted to ease the access to equity capital for
young high-technology enterprises by improving the
regulatory conditions the venture capitalists face in the
Indian markets and by granting different subsidies.
The US venture capital financing size can serve as a
benchmark for the discussion of the development in the
Indian size of VCF. In the US, venture capital is
predominantly invested in relatively young, high technology
enterprises. During the 1990s, pension funds were the main
capital provider to venture capital funds. These funds were
managed by independent venture capitalists that are often
specialized on particular stages of enterprises development
and/or particular technologies.
The size of Indian venture capital financing, are relatively
smaller as compared to the US size. This follows from the
comparisons of investments in young enterprises and from
investments in particular high technology areas in India.
Until 1990, banks were the main sources of financing here.
Only at the beginning of the new millennium, the
importance of pension funds increased in most parts of the
world. In India, venture capitalists are often dependent on
their capital providers. Especially banks prefer to invest in
their own subsidiaries and not in an independent venture
capital fund.
Moreover, this paper also investigate whether FIs as a
venture equity investors acting in a particular national
market differ significantly with respect to investment
strategies using a collection of primary data of FIs of Assam
and Karnataka. This is important because many state
governments of India like Gujarat, Maharastra etc. have
introduced specific policies to stimulate venture capital
activity, which cannot be identified in aggregated data on
VCF activity in India.
The paper proceeds with a description of the Key facts of
the US venture capital market. In the next section, the
development, of Indian VC market along with two Indian
regional VC environments have been examined with respect
to the funds raised, investments, and impact of Human and
Social Capital in formation of VC and finally compared with
the US venture capital market. All these discussions are
ranging from 1990 to 2006. Last section summarizes the
findings.
reversing the trend in both private equity investment

performance and partnership commitments.
In 1998, the venture capital industry in the United States
The venture capital market in the US is the oldest and most continued its seventh straight year of growth. It raised
developed of the world and is therefore chosen as the USD25bn in committed capital for investments by venture
benchmark for the analysis of the Indian market. In the firms, who invested over USD16bn into domestic growth
American tradition, which is used here, venture capital companies in all sectors, but primarily focused on
finance denotes the simultaneous offering of financial means information technology.
and management support for a certain area of young high- This potential can be seen in the growth of sales figures for
technology firmsi. Venture capital funded companies are an the US. From 1992 to 1998, venture-backed companies saw
integral part of the American economy. The dollars and their sales grow, on average, by 66.5 per cent per annum as
cents contribution of the venture capital industry goes well against five per cent for Fortune 500 firms. The export
beyond the objective economic contribution. It continually growth by venture-funded companies was 165 per cent. The
reinforces Americas entrepreneurial spirit. In addition, in so top ten US sectors, measured by asset and sales growth,
doing, the venture capital industry becomes a catalyst for were technology-related.
change. Venture capitalists, many of whom are successful Thus, venture capital is valuable not just, because it makes
former
entrepreneurs
themselves,
shepherd
new risk capital available in the early stages of a project, but also
businesspersons and women to reach their full potential.
because a venture capitalist brings expertise that leads to
The late 1980s marked the transition of the primary source superior product development. The big focus of venture
of venture capital funds from wealthy individuals and capital worldwide is, of course, technology. So in 1999, of
families to endowment, pension, and other institutional USD30bn of venture capital invested in the US, technology
funds. The surge in capital in the 1980s had predictable firms received approximately 80 per cent. In addition to this
results. Returns on venture capital investments plunged. huge supply of venture funds from formally organized
Many investors went into the funds anticipating returns of venture capital firms, is an even larger pool of angel or
30 percent or higher. That was probably an unrealistic seed/start-up funds provided by private investors. In 1999,
expectation to begin with. The consensus today is that according to estimates, approximately USD90bn of angel
private equity investments generally should give the investor investment was available, thus making the total at-risk'
an internal rate of return something to the order of 15 investment in high technology ventures in a single year
percent to 25 percent, depending upon the degree of risk a worth around USD120bn.
firm takes.
Pension funds have been the main capital providers to
However, by 1990, the average long-term return on venture venture capital funds (limited partnerships), while
capital funds fell below 8 percent, leading to yet another corporations, and financial and insurance have played a
downturn in venture funding. Disappointed families and minor role (Exhibit 1). Pension funds contributed between
institutions withdrew from venture investing in phases 35 and 60 per cent of the new funds raised between 1990
during the 1989-91 periods. The economic recovery and the and 1998. In 1999, however, only 23 per cent of the capital
IPO boom of 1991-94 had gone a long way towards was contributed by pension funds.
Exhibit 1: Sources of New Funds and its Allocation in the US*
II
THE US MARKET OF VENTURE

CAPITAL FINANCE
1990
1991
1992
1993
*Compiled from the original table source: European new

funds raised and exchange rates are from EVCA 1991
2000,US new funds raised are from NVCA (2000), consumer
1994
1995
1996 1997
1998 1999
price indices are from International Financial Statistics CD

ROM IFS (2000).
The 1980 Safe Harbor Regulation further improved the
conditions for venture capital committed by pension funds

because it defined pension funds as limited partners, which
reduced the risk exposure of venture capitalists. These acts
had clearly a considerable impact for the upswing in venture
capital activity at the beginning of the 1980s. Especially
pension funds and their de-regulation seem to have played a
significant role in the development of the US venture capital
market.
This extraordinary boom during the 1990s is not the first
significant change that the American market for venture
capital has experienced since its humble beginnings in the
1930s. Two upswings of venture capital activity can be
identified in the time series. The first upswing took place in
the mid- 1960s, the second at the beginning of the 1980s.
Both upswings, however, in the US, new funds raised for
private equity grew at a lower rate than new funds raised for
venture capital are small compared to the increase in venture
capital activity at the end of the 1990s. The first two
upswings seemed to be influenced by public policies2.
The journal Venture Economics had identified two reasons
for the extraordinary boom in the investments in enterprises
early and expansion stages at the end of the 1990s (BVK
2001)3. Venture capital funds brought their passive investors
high returns, resulting in a considerable re-investment of
money; especially institutional investors reinvested large
amounts of their funds. Secondly, the development of stock
markets resulted in a restructuring of institutional investors
portfolios so as to invest more money in venture capital
funds.4 Thus, the US government also supports the creation
of venture capital companies.
California, Texas, Massachusetts, Washington, and
Pennsylvania topped the list of states by sales of venture
capital backed firms headquartered in the State by 2003.
Venture capital backed companies headquartered in
California were responsible for USD438 billion in sales in
2003. In Texas, venture backed sales reached nearly
USD190 billion in 2003 and exceeded USD100 billion in
Massachusetts. Other leading states measured by venture
capital backed firms sales were Washington, at slightly more
than USD100 billion, and Pennsylvania, at USD 94 billion
in 2003. (Exhibit 2)
Venture capital funded companies were directly responsible
for more than 10 million jobs and $1.8 trillion in sales in
2003. This corresponds to 9.4 percent of total U.S. private
sector employment and 9.6 percent of company sales. This
is impressive given that venture investment was less than
two percent of total equity investment for most of the past
34 years. Venture Capital Backed Firms Outperform Other
Companies Venture backed firms added some 600,000 net
jobs to the U.S. economy between 2000 and 2003.
Venture supported firms such as ebay, Google, and JetBlue
are just three examples of the many successful ventured
businesses that have hired hundreds of new employees over
these three years.

Exhibit 2: State Wise Classification of Turnovers by VC
Backed Firms in US
Source: Global Impact 2004, v.18, no.3

In the first quarter of 2007, venture capitalists invested
USD7.1 billion into 778 deals, the highest quarterly dollar
amount since the fourth quarter of 2001, according to the
MoneyTree Report by Price Waterhouse Coopers and the
National Venture Capital Association based on Thomson
Financial data. Deal volume actually declined in the quarter
compared with the fourth quarter of 2006, indicating venture
capitalists willingness to put more dollars into each round.
The Life Sciences sector (Biotechnology and Medical
Devices together) had an extremely strong quarter, with
Biotechnology ranked as the number one industry for
investment, while Medical Devices was at an all-time high.
Later Stage investing also jumped in the quarter to the
highest dollar level since the fourth quarter of 2000. First
time financings remained relatively steady, increasing
slightly over last year. Medical Device investing
skyrocketed to an all-time high in the first quarter, with
USD1.08 billion going into 96 deals, a 60 percent increase
in dollars over last quarter 2006. Biotechnology was the
single largest industry sector with USD1.5 billion going into
102 deals, unseating software, which was traditionally the
largest sector. Life Sciences accounted for 36 percent of the
quarters dollars, an all-time high.
III
THE INDIAN MARKET OF VENTURE

CAPITAL FINANCE
In the early 1980s, the idea that venture capital might be

established in India would seem to be fuzzy. India has
highly insulated economy, avowed pursuit of socialism,
quite conservative social and business perception, and a
risk-averse financial system provided little institutional
space for the development of venture capital. With the high
level of government involvement, it is not surprising that the

first formal venture capital organizations began in the public
sector.
The 1980s were marked by an increasing disillusionment
with the trajectory of the economic system and a belief that
liberalization was needed. Prior to 1988, the Indian
government had no policy toward venture capital. In 1988,
the Indian government issued its first guidelines to legalize
venture capital operations, Ministry of Finance (19885).
These regulations were aimed at allowing state-controlled
banks to establish venture capital subsidiaries, though it was
also possible for other investors to create a venture capital
firm. There was only minimal interest, however, in the
private sector in establishing a venture capital firm, Ramesh
et al. (19956)
In the late 1990s, the Indian government became aware of
the potential benefits of a healthy venture capital sector.
Thus in 1999 a number of new regulations were introduced.
Some of the most significant of these related to liberalizing
the regulations regarding the ability of various financial
institutions to invest in venture capital. Perhaps the most
important of these went into effect in April 1999 and
allowed banks to invest up to 5% of their new funds
annually in venture capital. Until 2001, however, they had
not made any venture capital investments. This is not
surprising since bank managers are rewarded for risk-averse
behavior. Lending to a risky, fast-growing firm could be
unwise because the loan principal is at risk while the reward
is only interest.7 In such an environment, even if bankers
were good at evaluating fledgling firms, itself a dubious
proposition, extending loans would be unwise. This meant
that since banks control the bulk of discretionary financial
savings in the country, there is little internally generated
capital available for venture investing.
From 2000 onwards, the venture capital industry has made
an enormous contribution to the high-technology industry.
In turn, high technology has furthered national productivity.
The three percent annual growth rate in productivity since
1996 in the US, stems from investments in a range of
technology industries such as computers, software, and
communications equipment. It has helped user industries
like retailing, airlines, and manufacturing to be more
productive. By 2000 some new countries has emerged in the
field of VCF. India is a country where the VCF penetration
was although taken place lately, but by 2002, it has attained
the coveted list of top twenty countries based on investment
criteria (Exhibit 3)

Exhibit 3: The World View: Top 20 Countries in 2002 &
2001 - Based on Investment
Source: AVCA report, 2003

The Indian government has reiterated its commitment to the
Indian software-driven IT industry by creating a National
Venture Capital Fund for the Software and IT Industry
(NFSIT). NFSIT, set up in association with various financial
institutions and the industry, operates under the umbrella of
the Small Industries Development Bank of India (SIDBI).
The objective of the fund is to encourage entrepreneurship
in the areas of software, services, dot.com and other IT
related sectors in which India has inherent as well as
acquired competency. The fund is expected to be a key
component in addressing the rapidly growing demand for
venture capital in India. The fund will be looking at
supporting entrepreneurship in high growth sectors.
Many state governments have already set up venture capital
funds for the IT sector in partnership with local state
financial institutions and SIDBI. These include Andhra
Pradesh, Karnataka, Delhi, Kerala, and Tamil Nadu. With so
much of changes happening around venture capital
financing in India yet, the fruitful result of exploring the
advantages of such financing has not been equally
distributed among the states in India. It is a fact that certain
states like Maharashtra, Gujarat, Karnataka and Andhra
Pradesh are far more advanced in mobilizing the venture
capital funds rather than the rest of the country. Especially
state like Karnataka is on the launching pad; thanks to the
information technology advancement.
The picture of venture capital financing is gloomier in entire
North Eastern Region in general and Assam in Particular.
Although it has been recognized several times that any
business running in the North Eastern Region is
comparatively risky proposition due to its geographical
location, environment, the infrastructural bottlenecks, etc.
but there are hardly any venture capital environment being
developed around this place. There is an urgent need being
felt to uncover why the entrepreneurs in this part of India
possess an averse attitude towards venture capital financing
- whether they do not have innovative ideas (in the form of
new technology) or other factors governing the growth and
development of human and social capital or the investing
environment of the region is a deterrence.

IV
THE VCF ENVIRONMENT OF ASSAM AND KARNATAKA
By considering the above factors, a research observation

would be to look into the problem of Venture Capital
growth in Assam. At the same time, it is noteworthy to grasp
some more information about the growth of Venture Capital
in some of the advance states of India where VCF has taken
place in large numbers. In India, Maharastra is the leading
state in terms of Venture Capital movement followed by
Gujarat, Tamil Nadu and Karnataka8 Karnataka happens to
be the state where it has been observed that, before the
information technology (IT) revolution since 1995 onwards;
there was negligible diffusion of venture capital funding9.
Predominantly having an agro- based economy, Karnataka
has shifted their focus from Agriculture to IT and IT enabled
services during the first generation of reforms and has
started enjoying the benefits during the second-generation
reforms starting from 1995 onwards. So far, it has also been
observed that the other top positioned states in terms of VCF
penetration differ in characteristics as compared to Assam.
Thus, the study has attempted to gather the experiences of
Karnataka in the direction of VCF development to suggest a
comprehensive methodology of VCF development in Assam
as because Assam is still an agrarian economy like pre 1995
Karnataka.
Even after having rich natural and other resources, Assam
has witnessed very poor development of venture capital
growth. It has been observed that the impact of Social and
Human Capital on venture capital needs to be considered as
a source of funding for young high-technology enterprises
and in the Karnataka market the presence of social and
human capital paves the way for formation of financial
capital, which ultimately develops the venture capital
market positively. The differences between equity investors
acting in a single state market are of special interest, since
their likely heterogeneity is important when interpreting
aggregated data on investments or on new funds raised,
because this heterogeneity may imply significant differences
in the quality of capital offered. The study was carried out
by approaching 12 financial institutions offering venture
capital in Karnataka and six financial institutions that are
sponsors of venture capital but having the business of
conventional financing in Assam. These financial
institutions engaged in the business of conventional
financing in Assam have been financing venture capital
through their subsidiaries or through a separate fund created
exclusively for the purpose in Karnataka and some other
states in India. Data have been collected by way of
canvassing a questionnaire amongst the respondents and
analyses have been pursued based on the feedback therein.
It was observed from the study that the formation of
financial capital in the state of Assam suffers due to some
poor record of accomplishment of repayments in
conventional type of loans. This creates a sense of lack of
confidence among the Financial Institutions in the state
towards the budding entrepreneurs. At the same time in
order to protect their risk involvement in financing a project
to get the repayment on time, the Financial Institutions
prefer to finance only those projects, which are backed by

some existing successful enterprises. This could be of any
form like experienced entrepreneurs, entrepreneurial
generations, conventional type of business where a steady
earning can be obtained, or stake of successful business
houses in the proposed enterprise. Such an attitude though
provides a good support for the Financial Institutions to
safeguard their business risk but it also left behind many
negative impacts. One of them could be in terms of
formation of Venture Capital Financing. Because Venture
Capital Financing is generally provided to a sunrise industry
having no experience of any actual performance unless it is
started and/or to those entrepreneurs who have for the first
time ventured into the project. Such conceptual conflict also
has some negative impact on the budding entrepreneurs as
they were deprived of getting their venture financed.
It was observed from the study that the formation of Human
Capital in the state of Assam in comparison to Karnataka is
somewhat unorganized. However, Assam has enough
potentiality to form such Human Capital but due to the
information asymmetry, the proper development of such
capital is not there in the state at present. At the same time,
the brain drainage could be another problem patronizing the
low formation of Human Capital in the state. However, a
detailed analysis as to why such problems exist in the state
reveals low formation of Social Capital. Interestingly, in
case of Karnataka it was found that the Financial Institutions
are least bothered to analyze the human capital while
receiving a proposal as such because the Social Capital in
the state is of high quality.
It was also observed that, as a compensating strategy that
entrepreneurs can adopt, is to have a wide range of contacts
in their social networks. Research also showed that when
networks contain people from a verity of work backgrounds,
especially those beyond the immediate work group, they
tended to be more powerful (Blau et al 1982)10 In Karnataka
market, it is seen that most of the IT based VC receivers are
previously having working experience mostly in the Silicon
Valley as highly paid executives. There is a positive
relationship between prior work experience and venture
survival and success, it was proved once again in the state
especially in IT, and IT enabled Venture Capital Financing.
Thus, network diversity enhances the chances of accessing a
wide array of resources. However, the likelihood that the
contacts will deliver value or resources depends on the
strength of the tie, or the nature of the relationships between
the network members. Individuals draw instrumental
resources like materials and physical resources, as well as
expressive resources such as friendship, mutual trust, from
their network contacts. In case of Karnataka, it seems that
the financial institutions were keen in financing VC as the
presence of social and human capital are there among the
entrepreneurs. Apart from education and training, human
capital derives from work environment (Carter et al.1997)11
and social capital derives from social environment. In
Karnataka, such environment is created not only from the
efforts of people of the state but also by the government.
However, in Assam due to the information asymmetry, brain
drainage, as well as absence of social network, the
entrepreneurial development in the state is not proper. The

governmental effort receives lesser success due to creation
of a negative atmosphere in developing entrepreneurial
skills among the youths. A financially disciplined approach
is necessary for Venture Capital Financing, which is missing
in the state.
An interesting finding by studying both the states is that
bootstrapping and loan financing provide a foundation for
gaining experience and legitimacy that position ventures to
secure equity financing. From the study it was observed that
in Karnataka, almost all the Financial institutions were
doing equity financing and for that they consider only the
presence of Human and Social capital. However, in Assam,
the loan financing itself gives such a gloomy picture to the
financial institutions as it was found that the majority of the
repayment scenario for the conventional loans in the state is
very poor. Under the circumstances, an equity financing
could turn out to be a daydream. It can also be inferred that
since the human as well as social capital formulation in the
state is very low, the financial institutions are not interested
to go for Venture Capital Financing.
The study reveals that there are many factors, which have an
adverse impact on the venture capital financing in Assam.
At the same time if it is looked from the business
potentiality and that too for growing up a considerable
venture capital market, the state of Assam can provide
certain opportunities also. It has a Strategic location - access
to the vast domestic and South Asian market. Assam has a
large and rapidly growing consumer market; constitute the
market for branded consumer goods - estimated to be
growing at 8% per annum. Demand for several consumer
products is growing at over 12% per annum. Assam is one
of the largest agro based sectors in the world in terms of Tea
production. An R&D investment in this sector may bring
many innovations that may lead to create many sunrise
industries. Assam has one of the pools of scientists,
engineers, technicians, and managers in certain specific
areas in the country having IIT, RRL, Agriculture
University, B-Schools etc. Assam has a potential R&D
infrastructure and technical and marketing services for
biotech sector. The state/ Central government has created
policy environment that provides freedom of entry,
investment, location, choice of technology, production,
import and export. There is a well-balanced package of
financial institutional incentives, Free, and full repatriation
of capital, technical fee, royalty, and dividends. There is no
income tax on profits derived from export of goods.
Complete exemption from Customs Duty on industrial
inputs and Corporate Tax Holiday for five years for 100 per
cent Export Oriented units & units in Export Processing
Zones may makes the environment a Venture capital
friendly one provided the entrepreneurs of the region should
come up to capitalize it. The information asymmetry
presently exist in Assam should be reduced and the
demonstration effect of Venture Capital Financing must be
properly communicated to the entrepreneurs. The security of
investment must be protected by way of mutual dependence
between the demand and supply side. Role of NGOs cannot
be ignored in creation of social capital. At the same time, the
mutual trust between the entrepreneurs and the financial

institutions must be created so that the Venture Capital
Financing gets momentum. An intervention from state
government machineries is necessary for creation of social
capital.
In Assam, the concept of supporting entrepreneurs and
innovators with Venture Capital funds has not yet
developed. Even though development funds have been
available from various Financial Institutions and
Development Banks, they are largely to support proven
technologies whether indigenously developed or imported.
Support by funding "Home grown technologies" are
available though Government and other sources they still
follow the pre-condition of having validated the technology
but at least at the laboratory scale, if not in the Pilot Plant.
Even today, most of the Venture Capital Companies whether
attached to large financial institutions such as IDBI or ICICI
or to State and Central Governments are varying in
supporting very early stage projects, which are at an R&D
stage, primarily due to the fear of failure. In Assam, there is
an urgent need to develop a Financial Institution, which will
work exclusively to promote Venture Capital Financing in
the state. The AIDC in collaboration with other Financial
Institutions can create such fund to facilitate the venture
capital growth in the state. A combination of Equity and
Debt financing support could be the ideal form of Venture
Capital Financing in the state. The VCF prospects in the
state include equity support to Pharmaceutical industry, IT
enabled industry, indigenous engineering process in Oil,
Tea, Natural Gas production, Carbon based industries,
exclusive SME financing etc. It is only when the human,
social and financial capital will meet together to have a
conducive atmosphere for Venture Capital Financing growth
in the state.
V
COMPARISON OF US AND INDIAN

VCF MARKET
India is a significant case study in VCF penetration for a

number of reasons. First, in contrast to the United States,
India had a history of state-directed institutional
development that is similar, in certain ways, to such
development in Japan and Korea, with the exception that
ideologically the Indian government was hostile to
capitalism prior to 1991. In the United States, venture
capital is only a small component of the much larger
national innovation system (NIS), and as such is dependent
on many other institutions. In the United States and in India
the development of venture capital has been a co
evolutionary process. This is particularly true in India,
where it remains a small industry precariously dependent
upon other institutions, particularly the government, and
external factors such as international lending agencies,
overseas investors, and successful Indian entrepreneurs in
Silicon Valley. The growth of Indian venture capital must be
examined within the context of the larger political and
economic system in Indiaii. As was true in other countries,
the Indian venture capital industry is the result of an
iterative learning process, and it is still in its infancy. If it is

to be successful, it will be necessary not only for it to grow,
but also for its institutional context to evolve.
In sharp contrast to the United States, however, where a
venture capital fund can invest in any industry it wishes, in
India only six industries have been approved for investment:
software, information
technology,
pharmaceuticals,
biotechnology, agriculture, and allied industries during 1990
until 2001. Statutory guidelines also limited investments in
individual firms based on the firms and the funds capital.
The result of these various regulations has been a channeling
of venture capital investment toward late-stage financing.
After a lot of debate finally, the SEBI regulations did not
have any sectoral investment restrictions except to prohibit
investment in financial services firms and of late investment
in real estate. Impediments to the development of venture
capital also exist in Indias corporate, tax, and currency
laws. Indias corporate law did not provide for limited
partnerships, limited liability partnerships, or limited
liability corporations (LP, LLP, and LLC, respectively) as
available in USA.
Moreover, Indian regulations did not recognize limited life
funds, so in India, it was relatively easy to terminate a trust,
but this meant that the entire firm was closed rather than a
specific fund within the firm. Therefore, each fund had to be
created as a separate trust or company. This process was
administratively and legally time-consuming. Terminating a
fund was even more cumbersome, as it requires court
approval on a case by- case basis. The restrictions on
venture capital extend beyond the framework of corporate
law.
The largest single source of funds for US venture capital
funds since the 1980s has been public and private sector
pension funds. In India, there are large pension funds but
they are prohibited from investing in either equity or venture
capital vehicles, thus closing off this source of capital. In
summation, prior to the late 1980s, though India did have a
vibrant stock market, the rigid and numerous regulations
made it nearly impossible for the existing financial
institutions to invest in venture capital firms or in startups.
Investors amenable to purchasing the equity in early stage
companies. It was also possible to bootstrap a firm and/or
secure funds from friends and familyif one was well
connected. However, no financial intermediaries
comfortable with backing small technology-based firms
existed prior to the mid-1980s. It is safe to say that little
capital was available for any entrepreneurial initiatives. An
entrepreneur aiming to create a firm would have to draw
upon familial capital or bootstrap their firm.
An interesting observation between the two countries is that
there is a surge in risk capital by 2004 onwards. The spread
of growth of such capital is outside the information
technology sector. The two of the three biggest deals of
2003 in India had nothing to do with technology. One was
CDCs $57 million investment in Punjab Tractors and the
other was Warburgs $50 million deal with Radhakrishna
Foodland. Henceforth the important point to really
concentrate here as to why the sudden diversification of
opportunities occurred in India. At the same time, the US
market also witnessed shifting of priorities from IT to

biotech by 2003 onwards. One may blame it on Indias
happy growth story as the economy is clipping at 7 percent
plus and could possibly gather more steam. On the other
hand, outsourcing has become a major movement across
sectors- from IT to BPO to automotive to textiles to
Pharmaceuticals and on the other, smaller but strategic
companies, especially in FMCG, are racking up stunning
growth thanks to their low cost, high quality strategy. Such
developments in IT sector in Indian market have a
downswing of VCF growth in certain states, which are
traditionally IT, backed like Karnataka and Andhra Pradesh.
However, these states have shifted its gear to adopt various
sectors to be incorporated in their priority list.
VI
SUMMARY
The above section has analyzed the differences and

similarities between the markets for Venture Capital in India
and the United States. In the American tradition, venture
capital comprises management support and financial means
for a subset of young high-technology enterprises provided
by experienced intermediaries, i.e. the venture capitalists.
Due to data limitations, all the results obtained here have to
be interpreted with caution. Indian markets for venture
capital differ considerably with respect to the industrial
sector invested in enterprises early and expansion stages. In
Karnataka, for example, early stage investments accounted
for mainly in IT and IT enabled sector, while in Gujarat the
early stage investments are predominantly in infrastructure
development. Assam has a potentiality of VCF investment
in biotech, agri-based, and pharmaceutical sectors.
The Indian markets for venture capital differ with respect to
their sources of funds then US. In India, banks are the main
contributors to entrepreneurial finance including venture
capital, while in US now a day; pension funds play a
significant role. Traditionally, pension funds have
contributed considerable amounts of capital to VCF
formation in the US, while in country as if India pension
funds have never been active as capital providers. Financial
Institutions have invested large amounts of capital in
venture capital in Karnataka and Maharastra, while in the
US banks have been getting less importance. In addition, the
Indian markets differ with respect to governments role in
comparison to US. Some states in India use tax incentives
for passive investors in order to ease the capital access for
young high-technology enterprises, while others use
guarantees and co-investment programs in order to reduce
the risk of young high-technology enterprises for VCF.
In comparison to the United States, some states of India like
Karnataka have invested in enterprises early stages having
similar focused areas. US venture capital investments are
more concentrated on high technologies than Indian VCF
investments. In the United States, almost 80 per cent of the
venture capital investments went into communications and
computer-related enterprises in 1999, while only 27 per cent
of the Indian VCF investments were invested in these
enterprises.
In addition to identifying the differences and similarities
between different states of India in terms of VCF, the paper

has also discussed the differences between VCF investors
acting in one national market by analyzing micro data on
Karnataka and Assam. VCF investors acting in one national
market can differ significantly with respect to their
investment behavior. The evidence of the Karnataka and the
Assam market supports this view, while the results of the
Karnataka market support it only to some extent in
comparison to US. Karnatakas VCF investors differ
considerably with respect to their investment strategies.
Independent equity investors have a high degree of
technological specialization compared to all other groups of
dependent equity investors. Moreover, independent equity
investors are more willing than subsidiaries of banks to
invest capital in high-risk enterprises.
The Karnataka market for VCF has not only experienced a
significant upswing in the last few years but also a
fundamental structural change towards financing hightechnology enterprises. The Assam market, by contrast, has
merely experienced a qualitative expansion. The number of
private equity investors that are not legally connected to
another company (i.e. independent equity investors) has
increased significantly in India. These equity investors, in
contrast to their dependent counterparts, act more like US
venture capitalists, and make more intensive use specific
control mechanisms such as convertible securities and
compensation systems.
VII
EPILOGUE
From the above analysis, the following outcomes were

emerged:
i. Socioeconomic environment in India is not
compatible to American methodology of VCF.
ii. Control and ownership of enterprise is the inherent
management practice with investors limited access
(with few exceptions) to it in the corporate sector in
India.
iii. There is lack of local market for high technology
products in India.
iv. It has been observed that in case of the VCF with
government stake emphasize more on the overall
development of the economy of the country/ region
than emphasizing on ROI of the projects at the
micro level. Which appears to the researchers as
not pragmatic in approach?
The characteristics of the American methodology for VCF
can be summed up as:
i. More specific to high technology driven,
envisaging fast growth.
ii. Long-term horizons classified into specific defined
phases.
iii. Expectation of very high risks and return.
iv. Focused on start up stage.
v. Strict preference for equity financing and risk
sharing.
vi. Pension fund is one of the major sources of VCF.
The differences between the US market and the Indian
market for VCF with respect to the investments in young
high-technology enterprises although do not offer

meaningful information on the development stage of the
Indian venture capital markets but it provides many inputs
for generating reforms in the Indian VCF market. The
reason is that each market has its own, often-quite special,
innovation system, which determines the role of venture
capital in an economy. For example, when the innovation
system is dominated by in-house research and development,
one cannot expect a dynamic venture capital market.
Moreover, the figures presented on venture capital activity
in India do not include other financial sources for hightechnology enterprises such as business angels, which are,
however, important to determine the development stage of
venture capital markets.
VIII NOTES
1
In the US, new funds raised for private equity grew at a

lower rate than new funds raised for venture capital
2
Pfirrmann, O., U. Wupperfeld and J. Lerner (1997).
Venture Capital and New Technology Based Firms: An USGerman Comparison. Heidelberg: Physica-Verlag.
3
NVCA Report, Special Annual edn. 2003 available at
www.nvca.org first accessed on July 23,2004
4
SBIR (Small Business Innovation Research Programme) is
a highly competitive programme that encourages small
business to explore their technological potential and
provides the incentive to profit from its commercialization.
By reserving a specific percentage of federal R&D funds for
small business, SBIR protects the small business and
enables it to compete on the same level as larger businesses.
SBIR funds the critical start-up and development stages and
it encourages the commercialization of the technology,
product, or service, which, in turn, stimulates the US
economy.
5
Ministry of Finance (1988). Venture Capital Guidelines,
Press Release No. S.11(86)-CCI(11) / 87 Department of
Economic Affairs, Office of the Comptroller of Capital
Issues, November 25.
6
Ramesh, S., & Gupta, A. (1995). Venture capital and the
Indian financial sector. Delhi: Oxford University Press.
7
It is true that in the United States, banks have never been an
important source of venture capital, even through their SBIC
subsidiaries. For the most part, a banks core competencies
are in evaluating and taking loans. The problem with loans
to small startups is that the capital is at high risk, so any
interest rate would have to be usurious. Moreover, since the
new firm is often losing money in its early days, paying
interest and principal would drain money from the firm
during the period when it most requires the money for
investment.
8
Mittal R, 2005.; Karnata Boom, Business World, vol 25,
issue 3,p.52
9
ibid,p.54
10
Blau,J.R. and Alba, R.D.; 1982, Empowering nets of
Participation. Administrative Science Quarterly, 27, 363379.
11
Carter, N.M., Williams, M. and Reynolds, P.D. 1997,
Discontinuance among new firms in retail: the influence of

initial resources, strategy and gender. Journal of Business
Venturing, 12, 125-146.
12
Dossani R. & Kenney M., 2002; Creating an environment
for venture capital in India; World Development Vol. 30,
No. 2, pp. 227253
IX
REFERENCES
1) Blau,J.R. and Alba, R.D.; (1982), Empowering

nets of Participation. Administrative Science
Quarterly, Vol. 27, pp. 363-379.
2) Carter, N.M., Williams, M. and Reynolds, P.D.
1997, Discontinuance among new firms in retail:
the influence of initial resources, strategy, and
gender. Journal of Business Venturing, 12, 125146.
3) Dossani R. & Kenney M., 2002; Creating an
environment for venture capital in India; World
Development Vol. 30, No. 2, pp. 227253
4) Mittal R,2005.; Karnata Boom, Business World,
vol 25, issue 3,p.52
5) Ministry of Finance (1988). Venture Capital
Guidelines, Press Release No. S.11 (86)-CCI (11) /
87 Department of Economic Affairs, Office of the
Comptroller of Capital Issues, November 25.
6) NVCA Report, Special Annual edn. 2003 available
at www.nvca.org first accessed on July 23, 2004
Pfirrmann, O., U. Wupperfeld and J. Lerner (1997).
Venture Capital and New Technology Based
Firms: An US-German Comparison. Heidelberg:
Physica-Verlag.
7) Ramesh, S., & Gupta, A. (1995). Venture capital
and the Indian financial sector. Delhi: Oxford
University Press.
Modelling Armed Robbery Crime Insurance Claims

in Nigeria
Dr Hamadu Dallah
Department Actuarial Science and Insurance
Faculty of Business Administration
University of Lagos, Akoka, Lagos, Nigeria
Email: Dallaram2007@yahoo.com
Tel: +2348039094884
Abstract- The objective of modelling claims sizes of
insurance policies was to be able to price premiums as
accurately as possible. In parametric modelling of loss
distributions in actuarial studies, an attractive candidate with
tail weight intermediate between that of Gamma and Pareto
distributions is the lognormal model. This paper investigates
the distribution of claims of Nigerian armed robbery insurance
crime data. Using expert model mining system, the 3parameter lognormal distribution demonstrated itself as the
best candidate. The result was quite revealing and in
agreement with previous studies, recommending lognormal
model for the analysis of right skewed general crime insurance
claims data. In addition, it has also provided a good estimate of
the deductible amount in claims management. Finally, the
estimated data-based lognormal risk premium amount could
provide the required basic framework for policy premium
underwriting in Nigerian general armed robbery crime
insurance market.
Keywords- General Crime Insurance, Armed Robbery

Claims Data, Lognormal Model, Deductible, Expert Model
Mining System.
I
INTRODUCTION
n insurance contract (policy) binds an insurance

company in the occurrence of contractually defined
loss events to pay a specified amount (claim) to the
insurance holder. In return, the insurance holder pays a fixed
sum (premium) to the insurance company. Since claim
amounts usually depend on the dimension of losses,
insurance companies offer uncertain future payoffs for a
certain premium at present. This constellation generates
three interesting phenomena studied in the literature:
adverse selection (bad risks are likely to demand coverage
than good ones), moral hazard (insurance holders behave
careless as they do not have to bear the losses), and
calculation of premiums (Bohme, 2005). Therefore, each
form of insurance has its background of occurrences, which
result in sudden and unforeseen financial shocks to
individuals or to groups of individuals, and, therefore, create
contingencies against which protection is desirable. Certain
crimes are the background for burglary, theft, and robbery
insurance and because these crimes are spectacular, and
have always had publicity value. Usually, in this context the
statistics published represent conditions at their worst. They
are taken from congested centre like Lagos where property
values are concentrated and burglaries and armed robberies
are, therefore, of mostly frequent; they represent those

trades which are particularly the target of criminals. The
data are compiled from the records of insurance companies,
and consequently may be said to typify the experience of
those who recognise the fact that they are peculiarly exposed
to hazards against which protections are necessary.
Nevertheless, these information point to an alarming
situation in case the complete crime records for Nigeria
could be compiled it will be of considerable magnitude both
in term of crimes and in loss of life and property. Nigeria is
ranked number one in burglary and armed robbery crimes
in Africa even though this position is of recent being
challenged by South Africa. In fact, a study on armed
robbery conducted in South Africa by Pretorius (2008) has
shown that the experience of being robbed and violently
assaulted left the victims with feelings of ontological
insecurity, xenophobia and distrust for strangers, fear of
crime and little confidence in the government and police to
maintain law and order. The manner in which short-term
insurance claims were negotiated and the amount of money
eventually paid, was a final source of frustration and disgust
for many respondents. The situation is not quite different
in Nigeria where everybody, firm, cooperation, and even
government valuable properties are subject to attached by
burglars and robbers. In fact, in Nigeria there is even passive
synonymy between burglary and armed robbery, which
usually carry capital punishment. Nowadays, it is common
to hear information that state government heavily
protected/guarded convey being attacked by robbers.
Furthermore, it is a commonplace that everyday-armed
robbery crime in Lagos metropolitan city, causes immense
economic, psychological damage and even loss of life,
although the true extend is still difficult to quantify. There is
need for urgent investigation in the covered claims paid by
insurance companies. The purpose of modeling claim sizes
is to price premiums as accurately, and to estimate the risk
of extreme claim events, which are unfortunately frequent in
armed robbery insurance. In this context, much attention has
been paid in the actuarial literature to alternative
distributions for claim sizes and some authors have
developed regression models (usually generalized linear
models) for explaining claim sizes as a function of risk
factors (see Haberman and Renshaw, 1996). Jorgensen and
de Souza (1994), Smyth and Jorgensen (2002) Heller,
Stasinopoulos and Rigby (2007) have considered in their

various studies, models for claim sizes, including zero
claims. Our study differs quite slightly of these since the
zero claims were not compiled in our case study data. On
the other hand, one of the more perplexing problems
encountered in the fitting of claim amount data to a
theoretical probability distribution, is that caused by the
presence of deductibles. Claims are paid only on losses
whose severity exceeds the deductible amount. Several
authors (Duval and Allen (1973), Schott (1979), Smith and
Head (1978)) have investigated the implication of
deductibles on both the insurer and the insured. In each of
these cases, it is assumed that the distribution function of the
true loss amount is known. This work deals with fitting the
log-Normal distribution to loss data with an unknown
constant deductible. For case, multiple deductibles see
Marlin (1984).
II
DATA DESCRIPTION

have been filed with the insurer during the observation
period, and the payment amount made.
III
EXPLORATORY DATA ANALYSIS
Before tackling the method of fitting the enabling stochastic

model to the data, it is important to perform an exploratory
data analysis (EDA) to our data. EDA as opined by Hoaglan
and Tukey (1977) will provide not only preliminary insights
to the data, but also, guide us on the future choice of the
appropriate model. In addition, it also brings out certain
hidden features of data, which can go unnoticed by the
investigator without performing in-depth EDA.
The following table 3.1 shows the summary of most
important descriptive statistics of the armed robbery
insurance claims data.
From the table 3.1 above, the first striking observation on
the result is the dramatic difference between the mean claim
(N 234, 452.71) amount and the median claim (N 43,316.25)
amounts which is of a ratio1 to 5. This positive skewed
nature of the data can be easily substantiated by the
magnitude of the coefficient of skweness (4.368). In
addition, the situation can be easily confirmed from the
Histogram and Box-and-Whisker plots displayed in Figure
3.1 and Figure 3.2 respectively.
In this paper, we consider armed robbery policy exposure

and claims experience data derived from general crime
insurance portfolios of a major general insurance company
in Nigeria. Our data are from WAPIC Insurance, a
subsidiary of Intercontinental Bank Plc. which was
incorporated in 1958 as a private limited liability insurance
business in Nigeria. WAPIC Insurance Plc is a composite
full-line insurance company offering a range of products and
services covering life and pension, general and special risk
businesses. The observations are from each policyholder
over a period of four years: November 2000 until November
2004. Thus, our data come from financial records of WAPIC
insurance policies, we consider only the claims file, which
provided the record of each armed robbery crime claim that
Table 3.1: Summary of Some Important Descriptive Statistics
Armed Robbery Claims Amount
Mean
95% Confidence Interval Lower Bound
for Mean
Upper Bound
Statistic
Std. Error
234452.7129
39095.48785
157360.4680
311544.9577
5% Trimmed Mean
133450.6004
Median
43316.2500
Variance
307219891181.304
Std. Deviation
554274.20216
Minimum
106.72
Maximum
4583716
Range
4583609.40
Interquartile Range
139761.26
Skewness
4.368
.172
Kurtosis
23.803
.341
Q-Q and P-P plots of Figure 3.3 and 3.4 respectively, are
suggesting an appropriate choice of a right skewed and
heavy tailed probability models. With the coefficient of
kurtosis of 23.80, the versatile choice between with tail
weight intermediate between that of gamma and Pareto
distributions will be the lognormal or loglogistic
distributions. We consider in this study the 3-parameter
lognormal as the choice model.
Histogram
200
150
Frequency
100
50
0
0.00
1000000.00
2000000.00
3000000.00
4000000.00
5000000.00
robbery
Figure 3.1: Distribution of Armed Robbery Insurance

Claim
Normal Q-Q Plot of robbery
194
Expected Normal
4000000.00
41
111
103
2000000.00
42
-1
14
145
-2
98
158
69
-3
-2,000,000
0.00
-1,000,000
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
Observed Value
robbery
Figure 3.2: Box-and-Whisker Plot of Armed Robbery

Insurance Claim
Figure3.3: Q-Q Plot Normal Plot of Armed Robbery

Insurance Claim
Moreover, the median lies outside the confidence intervals

of the mean claim amount [N 157,360.47, N311, 544.96].
These results coupled with the non-normality results of the
Normal P-P Plot of robbery
1.0
Expected Cum Prob
0.8
0.6
0.4
0.2
0.0
0.0
0.2
0.4
0.6
0.8
1.0
Observed Cum Prob
Figure 3.4: P-P Normal Probability Plot of Armed Robbery Insurance Claim Data
IV

Consider a data set yi (1 i n) , which, are independent
claim amount observations. Let us assume y1 y 2 ... y n
, then the maximum likelihood estimators (MLE) of the
location and the scale parameters are.
METHODS
A. Lognormal Distribution
The three-parameter lognormal distribution is one the most

popular distributions in actuarial and management fields.
With a variable y and three parameters , and , the
probability density function is expressed by
ln(( y ) / 2 (1)
1
f ( y; , , )
exp
2 2
2 ( y )
Where, y , 0, 0
In addition, the likelihood function is expressed by
n
L( , , ) f ( y i , , , )
(2)
i 1
Y exp( X )
E (Y ) exp( 2 / 2)
(3)
In addition, find a good estimator to it.

Let us set =0 without loss of generality, then we have the
lognormal model define by the cumulative distribution
function (cdf)
ln y
F ( y )
, y 0

The density function is subsequently given by

ln y
f ( y)
F ( y)
, y0
dy
y
Hence making substitutions, so that dx exp(z ) ,
so that we can easily obtain the moments
E (Y k ) y k f ( y )dy
1
ln y )
y k

dy
y
2
1
z k 2 k k
2
2
k 2
k
2
2
2
Variance V (Y ) e
i 1
( 0 )
, ( 0 ) provided that is fixed to 0 , where

1 n
2
log( yi ) log ( ) And
n i 1
(5)
1 n
log( yi )
n
i 1
Consequently, if we want to obtain the maximum likelihood

estimate, it suffices to find an , such that
L ( ) L( , ( ) , ( ) ) achieves its maximum. However,
( ) exp
because of the fact that, L ( ) as y n , L( , , )

becomes unbounded. As pointed out by Komori and Hirose
(2001), the other parameters then lead to inadmissible
values. Several authors (Hill, 1963; Wingo, 1984; Hirose,
1997) have treated the methods of finding the maximum
estimates of 3-parameter lognormal model. In fact, Komori
and Hirose (2001) have proposed an easy estimation by a
new parameterization in the three-parameter lognormal
model by proposing a new computing method for the
primary relative maximum of the likelihood function. In
addition, stochastic distributions like the Log-logistic,
Gamma and other competing distributions are also being
included in the present study.
B. Kolmogorv- Siminov Test
The Kolmogorov-Smirnov (K-S) test is based on the
empirical distribution function (ECDF). Given N ordered
data points Y1, Y2, ..., YN, the ECDF is defined as
(6)
Therefore, the lognormal mean and variance are given as

follows
E (Y ) e
e 2 , and the
These yield the MLE of the mean,
estimators and each having the favorable properties
of converging to their respective parameters and having
minimal asymptotic variance. However, in this case, the
threshold parameter is unknown and must be estimated
from the data with the two other location and scale
parameters. Since log( y ) obeys a normal distribution,
L( , , ) achieves its maximum at a point
( )
Where represents the threshold value and X is normal a

random variable with mean and standard deviation .
Our focus in this paper is on the estimation of the mean of
lognormal distribution,
i 1
Let us denote the lognormal model as
n 1 log yi And n 1 log yi 2 2 (4)
(e 1)
2
Where n(i) is the number of points less than Yi and the Yi

are ordered from smallest to largest value. This step function
increases by 1/N at the value of each ordered data point.

Considering the following hypothesis statement
H0: The data follow a specified distribution
Ha: The data do not follow the specified distribution
There is no need for the K-S tables in the work since the
software programs used gives both the K-S test and the
critical probability values.
The Kolmogorov-Smirnov test statistic ( D) is defined

as
i 1 i
D max F (Yi )
, F (Yi )
1i N
N N
ANALYSIS RESULTS
A. Summary Results and Discussion
(7 )
Where F is the theoretical cumulative distribution of the

distribution, being tested which must be a continuous
distribution.
The hypothesis regarding the distributional form is rejected
if the test statistic, D, is greater than the critical value
obtained from a table. There are several variations of these
tables in the literature that use somewhat different scaling
for the K-S test statistic and critical regions.
The following Table 5.1 and 5.2 gives the summary of

results of the best three competing models. The results
include parameters estimates and goodness of fit the
simulated distributions. (For the full results, see Appendices
I and II):
Table 5.1: Summary of Parameters Estimates for the Best Three Fitted Distributions
Lognormal (3P)
1.9113 10.704 5.6732
Lognormal(P)
1.9128 10.703
Log-Logistic (3P)
0.88352 44571.0 106.72
Table 5.2: Summary of Kolmogov Sminov Goodness of Fit for the Best Three Distributions
Lognormal (3P)
0.02936
Lognormal (2P)
0.02941
Log-Logistic (3P)
0.03683
We can easily observe Tables 5.1 and 5.2 that, the threeparameter lognormal distribution is the best candidate for
the data. With Kolmogorov Siminov goodness of fit
coefficient of 0.02936, it ranks first and subsequently,
outperforming other competing distributions. Closely
following is as expected the two-parameter lognormal
distribution
and
the
three-parameter
log-logistic
distributions with goodness of fit coefficients of 0.02941and
0.036 respectively. These findings support the theoretical
choice of the model for the robbery claims data. In fact, by
closely examining the distribution and P-P Probability plots
in figures 5.1 and 5.2 the EDA results supports our
analytical choice of the model. On the other hand, a close
look at the Q-Q plot displays in Figure 5.3 demonstrated the
adequacy and suitability of the fitted model but also raised
a cautionary note on possible two possible outlying values
which in future call for the use of robustness in insurance

claims management.
Probability Density Function

0.96
0.88
0.8
0.72
0.64
f(x)
0.56
0.48
0.4
0.32
0.24
0.16
0.08
0
0
2E+6
4E+6
x
Histogram
Lognormal (3P)
Figure 5.1: Distribution of Fitted 3-parameter Lognormal Model to the Armed Robbery Insurance Data
P-P Plot
1
0.9
0.8
P (Model)
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.2
0.4
0.6
0.8
P (Empirical)
Lognormal (3P)
Figure 5.2: P-P Plot 3-Parameter Lognormal Model to Armed Robbery Insurance Data
Q-Q Plot
4.4E+6
4E+6
Quantile (Model)
3.6E+6
3.2E+6
2.8E+6
2.4E+6
2E+6
1.6E+6
1.2E+6
800000
400000
0
0
2E+6
4E+6
x
Lognorm al (3P)
Figure 5.3: Q-Q Plot 3-Parameter Lognormal Model to Armed Robbery Insurance Data
Thus, the estimated fitted lognormal mean is given as

follows
exp( 2 / 2) 5.6732 exp 10.704 (1.91132 / 2)
276,651.4
5)
B. The Risk Premium Estimate

The basis of the estimate of the risk premium risk premium
is the estimate of the total loss R. this is given as
R N ( exp( 2 / 2)) 201 276651.4 55606931
With an estimated mean claim of N 276,651.4 yields an
estimate risk premium of N 55,606,931
VI
CONCLUSION
Motivated by the alarming rate of armed robbery crimes

generally in Nigeria and Lagos state in particular, we
investigated empirically the distribution of claim amounts
paid by Nigerian general crime insurance company to their
policies holders victims of armed robbery. The lognormal
model was considered not based only on theoretical ground,
but also from preliminary EDA results. Using expert model
mining procedure, the 3-parameter lognormal distribution
demonstrated a superior level of adequacy and goodness of
fit over other stochastic claims distribution models. The
present findings provided good empirical reasons to support
previous theoretical and empirical results, which favor the
lognormal distribution as an appropriate model when
modeling claims data specifically, with intermediate tail
weight between the gamma and Pareto distributions. It is
also important to note the slight difference between the
usual two-parameter lognormal distribution popularly used
in modelling returns stochastic volatility in empirical
finance and the three-parameter lognormal model, which
make a strong case for an estimated deductible of about N
1,140 in actuarial studies and practice. Finally, it is
important to have a critical look at the financial implication
of the estimated lognormal data-based risk premium
amounts of about N55,606,931, in future premium
underwriting for both existing policy holders and new
customers in Nigerian emerging market economy.
VII
REFERENCES
1) Bohme, R. (2005), Cyber-Insurance Revisited.

Workshop on the Economics of Information
Security (WEIS) 2005, Kennedy School of
Government, Cambridge, MA, USA.
2) Duval, R. M. and Allen, T. C. (1973), Least Cost
Deductible Decisions, The Journal of Risk and
Insurance, 40, 495507.
3) Haberman , S. and Renshaw, A. E. (1996),
Generalized Linear Models and Actuarial
Science, The Statistician, 45, 407-436.
4) Hill, B. M. (1963), The Three-parameter
Lognormal Distribution and Bayesian Analysis of a
6)
7)
8)
9)
10)
11)
12)
Point-source Epidemic, Journal of American

Statistical Association, 58, 72-84
Hirose, H. (1997), Maximum Likelihood
Parameter Estimation in the Three-parameter
Lognormal Distribution Using the Continuation
Method, Computational Statistical Data Analysis,
24, 139-152.
Jorgensen, B. and de Souza, M. C. P.(1994),
Fitting Tweedies compound Poisson Model to
Insurance Claims Data, Scandinavian Actuarial
Journal, 69-93.
Omobola, J. (2008), Transformatio9n and
Insurance Growth in Nigeria Accenture 7
April,2008.
Marlin, P. (1984), Fitting the Log-Normal
Distribution to Loss Data Subject to Multiple
Deductibles, The Journal of Risk and Insurance,
51, 687-701.
Schott, B. (1979), Annual Losses for Straight
Deductible Coverage. The Journal of Risk and
Insurance, 46, 619-635.
Smyth, G. K. and Jorgensen, B. (2002), Fitting
Tweedies compound Poisson Model to Insurance
Claims Data: Dispersion Modeling, ASTIN
Bulletin, 32, 143-157.
Smith, M. L. and Head, G. L., (1978), Guidelines
for Insurers for Pricing Deductibles, The Journal
of Risk and Insurance, 45, 217-238.
Wingo, D. R. (1984), Fitting Three-parameter
Lognormal Models by Numerical Global
Optimization-an
Improved
Algorithm,
Computational Statistical Data Analysis, 2, 13-25.
VIII APPENDIX
Appendix I Fitting Results
#
Distribution
Parameters
Beta
1=0.14219 2=2.1991 a=106.72 b=4.5837E+6
Cauchy
=33439.0 =27234.0
Chi-Squared
=2.3445E+5
Chi-Squared (2P)
=2.2474E+5 =98.183
Error Function
h=1.2757E-6
Exponential
=4.2653E-6
Exponential (2P)
=4.2672E-6 =106.72
Fatigue Life
=3.071 =40194.0
Fatigue Life (3P)
=2.5141 =60735.0 =-902.16
10
Frechet
=0.6352 =17808.0
11
Frechet (3P)
=0.91368 =13843.0 =96.212
12
Gamma
=0.17892 =1.3104E+6
13
Gamma (3P)
=0.38085 =6.1617E+5 =106.72
14
Gen. Extreme Value
k=0.69501 =70701.0 =37087.0
15
Gen. Pareto
k=0.65115 =87102.0 =-15229.0
16
Gumbel Max
=4.3217E+5 =-15000.0
17
Gumbel Min
=4.3217E+5 =4.8391E+5
18
Inv. Gaussian
=41949.0 =2.3445E+5
19
Inv. Gaussian (3P)
=12663.0 =3.1867E+5 =97.787
20
Johnson SB
=2.3157 =0.50188
=5.9222E+6 =-20527.0
21
Laplace
=2.5515E-6 =2.3445E+5
22
Log-Logistic
=0.91777 =43489.0
23
Log-Logistic (3P)
=0.88352 =44571.0 =106.72
24
Logistic
=3.0559E+5 =2.3445E+5
25
Lognormal
=1.9128 =10.703
26
Lognormal (3P)
=1.9113 =10.704 =-5.6732
27
Normal
=5.5427E+5 =2.3445E+5
28
Pareto
=0.16575 =106.72
29
Pert
m=106.72 a=106.72 b=4.5837E+6
30
Power Function
=0.06466 a=106.72 b=4.5837E+6
31
Rayleigh
=1.8707E+5
32
Rayleigh (2P)
=4.6280E+5 =-127.0
33
Student's t
=2
34
Triangular
m=106.72 a=106.72 b=4.5837E+6
35
Uniform
a=-7.2558E+5 b=1.1945E+6
36
Weibull
=0.6351 =1.0622E+5
37
Weibull (3P)
=0.54574 =1.1510E+5 =106.72
38
Erlang
No fit
39
Erlang (3P)
No fit
40
Johnson SU
No fit
Appendix II
Goodness of Fit Summary
#
Distribution
Kolmogorov Smirnov
Statistic
Rank
Beta
0.35471
21
2
3
Cauchy
Chi-Squared
0.28305
0.80099
16
36
4
5
Chi-Squared (2P)
Error Function
0.79602
0.50008
35
29
6
7
8
Exponential
Exponential (2P)
Fatigue Life
0.36437
0.36462
0.10061
24
25
8
9
10
11
Fatigue Life (3P)

Frechet
Frechet
0.12118
0.084
0.21106
9
5
15
12
13
Gamma
Gamma (3P)
0.30964
0.14627
18
11
14
Gen. Extreme Value
0.14724
12
15
16
Gen. Pareto
Gumbel
0.15504
0.38074
13
27
17
Gumbel
0.40507
28
18
19
20
Inv. Gaussian
Inv. Gaussian (3P)
Johnson SB
0.19953
0.13214
0.30158
14
10
17
21
22
Laplace
Log-Logistic
0.36295
0.03965
23
4
23
Log-Logistic (3P)
0.03683
24
25
Logistic
Lognormal
0.34066
0.02941
20
2
26
Lognormal (3P)
0.02936
27
Normal
0.33622
19
28
29
Pareto
Pert
0.35501
0.61559
22
32
30
31
Power Function
Rayleigh
0.58063
0.548
31
30
32
Rayleigh
0.72301
34
33
Student's t
0.99996
37
34
35
Triangular
Uniform
0.71756
0.37795
33
26
36
37
Weibull
Weibull (3P)
0.08883
0.08703
7
6
Source: EasFit Expert Model Mining
Promoting an Emerging Tourism Destination

Bassey Benjamin Esu (corresponding author)
Lecturer, Department of Marketing
University of Calabar
PMB 1115, Calabar, Nigeria
08034740556, esubenjamin@yahoo.com
Ezekial Ebitu
Lecturer, Department of Marketing
University of Calabar, PMB 1115, Calabar, Nigeria
08039451333
Abstract- Emerging tourist destinations have unique
characteristics, which differentiate them from matured
destinations or destination at their decline stage. Destination
Marketing Organizations (DMOs) have the responsibility of
creating, attracting, and retaining valued customers, in this
case, tourists to the destinations. One way of achieving these
functions is through effective promotional strategies of
destinations. This study attempts to highlight the relevance of
promotional strategy to tourism development, tourism
enterprise planning. The major crux of the paper is the
conceptualization of a model for the development of
promotional strategies for emerging tourism destination.
Key words- Emerging tourism destination, promotional

strategy, marketing, destination marketing organization,
attractions, and festivals.
I
INTRODUCTION
ourism and hospitality sector is the fasted growing

sector of global economic. This claim is supported by
statistical data from regional, national, and international
studies (WTO, 2000; WWTC, 2005). Globalization of the
tourism market has made tourism business environment
more complex. This is because tourists whether inbound or
out bound are in search of places and attractions that will
optimally satisfy their touristic desires. The global choice of
destination according to Henderson (2007) is growing and
certain of these destinations have similar characteristics.
This gives rise to a situation where one can be replaced by
another as the notion of destination choice set implies.
Destination is commonly referred to as place in tourism
parlance. Tourism destinations are places with tourists
attractions. Attraction can be manmade, natural, or cultural.
The attraction and the benefit it offers are sometimes the
reasons for visiting a destination.
Bassey Benjamin Esu
is a lecturer in the Department of
Marketing, University of Calabar. His current research interests
include destination marketing and tourism
economy. He has published in both local and international journals.
He has a Ph.D in Marketing. He is Member of National Institute of
Marketing of Nigeria. Tel: 234-0804740556, email: esubenjamin
@yahoo.com.
Dr Ezkial Ebitu H is a lecturer in Department of Marketing,
University of Calabar, His research interests include
entrepreneurial development and marketing. He has a Ph.D in
industrial Sociology. Tel O8039451333.
An emerging tourism destination is conceptualised as a geopolitical area where tourism has just been accepted as a
major socio-economic development tool and where the
community has expressed willingness to leverage the
tourism potentials to enhance their socio-economic wellbeing. Every destination has a cycle with unique stages and
characteristics. Examples of destinations that have entered
the maturity stage are United Kingdom (UK), United States
of America (USA), South Africa (SA), Kenya, etc. A good
example of an emerging tourism destination is Nigeria.
Nigeria has just begun taking tourism seriously. The past
nine years has witness a conscious effort by some of the
States (e.g. Cross River, Kebbi, Osun, etc.). Two common
models on destination life cycle are Butlers Destination
Area Cycle Model (Butler, 1980) and Doxey Irredex (
Doxey, 1975). Butlers model gives us an elaborate
understanding of what a destination goes through from the
time the community decides to take tourism as a serious
economic development tool. The Butlers model is linked to
the business/marketing concept of product life cycle. It is
theoretically underpinned on the product life cycle. The
product life cycle is a theory in which sales of a new product
are seen to slowly grow and then experience rapid growth,
before stabilizing and subsequently declining (Esu, 2005).
When applied to tourism destinations, it suggests that
destinations develop and change over time. Butler
Destination Area Cycle Model is made up of a number of
linked stages: exploration, involvement, development,
consolidation, stagnation, and decline (post-stagnation).
Figure 1 Hypothetical Evolution of a Tourist Area (Butler ,1980)
Inferring from Butlers Model, some basic assumptions can

be made about an emerging destination. An emerging
tourism destination is characterized on the supply side by
acceptance of tourism by government and the community as
being strategic to the economic importance of the state; the
introduction of strategies to actualize these visions (product
design and development), the euphoria that accompanies the
idea of having an identity as a tourism destination. On the
demand side, there may be little or no awareness of
destination by the market, lack of specific unique product to
attract tourist, low visitor arrival, low tourists receipts, etc.
Theoretically, destinations are promoted by the use of one
or combination of promotional tools (advertising, personal
selling, sales promotion, publicity, public relations and
internet,). These activities undertaken by individuals or
organizations want its voice to be head in the market place.
The peculiarities that characterise an emerging tourism
destination account for the need to advocate for specific
strategies for the promotion of emerging tourists
destinations. Because of these peculiarities and the
complexities in understanding tourists behavior, it does
appear that the traditional promotional tools are inadequate
to generate appropriate consumer response especially in
emerging tourism destination without a broad strategic
approach. In this paper, we shall identify the importance of
destination promotion, responsibility of Destination
Marketing Organizations (DMOs) in destination promotion
and propose a conceptual model for developing promotional
strategies for emerging tourist destinations. Attempt shall
also be made to capture some strategies commonly used by
successful emerging destinations. It is expected that this
paper will give some impetus to the frame-work for the
rebranding of Nigeria which has just been launched by the
President, Alhaji Musa Yadua.
II
IMPORTANCE OF PROMOTION TO
DESTINATION MARKETING
Destination promotion has the potentials of producing the

following benefits:
i. Build awareness and interest in the destination and
the attractions or products
ii. Differentiate the destination and its offering from
competing destinations
iii. Communicate the physical and psychological
benefits of products offered by the destination to
the market
iv. Build and maintain the overall image and
reputation of the destination
v. Persuade tourists to visit the destination and
increase length of stay in destination
vi. Promotion can assist the destination management
in leveling out peaks and valleys resulting from
seasonality of demand
III
RESPONSIBILITY FOR DESTINATION

PROMOTION
Destination promotional function is primarily the

responsibility of the Destination Marketing Organization
(DMO). DMOs are organizations that have been established
to promote specific destinations to potential travelers
(Gartrell, 1994). Regional Tourist Boards may be regarded
as marketed, agencies. Their role is to promote place. That
is, attract visitors to destinations in these areas (Pattinson,
1990). Destination marketing is a collective effort that
requires various organizations and businesses in a
geographically limited area to harmoniously work together
to achieve a common goal (Gransjo, 2003). Following the
understanding that place can be marketing, tourism
planners and marketers have made attempts to apply
marketing principles to place or destination. One of such

principles is promotion. There is copious literature on
place or destination promotion. One of such early works was
that of Pattison (1990).
Specifically, DMOs perform the following responsibilities:
i. They are non-profit organizations aim at generating
tourist visitations for a given destination at a given
period.
ii. Responsible for developing a unique image of the
destination.
iii. Co-ordinating private and public tourist industry
constituency.
iv. Providing information to visitors.
v. Leading the overall tourism industry at a
destination.
IV
CONCEPTUAL MODEL FOR DEVELOPING

PROMOTIONAL STRATEGIES OF
EMERGING TOURISM DESTINATION
Promotion refers to the communicative activity of

marketing. It fills the perceptual and informational gaps that
exist between suppliers of tourism (industry) and the tourists
(market). Promotion involves the creation and dissimulation
of information that the tourist need to take a purchase and
consumption decision.
Promotional strategy is a controlled integrated programme
of communication methods and materials designed to
present an organization and its products to prospective
customers; to communicate need satisfying attributes of
product to facilitate sales and thus contribute to long-run
profit performance (Engel, Warshaw and Kinnear; 1991).
Promotional activities must be consistent with the needs of
the tourists and integrated with the other elements of the
marketing mix. Information is used to position, market and
sell destinations (Tunnard and Haines, 1995). The
promotional strategies will serve as connect between the
customers and the experience they are seeking. Since
tourists have expectations, it has become necessary that
these requirements form the bases of the promotional
strategies of tourism destination.
The development of effective promotional strategies
demands more than just being aware of the tools of
promotion. The peculiarities of emerging tourism
destination make it imperative for a special model that will
cater for these complexities. Tourist demand is influence by
tourist needs and motivations. These two currents form the
theoretical underpinning of tourism product consumption.
The model has four components.
i. Analysis of destination drivers
ii. Formulation of destination communication
objectives
iii. Strategy formulation
iv. Selection of promotional tools
v. Evaluation of the effectiveness of destination
promotion

A. Analysis Of Destination Drivers
Destination drivers are those attributes of the destination
that can be associated with the destination and that
correspond with the values and actual needs of prospective
tourists and have the likelihood of evoking an image that
will stimulate tourists interest to visit such a destination.
The destination attributes usually form a destinations
attractiveness (Babu & George, 2008; Czech tourism,
2004). In real life we are aware of such generally shared
associations;
Mercedes=prestige,
Volvo=safety,
Kenya=safari, Porsche =wild driver, etc. The tasks at this
stage is to determine the destination attributes the will build
strong associations. A simple methodology proposed by Esu
and Mdaze-Arrey (April 2009) in their paper on Branding
of Cultural Festivals as Destination Attraction could be
used to determine the destination attractions that will serve
as a connect with the destination. The method begins with
the generation of destination attribute, selection of
significant attributes using two statistical techniques:
importance-performance analysis matrix and discriminant
analysis to test significant associations with market
segments. This is necessary because the attributes must
agree with the tourists value, needs, and motivations. A
need is a state of disequilibrium that requires satisfaction.
Motivation is the drive to satisfy the identified need. The
concepts of push and pull factors are often used to explain
the concept of need and motivation (Crompton, 1979; Dann,
1981). Push factors are the socio-psychological needs that
will encourage a person to travel, while the pull factors is
one in which the person is motivated, or arouse by the
destination. The push factors are logical and temporary
antecedents to pull factors. The destination must possess
attributes that matches the tourists needs before the tourist
would respond positively to the promotional strategy. The
attributes that show significant relationship with market
segment are those ones that are conceptualise as destination
drivers. Czechtourism (2004) suggest that a Destination
Marketing Organisation should produce one strong
association with which tourists can connect the destination.
This idea is supported by the following assumptions:
perception is more important than reality and that
success is not in the product, but in the minds of clients.
The destinations significant associations are personified to
give the destinations brand personality.
Figure 2: Conceptual framework for promotional strategy of emerging tourism destination

Analysis of destination drivers
Formulation of destination communication objectives
Destination promotion strategy formulation
Selection of promotion tools
Evaluation of the effectiveness of destination promotion

B. Formulation
Objectives
Of
Destination
Communication
Before the strategy is formulated, the destination promotion

objectives should be established. For a comprehensive
articulation of the destination promotion objectives, a
knowledge of the VICE Model is necessary (Tourism
Recreation research and Education Centre, 2004). VICE
(visitor, industry, communities and environment) is an
acronym for an international model that specifies the
stakeholders expectation in a tourist destination. The
destination communication is usually aim at achieving the
following stakeholders objectives: Visitor (welcome,
involve and satisfy visitors), Industry (achieve a profitable
and prosperous industry), Communities (engage and benefit
host communities), Environment (protect and enhance the
locals).
C. Strategy Formulation
After determining the destination drivers and the
formulation of the destination promotion objectives it seeks
to achieve, the destination managers could then formulate
activities that will attract the identified customer segments.
This idea is in view of the fact that integrated marketing
communication experts belief that every contact a customer
makes with the brand or organization is saying something.
In this vein it is conceptualise that there are specific
activities that can arouse the interest of tourist to visit the
destination, thereby achieving destination promotional
objectives. These activities form the bases of the promotion
strategies of the destination. Strategy formulation entails the
design and development of unique destinations associations
and brand personality that jointly give the destination an
image.
It is generally known in marketing that a successful, product
or service means nothing unless the benefit of such a service
can be communicated clearly to the target market. The

message to be communicated links the tourist needs,
motivation, and the destination. The strategy spells out what
to say about the destination in order to achieve the
destination promotion objectives.
D. Selection Of Promotion Tools
Promotion tools are devices, activities, or methods used by
marketing managers to convey the desired message to the
market in order to achieve any desired promotion objectives.
There are five traditional promotional tools.
i.
Advertising
Is any paid form of non-personal communication about an

organization, product, service, or idea by an identified
sponsor (Alexander, 1965). The issues in advertising are the
development message, design of the message and the choice
of media. The first one is the creative strategy (it involves
finding effective, memorable ways to operate on consumers
minds). The second is how the message will be said and the
third how it be heard by the consumer (it involves media
selection and buying of space).
A quote by Steuart Britt in Esu (2003) buttresses the
importance of advertising to a tourism business. The quote
says: Doing business without advertising is like winking at
a girl in the dark. You know what you are doing. But
nobody else does. Advertising informs, persuades,
educates, and reminds prospective or actual tourists about
attraction and destination. According to Middleton (1988),
the following media types are available to the tourist
destination manager: TV, radio, newspaper, cinema
advertising, consumer magazine, trade magazine, outdoor
advertising, tourist board brochures and guides, commercial
consumer guides, directive and yellow pages, exhibitions, in
home magazines, direct mail, and door to- door
distribution.
ii. Public Relations

Public Relations (PR) also has communication function.
The British Institute of Public Relations defines Public
Relations as the deliberate planned and sustained effort to
establish and maintain mutual understanding between an
organization and the public. It is a management function,
which evaluates public attitudes, identifies the policies and
procedures of an individual or organization with the public
interest, and executes a programme of action to earn public
understanding and acceptance (Moore and canfield, 1977).
PR is implemented from corporate, rather than from
marketing funds. At the tactical level, PR may be used to
create and exploit opportunities to communicate selected
messages to the general public or target groups. Example of
PR techniques includes press release, press launches,
receptions, personality appearances and staged events,
facility tour and participation in community activities.
iii. Sales Promotion
Another promotional technique is sales promotion. Belch &
Belch (2001:21) define sales promotion as those marketing
activities that provide extra value or incentives to the sales
force, distributors, or the ultimate consumer and can
stimulate short-term sales. The part of sales promotion that
takes place at point of sales is called merchandising.
Merchandising is the sum total of effort to move goods and
services at the point of sale. Advertising and PR take place
away from the point of sales, while sales promotion takes
place at the point of sales. Middleton (1988: 165) defines
point of sale as any location at which a purchase
transaction takes place. Sales promotion techniques used
by tourism marketing include: price cuts/sales offers,
coupons, extra product, additional services, gift, passport
schemes, extra commission, prize draws, parties/reception,
and business and travel incentives, etc. The marketing
objectives attainable by sales promotion are: leveling of
demand, reward regular customers, Increase market share,
secure dealer support and recommendation, achieve
brochure display, improve dealer awareness of products,
improve volume of sales through incentives, and improve
display in distribution outlets.
iv. Personal Selling
Personal selling refers to person-to-person communication
in which a seller attempts to assist and/or persuade
prospective buyers to purchase the companys product,
service or idea (Belch & Belch, 2001). Selling of tourism
products and services falls into three types: (a) external
point of sales (retail travel agency, ticket/booking desks),
(b) internal- in house point of sales (reception desk in the
hotel and attraction sites) and (c) Reservation system via
customers home (booking and responding via direct mail,
TV, radio and telephone calls).
v.
Publicity
Publicity refers to nonpersonal communications regarding

an organization, product, service, or idea not directly paid
for or run under identified sponsorship for making a sales
(Belch & Belch, 2001). It is in the form of a news story,
editorial, announcement about the organization and/or its
product and services. The special techniques used for
publicity include news release, feature articles, photographs,
films, and videotapes.
vi. Interactive/Internet Marketing
This promo tool is driven by the growth in information
technology. Included in this group are the internet, CDROM, and interactive televisions. Interactive media enable
buyers and sellers to interact (Crevens and Piercy, 2006).
The task at this stage is the selection of an optimal mix of
tools that will carry the message about the destination.
Cravens and Piercy (2006) asserts that early in the process
of developing the promotion strategy, it is useful to set
guidelines as to the expected contribution for each. A mix of
tools is prescribe because of the synergy derive from the
combination. Each promotional tool has its strengths and
weaknesses. A combination of tools will provide a trade-off
thereby leading to increase effectiveness and impact on
overall destination objectives.
E. Evaluation Of Effectiveness Of
Strategy
Promotional
The evaluation of the effectiveness of a promotional strategy

is in two parts. The first is the impact of the message content
on the destination promotion objectives. The second part is
the effectiveness of the promotional mix. In this paper, our
focus is on the former. The effect of a destination promotion
is expected to impact on two areas: (1) The effect on the
perception of tourists at the generating areas and (2) the
effect at the receiving areas {on the number of visitor
arrivals (visitor), tourist receipts (industry), community
benefit (community), and environmental sustainability
(environment)}.
At the tourist generating area, the Anholt Nation Brands
Index (ANBI) model could be used to assess the effect of
the destination promotion campaign on the perception of
prospective tourist (Mari, 2008). ANBI is an analytical
framework of brand index which is based on six destination
attributes: tourism, export, governance, investment and
immigration, culture and heritage, and people.
Tourism: Assess the level of interest by prospective tourist
in visiting a country or destination because of a draw of
natural and fabricated tourist attractions.
F. Export
Assess the publics image of products from each country
and the extent to which consumers proactively seek or avoid
products from the destination.

G. Governance
The public opinion regarding the level of national
government competency and fairness. It includes
individuals beliefs about the destination as well as
perceives commitment to global issues, such as democracy,
justice, poverty, and environment.
Investment and Immigration: It measures the destinations
power to attract people to live, work or study in it
(perception of the economic and social situation).
Culture and heritage: Measures the perception of the
destinations heritage and tourists appreciation of her
cultural (including film, music, art, sport, literature, etc.).
People:
Determines the perception tourist hold about a
destinations population. This is in terms of reputation,
competence, education, openness, friendliness, etc.
V
SPECIFIC PROMOTIONAL STRATEGIES FOR

EMERGING TOURIST DESTINATION
i.
ii.
iii.
iv.
v.
vi.
vii.
The following strategies are commonly used by

successful emerging tourism destinations.
promote destination through small businesses
promote destination through ensuring a positive
community attitude
promote destination through events /festivals
promote destination through destination marketing
system
Collective and collaborative destination marketing
Promoting destination through film production

promoting the destination without a cooperative marketing
approach.
C. Promote
Destination
Marketing System
Through
Destination
Information is used to position markets and sell destinations.

One of such ways of creating and making information
available to target markets is with destination marketing
system (DMS). DMS is a destination database (Tunnard and
Haines (1995). The challenge confronting DMS is to ensure
that they have a product database that is capable of strong
multi-media data; that is amenable to text, photographical,
sound, and video clips.
The trend in the organization and operation of DMS is the
involvement of the private sector in the management. The
various options according to Tunnard and Haines ( 1995)
are: (1) a handover to private sector after the information
stage, if there is an existing information call centre and
wishes to continue operating it, (2) a joint venture operation
with the private sector and (3) a cooperative venture owned
by partners such as associations, and private sector players.
This in essence means getting destination marketing out of
the government ministries and putting the responsibility into
the hands of autonomous and independent tourist boards.
DMS has made it unnecessary for tourist boards to be
positioned in the main street of the capital city in order to
secure visibility or need to be in the originating market place
(Bennett, 1999). According to Bennett (1999:53) any
tourist destination which is not working on some form of
DMS is losing the plot.
A. Promote Through Small Businesses

D. Promote Destination Through Events /Festivals
The role of small business in destination image is supported
by Moutinho (1990). According to him, small businesses,
like the large ones are part of the product offered by
destinations. This is because overall experience is composed
of numerous small encounters with a variety of tourism
service providers. The promotion of quality and
international best practices in service delivery in an
emerging tourism destination has the potential of enhancing
the destinations image and increase tourists traffic to the
destination. The implication is that, (1) tourist enterprises
will operate profitably in the destination, (2) tourists visiting
the area will receive higher quality service, which can be
leveraged for destination positioning, and (3) small
businesses operating profitably will breed new services and
broaden target market.
B. Promote Destination Through Ensuring A Positive
Community Attitude
Destination managers should ensure that the locals are
positively committed to tourism development (Inbakaran
and Jackson (2005). This should be done through an
inclusive approach that respects and involves the locals in
all tourism promotional endeavors. It is difficult to garner
the unlimited goodwill of the local communities in
The major role of staging event and festivals in a destination

is to act as catalysts for attracting visitors, thereby
increasing the tourist spending and length of stay in the
destination. Events and festival also acts as image-makers
for the destination. It creates a profile for the destination,
which helps in target marketing and positioning (Getz,
1997). All these give the destination a competitive edge.
E. Promote destination through governance
According to ANHOLT Nation Brand Index, governance is
one critical area of a destinations attractiveness (Mari,
2008). Corruption, conflict, war, and human rights violation
are some of the factors that can damage the image of a
country and destination. Damage to a countrys image
shows that its citizens do not have realistic view of their
own country and cannot get together to do something
positive. These factors are regarded as brand erodes. This
is a common feature in most of the Less Developed
Countries (LDC). The government should enshrine good
and democratic principles in governance. The destination
managers should launch a campaign that will rebrand the
country or destination to give it a positive image in the
international community.

F. Collective and collaborative destination
marketing
Promoting a destination requires a collective and
collaborative effort of all stakeholders in the destination.
Collaborative process refers to a process of shared decision
making among all key stakeholders of a destination (Gray,
1985, 1989).
G. Promoting destination through film
production
Emerging destinations could enjoy competitive advantage
with film tourism. Hudson and Ritchie (2006) suggest that
DMOs would be more successful if they were first proactive
in promoting the film in their locations and then proactive in
promoting the film location after release of the film in
generating areas.
VI
CONCLUSION
Emerging destinations have unique characteristics, which

differentiate them from destinations in the maturity stage.
Destination managers and marketers require this
understanding in the marketing and promotion of such
destinations. Since emerging destinations are theoretically in
the first and second stages of the Butlers destination cycle
model, DMOs should adopt promotional strategies that are
product-oriented. By this, we mean that the physical, social,
cultural, and psychological components of the destination
should form the bases of destination strategy formulation.
The set of promotional strategies suggested in this paper are
derived from extensive review of literature about successful
tourism destinations.
The scientific community holds the concept of cause effect
relationship as sacrosanct. It is based on a truth that the
authors argued for seamless means of communicating an
emerging destination to the generating areas. These
strategies would create niche markets for the destinations. It
will also differentiate the emerging destinations distinctively
from the mature destinations.
VII
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Are the Global Stock Markets Inter-linked?

Evidence from the Literature
Gagan Deep Sharma
Senior Lecturer and Coordinator
Department of Management Studies,
BBSBE College, Fatehgarh Sahib
B.S. Bodla (Dr.)
Professor,
University School of Management,
Kurukshetra University, Kurukshetra
Abstract- Opening-up of the financial markets of the world
for foreign capital has led to the increased financial integration
among different countries. This paper reviews and summarizes
the research on the subject of integration and dynamic linkages
between stock markets in different parts of the world. Majority
of the studies suggested that market integration has increased
significantly over the years, within an international context.
We find that not many studies have concentrated on the
interaction of Indian markets with the foreign markets, and
most of the studies concerning Indian have concentrated at the
inter-relationship of Indian stock market with those of the
Developed nations. Therefore, there is a scope to study the
inter-linkages between Indian stock markets and those of the
other SAARC nations.
Keywords- Financial integration, dynamic linkages, SAARC

Nations
I
INTRODUCTION
he present global business environment is presenting

unique set of opportunities and challenges to the
business organizations, consumers and the investors. During
the last 20 years, the world is living in a new era of
globalized economies and capital markets. Companies, and
capital, cross countries borders in order to take advantage
of arbitrage opportunities and to cover regional market
imperfections (Grubel 1968). As the fruits of economic
integration of the world spread across the globe, masses are
moving up the value chain. This makes people look for
some highly rewarding investment avenues. As a result, a
number of new and old investment avenues are getting
popular in recent times. Equity markets are one of the most
rapidly developing investment avenues, of late. Across the
globe, a broad movement towards an equity culture has
taken root as traditional bank financing takes a back seat to
the emergence of globally interconnected capital markets.
Interaction of financial markets is one of the most
extensively discussed topics of financial literature. Various
factors contributed in this dimension. These include cross
border movement of funds, the technological innovations in
communications, scientific trading, and settlement systems,
and the introduction of innovative financial products.
Globalizations also played a pivotal role in increasing
theinterest in the study of dynamic inter-linkages among
financial markets (Hasan, Saleem and Abdullah, 2008).
Levine and Zervos (1996) pointed out that the perfect capital
market integration needs the free flow of capital across
international borders to equate the price of risk. If there
exists any capital controls or other barriers impede the
movement of capital, the price of risk tends to be different
internationally.
The issue of financial integration has strong implications on
financial stability. On the one hand, financial integration
would benefit the region through more efficient allocation of
capital, a higher degree of risk diversification, a lower
probability of asymmetric shocks, and a more robust market
framework (Pauer (2005). These effects would help improve
the capacity of the economies to absorb shocks and foster
development. Moreover, financial integration may also
promote financial development and hence enhance
economic growth. The suppliers of capital institutional
investors and/or individual savers receive better returns on
their investments. Capital seekers around the world are
looking beyond their home country's borders for financial
resources. This results in increased integration between the
Stock markets throughout the world. On the other hand,
intensified financial linkages in a world of high capital
mobility may also lead to the financial instability in one
country being transmitted to neighbouring countries more
rapidly.
The main drivers of these stock market interdependencies
are the progressive deregulation of financial markets, the
technological improvements and the development of
investment institutions, such as insurance companies,
pension funds and so on.
Integration is generally opposed to segmentation depending
on whether or not barriers to investment exist between
countries. Barriers to investment are essential factors that
can prevent markets to integrate. Among these factors are
exchange rate risks, legal and tax differences, information
availability, foreign ownership restrictions, homes bias
(Stulz, 1981; Errunza and Losq, 1985).
In this way, the financial world is reshaping itself. New
market structures and practices are need of time due to
financial liberalization and elimination of traditional
regulatory barriers and advancement of technology. We are
marching towards a globally integrated financial world.
Emerging equity markets are attracting the attention of
global fund managers because these offer opportunity for

portfolio diversification. The benefits and costs of
international portfolio diversification need to be considered
by anyone holding a financial Portfolio (Hasan, Saleem, and
Abdullah, 2008).
With financial integration, the law of one price to financial
assets with the same risk is being tested. If financial markets
are not integrated, investors face different expected returns
for the same asset (Adjout, Danthine, 2003), (Baele et al.,
2004), (Bekaert, Harvey, 1997). This is because of the fact
that source of risk and their price may differ across markets
(Kucukcolak, 2008). On the same lines, Adam et al. (2002)
argue financial markets are integrated when the law of one
price holds. In perfectly integrated markets, all assets with
identical risk exposure also command identical expected
returns (Campbell and Hamao, 1992). In addition, a high
degree of integration between national markets minimizes
the potential benefit from international diversification
(Bessler and Yang, 2003).
This paper reviews and summarizes the research on the
subject of integration and linkages between stock markets in
different parts of the world. There is a fair need to review
the literature available on the topic since conflicting signals
emerge from the literature about the existence of linkages.
While some studies suggest that there exist the linkages
between stock markets across the globe, some studies point
otherwise. Moreover, a number of studies have focused on
the developed nations and the emerging economies, have not
received similar amount of attention. The study on hand,
tries to reach a conclusion regarding the stock markets of
which parts of the globe need to be studied for interlinkages.
The literature used for the purpose of the study has been
chosen based on frequency of being quoted. Hence, we use
the frequently quoted studies as the inputs for our study.
The paper is structured in five parts. Part 1 gives the
Introduction to the study, part 2 outlines the objectives of
the paper, part 3 brings forth the concept of stock market
linkages, part 4 deals with the literature available on Global
financial markets, part 5 covers the studies on Asian stock
markets, part 6 presents the historical work done on the
subject in the form of a comprehensive table, and part 7
concludes the paper.
II
OBJECTIVES OF THE STUDY
The study aims at the following objectives

i. to understand the concept of stock market linkages;
ii. to review the literature available on the subject of
stock market linkages in order to judge the level of
integration of global financial markets; and
iii. to find out the areas of future research in the field
of global financial market integration.
III
STOCK MARKET LINKAGES
There is no precise definition of capital market integration in
the current literature (Adler and Dumas, 1983). However,
there is a large body of financial literature which studies the
existence of inter-linkages among international capital
markets since such linkages have serious implications for

portfolio diversification as well as macroeconomic policies
of the countries concerned (Bose, 2005). Stulz (1999) argues
that as markets become more integrated, the cost of capital
decreases because the removal of investment barriers allows
for risk sharing between domestic and foreign agents.
All assets with identical risk exposure also command
identical expected returns in perfectly integrated markets
(Campbell and Hamao, 1992). Barriers to investment like
exchange rate risk, legal and tax differences, information
availability, foreign ownership restrictions, can prevent
markets from integrating. (Stulz, 1981; Errunza and Losq,
1985). The complete elimination of barriers to financial
integration allows firms to choose the most efficient sources
and greater financial integration allows a better allocation of
capital leading to the most productive investment
opportunities to become available to investors, and a
reallocation of funds to the most productive investment
opportunities takes place.
IV
LITERATURE ON INTEGRATION OF
GLOBAL FINANCIAL MARKETS
The relationships between international stock markets have

become increasingly important since Grubel (1968)
analyzes the benefits of international diversification. His
study was based on empirical data sketching ex post rates of
returns from investment in 11 major stock markets. Since
then many researchers have studied these relationships
within an international context.
The interdependency between financial markets has been at
the focus of interest since then. The majority of studies in
that early period reach the conclusion that the degree of
interdependency between markets is quite low, since the
prime factors in the development of financial markets are of
domestic nature. Even in those years some studies were
published that supported the existence of limited
interdependency between markets. These include Agmon
(1972) who establishes some degree of interdependency
between the markets of the US, UK, Germany and Japan
during 1961 until 1966; and Ripley (1973) who finds that
there is interdependency but only between those countries
that are open to foreign capital investments, in contrast with
the isolated markets that do not show any interdependence
with the other countries (Glezakos, Merika, Kaligosfiris,
2007).
The interrelationships between seven stock markets, vis-vis, Germany, France, Italy, the Netherlands, Belgium, the
United Kingdom and U.S.A. over the period 19691976 has
been investigated by Bertoneche (1979). The results show a
trend towards higher segmentation between the various
stock exchanges, which means larger opportunities for
international diversification.
The studies conducted by Eun and Shim (1989), Hassan and
Naka (1996), Peiro et al. (1998) and Aggarwal and Park
(1994) give significant conclusions with regard to the
impact of US markets over the other ones. Eun and Shim
(1989) find a substantial multi-lateral interaction among the
nine largest stock markets in the world. In particular, they
documented that news originating in the U.S. market brings

the most influential responses from other national markets.
Similar study has been undertaken by Hassan and Naka
(1996) who investigate the dynamic linkages among the
U.S., Japan, U.K. and German stock market indices using
daily data for the 1984 to 1991 period. The research finds
significant evidence in support of both short-run and longrun relationships among these four stock market indices.
The study observes that U.S. stock market led other stock
markets in short-run in the pre and post October 1987 crash,
but led all other markets in the long-run in all periods
examined. One long-run cointegrating equilibrium
relationship has been found among the four stock market
indices. This implies a limited role of international
diversification for investors with long holding periods.
However, because the US-Japan-Germany stock market
indices, and Japan-UK-Germany indices are not
cointegrated with each other, these indices may yield
international portfolio diversification in the long-run. As
such, the study could not arrive on any conclusive evidence
on international stock market efficiency. Using daily return,
Peiro et al. (1998) examine the stock markets of New York,
Tokyo, and Frankfurt for the years 1990-1993. By applying
non-linear least squares, they found that New York is the
most influential stock market and Tokyo is the most
sensitive to international innovations. Frankfurt stands in the
middle. Aggarwal and Park (1994), on the other hand,
examine the daily and overnight transmission of equity
prices between the U.S. and Japan. The work finds that U.S.
equity prices do not lead Japanese equity prices as both U.S.
and Japanese opening equity prices reflect overnight price
changes in the other market.
Kanas (1998) analyzes potential linkages between US stock
markets and stock markets in UK, Germany, France,
Switzerland, Italy and the Netherlands and found that the
US does not share long-run relationships with any of these
countries. However, contrasting results can be found in
Gerrits and Yuce (1999) which finds evidence that the US
stock market is cointegrated with Germany, UK, and the
Netherlands.
The studies of Koch and Koch (1991), Longin, and Solnik
(1995), point towards increase in the degree of international
stock market correlation over a period. Koch and Koch
(1991) study the evolving of dynamic linkages among the
daily rates of return of eight national stock indexes since
1972. The study uses a dynamic simultaneous equations
model to describe the contemporaneous and lead/lag
relationships across national equity markets over three
different years: 1972, 1980, and 1987. Growing market
interdependence was revealed within the same geographical
region over time. The study concludes that there was a high
degree of international market efficiency in the given period.
Longin and Solnik (1995) study the correlation of monthly
excess returns for seven major countries over the period
1960-90. The study observes that the international
covariance and correlation matrices are unstable over time.
An explicit modelling of the conditional correlation
indicates an increase of the international correlation between
markets over the period under study. The study also finds
that the correlation rises in periods of high volatility.

Kasa (1992) examines the common stochastic trends in the
equity markets of the U.S., Japan, England, Germany, and
Canada. He uses Monthly and quarterly data from January
1974 through August 1990 and applies Johansen (1988,
1991) tests for common trends. His study points towards a
single common trend, although the stochastic properties and
relative importance of this trend differs somewhat from the
trend in stock prices. Richards (1995) points out that a major
reason for the findings in Kasa (1992) is an inappropriately
long lag length used in the estimation process.
Kwan, Sim and Cotsomitis (1995) studies the monthly time
series of nine major stock market indices over the period
January 1982 to February 1991 to examine for causal
linkages. The empirical results indicate that there is
adequate evidence to refute the notion of informationally
efficient stock markets.
Richards (1995) finds evidence for the predictability of
relative returns and the existence of a winner-loser effect
across 16 national equity markets and concluded that
national stock market indices include a common world
component and two country-specific components, one
permanent and one transitory.
The relationship between equity markets in the United
States, Canada, and Mexico has been studied by Atteberry
and Swanson (1997). The study identifies more causal
relationships during periods of economic uncertainty than
during periods of relative calm. This implies that the
potential benefits associated with diversification across
equity markets within the North American system appear to
be diminished during periods of economic uncertainty. Pan,
Liu and Roth (1999) examine linkages between the U.S. and
five Asian-Pacific stock markets (Australia, Hong Kong,
Japan, Malaysia, and Singapore) during the period from
1988 to 1994. The results of the study indicated that the six
stock markets are highly integrated through the second
moments of stock returns but not the first moments. Masih
and Masih (2001) investigate the dynamic causal linkages
amongst nine major international stock price indexes.
Results of this study tend to support the contention offered
by several studies in the literature of significant
interdependencies between the established OECD and the
Asian markets, and the leadership of the US and UK
markets over the short and long run. It was found that these
three markets (US, UK and Japan) have consistently
contributed over 75% of global stock market capitalization
over the major part of the sample under consideration.
Choudhry (1997) investigates the empirical investigation of
the long-run relationship between stock indices from six
Latin American markets and the United States using weekly
data from January 1989 to December 1993, by applying the
unit root tests, cointegration tests, and error-correction
models. Results from the unit root tests provide evidence of
a stochastic trend in all indices. Results from the
cointegration tests indicate the presence of a long-run
relationship between the six Latin American indices (with
and without the United States index). Error-correction
results indicate significant causality among the stated
indices.

Janakiramanan and Lamba (1998) examine the linkages
between the stock markets in the Pacific-Basin region
during 198896 using a vector autoregression model. The
study finds that during 198896 the US market influences
all other Australasian markets, except Indonesia, and none
of these markets exert a significant influence on the US
market. An analysis excluding the US market revealed
persistent linkages between these markets that can be traced
to the indirect influences of the US market. The study
indicates that the markets that are geographically and
economically close and/or with large numbers of crossborder listings exert significant influence over each other,
with markets closing earlier in the day exerting greater
influence over markets closing later in the day.
Roca (1999) investigates the price linkages between the
equity market of Australia and that of the US, UK, Japan,
Hong Kong, Singapore, Taiwan, and Korea using weekly
MSCI stock market data covering the period 1974-1995.
The study conducted Cointegration test using the Johansen
(Journal of Economic Dynamics and Control, 12, 1988) and
Johansen and Juselius (Oxford Bulletin of Economics and
Statistics, 52, 1990) procedure and Granger-causality tests
based on error-correction models and standard vector
autoregression models. He found no correlation between
Australia and the other markets. However, the Grangercausality and forecast variance decomposition analyses
reveal that Australia is significantly linked with the US and
the UK. The impulse response analyses further show that
Australia responds to shocks from the US and the UK
immediately during the first week and this response is
completed with a period of four weeks.
The dynamic interdependence of the major stock markets in
Latin America (Argentina, Brazil, Chile, Colombia, Mexico,
and Venezuela) has been studied by Chen, Firth and Rui
(2002) using data from 1995 to 2000. The study finds that
there is one cointegrating vector, which appears to explain
the dependencies in prices. The results are robust to
sensitivity tests based on translating indexes to US dollars
(i.e., a common currency for all the markets) and to
partitioning the sample into periods before and after the
Asian and Russian financial crises of 1997 and 1998,
respectively. Results of the study suggest that the potential
for diversifying risk by investing in different Latin
American markets is limited.
A number of studies have investigated the stock market
linkages in Europe. These include Bessler and Yang (2003);
Baele and Vennet (2001); Yonghyup (2003); and Aggarwal,
Lucey and Muckley (2003). Bessler and Yang (2003) study
the dynamic structure of nine major stock markets using an
error correction model and directed acyclic graphs (DAG).
The results did show that the Japanese market was among
the most highly exogenous and the Canadian and French
markets among the least exogenous in the nine markets
under study. The US market was found to be highly
influenced by its own historical innovations, but it was also
influenced by market innovations from the UK, Switzerland,
Hong Kong, France, and Germany. The study pointed out
that the US market is the only market that had a consistently
strong impact on price movements in other major stock

markets in the longer-run. Baele and Vennet (2001)
investigate the existence of market integration in Europe for
the period 1990-2000. Extracting weekly stock returns from
the markets of ten European countries and applying a
GARCH process, their results suggested that the main driver
of European market integration is the reduction of currency
volatility within European countries. Yonghyup (2003)
examines the recent trend of sector-level returns for four
European countries, France, Germany, Italy, and the UK,
using "return on assets" of a panel of listed firms of these
countries for the period 198895. Initial findings suggested
that sector returns have converged across countries over
time. However, when integration is tested within a capitalasset pricing model framework, the country effect remains
strong. The overall result support the view that European
capital market integration is under way, but is far from
complete. Aggarwal, Lucey and Muckley (2003) examine
the integration of European equity markets over the 19852002 period using a relatively new cointegrating technique
that assesses how the level of integration in equity price
levels changes over time. They supplement this technique by
two other dynamic techniques that also measure the extent
of time-varying integration from complementary
perspectives. The three methods agree that there has been an
increased degree of integration among European equity
markets especially during the 1997-98 periods. The
evidence presented in this study also indicated that Frankfurt
is the dominant market for equities in Europe.
Glezakos, Merika and Kaligosfiris (2007) examine the short
and long run relationships between major world financial
markets with particular attention to the Greek stock
exchange. The study covers the period of 2000-2006 using
monthly data. The study finds out that the US global
influence is noticeable on all major world financial markets.
It also responds significantly to primarily domestic shocks.
Furthermore, our findings suggest that the Athens stock
market is strongly affected by the US and the German
markets but the influence as the estimation of the impulse
response function suggested is completed within a day. This
paper also presents a summary of research done on Stock
market integration across the globe. However, this summary
is mostly focused on the Developed world. Out of the 22
papers quoted in the summary, as many as 18 deal with the
Developed world. These papers are ranging from the year
1989 to 2001.
Kucukcolak (2008) measures the integration level of the
Turkish equity market with the EU market indices of UK,
Germany, France and Greece. The study uses daily data for
the period of 2001-2005. The study concludes that in the
long run, the Turkish stock market is not co-integrated with
its mature counterparts in the EU, in contrast to the Greek
market, which is co-integrated.
V
LITERATURE ON ASIAN MARKETS
The stock market crash of 1987 holds special relevance in

the study of integration of Asian stock markets with those of
the Developed world. The crisis originated with the US
when within a duration of five trading days in October 1987,

the prices on New York Stock Exchange fell by one-third.
This movement was triggered by high trade deficits and
proposed takeovers related legislation. The crisis, after
originating from the US spread to all major developed
markets except Japan. It is worth mentioning here that the
stock markets of most of the Nations had peaked up between
April and September 1987. The study of Arshanapalli,
Doukas, and Lang (1995) supports this argument. They
investigate the presence of a common stochastic trend
between the U.S. and the Asian stock market movements
during the post-October 1987 period. The evidence suggests
that the cointegrating structure that ties these stock
markets together has substantially increased since October
1987. The influence of the U.S. stock market innovations
was also found to be greater during the post-October period.
The results also indicate that the Asian equity markets are
less integrated with Japan's equity market than they are with
the U.S. market.
No clear signals seem to emerge from the literature on
integration of Asian Stock markets. This observation is
driven from the researchers conducted by Ghosh, Saidi and
Johnson (1999); Bailey and Stulz (1990); Phylaktis and
Ravazzolo (2002), Click and Plummer (2003), Sharma and
Wongbangpo (2002), Choudhry and Lin (2004).
Ghosh, Saidi and Johnson (1999) examined the debacle of
the Asian-Pacific stock markets by utilizing the theory of
cointegration to investigate which developing markets are
moved by the markets of Japan and the United States. The
empirical evidence suggested that some countries are
dominated by the US, some are dominated by Japan, and the
remaining countries are dominated by neither during the
time period investigated. Similarly, Bailey and Stulz (1990)
investigate the US, Malaysia, Korea, Singapore Hong Kong,
Japan, Philippines, Taiwan and Thailand market indices
from January 1977 to December 1985 using simple
correlation analysis to detect interrelations among the
markets. The study concluded that the degree of correlation
between US and Asian equity returns depended upon the
period specification, whether daily, weekly or monthly. This
conclusion is supported by the finding that with daily
returns, only correlations between the US & Hong Kong,
and Japan & Taiwan were significant, where as for monthly
returns, correlations between all Asian markets were
significant with the exception of the Philippines and
Thailand. Similar results have been shown in the study of
Phylaktis and Ravazzolo (2002), who examine real and
financial links simultaneously at the regional and global
level for a group of Pacific-Basin countries by analyzing the
covariance of excess returns on national stock markets over
the period 19801998. The study concludes that financial
integration is accompanied by economic integration. The
results suggest that economic integration provides a channel
for financial integration, which explains, at least partly, the
high degree of financial integration. Click and Plummer
(2003) examine the stock market integration of Indonesia,
Malaysia, the Philippines, Singapore, and Thailand for the
period of July 1998 to December 2002, using daily and
weekly data. The research concludes that the markets under
study are cointegrated whether analyzed using daily and

weekly data. These results are to some extent similar to
those produced by Sharma and Wongbangpo (2002), who
examine monthly data from January 1986 to December 1996
for the stock markets of Indonesia, Malaysia, Singapore, the
Philippines, and Thailand. Sharma and Wongbangpo (2002)
find a long-run cointegrating relationship among the stock
markets of Indonesia, Malaysia, Singapore, and Thailand,
which is not shared by the Philippine stock market.
Choudhry and Lin (2004) investigate the change(s) in the
long-run relationship(s) between the stock prices of eight
Far East countries around the Asian financial crisis of 1997
98. Further tests were conducted to check the change in the
influence of the Japanese and the US stock markets in the
Far East Region before, during and after the crisis. The
study showed that significant long-run relationship(s) and
linkage exist between the Far East markets before, during,
and after the crisis. The most significant linkage and
relationship were found during the crisis period. Results
mostly indicated larger US influence in all periods but some
evidence of increasing Japanese influence was also shown.
Phylaktis (1999) follows the same methodology as has been
mentioned earlier (in this paper) with reference to Masih and
Masih (2001) and investigated stock market integration in
the Pacific Basin countries after the deregulation of their
domestic capital markets. He uses monthly data in all the
cases except one wherein quarterly data was used. VAR
techniques were used for analyzing the data. The results
suggest that the level of integration has increased in the
post-liberalization period in Singapore and Taiwan. Also the
Japanese market seems to be the most influencing during the
period under investigation and the Japanese and US interest
rates appear to drive the rates in the other countries.
Huang, Yang and Hu (2000) explore the causality and
cointegration relationships among the stock markets of the
United States, Japan and the South China Growth Triangle
(SCGT) region. The study of 1992-1997 finds that there
exists no cointegration among these markets except for that
between Shanghai and Shenzhen. The stock returns of the
US and Hong Kong markets are found to be
contemporaneous.
Siklos and Ng (2001) examine a number of common
stochastic trends among stock prices in the US, Japan, Hong
Kong, Korea, Singapore, Taiwan and Thailand. The study
observes that a single common stochastic trend among
Asian and North American markets is a recent phenomenon.
The reason is that the stock markets studied were only
recently sufficiently liberalized to permit some form of
integration to emerge. Also, not only was the 1987 stock
market crash significant, but the 1991 Gulf War also
signalled a turning point in the degree of stock market
integration among the countries studied.
In, Kim, Yoon and Viney (2001) examine dynamic
interdependence, volatility transmission, and market
integration across selected stock markets during the Asian
financial crisis periods 1997 and 1998. The study finds that
reciprocal volatility transmission existed between Hong
Kong and Korea, and unidirectional volatility transmission
from Korea to Thailand. Moreover, the study observes that
Hong Kong played a significant role in volatility

transmission to the other Asian markets. The data also
indicates market integration in that each market reacted to
both local news and news originating in the other markets,
particularly adverse news.
Yang and Lim (2002) concludes that only short-term (and
no long term) co-movements exist among East Asian stock
markets (Hong Kong, Indonesia, Korea, Malaysia and
Thailand, the Philippines, Singapore, Taiwan, and Japan).
VAR model confirms that shocks or impacts of innovations
to a market are very short-lived (often as little as 2days).
Moreover, this study found a substantial increase in the
degree of interdependence after the 1997 crisis. The study
further observed that Taiwan is very independent from other
markets. The results obtained in this study also suggested
that capital controls might have an impact on the interrelationships between stock markets in the region.
The studies of Leong and Felmingham (2003) and Jeon et al.
(2006) are very relevant in the context of linkages among
Asian stock markets. The study conducted by Leong and
Felmingham (2003) analyzes the interdependence of five
East Asian stock price indices Singapore Strait Times
(SST), Korea Composite (KC), Japanese Nikkei (JN),
Taiwan weighted (TW) and Hang Seng (HS) on daily data
from 1990 to 2000. The study reveales that the degree of
integration among these five Indices had increased and the
opportunities for risk diversification had lessened in the
1990s. Jeon et al. (2006) observe the increase in the degree
of financial integration in East Asia in recent times. They
further find that the increase is due to the integration with
the global market rather than regional counterparts.
Kawai (2005) concludes that the rise in Asian newly
industrialized economies investment contributes to the
integration of the East Asian economies through FDI and
FDI-driven trade.
Hasan, Saleem and Abdullah (2008) investigated the longterm relationship between Karachi stock exchange and
equity markets of developed world for the period 2000 to
2006 by using multivariate Cointegration analysis. Johansen
and Juselius multivariate Cointegration analysis, when used
in the study indicated that markets are integrated and there
exist a long-term relationship between these markets.
However pair wise Cointegration analysis shows that
Karachi stock market is not cointegrated with equity market
of US, UK, Germany, Canada, Italy and Australia.
However, the study found Karachi stock exchange to be
integrated with France and Japan. Impulse response analysis
and variance decomposition analysis indicate that the
Karachi stock market is in general independent as most of
its shock is explained by its own innovations whereas US
and UK markets are exerting some impact on Karachi.
The studies with the Indian perspective have not been
conducted in big numbers. However, the works of Nath and
Verma (2003); Narayan, Smyth and Nandha (2004); Lamba
(2005); Bose (2005), Bodla and Turan (2006) have been
cited quite often and are worth the mention here. Nath and
Verma (2003) study the interdependence of India, Taiwan
and Singapore by employing bivariate and multivariate cointegration analysis for the period of January 1994 to

November 2002. The study finds no co-integration between
the stock markets under study.
Narayan, Smyth and Nandha (2004) examined the dynamic
linkages between the stock markets of Bangladesh, India,
Pakistan, and Sri Lanka using a temporal Granger causality
approach by binding the relationship among the stock price
indices within a multivariate cointegration framework. In
addition, they also examined the impulse response functions.
The study observed that in the long run, stock prices in
Bangladesh, India and Sri Lanka Granger-cause stock prices
in Pakistan. In the short run there is unidirectional Granger
causality running from stock prices in Pakistan to India,
stock prices in Sri Lanka to India and from stock prices in
Pakistan to Sri Lanka. As per the study, Bangladesh is the
most exogenous of the four markets, reflecting its small size
and modest market capitalization.
Lamba (2005) studied the long-term relationships among
South Asian equity markets and the developed equity
markets for the period 1997-2003. His findings show that
Indian stock markets are influenced by developed equity
market of US; UK and Japan while Pakistani and Sri Lankan
equity markets were relatively independent from the
influence of equity markets of developed markets. His
research pointed out that the three South Asian equity
markets are becoming more integrated with each other but at
a relatively slow pace.
Bose (2005) investigated the interlinkages between the
Indian stock market and the stock markets in Asia and the
US. The study found that post-Asian crisis and up to mid2004, the Indian stock market did not function in relative
isolation from the rest of Asia and the US as stock returns in
India were highly correlated with returns in major Asian
markets and was led by returns in the US, Japan, as well as
other Asian markets. On the other hand, the Indian BSE
Sensex return was also seen to exert some influence on
stock returns in some important Asian markets. Despite
existing restrictions on capital flows, the Indian market is
also seen to belong to the group of Asian markets
cointegrated within themselves and with the US market. The
degree of integration found between the Indian and other
markets in the Asian region is, however, not of a very high
order, consequently leaving sufficient room for portfolio
diversification and not posing any immediate threat for
capital outflows in case of regional crisis.
VI
COMPREHENSIVE SUMMARY OF THE

LITERATURE AVAILABLE
We cover the comprehensive summary of the literature

available worldwide on the subject of integration among
financial markets. Table 1 presents as many as 37 studies
conducted across different periods of time and covering
Asian as well as other countries of the world.
Table 1 about here
VII CONCLUSION
In conclusion, we can mention that the majority of the
studies suggested that market integration has increased
significantly over the years, within an international context.

There are, however, a number of studies that did not detect
any signs of integration. Despite the small number of studies
indicating the absence of market integration, there is
considerable
evidence
that
the
stock
market
interdependencies exist and become increasingly important
as the degree of economic interaction among countries gets
higher.
Though most of the studies had initially been conducted for
the developed markets like the US, European countries and
Japan, recently (post-Asian crisis), the literature has started
focusing on emerging Asian markets as well. Quite a few
papers address the issue of capital markets integration in
emerging economies in the Asia-Pacific basin, with
evidences of mixed results, depending on the methodology,
data, time period and/or framework used (Bose, 2005).
However, studies with the Indian perspective are lacking.
Whatever studies have been done on India, most of them
have concentrated at the inter-relationship of Indian stock
market with those of the Developed nations. Same is true in
the case of the studies concerned with other Asian markets
too, wherein inter-relationship with the Developed rather
than Developing nations has remained the cynosure of the
studies. With the directions of world trade growing wider
and wider day-by-day, the allocation of investments within
developing nations is becoming a norm rather than an
exception. Because of this, the stock markets of developing
nations will start being more inter-related in the times to
come. Therefore, there exists a need to study the Indian
stock markets in relation with those of the other developing
nations. With the advent of regional trading blocks on the
global scenario, South Asian Association of Republic
Countries (SAAC) holds potential for developing as a
Trading Block, in addition to being a political block. As
such, there is a scope to study the inter-linkages between
Indian stock markets and those of the other SAARC nations.
6)
7)
8)
9)
10)
11)
12)
13)
14)
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International Investment. Journal of Finance,
Volume 36, Issue 4, pp. 923-934.
Yang, T. and Lim, J. J. (2002). Crisis, Contagion,
and East Asian Stock Markets. Working Paper
Economics and Finance No 1, February 2002,
Institute of South East Asian Studies.

S. No.
Author (s)
Year of
Study
Period
under Study
Markets under Study
Tool(s) used
Results
Bertoneche
1979
1969-1976
Germany, France, Italy,

Netherlands, Belgium, UK,
USA.
Larger opportunities for international

diversification
Eun and Shim
1989
1980-1985
Australia, Canada, France,

Germany, Hong-Kong,
Japan, Switzerland, Britain,
USA
VAR model
Impulse responses
News originating in the U.S. market

brings the most influential responses
from other national markets
Bailey and Stulz
1990
1977-1985
US, Malaysia, Korea, Singapore

Hong Kong, Japan, Philippines,
Taiwan, Thailand
Simple correlation
analysis
The degree of
correlation between US and Asian
equity returns depended upon the
period specification, whether daily,
weekly or monthly
Koch and Koch
1991
1972, 1980,
1987
Japan, ustralia, Singapore,

Hong- ng, Switzerland,
Germany, Britain, USA
Dynamic System of
Simultaneous
Equations
High degree of international market

efficiency in the period under study
Kasa
1992
1974-1990
U.S., Japan, England, Germany,

Canada
Cointegration Tests
A single common trend
Aggarwal and Park
1994
Richards
1995
1970-1994
ustralia, Austria, Canada,

France, Germany, Denmark,
Hong-Kong, taly, USA, Japan,
Britain, Sweden, Switzerland,
Holland, orway, Spain
Cointegration Tests
A Nations stock market indices

include a common world component
and two country-specific
components, one permanent and one
transitory
Kwan, Sim and

Cotsomitis
1995
1982-1991
Nine major stock exchanges
Granger Causality
There is adequate evidence to refute

the notion of informationally efficient
stock markets
Arshanapalli, Doukas,
and Lang
1995
10
Longin and Solnik
1995
1960-1990
Seven major countries
International
Covariance,
Correlation Matrices,
Multivariate GARCH
Increase
in
the
international
correlation between markets over the
period under study. The correlation
rises in periods of high volatility
11
Hassan and Naka
1996
1984-1991
USA, Britain, Germany, Japan
Vector error
correction model
(VECM)
No conclusive evidence on
international stock market efficiency
12
Choudhry
1997
1989-1993
rgentina, razil, Chile,

Colombia, xico, Venezuela,
USA
Cointegration Tests
The presence of a long-run

relationship between the six Latin
American indices
13
Atteberry and Swanson
1997
14
Peiro et al.
1998
USA, Japan
US markets has impact over the

Japanese Market
Asian stock markets and USA
The cointegrating structure that

ties the stock markets(under study)
together has substantially increased
since October 1987. Asian equity
markets are less integrated with
Japan's equity market than they are
with the U.S. market.
USA, Canada, Mexico
1990-1993
USA, Japan, Germany
The potential benefits associated

with diversification across equity
markets within the North American
system appear to be diminished
during periods of economic
uncertainty
Non-linear least
squares
New York is the most influential stock

market and Tokyo is the most
sensitive to international innovations.
Frankfurt stands in the middle.

15
Janakiramanan
and Lamba
1998
16
Ghosh, Saidi and

Johnson
1999
17
Pan, Liu and Roth
1999
18
Roca
19
1988-1996
ustralia, Hong-Kong, Japan,

New eland, Singapore, USA,
Indonesia, Malaysia, hailand
VAR Models
The markets that are geographically

and economically close and/or with
large numbers of cross-border listings
exert significant influence over each
other
Asia Pacific, USA, Japan
Cointegration Tests
Some countries are dominated by the

US, some are dominated by Japan,
and the remaining countries are
dominated by neither during the time
period investigated
1988-1994
Australia, Hong Kong, Japan,

Malaysia, Singapore, USA
Cointegration Tests,
GARCH Model
The six stock markets are highly

integrated through the second
moments of stock returns but not the
first moments
1999
1974-1995
USA, UK, Japan, Hong Kong,

Singapore, Taiwan, Korea,
Australia
Granger Causality Test
Different results for different tests
Huang, Yang and Hu
2000
1992-1997
USA, Japan, South China

Growth Triangle
Granger Causality Test
There exists no cointegration among

these markets except for that
between Shanghai and Shenzhen
20
Masih and Masih
2001
1992-1994
USA, Britain, Japan, Germany,

S. Korea, Singapore, Hong
Kong, Australia
Cointegration Tests
Significant interdependencies
between the established OECD and
the Asian markets. The leadership of
the US and UK markets over the short
and long run
21
In, Kim, Yoon, and Viney
2001
1997-1998
Hong Kong, Korea, Thailand
Multivariate VAREGARCH model
Reciprocal volatility transmission

existed between Hong Kong and
Korea, and unidirectional volatility
transmission from Korea to Thailand.
Hong Kong played a significant role in
volatility transmission to the other
Asian markets
22
Baele and Vennet
2001
1990-2000
Europe
GARCH
The main driver of European market

integration is the reduction of
currency volatility within European
countries
23
Siklos and Ng
2001
USA, Japan, Hong Kong, Korea,

Singapore, Taiwan, Thailand
Cointegration Tests
Single common stochastic trend

among Asian and North American
markets is a recent phenomenon. The
1987 stock market crash was
significant. The 1991 Gulf War also
signalled a turning point in the
degree of stock market integration
among the countries studied
24
Yang and Lim
2002
1990-2000
Hong Kong, Indonesia, Korea,

Malaysia, Thailand, Philippines,
Singapore, Taiwan, Japan
VAR Technique,
Standard correlation
tests, Grangercausality test
Substantial increase in the degree of

interdependence after the 1997
crisis. Taiwan is very independent
from other markets. Capital controls
may have an impact on the interrelationships between stock markets
in the region
25
Phylaktis and Ravazzolo
2002
1980-1998
USA, Japan, Pacific-Basin

Countries
Multivariate
Cointegration Model
Economic integration provides a

channel for financial integration,
which explains, at least partly, the
high degree of financial integration
26
Chen, Firth and Rui
2002
1995-2000
Argentina, Brazil, Chile,

Colombia, Mexico, Venezuela
Vector Auto
Regressions (VAR)
technique
The potential for diversifying risk by

investing in different Latin American
markets is limited
27
Nath and Verma
2003
1994-2002
India, Taiwan, Singapore
Bivariate and
multivariate cointegration analysis
No co-integration between the stock

markets under study.
28
Bessler and Yang
2003
29
Aggarwal, Lucey and

Muckley
2003
30
Yonghyup
31
Canada, France, UK,

Switzerland, Hong Kong,
Germany, USA
Error Correction
Model and Directed
Acyclic Graph
The US market is the only market that

had a consistently strong impact on
price movements in other major
stock markets in the longer-run
1985-2002
European Stock Exchanges
Dynamic Integration
Tests, Multilateral
Correlation Analysis,
Haldane-Hall Kalman
Filter Methodolgy
There has been an increased degree

of integration among European
equity markets especially during the
1997-98 period
2003
1988-1995
France, Germany, Italy, UK
Integration Tests
European capital market integration

is under way, but is far from
complete
Leong and Felmingham
2003
1990-2000
Singapore, Korea, Japanese,

Taiwan, Hong Kong
Integration Tests
The degree of integration among the

Indices under study had increased
and the opportunities for risk
diversification had lessened in the
1990s
32
Narayan, Smyth and

Nandha
2004
Bangladesh, India, Pakistan, Sri

Lanka
Granger Causality
In the long run, stock prices in

Bangladesh, India and Sri Lanka
Granger-cause stock prices in
Pakistan. In the short run there is
unidirectional Granger causality
running from stock prices in Pakistan
to India, stock prices in Sri Lanka to
India and from stock prices in
Pakistan to Sri Lanka
33
Choudhry and Lin
2004
1997-1998
USA, Japan, eight Far East

countries
34
Lamba
2005
1997-2003
USA, UK, Japan, India,

Pakistan, Sri Lanka
Multivariate
Cointegration
Framework
35
Bose
2005
1999-2004
Hong Kong, Korea, Malaysia,

Singapore, Taiwan, Thailand,
India, USA, Japan
Stationary Tests,
Granger Causality
36
Kucukcolak
2008
2001-2005
UK, Germany, France, Greece,

Turkey
Cointegration Tests
In the long run, the Turkish stock

market is not co-integrated with its
mature counterparts in the EU, in
contrast to the Greek market, which
is co-integrated
37
Hasan, Saleem and

Abdullah
2008
2000-2006
Pakistan, USA, UK, Germany,

Canada, Italy, Australia
Cointegration Tests
Karachi stock market is cointegrated

with equity market of France and
Japan and not with US, UK, Germany,
Canada, Italy and Australia
Significant long-run relationship(s)

and linkage exist between the Far
East markets before, during, and
after the crisis
Indian stock markets are influenced
by developed equity market of US;
UK and Japan while Pakistani and Sri
Lankan equity markets were relatively
independent from the influence of
equity markets of developed markets.
The three South Asian equity markets
are becoming more integrated with
each other but at a relatively slow
pace
Post-Asian crisis and up to mid-2004,
the Indian stock market did not
function in relative isolation from the
rest of Asia and the US as stock
returns in India were highly
correlated with returns in major
Asian markets and was led by returns
in the US, Japan, as well as other
Asian markets
Critical Service Encounters: The Employees

Viewpoint (A Study on Restaurant Services in
Dhaka City)
SSM Sadrul Huda Assistant Professor Business Administration East West University
Afsana Akhtar Senior Lecturer BRAC University Segufta Dilshad
Research Fellow Center for Policy Research and Social Responsibility
Abstract- The purpose of the study is to evaluate critical
service encounter or the critical decisive moment and the
customer behavior in those cases. The scope of the study is the
frontline employees of different restaurant service industries of
Dhaka City. Data were collected using the critical incident
technique (CIT), through structured, open-ended questions
and the results are content analyzed to examine employees
perspective of critical service encounters. The research was
conducted over 50 sample units (employees of different
restaurants) using the convenience sampling technique. Finally,
the study attempted/considered the qualitative data into
quantitative analyses. The most notable finding of this research
is that employee response to customer need, employee response
to service delivery system failures, and unprompted and
unsolicited employee action are the critical factor for both the
satisfactory and dissatisfactory service delivery in Bangladesh.
However, it is learnt from the employee that customers can be
the source of their own dissatisfaction through inappropriate
behavior. In conclusion, these types of customers are the
challenge for the restaurant services including the employees
themselves.
INTRODUCTION
he worldwide quality movement that has swept the

manufacturing sector over the last decade is beginning
to take shape in the service sector (Business Week 1991;
Crosby 1991, Bitner, Booms and Mohr 1999). According to
some, the shift to a quality focus is essential to the
competitive survival of service business, just as it has
become essential in manufacturing (Heskett et al. 1994;
Schlesinger and Heskett 1991, Bitner et.al, 1999).
Service quality researchers have suggested that the proof of
service [quality] is in its flawless performance (Berry and
Parasuraman 1991, p.15), a concept akin to the notion of
zero defects in manufacturing. Others have noted that
breakthrough service managers pursue the goal of 100%
defect-free service (Heskett, Sasser and Hart 1990, Bitner
1999). Customers consider that the most immediate
evidence of service occurs in the service encounter or the
moment of truth when the customer interacts with the firm.
Thus, zero defects in the service is the most expected goal
to achieve a 100% flawless performance in service
encounters. Here, flawless performance is not mean to imply
rigid standardization, but rather 100% satisfying
performance from the customers point of view. The cost of
not achieving the flawless performance is the cost of
quality, which includes the costs associated with redoing
the service, or compensation for the poor service, lost

customer, negative word of mouth.
The different types of services in Dhaka City, Bangladesh
catering to more than 12 million people, faces numerous and
significant challenges. The complex and the heterogeneous
services of the restaurants are largely dominated by the
behavior of the employee in handling a critical situation.
The factors also contribute enormously to the behavior of
the customers as well, and the situation that by accounts is
deteriorating rapidly.
During the three decades after the liberation of the country
in 1971, there has been a big spurt in building restaurants all
over the country in the private sector to meet the demand of
people (Banglapedia, 2006). Many of these restaurants offer
good food at budget prices. These are becoming increasingly
popular. There are now hundreds of restaurants all over the
metropolitan cities of Dhaka and Chittagong offering local,
oriental, Indian and western foods. Some exclusive
restaurants in Dhaka offer Korean, Thai, and Japanese food.
The number of fast food restaurants is also growing in the
cities, mainly to cater to the growing.
Although more firms are realizing the importance of service
quality and customer satisfaction, it is not always clear how
to achieve this goal (Bitner at.el.). Situations arise in which
the quality of the service may low and the problem is
recognized both the customer and the employee but there
may be disagreement on the causes of the problem and the
appropriate solutions. In service encounters such
disagreements, sure to diminish customer satisfaction. The
restaurant industry should understand the encounter from
multiple perspectives, so that they are able to design
processes and educate their employees to achieve quality is
service encounters.
The literature shows that previous research in the context of
the restaurant, hotel and airline industries identified
categories of events and behaviors that underlie critical
service encounters from the customers point of view
(Bitner, Booms and Teteault 1990) and employees point as
well (Bitner, Booms and Mohr 1999). But in Bangladesh
none took place regarding the critical service encounter of
the restaurant services. Beside that restaurant service is one
of the sectors which are totally unexplored. But restaurant is
great recreational sector for the urban people. The primary
purpose of this study is to examine the contact employees
perspective of critical service encounters and to understand,
in the context of the restaurant service industries, the kinds

of events and behaviors that employees believe underlie
customer satisfaction.
II
THE BACKGROUND OF THE STUDY:

CONTACT EMPLOYEE VIEWPOINTS
Frontline personnel are a critical source of information

about customers. There are basically two ways that customer
knowledge obtained by contact employees is to improve
services: firstly, such knowledge is used by the contact
employee themselves to facilitate their interactions with
customers and secondly, it is used by the firm for making
decisions. Employees often modify their behavior from
moment to moment based on the feedback they receive
while serving customers. Schneider (1980) argues that
people who choose to work in service occupations generally
have a strong desire to give good service. To the extent that
this is true, contact personnel can be expected to look
frequently for cues that tell them how their service is
received by the customers. The more accurate their
perceptions are, the more likely their behavioral adjustments
are to improve customer satisfaction.
Second, because contact personnel have frequent contact
with customers, they serve a boundary-spanning role in the
firm. As a result, they often have better understanding of
customer needs and problems than others do in the firm.
Researchers have theorized and found some evidence that
open communication between the frontline personnel and
managers is important for achieving service quality
(Parasuraman, Berry and Zeithaml 1990; Zeithaml, Berry
and Pararuraman 1988, Bitner et.al, 1999). Schneider and
Bowen (1984) argued that the firms should use the
information, which they gathered from their contact
employees in their strategic planning, especially in new
service development and in service modifications.
According to the Bitner, Booms, and Mohr (1999), accurate
employee understanding of customers enables both the
employee and firm to adjust appropriately to customer
needs. However, Schneider and Bowen (1985) and
Schneider, Parkington and Buxton (1980) found high
correlations (r = 0.63 and r = 0.67, respectively) between
employee and customer attitudes about overall service
quality in a banking sector. Their results are contradicted,
however, in a study by Brown and Swartz (1989). Similarly,
another study of 1300 customers and 900 customer service
professionals conducted by Development Dimensions
International found differences in perceptions between the
two groups (Service Marketing Newsletter 1989). Customer
service professionals in that study consistently rated the
importance of particular service skills and competencies. In
the same way, Langeard and Colleagues (1981) found that
field managers at two banks tended to overestimate
(compared with customer ratings) the importance of six
board service delivery dimensions. Other studies have found
differences when comparing customer and employee
evaluations of business situations using scenarios and roleplaying in product failure contexts (Folks and Kotsos 1986),
a complaint context (Resnik and Harmon 1983) and the
context of retailer responses to customer problems (Dornoff

and Dwyer 1981). The Critical Incident Technique (CIT)
has been used extensively in this context in recent years to
explore service research issues and has been instrumental in
advancing our understanding of these issues. The concept of
CIT usually employed in service research to (a) help current
and future researchers employing the CIT method to
examine their methodological decisions closely and (b)
suggest guidelines for the proper application and reporting
of the procedures involved when using this method.
Although the CIT method appeared in the marketing
literature as early as 1975 (Swan and Rao), the major
catalyst for use of the CIT method in service research
appears to have been a Journal of Marketing study
conducted by Bitmer, Booms, Tetreault(1990) that
investigated sources of satisfaction and dissatisfaction in
service encounters. Service researchers have found CIT to
be a valuable tool, as the analysis approach suggested by the
CIT method often results in useful information that is mere
rigorously defined than many other qualitative approaches.
It allows researchers to focus on a very specific
phenomenon because it forces them to define the specific
aim of their study and helps identify important thematic
details, with vivid examples to support their findings.
Bitmer, Booms, Tetreaults (1990) study focusing on service
encounters provides an example of the value of the CIT
method to service research. Their analysis of 700 critical
service encounters in three industries, examined from the
perspective of the customer, led to the identification ot three
typed of employee behaviors (ultimately labeled recovery,
adaptability, spontaneity) as sources of satisfaction and
dissatisfaction in service encounters. Prior to their research,
much of what scholars understood about such evaluations
was limited to global assessments of satisfaction or abstract
concepts (e.g., service quality). Based on the knowledge
gained from the 1990 study Gremler and Bitner (1992)
extended the generalizability of the 1990 study by
investigating the service encounters across broad range of
service industries. In a recent study, Bitner and colleagues
used the CIT method to examine self-service encounters
where there is no employee involved in service delivery
(Meuter et al. 2000). The findings from this study suggest a
different set of factors are sources of satisfaction and
dissatisfaction when service is delivered through
technology- based means. As these studies suggest, the CIT
method is flexible enough to allow service encounters to be
extensively studied in a variety of ways. Bitners research
on service encounters has focused primarily on customers
cognitive response and/or assessments of service
encounters; van Dolen et al. (2001) have extended service
encounter research by focusing on understanding affective
consumers responses in service encounters by examining the
emotional content in narratives of critical incidents.
Keaveneys (1995) study on service switching also
illustrated the contribution that the use of the CIT method
has made to service research. In her study, Keaveney
employed the CIT method to understand reasons service
customer switch providers. Her analysis of more than 800
critical behaviors of service firms (critical incidents) led to
the identification of 8 distinct categories of reasons why

customers switch providers. Prior to her CIT study, most
research attempting to identify caused of service switching
focused on issues related to dissatisfaction. Although some
caused are fairly predictable dissatisfaction-related issued
(e.g., core service failure, service encounter failure, recovery
failure), other causes fall outside the satisfactiondissatisfaction paradigm (i.e., customers were satisfied, but
they still switched). Keaveney pointed out convenience,
competition, involuntary switching, and pricing issues to be
considered if service-switching behavior is to be understood.
Thus Keaveneys application of the CIT method has opened
the door for a much wider and more comprehensive
switching behavior paradigm.
A. Overview Of The Critical Incident
Technique
CIT, a method that relies on a set of procedures to collect,
content analyze, and classify observations of human
behavior, was introduced to the social sciences by Flanagan
(1945) 50 years ago. Flanagan conducted a series of studies
focused on differentiating effective and ineffective work
behaviors; in the beginning, his research teams observed
events or critical incidents and over time, reports provided
by research subjects were used in place of direct
observation. Since its introduction, the CIT method has been
used in a wide range of disciplines. Chell (1998) provided
the following description of the CIT method: the CIT
technique is a qualitative interview procedure which
facilitates the investigation of significant occurrences
(events, incidents, processes, or issues) identified by the
respondent, the way they are managed, and the outcomes in
terms of perceived effects. The objective is to gain
understanding of the incident from the perspective of the
individual, taking into account cognitive, affective, and
behavioral elements.
Bitmer, Booms, Tetreault (1990) defined an incident as an
observable human activity that is complete enough to allow
inferences and prediction to be made about the person
performing the act. A critical incident is described as one
that makes a significant contribution, positively or
negatively, either to an activity or phenomenon (Bitmer,
Booms, Tetreault 1990; Grove and Fisk 1997). Critical
incidents can be gathered in various ways, but in service
research, the approach generally asks respondents to tell a
story about an experience they have had.
B. Strengths and Advantages of the CIT method
The CIT method has been described by service researchers
as offering a number of benefits. First, the data collected ate
from the respondents perspective and in his or her own
words (Edvardsson 1992). The CIT method therefore
provides a rich source of data by allowing respondents to
determine which incidents re the most relevant to them for
the phenomenon being investigated. In so doing, the CIT is
a research method that allows respondents as free a range of
response as possible within an overall research framework

(Gabbot and Hogg 1996).The CIT method reflects the
normal way service customers think (Stauss 1993) and does
not force them into any given framework. During an
interview, respondents are simply asked to recall specific
events; they can use their own terms and language (Stauss
and Weinlich 1997). Second, this type of research is
inductive in nature (Edvardsson 1992). Consequently, this
method is especially useful (a) when the topic being
researched has been sparingly documented (Grove and Fisk
1997), (b) as an exploratory method to increase knowledge
about a little-known phenomenon, or (c) when a through
understanding is needed when describing or explaining a
phenomenon (Bitmer, Booms, Tetreault 1990). CIT can be
particularly effective when used in developing the
conceptual structure (i.e., hypotheses) to be used and tested
in subsequent research (Walker and Truly 1992).The CIT
method does not consist of a rigid set of principles to follow,
but it can be thought of as having a rather flexible set of
rules that can be modified to meet the requirements of the
topic being studied (Burns, Williams, and Maxham 2000;
Hopkinson and Hogarth-Scott 2001; Neuhaus 1996); indeed
, the CIT method is effective in studying phenomena for
which it is hard to specify all variables as priori (de Ruyter,
Kasper, and Wetzels 1995). Third, the CIT method can be
used to generate an accurate and in-depth record of events
(Grove and Fisk 1997).It can also provide an empirical
starting point for generating new research evidence about
the phenomenon of interest and, given its frequent usage in a
content analytic fashion, has the potential to be used as a
companion research method in multi method studies (Kolbe
and Burnett 1991). Fourth, the CIT method can provide a
rich set of data (Gabbott and Hogg 1996). CIT can be
adapted easily to research seeking to understand experiences
encountered by informants (Burns, Williams, and Maxham
2000), particularly in service contexts. The verbatim stories
generated can provide powerful and vivid insight into a
phenomenon (Zeithaml and Binter 2003) and can create a
strong memorable impression on management when shared
throughout an organization. Critical incidents can also be
easily communicated to customer-contact personnel,
particularly ehen describing what behaviors to do and not do
in order to satisfy customers (Zeithaml and Binter
2003).Finally, the COT method is particularly well suited
for use on assessing perceptions of customers from different
cultures (Stauss and Mang 1999).In their study, de Ruyter
Perkins, and Wetzels (1995) characterized the CIT method
as a culturally neural method that incites consumers to
share their perceptions on an issue, rather than indicate their
perceptions to researcher-initiated questions.
C. Drawbacks and Limitations of the CIT Method
Although the benefits of using the CIT method are
considerable, the method has also received some criticism
by scholars. For example, this method has been criticized on
issues of reliability and validity (Chell 1998). Problems may
also arise as a result of ambiguity associated with category
labels and coding rules within a particular study (Weber
1985).CIT is a naturally retrospective method. Thus, the CIT

method has been criticized as having a design that may be
flawed by recall bias (Michel 2001). Similarly, this method
may result in other undesirable biases, such as consistency
factors or memory lapses (Singh and Wilkes 1996).The
nature of the CIT data collection process requires
respondents to provide a detailed description of what they
consider to be critical incidents. However, respondents may
not be accustomed to or willing to take the time to tell a
complete story when describing a critical incident
(Edvardsson and Roos 2001). Because the technique
requires respondents to take tome and effort to describe
situations in sufficient detail, a low response rate is likely
(Johnston 1995).
III
OBJECTIVES OF THE STUDY
The specific purpose of the study is guided by the following

questions:
i. From the contact employees point of view, what
kinds of events lead to satisfying service
encounters for the customers? What causes these
events to the remembered favorability?
ii. From the contact employees point of view, what
kind of events lead to dissatisfying service
encounters for the customers? What causes these
events to be remembered with distaste?
IV
METHOD AND ANALYSIS

Finally, the study attempted/considered the qualitative data
into quantitative analyses.
V
RESULTS AND DISCUSSIONS
A. Classification of Employee Reported Incidents

The critical incident classification system based on incidents
gathered from customers consists of three major groups of
employee behavior that account for all satisfactory and
dissatisfactory incidents:
i. Employee response to service delivery system
failures
ii. Employee response to customer need and request
iii. Unprompted and unsolicited employee action
B. The Employees Views of Satisfactory Versus
Dissatisfactory Encounters
Here the study examine the proportions of employee
accounts in the three groups and the categories as shown in
the table 1, it should be noted that the proportions shown in
the table reflects numbers of reported events. Here, the
descriptive analysis done just to identify the reasons of any
service delivery failure or success of the restaurant industry.
However, the discussion focuses on the three major groups.
To facilitate understanding, the employee reported incidents
are summarized and ranked according to the percentage of
incidents in the three major incidents groups:
A. Data Collection
The scope of the study is the frontline employees of
different restaurant service industries of Dhaka City. Data
were collected using the critical incident technique (CIT), a
systematic procedure for recording events and behavior that
are observed to lead to success or failure on a specific task
(Ronan and Latham 1974), in this case, satisfying the
customer. Using the CIT, data are collected through
structured, open-ended questions and the results are content
analyzed to examine employees perspective of critical
service encounters and to understand, in the context of the
restaurant service industries, the kinds of events and
behaviors that employees believe underlie customer
satisfaction. The research was conducted over 50 sample
units (employees of different restaurants) using the
convenience sampling technique. The restaurant employees
were interviewed and asked to recall critical service
encounters that caused satisfactions or dissatisfaction for
customers of their restaurant. The questions are as follows:
i. When did the incident happen?
ii. What specific circumstances led up to this
situation?
iii. Exactly what did you or your fellow employee say
or do?
iv. What resulted that made you feel the interaction
was satisfying (dissatisfying) from the customers
point of view?
v. What would you or your fellow employee have
said and done? (for dissatisfying incident only)
Distribution of Dissatisfactory Incidence

Rank Order
Group#
Percentage
1
Group 2- Response to requests
61.6%
2
Group 1- Response to failures
23.7%
3
Group 3- Unprompted action
9.6%
Distribution of Satisfactory Incidence
Rank Order
Group#
Percentage
1
Group 2- Response to requests
58.3%
2
Group 1- Response to failures
25.0%
3
Group 3- Unprompted action
16.7%
When employees were asked to report incidents resulting in

customer dissatisfaction, they tend to describe problems
with external causes such as the delivery system or
inappropriate customer behaviors. By far the largest
numbers of dissatisfactory incidents were categorized in
Group 2 (Employee response to service delivery system),
with the next largest proportion falling into Group 1
(Employee response to customer need and request). These
results are not unexpected given what theory suggests.
When situation go wrong, people are more likely to blame
external, situational factors rather than to attribute the failure
or their own shortcomings. The highest number of
dissatisfactory incidents found in group 2 (see table 1). In
many of the cases, the employees implied that they are
unable to satisfy customers need due to constrained placed

on them by laws or their own organizational rules and
procedures. The smallest number of dissatisfactory incidents
were classified in group 3, which reflects spontaneous
negative employee behavior (e.g. lack of attention, rudeness
etc.). Again, this is consistent with the bias toward not
blaming oneself for failure.
The largest proportion of satisfactory incidence, from the
employees point of view, occurred in response to customer
needs and requests (group 2). More that half of the
particularly satisfying customers encounters reported by
employees resulted their ability to adjust the system to
accommodate the customer needs and requests. Success in
attributes in the case to the employees own abilities and
willingness to adjust. The next largest proportions of
satisfactory incidents were categorized in group 1. This is an
interesting set of incidents, because each one began as a
failure but ended as a success because of the ability of the
employee to recover. Employees clearly remember their
ability to recover in failure situations as a significant cause
for ultimate customer satisfaction. The smallest number of
satisfaction incidents was categorized as unprompted and
unsolicited action of the employees. Perhaps employees do
not view their own behavior as a spontaneous, but they still
remember them in association with a specific external cause
(e..g. customer need, service failure etc.).

Table 1: Percentage Analysis of Cause of Successful and
Unsuccessful Service Delivery
Distribution of Dissatisfactory Incidence
Group 1: Rank 2
Employee response to service delivery system failures
Slow Speed of Service
10.5%
Lack of Service
7.9%
Failure of a core Service
5.3%
23.7%
Group 2: Rank1
Employee response to customer need and request
Customer error
36.8%
Excessive Service Charge
7.9%
Incorrect Billing
6.3%
Inappropriate Environment
4.3%
Inappropriate Employee Behavior 6.3%
61.6%
Group 3: Rank 3
Unprompted and unsolicited employee action
Lack of Care to Customer
6.1%
Employee Error
3.5%
9.6%
Distribution of Satisfactory Incidence
Group 1: Rank 2
Employee response to service delivery system
Success of a Core Service
8.3%
Fast Speed of Service
16.7%
25.0%
Group 2: Rank1
Employee response to customer need and request
Employee Performance
33.3%
Appropriate Employee
Behavior
25.0%
58.3%
Group 3: Rank 3
Unprompted and unsolicited employee action
Better Care to Customer
16.7%
16.7%
C. The Employees Views of Customer Behavior for
Satisfactory and Dissatisfactory Service Delivery
Table 2 represents the data from the currents study for the
purpose of identifying customer behavior in the critical
moment. A primary contribution of this research effort is the
empirical based finding that unsatisfactory service encounter
may be due to inappropriate customer behavior-the notion

that the customers are wrong. The problem customer is
identified by exploring the sources of customer
dissatisfaction. The highest number of dissatisfactory
Table 2: Percentage Analysis of Customers Behavior for
Satisfactory and Unsatisfactory Service Delivery
Behavior found in the case of verbal abuse, mean the
customer verbally or physically abuses either the employee
or the other customers. It is needless to say, these types of
customers leads to stresses and strains for managers and
potentially had a bigger impact of the restaurant. A large
Dissatisfactory Service Delivery

Variables
Percentage

number of employees spread negative word of mouth. On
the other hand, the positive minded customers use to spread
positive word of mouth (WOM), positive words to
employee. Customers positive behavior automatically
encourages them to provide better service.
Satisfactory Service Delivery

Variables
Percentage
Verbal Abuse
42.1%
Spread good WOM
33.3%
Spreading bad WOM
28.9%
Complemented Verbal
25.0%
Threat of any kind
7.9%
Behaved Cooperatively
16.7%
Disturbing customers
5.3%
Tips of any Kind
16.7%
Physical Abuse
5.3%
Complemented Physically
Uncooperative Behavior
5.3%
Breaking Rules
5.3%
8.3%
Source: Compiled by the Authors from Field Survey Data

VI
CONCLUSIONS
The behavior of the employee in the critical moment has a

direct impact on the firm or the restaurant. Present study has
specified to identify the critical factor for the satisfactory
and the dissatisfactory service delivery in case of restaurant
services in Dhaka City, Bangladesh. In particular, the
research explicitly recognized that critical factors and
measured those factors using descriptive analysis.
The most notable finding of this research is that employee
response to customer need, employee response to service
delivery system failures, and request and unprompted and
unsolicited employee action are the critical factor for both
the satisfactory and dissatisfactory service delivery in
Bangladesh. This implies that the employees should more
careful on the on the dissatisfactory incidence then the
customers would feel more satisfactory. But it is learnt from
the employee that customers can be the source of their own
dissatisfaction through inappropriate behavior. Thus, the
behavior for the unsatisfactory and satisfactory service
examined to identify the dissatisfactory incidence caused by
the problematic customer. In conclusion, these types of

customers are the challenge for the restaurant and for the
employee itself.
While the results of this research were based on the
descriptive statistics and thus it is acknowledge the need to
replicate this work. In conclusion, the findings can be
applied to different critical analysis of the restaurant service
experiments and hope that future researchers will expand
and improve upon this work.
VII
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Reliability and Availability Based Hybrid Flow

Shop Scheduling Using Fuzzy Logic
Sanjoy Kumar Paul and Abdullahil Azeem*
Department of Industrial and Production Engineering
Bangladesh University of Engineering and Technology
Dhaka 1000, Bangladesh
*Tel: 880-2-9665611; Email: azeem@ipe.buet.ac.bd
Abstract- This paper addresses the Hybrid Flow Shop (HFS)
scheduling problems to minimize the over utilization of
machines. Job scheduling problems are one of the oldest and
real world optimization problems. It is multi objective and
complex in nature. Some criteria must be taken into
consideration when evaluating the quality of the proposed
schedule. Consideration of job and machine reliability is very
important during assignment of jobs in each stage to get
realistic hybrid flow shop schedule. In this paper, flow shop
problem considers the sequencing of a given number of jobs
through a series of machines with the aim to optimize a set of
objectives by satisfying a set of constraints. Fuzzy sets and logic
are used to tackle uncertainties, which are inherent in actual
flow shop scheduling problems. Fuzzy processing time, due
date, available raw material, and profit over time and cost over
time has been considered to determine the job priority. On the
other hand, machine priority is obtained by considering mean
time to failure, mean time to repair, mean time between
shutdowns and failure rate. MATLAB fuzzy toolbox is used to
calculate the priorities of jobs and machines at different stages.
Later on, grouping and sequencing of different jobs into
different machines are performed by developing an algorithm.
Keywords- Target utilization, Scheduling, Hybrid flow

shop, Fuzzy logic.
I
INTRODUCTION
cheduling is the process of organizing, choosing, and

timing resource usage to carry out all the activities
necessary to produce the desired outputs of activities and
resources. In flow shop there is more than one machine and
each job must be processed on each of the machines- the
number of operations for each job is equal with the number
of machines, the jth operation of each job being processed
on machine j. A Hybrid Flow Shop scheduling problem
consists of series of production stages, each of which has
several machines operating in parallel. Some stages may
have only one machine, but at least one stage must have
multiple machines. Each job is processed by one machine in
each stage and it must go through one or more stages. Flow
shop problem concerns the sequencing of a given number of
jobs through a series of machines in the exact same order on
all machines with the aim to satisfy a set of constraint as
much as possible and optimize a set of objectives.
Fuzzy logic (FL) has two different meanings. In a narrow
sense, fuzzy logic is a logical system, which is an extension
of multi-valued logic. However, in a wider sense fuzzy logic
is almost synonymous with the theory of fuzzy sets, a theory
that relates to classes of objects with un-sharp boundaries in
which membership is a matter of degree. In this perspective,

fuzzy logic in its narrow sense is a branch of FL. Even in its
more narrow definition, fuzzy logic differs in both concept
and substance from traditional multi-valued logical systems.
FL is a problem solving control system methodology that
lends itself to implementation in systems ranging from
simple, small-embedded micro controllers to large,
networked, multi- channel PC or workstation-based data
acquisition and control systems. It can be implemented in
hardware, software or a combination of both. FL provides a
simple way to arrive at a definite conclusion based upon
vague, ambiguous, imprecise, noisy or missing input
information. In this paper, triangular membership functions
are used for different input and output variables. Fuzzy logic
was used by different authors successfully with different
approaches. Grabot and Geneste (1994) proposed a way to
use fuzzy logic in order to build aggregated rules allowing
obtaining a compromise between the satisfactions of several
criteria. Allet (2003) dealt with a particular scheduling
problem inspired by a practical case coming from a Belgian
Pharmaceutical company. Hong and Wang (2000)
articulated that flexible flow shops can be thought of as
generalizations of simple flow shops. Cheng et al. (2001)
considered the three-machine permutation flow shopscheduling problem with release times where the objective
is to minimize the maximum completion time. A fuzzy
approach to operation selection was developed by Felix and
Abhary (1997). Ishibuchi et al. (1994) formulated a fuzzy
flow shop-scheduling problem where the due date of each
job is given as a fuzzy set. Petroni (2002) used fuzzy logic
based methodology to rank shop floor dispatching rules.
Fuzzy set theory can be useful in modeling and solving flow
shop scheduling problems with uncertain processing times
and illustrates a methodology for job sequencing problem,
which the opinions of experts greatly disagree in each
processing time (Tsujimura, 1993). Fuzzy set was
introduced by Zadeh (1965). McCahonE and Lee (1992)
used fuzzy logic for job scheduling in a flow shop.
Metaheuristic approaches to schedule in hybrid flow shop
with a cost related criterion used by Janiak et al. (2005).
Nowicki and Smutnicki (2006) dealt with flow shop
scheduling problem with the make span criterion. The
problem of selecting and scheduling the orders to be
processed by a manufacturing plant for immediate delivery
to the customer site were optimized by Gracia (2005).
Hybrid flow shop scheduling problems can be formally
described by Engin and Dyen (2004). Job is processed by

one machine in each stage and it must go through one or
more stages. Machines in each stage can be identical,
uniform or unrelated (Linn and Zhang, 1999). Ng et al.
(2007) solved the three-machine flowshop scheduling
problem to minimise maximum lateness, where setup times
are considered separate from processing times. A new fuzzy
logic based decision support system for parallel machine
scheduling/rescheduling in the presence of uncertain
disruptions was presented by Petrovic and Duenas (2006).
Muhuri and Shukla (2008) considered fuzzy timing
constraints by modeling the real-time tasks with fuzzy
deadlines and fuzzy processing times with different
membership functions.
The above-proposed methods did not consider availability
and reliability of both jobs and machines at the same time.
Some proposed methods considered the criteria to prioritize
the jobs but did not consider machine reliability-based
utilization. If machine reliability is not considered during
scheduling, the schedule may not be realistic due to the
uncertain breakdown of the machine. To optimize the
considered multi-objectives addressing this uncertainty, a
fuzzy rule based system is developed. This system provides
the priority of each job by considering processing time, due
date, profit over time, cost over time and available raw
material as an appropriate fuzzy membership function.
Secondly, another fuzzy inference system (FIS) is developed
to provide machine priority based on reliability and
availability of each stage considering the information about
mean time to failure (MTTF), mean time to repair (MTTR),
mean time between shutdowns (MTBS) and failure rate
(FR). A maximum utilization target of each machine is
calculated using the reliability of each machine found from
the third FIS. Based on the priority calculation for each job
and machine for each stage, an algorithm is developed for
grouping, sequencing, and allocating the jobs to the
machines at every stage in such a way that minimizes the
total percentage of over utilization.
II
PROBLEM DEFINITION
In hybrid flow, shop there may be a numbers of stages of

processor and each stage has more than one identical
machine. The machines are identical in a sense that, for a
given stage the jobs need the same time to be processed on
each machine. But the reliability and availability
characteristics, i.e., mean time to failure (MTTF), mean time
to repair (MTTR), mean time between shutdowns (MTBS)
and failure rate (FR) are different for each machine in a
single stage. So even these machines in an individual stage
are identical in a sense of processing time, their different
values of mean time to failure (MTTF), mean time to repair
(MTTR), mean time between shutdowns (MTBS) and
failure rate (FR) result in prioritizing the machines.
Each of the selected jobs needs to be processed on every
stage. The priority of the jobs could be appraised by the
values of there processing time, due date, profit over time,
cost over time and available raw material. In each stage the
identical machines priority is determined based on the
information of mean time to failure (MTTF), mean time to

repair (MTTR), mean time between shutdowns (MTBS) and
failure rate (FR). Figure 1 shows the typical flow shop
structure in a manufacturing facility. Here Mij indicates the
machine j in stage i. Therefore, jobs in the system are
passing through three different stages having seven
machines.
M
Jobs
In
11
21
31
12
22
32
Jobs
Out
13
Figure 1. Typical scenario of hybrid flow shop

Hence, this problem involves determining the mechanism of
priority determination of the jobs and machines in each
individual stage, and grouping, sequencing and allocating
the jobs in the machines at every stage in such a way that
total percentage of over-utilization will be minimum and top
priority jobs will be processed using the top priority
machines.
III
DETERMINATION OF JOB PRIORITY USING FIS
To incorporate multi-objective scheduling, fuzzy job priority

is calculated by developing a Fuzzy Inference System (FIS)
using MATLAB fuzzy logic toolbox. Five input variables,
e.g., processing time, due date, profit over time, cost over
time and available raw material have been used in this FIS
which results job priority as output of this FIS. These input
and output values should be expressed as a membership
function to develop the FIS. A membership function (MF) is
a curve that defines how each point in the input space is
mapped to a membership value between 0 and 1.
A. Job priority at the First Stage

To find out the priority at the first stage, five input variables are considered. These input variables are processing time, Profit
over time, Due date, Cost over Time and Available Raw Material. All the input variables are considered triangular
membership function and all
variables are divided into three
zones, i.e., low, medium and
Processing Time
high.
Profit over Time
Due Date
Job stage 1
Cost over Time
Job Priority at Stage

1
Available Raw
material
Figure 2. FIS model for job

priority at the first stage
An output variable of the first
stage is job priority (value
between 0 and 1). Output
membership function is also
triangular shaped. It is divided
into five possible zones, i.e., very
low, low, medium, high, and very
high. The developed FIS model
for job priority at this stage is
shown in Figure 2.
B. Job Priority at Other Stages

After completing the first stage, one of the five input variables, available raw material, will be converted into work-inprocess, which would be automatically available for the next stages. That is why, the remaining four input variables,
processing time, profit over time, due date and cost over time, need to be considered to find out the job priority in the other
stages. Like the first stage, all input variables are considered triangular membership function and all variables are divided
into three zones, i.e., low, medium and high.
Figure 3. FIS model for job

priority at other stages
Processing Time
Profit over Time
Job stage 2 and 3
Due Date
Cost over Time
Job Priority at Stage 2 and 3
An output variable of these stages

is job priority (value between 0
and 1). Output membership
function is also triangular shaped.
It is divided into five possible
zones, i.e., very Low, low,
medium, high, and very high.
Figure 3 depicts the developed FIS
model for job priority at other
stages.

IV
DETERMINATION OF MACHINE PRIORITY

Normalized priority (for machine j at stage i),
USING FIS
In hybrid flow shop scheduling, machine priority is very

important because the highly reliable and available machine
should get the high priority during allocation of the top
priority jobs. Reliability is a broader term that focuses on the
ability of a product to perform its intended function.
Reliability can be defined as the probability that an item will
continue to perform its intended function without failure for
a specified period under the stated conditions.
NR j
MTTF
Machine
Priority
MTBS
Machine
Priority
FR
Figure 4. FIS model for machine priority

For the priority of each machine at every stage, fuzzy
inference system is developed considering mean time to
failure (MTTF), mean time to repair (MTTR), mean time
between shutdowns (MTBS) and failure rate (FR) as input
variables and machine priority as output variable. In this
FIS, triangular membership function is chosen for each of
the input variables as well as for the output variable. The
FIS for machine priority determination using the described
membership functions is shown in Figure 4.
To determine both the job and machine priorities, several
rules have been developed in Fuzzy Interference System.
These rules determine the output (priority) of following
input variables. For example, to determine the job priority at
first stage, one rule is If (Processing Time is Low) then
(Job Priority is High). 17 rules for job priority at stage 1,
14 rules for job priority at other stages and 20 rules for
machine priority are considered.
V
GROUPING AND SEQUENCING ALGORITHM
A. Grouping
Main principle of this grouping algorithm is to perform the
top priority job in the top priority machine. So at the first
step, the top priority job is assigned to the highest priority
machine until it satisfies the target utilization. The target
utilization of machine j at particular stage i is calculated
with the following equations:
(1)
Where, j = 1n
Target Utilization (for machine j at stage i),
T j NR j TPT
Where, Rj
TPT
MTTR
Rj
Rj
(2)
= Priority value of machine j at specific
stage i.
= Total processing time
At second step, if first assignment does not satisfy the

condition, the second highest priority machine is selected
and the rest of the jobs are assigned until it satisfies the
target utilization of the second highest priority machine.
Then percentage of over utilization is calculated for that
assignment (U2%) and the percentage of over utilization
(U1%) is also calculated if it is assigned to the highest
priority machine with previous assignment. The job is
assigned to the machine, which minimizes the percentage of
over utilization, and the rest of the jobs are assigned until it
satisfies the target utilization of the second highest priority
machine.
At third step, if second assignment does not fulfill other than
first assignment, the third highest priority machine is
selected and the rest of the jobs are assigned until it satisfies
the target utilization of the third highest priority machine. If
it does not match the conditions in first assignment,
percentage of over utilization is calculated for that
assignment and the percentage of over utilization is
calculated if it is assigned to the second highest priority
machine with previous assignment. The job needs to be
assigned to the machine, which minimizes the percentage of
over utilization, and the rest of the jobs are assigned until it
satisfies the target utilization of the third highest priority
machine.
At fourth step, if the first three assignments are unable to
satisfy the conditions, the fourth highest priority machine is
selected and the rest of the jobs are assigned until it satisfies
the target utilization of the fourth highest priority machine.
Similarly, grouping is performed in the other stage.
At last, a regrouping operation is performed starting from
the lowest priority machine, which has over utilized
allocation. Among the group, the job having highest priority
is sent to the next higher priority machine and the over
utilization is calculated. The job is assigned to the machine,
which minimizes over utilization. Similarly, all machines
having over utilization need to be checked from bottom to
top.
B. Sequencing
Find the priority for each job and

machine in every stage using FIS
Calculate Target utilization for each

machine in every stage
Assign the top priority jobs to the

highest priority machine
Yes
Satisfy target
in machine 1?
No
Assign the jobs to the second highest
priority machine
Yes
Satisfy target
in machine 2?
No
Assign the jobs to the third highest
priority machine
Repeat the steps as before
No
Is it first
assignment?
Yes
%U1>%U2
Regrouping the jobs by comparing the

over utilization
Re sequencing the jobs if possible

Figure 5. Grouping and sequencing algorithm
Yes
No
Assign that job to the highest priority
machine

Sequencing is needed when multiple jobs will be assigned in
a single machine. Sequencing is determined based on the
priority of the jobs, which are assigned at that machine.
Highest priority job on the group goes first, then second,
third and so on. But except the first stage, sequencing may
need to be modified in order to minimize the make span
without hampering the main principle of grouping and
sequencing, i.e., the higher priority job does not need to wait
for the job which has less priority.
It is modified in such a way that if the arrival time of the
higher priority job is greater than the completion time of the
less priority job at that stage of the same group, then the less
priority job will be performed first. The mentioned grouping
and sequencing algorithm is shown in Figure 5.
CASE STUDY
VI
A Case study is presented here using hypothetical data to

clarify the proposed process. Four different jobs have been
considered in 3 separate stages for hybrid flow shop
scheduling. Three machines are set at the first stage as well
as second stage, whereas two machines are set at the third
and final stage. The schematic diagram of the considered
hybrid flow shop problem is presented in Figure 6.
Processing time (min)
M11
M31
Jobs In
M12
Jobs Out
M22
M32
M13
M23
Stage 1: 3 machines
Stage 2: 3
machines
Stage 3: 2
machines
Figure 6. Typical scenario of hybrid flow shop
All machines in every stage have identical processing time

but priority is calculated based on mean time to failure
(MTTF), mean time to repair (MTTR), mean time between
shutdowns (MTBS) and failure rate (FR). Four jobs have
been considered having 3 different processing times at 3
different stages. Profit over time, due date and cost over
time for each job are determined based on customer
requirements. Available raw material for each job is
determined from the inventory information of flow shop.
Information about the jobs and machines at each stage is
shown in Table 1 and Table 2 respectively.
Stage 1
Stage 2
Stage 3
Profit
over time
A
B
C
D
10
7
13
15
15
14
8
13
12
18
14
9
10
15
20
25
Total Processing
time
45
50
53
Job
M21
Due date
Cost
over time
Available raw materials

(stage 1)
5
7
3
4
60
50
70
80
700
500
800
950
Table 1. Information about jobs at stage 1, stage 2 and stage 3
Stage
Machine
MTTR
(min)
MTTF
(min)
MTBS
(day)
FR
(times/day)
1
2
3
1
75
125
100
50
1250
1000
900
1300
20
30
40
10
1
0.5
1.5
0.75
2
3
80
110
800
1150
25
40
0.6
1.2
60
1400
15
0.7
90
1200
12
1.6
Table 2. Information about machines at stage 1, stage 2 and stage 3

Priority of jobs is calculated using Fuzzy Inference System
(FIS). Based on this priority the top priority job at stage 1 is
C, following A and D, and the lowest priority job is B.
Priority of the all jobs in other stages is determined
Job
Accordingly. Table 3 shows the priority values of jobs at 3

different stages.
Priority values
Stage 2
Stage 1
0.569
Stage 3
0.411
0.5
B
0.469
0.43
C
0.575
0.609
D
0.546
0.596
Table 3. Priority values of different jobs at different stages
Priorities of machines are also determined based on the
reliability of the machines found from the fuzzy inference
system. The machine, which has the highest priority, has
ranked top priority machine at that stage, the machine,
which has second highest priority, has ranked the second top
Stage
1
0.38
0.547
0.626
and so on. Then based on their normalized priority

proportion, the target utilization for each machine is
determined. These priority values and target utilizations of
machines at different stages are depicted in Table 4.
Machine
Priority
Normalized Priority
Target Utilization
1
2
3
1
2
3
0.543
0.499
0.501
0.511
0.587
0.505
0.532
0.496
0.352
0.323
0.325
0.319
0.366
0.315
0.518
0.482
15.836
14.553
14.611
15.9388
18.3094
15.7517
27.4280
25.5720
1
2
Table 4. Priority values and target utilizations of different machines at different stages
Using the developed algorithm explained in Figure 5, the machine, sequencing of the concerned jobs is also obtained
following table provides the ultimate grouping of the jobs to using the same algorithm. Table 5 shows the schedule of
the machines. For multiple jobs grouped to a single
each job prioritized to be processed in each machine at each
stage.
3
Stage
Machine
Priority
Job
0.543
0.501
0.409
A, B
0.587
0.511
C, A
0.505
0.532
C, B
0.496
D, A
3
Table 5. Schedule of jobs in different machines at different stages

As obtained in the developed method, at stage 1, job D
should be processed in machine 1 and job C should be
processed in machine 3. The remaining machine 2 should
process job A first and then job B. At stage 2, job B should
be processed in machine 2 and job D should be processed in
machine 3. The remaining machine 1 should process job C
first, and then job A. Finally at stage 3, machine 1 should
process job C first and then job B, whereas job D and A
should be processed respectively in machine 2.
VII CONCLUSIONS
A multi-objectives hybrid flow shop scheduling problem has
been considered in this research while uncertainty is added
through fuzzy processing time, fuzzy due date, fuzzy profit
over time, fuzzy cost over time and fuzzy available raw
materials to determine the job priority and machine
reliability and availability affected variables such as, fuzzy
mean time to failure (MTTF),fuzzy Mean time to repair
(MTTR), fuzzy mean time between shutdowns (MTBS),
fuzzy mean time between maintenance (MTBM) and fuzzy
mean time between failures (MTBF) and fuzzy failure rate
(FR). Several objectives have been considered like to
minimize lead time, to minimize set up time, to minimize
work in process inventory level, to maximize machine or
labor utilization, to meet due dates. Fuzzy Inference System
(FIS) is used to calculate the weight of jobs and machines at
various stages. Several variables are used to calculate job
and machine priority. Some other variables (where need)
can be added to make final schedule more realistic. Then a
programming code is developed to make the final schedule
where weight or priority of jobs and machines are the input
and target is to minimize the over utilization.
7)
8)
9)
10)
11)
12)
13)
14)
VIII
REFERENCES
1) Allet, S., (2003), Handling flexibility in a

generalized job shop with a fuzzy approach,
European Journal of Operations Research, Vol.
147, pp. 312-333.
2) Cheng, J., Steiner, G. and Stephenson, P., (2001),
A computational study with a new algorithm for
the three-machine permutation flow-shop problem
with release times, European Journal of
Operations Research, Vol. 130, pp. 559-575.
3) Engin, O. and Dyen, A. (2004), A new approach
to solve hybrid flow shop scheduling problems by
artificial immune system, Future Generation
Computer Systems, Vol. 20, pp. 1083-1095.
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approach to operation selection. Engineering
Applications of Artificial Intelligence, Vol. 10,
pp. 345-356.
5) Garcia, J. M. and Lozano, S., (2005), Production
and delivery scheduling problem with time
windows, Computers and Industrial Engineering,
Vol. 48, pp. 733-742.
6) Grabot, B. and Geneste, L., (1994), Dispatching
rules in scheduling: a fuzzy approach,
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32, No. 4, pp. 903-915.
Hong, T. and Wang, T., (2000), Fuzzy flexible
flow shops at two machine centers for continuous
fuzzy domains, Information Sciences, Vol. 129,
pp. 227-237.
Ishibuchi, H., Yamamoto, N., Misaki, S. and
Tanaka, H., (1994), Local search algorithms for
flow shop scheduling with fuzzy due-dates,
International Journal of Production Economics,
Vol. 33, pp. 53-66.
Janiak, A., Kozan, E., Lichtenstein M. and Oguz,
C., (2005), Metaheuristic approaches to the hybrid
flow shop scheduling problem with a cost-related
criterion, International Journal of Production
Economics, Vol. 105, pp. 407-424.
Linn, R. and Zhang, W., (1999), Hybrid flow shop
scheduling: a survey, Computers and Industrial
Engineering, Vol. 37, pp. 57-61.
McCahonE, C. S. and Lee, S., (1992), Fuzzy job
scheduling for a flow shop, European Journal of
Operational Research, Vol. 62, pp. 294-301.
Muhuri, P. K. and Shukla, K. K., (2008), Realtime task scheduling with fuzzy uncertainty in
processing times and deadlines, Applied Soft
Computing, Vol. 8, No. 1, pp. 1-13.
Ng, C. T., Allahverdi, A., Al-Anzi, F. S. and
Cheng, T. C. E., (2007), The three-machine
flowshop scheduling problem to minimise
maximum lateness with separate setup times,
International Journal of Operational Research ,
Vol. 2, No. 2, pp. 135-155.
Nowicki, E. and Smutnicki, C., (2006), Some
aspects of scatter search in the flow-shop problem,
European Journal of Operational Research, Vol.
169, pp. 654-666.
Petroni, A and Rizzi, A., (2002), A fuzzy logic
based methodology to rank shop floor dispatching
rules, International Journal of Production
Economics, Vol. 76, pp. 99-108.
Petrovic, D. and Duenas, A., (2006), A fuzzy
logic based production scheduling/ rescheduling in
the presence of uncertain disruptions, Fuzzy Sets
and Systems, Vol. 157, No. 16, pp. 2273-2285.
Tsujimura, Y., Park, S. H., Chang, I. S. and Gen,
M., (1993), An effective method for solving flow
shop scheduling problems with fuzzy processing
times Computer and Industrial Engineering, Vol.
25, pp. 239-242.
Zadeh, L. A., (1965), Fuzzy sets, Information
and Control, Vol. 8, pp. 338-353.
Financial Liberalisation Policy for Fostering Credit

to the Private Sector in Nigeria for Economic
Growth
Tomola Marshal Obamuyi
Department of Banking & Finance
Adekunle Ajasin University
Akungba Akoko, Nigeria
Email: tomolaobamuyi@yahoo.co.uk
Abstract- This paper assesses the impact of Nigerias
financial liberalisation policy for fostering private sector
development. Relevant data relating to the influence of the
policy on macro-economic performance and private sector
development were obtained from primary and secondary
sources. The analyses were descriptive and quantitative in
perspective. The findings provided insights on the overall
impact of financial liberalisation policy on the private sector. It
shows that financial liberalisation has led to increased
manufacturing capacity utilisation necessary for economic
growth, but needs to be complimented by an increased flow of
funds to the private sector for investment in the real sector of
the economy. This is because, credits to private sector were not
found to have a positive impact on economic growth in Nigeria.
This implies that credits to private sector were used for
commerce (buying and selling), or diverted to some
unproductive ventures, rather than production activities, or at
least too small to positively impact on economic growth.
However, poor infrastructure, high level of corruption,
political and economic instability, and high cost of funds were
found to have constrained the contribution of the private sector
to economic development. The policy implication is that the
private sector in Nigeria could only be a positive force for
growth, if the government would sincerely provide the needed
conducive environment and the private sector efficiently
utilises banks credits for industrial development. This study
will assist policy makers in fine-tuning their liberalisation
policy and the private sector to adopt a value re-orientation
approach to enhance the performance of the economy,
especially in developing countries.
Keywords- Government Policies, Flow of Funds, Private Sector,
Economic Development
INTRODUCTION
igeria is one of the richest countries in Africa with a

population of about 144.7 million (World Bank 2007).
The country is endowed with human and natural resources 8th largest oil producer and 6th largest deposit of gas.
Despite the rich resources and large internal market, the
country is being regarded as a low-income country. All
indicators of social and economic development pointed to a
significant weakening in the countrys performance. For
instance, in 2007, the country had a real gross domestic
product (GDP) growth rate of 6.2 per cent, industrial
capacity utilisation of 45.2 per cent, and life expectancy of
47.77 per cent. There is evidence that a small proportion of

the population (estimated at 20 per cent) account for up to
80 per cent of the nations wealth (Nigerian Banking Report
2008). Over half of the population lives in absolute poverty.
The argument is that Nigeria is not a poor country, but a
poorly managed country. Economists refer to the
coexistence of vast natural resources and extreme personal
poverty in developing countries like Nigeria as the resource
curse (Wikipedia 2007). The bane of Nigerias poor
development has been over dependent on the public sector,
mismanagement of resources, fraud, and economic
instability.
The attempt to strengthen the private sector by the
government led to the implementation of financial
liberalisation policy in 1986 as part of the Structural
Adjustment Programme (SAP). The country also adopted a
medium-term strategy, called the National Economic
Empowerment and Development Strategy (NEEDS) in
2004, as a response to the numerous challenges facing the
nation. Recently, the government approved vision 20-2020
for transforming the country into a modern economy, among
the 20 leading countries in the world by 2020 (The Times of
Nigeria 2008). The objective of the vision 20-2020 is in line
with various studies and projections by Goldman Sachs that
Nigeria will be the 20th and 12th largest economy of the
World by 2025 and 2050 respectively ahead of Italy,
Canada, Korea, among others(Skyscraper City 2006), and
Africa biggest economy by 2050(Business Economy, 2008).
The vision 2020 is to be realised through the growth of the
private sector. However, as Solanke (2007) argues, the state
of the private sector, its characteristics, disposition, and
resilience would determine in substantial respects how far
the lofty objectives of repositioning Nigerias economy can
be achieved.
Hence, the fundamental questions that need to be answered
are: (i) Had the policy of financial liberalisation
significantly influenced the performance of the Nigerian
economy? What are the key constraints that have retarded
the growth of the private sector? Based on the research
questions, the specific objectives of the study are to:
i. investigate the impact of financial liberalisation
policy on private sector development using some
major indicators of economic performance.

ii. identify the constraints to increasing development
of the private sector in Nigeria This paper is
relevant and timely, especially at this period when
all the countries of the world are emphasising
private sector development as a catalyst for
economic growth. The paper has clearly shown that
development through private sector is feasible with
the commitments of all stakeholders in the
economy.
II
FINANCIAL LIBERALISATION POLICY AND PRIVATE

SECTOR DEVELOPMENT IN NIGERIA
The government of Nigeria has been playing active role in

promoting industries in the country since independence in
1960. Government policy was predicated on the premises
that industrialisation contributes directly to economic
growth, effective use of available resources, employment
generation and reduction of dependence on imports (Federal
Ministry of Industry 2007). Unfortunately, the country lacks
the technological capability and the infrastructural facilities
to attract investments and sustain industrial growth. The
problem was compounded by absence of supportive
enabling investment climate. There was massive wastage of
the revenue from the oil boom without any regard for
serious economic planning for the productive sector. Thus,
by early 1981, the country started experiencing serious
difficulties. The climax was reached in 1985 when the
external sector became virtually unmanageable. The
introduction of the Structural Adjustment Programme (SAP)
in September 1986, brought a number of sectoral reforms to
the economy, including financial liberalisation policy.
The policy of SAP involves a reduction in the role of the
public sector in production activities through the processes
of privatisation/commercialisation of public sector
investment. The aim of the policy, among others, is to make
the private sector an engine of growth. Therefore, the
creation of accommodating reforms was acknowledged as
an important pre-requisite for unleashing a private sector
response towards economic growth. Thus, the financial
liberalisation policy provides a mechanism intended to
facilitate the flow of funds for private sector in order to
foster enterprise development and substantially increase
growth.
The main areas of the financial liberalisation policy were
banking credit to the economy, licensing of banks, interest
rate administration, and saving behaviour. For instance, with
the policy of financial liberalisation, the conditions for
licensing of banks and other financial institutions were
relaxed, leading to proliferation of banks. Thus, by 1993,
about 120 banks have been registered. This scenario,
however, brought distress into the financial system. Between
1994 and 2000, a total of 33 banks were liquidated (2 in
1994, 2 in 1995, 26 in 1998 and 3 in 2000). Most of the
banks were liquidated because of fraud, mismanagement,
undercapitalisation and the country economic crises. The
implication is that credit flows to the private sector declined,
and the banks were forced into employing tighter control in
their lending activities to the private sector. By 2005, a clear

picture of the structural deficiencies in the financial sector
that may ultimately constrain bank lending to the private
sector had emerged. As Soludo (2006) observes, the sector
was characterised by structural and operational weaknesses
such as: Low capital base; Dominance of few banks;
Insolvency and illiquidity; Over-dependence on public
sector deposits and foreign exchange trading; Poor asset
quality; Weak corporate confidence; Low depositor
confidence; and Banking sector credit to the domestic
economy at 24 per cent of GDP, compared to Africa average
of 87 per cent.
In an attempt to make the banking sector sound, stable,
reliable, dependable, internationally competitive, and to
strengthen its ability to provide credit to the private sector,
the Central Bank of Nigeria (CBN) embarked on the
financial policy of recapitalisation of banks. The policy,
announced on July 6, 2004, directed that the minimum paid
up capital of banks be increased from N2 billion to N25
billion, with effect from January 1, 2006. At the end of the
consolidation exercise, out of the 89 existing commercial
banks, 25 groups of banks emerged, while 14 banks that
could not merge were set for liquidation. To raise the funds,
the banks used strategies such as mergers, acquisition,
floating of new shares and so on. The hope for the
consolidation was that, mega banks would mobilise large
amount of funds to provide loanable funds to the productive
sector, dominated by the small and medium enterprises in
Nigeria. Thus, the tendency is for the SMEs to grow into
large and conglomerate firms. However, consolidation
presents a new challenge, which requires a more serious
effort by the banks to control costs, increase the efficiency
in service delivery, and remain competitive.
The Central Bank of Nigeria (CBN) also introduced new
micro-finance policy (MFP) on 15th December, 2005. The
micro finance programme is designed to be public and
private sector driven. The purpose is to allow for the
merger of community banks for them to grant both
collaterised and uncollaterised loans to finance micro
economic activities. The policy also aims at making the
financial services accessible to a large segment of the
potentially productive Nigerian population who otherwise
have little or no access to financial services. The micro
finance institutions are to specialise in financing the small
and medium enterprises. The challenges before the new
micro-finance institutions is how to provide financial
assistance to over 65% of the economically active
population uncatered for by the formal financial institutions.
However, in doing this, the institutions must tighten their
lending standards, especially for loans more than 12 months.
Similarly, the new micro credit institutions must not be
allowed to serve as conduit pipes, like the past government
assisted credit schemes, for political office holders who are
only interested in embezzling the money. Therefore, the best
design of the new micro credit institutions should be public
and private sector owned, but privately managed for
effective performance and sustainability. As stated by
Mullin (2002), the public-private partnership (PPP) remains
an important approach to designing and implementing
economic development strategies.

III
CONCEPTUAL AND THEORETICAL FRAMEWORK
Financial systems have long been recognised to play an

important role in economic development. This recognition
dates back to Goldsmith (1955), Cameron (1967),
McKinnon (1973) and Shaw (1973), which demonstrated
that the financial sector could be a catalyst of economic
growth if it is developed and healthy. The benefits accruable

from a healthy and developed financial system relate to
savings mobilisation and efficient financial intermediation
roles (Gibson and Tsakalotos 1994).
The goal of financial liberalisation is to provide a
mechanism that facilitates the flow of funds for private
sector development and generate increased savings and
investment and efficient allocation of capital for economic
growth.
Financial Liberalisation Policy
Improved Financial Intermediation
Savings and Investment
Credit to Private sector
Manufacturing Capacity utilisations
Income
Poverty Reduction
Per Capita Growth
Economic Growth
Figure 1: Financial Liberalisation Policy, Private Sector Development, and Economic Growth
Figure 1 demonstrates that an improved financial
intermediation is expected to stimulate the level of credit to
the private sector and increase the level of investment and
income, on one hand, and enhance manufacturing capacity
utilisation, on the other hand. The ultimate effect is to
reduce poverty, increase per capita income, and by
extension leads to economic growth. Thus, the contribution
of the private sector to a countrys economic development
will be optimal, if the financial liberalisation policy is well
formulated and managed
IV
METHODOLOGY
The approach adopted for the paper consists of conducting a

survey among private sector operators in different sectors of
the economy. Relevant data relating to the influence of
financial policy on macro-economic performance and
private sector development were obtained from primary and
secondary sources. The South West States of Nigeria,
comprising Ekiti, Lagos, Ondo, Ogun, Osun and Oyo States,
were chosen for the study, because they are the commercial
hearts of the country. In each State, 10 private sector
entrepreneurial customers were purposively sampled from
each of the branches of 5 selected banks (Spring Bank, Skye
Bank, Union Bank, First Bank and United Bank for Africa),
which were randomly selected from the 25 group of banks
that emerged after the consolidation. Semi- structured
questionnaire was administered for 2 days on sample of 300

private sector operators from the 30 branches of the 5
selected banks in the 6 States. Interviewees needed to meet
the following requirements for participation in the study: (i)
They must operate current accounts with the banks; (ii)
They must be business owners, founders or part of a
founding group; and (iii) The business has a minimum of 5
years experience. The interview commenced at 9.00 am and
closed at 3.00 pm daily. The first respondent in a bank was
chosen purposively, but the next respondents were
systematically selected at an interval of ten minutes after the
completion of the questionnaire with the preceding
interviewee. The secondary data was obtained from the
publications of institutions such as World Bank, Central
Bank of Nigeria and document of Government of Nigeria.
The data were analysed through descriptive and quantitative
techniques. The real gross domestic product (GDP) growth
rate was regressed on credit to the private sector and other
macroeconomic indicators. The relationship is specified
thus:
GDP = f(CRP, MCU, MLR, SGD, DGD)
+
+
+
GDP = 0 + 1CRP + 2MCU + 3MLR + 4 SGD +
5 DGD +
Where,

GDP = Real gross domestic product growth rate,
CRP = Growth of credit to private sector,
MCU = Manufacturing capacity utilisation rate,
MLR = Maximum lending rate of banks,
SGD = Saving/GDP ratio,
DGD = Deficit /GDP rate, and
t = Error term, which is identically and independently
normally distributed with mean zero and constant variance.
The a priori expectation is that GDP growth rate is
positively related to credit to private sector (CRP),
manufacturing capacity utilisation (MCU), and saving/GDP
ratio (SGD), but negatively related to lending rate (MLR).
Prior to estimation, the time series properties of all the
variables were ascertained to avoid spurious regression,
which results from the regression of two or more nonstationary time series data. This means that the time series
have to be detrended before any sensible regression analysis
can be performed. Granger and Newbold(1974) had
concluded that regression results of non-stationary series
may, most of the times, be spurious to the extent that a
relationship would be accepted as existing between two
variables as measured by their coefficient of determination,
R2, when in actual fact no such relationship exists. In other
words, time series analysis was carried out to examine the
data for stationarity or non-stationarity problems, using
Augmented Dickey-Fuller (ADF), which is an extension of
Dickey-Fuller test (see Dickey and Fuller, 1979 and 1981).
V
HYPOTHESIS
Increased flow of funds to the private sector through

financial liberalisation policy is a prime determinant of
economic growth.
A. Data Analysis and Findings
i.
The study tried to know how the entrepreneurs evaluated the

importance, impact and quality of financial policy on the
flow of funds to the private sector in terms of availability of
finance, conditions of lending, and cost of funds (see
Figures 2 - 4). The aim was to establish whether bank
performance actually improved during the period of
financial liberalisation policy.
Cant say
4%
Fairly satisfied
28%
Figure 2: Availability of Finance
Cant say
7%
Very dissatisf ied

47%
Very satisf ied

9%
Fairly satisf ied
4%
Figure 3: Conditions for Lending
Cant say
7%
f airly dissatisf ied

33%
Very satisfied
16%
Fairly satisfied
8%
Very dissatisfied
49%
Fairly dissatisfied
20%
Figure 4: Bank Charges
Although, majority of SMEs (92.7 per cent) are either very,

or fairly, satisfied with the liquidity position of their banks,
the stringent lending conditions, including various
astronomical charges, have made banks finance unattractive
to the private sector. About 80 per cent and 69 percent of the
private business operators are dissatisfied with the lending
conditions and high cost of funds of the banks respectively.
The issue, therefore, is that the banks are liquid and are
ready to lend, but the private sector is reluctant to borrow,
because of the high transaction costs and other lending
conditions. This has the implication of restraining private
sector investment, and ultimately retards economic growth.
This statement may be justified, especially when viewed
against the performance of the economy since 1985, as
shown in Table1, with graphical illustration in Figure 5.
Descriptive Statistics of Performance of the

Economy
Very
Fairly
dissatisfied
dissatisfied
1%
3%
Very satisfied
64%
Table 1: Performance of the Economy (1985 2006)

Year
GDP
CRP
MCU
MLR
SGD
DGD
1985
9.4
5.9
38.3
11.8
17.0
3.9
1986
3.2
26.7
38.8
12.0
19.0
10.4
1987
-0.6
46.7
40.4
19.2
17.0
5.3
1988
10.0
16.9
42.4
17.6
16.0
8.5
1989
7.3
3.9
43.8
24.6
11.0
7.9
1990
8.3
18.4
40.3
27.7
11.0
8.5
1991
4.7
23.7
42.0
20.8
12.0
11.0
1992
3.0
34.6
38.1
31.2
10.0
10.2
1993
2.3
51.6
37.2
18.3
12.0
15.4
1994
1.3
32.2
30.4
21.0
12.0
7.9
1995
2.2
49.4
29.3
20.8
5.0
0.1
1996
3.4
23.9
36.8
20.8
5.0
1.3
1997
3.2
23.9
37.2
20.9
6.0
1.1
1998
2.4
27.4
34.9
21.8
30.0
-4.8
1999
2.7
29.2
36.0
27.2
30.0
-8.8
2000
5.4
17.5
36.1
26.4
30.0
-1.8
2001
4.7
43.5
59.6
31.2
35.0
-3.1
2002
4.6
19.7
54.9
25.7
4.0
-3.8
2003
9.6
26.8
56.5
21.6
7.0
-2.0
2004
6.6
26.6
55.7
20.4
18.0
-1.5
2005
6.5
30.8
54.8
19.5
19.0
-1.1
2006
5.6
28.2
53.3
18.7
20.0
Source: Central Bank of Nigeria Statistical Bulleting and Annual Reports (Various issues)
-0.6
70
60
Percentage
50
40
30
20
10
0
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
-10
-20
Year
Figure 5: Performance of the Economy, 1985- 2006
Credit to private sector
Capacity Utilisation
Saving/GDP Ratio
Figure 5 shows that most of the basic factors affecting

private investment have not shown significant
improvements over the years. For instance, the contribution
Gross Domestic Product

Lending Rate
Deficit/GDP Ratio
of the financial liberalisation to real GDP growth could only

be marginal. In addition, the ratio of savings to GDP
fluctuates over the periods. This implies that financial

liberalisation did not improve the level of savings, a possible
source of increased investment. The poor performance of
savings is believed to have resulted from the public loss of
confidence in the banking system because of distress in the
system, especially between 1994 and 1998 and between
2001 and 2002.
The share of private sector credits in the total credits
remained very low, even after the policy. From 19852006,
only average of 27.6 per cent of the total credit to the
economy went to the private sector. The bulk of the credit
that was channeled to the private sector was mainly directed
towards short-term investment. Long-term finance is very

rare and only the most creditworthy have access to it (World
Bank 2002). The private sector, especially the small and
medium enterprises (SMEs) are yet to feel the impact of
financial liberalisation policy. As Ajayi (2007) observed, the
anticipated flow of funds from the banking sector to the real
sector, which was one of the thrusts of the government
policy, is yet to manifest on the economy, especially on
SMEs, with the current tendencies of the financial sector
reflecting high preferences for mega enterprises. Table 2
shows the credit to SMEs as ratio of total credit to the
economy.
Table 2: Ratio of Loans of Small Scale Enterprises to Commercial Banks Total Credit
Year
Commercial Banks Loans to

Small Scale Enterprises
(N Million)
Commercial Banks Total

Credit
(N million )
Commercial Banks loans to Small

Enterprises as percentage of total credit (%)
1992
20,400.0
41,810.0
48.8
1993
15,462.9
48,056.0
32.2
1994
20,552.5
92,624.0
22.2
1995
32,374.5
141,149.0
22.9
1996
42,302.1
169,242.0
25.0
1997
40,844.3
240,782.0
17.0
1998
42,260.7
272,895.5
15.5
1999
46,824.0
353,081.1
13.3
2000
44,542.3
508,302.2
9.7
2001
52,428.4
796,164.8
6.6
2002
82,368.4
954,628.8
8.6
2003
90,176.5
1,210,033.1
7.5
2004
54,981.2
1,519,242.7
3.6
2005
50,672.6
1,899,346.4
2.7
Source: CBN Statistical Bulletin volume 16 December 2005
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
0
0. 0
00 0
,
0
0
.0
2,0 ,000 0
0
.0
0
1,8 0,000 0
0
.0
1,6 ,000 0
.0
00
1,4 0,000 0
0
.0
1,2 ,000 0
0
0
.0
1,0 ,000 0
0
0
8 000. 0
,
0
600 00. 0
0
,
0
400 000. 0
,
0
200 0.0
19
92
Amount(Naira)
Year
Figure 6: Amount of Loans to Small Scale Enterprises by Commercial

Banks 1992 - 2005
Commercial Banks Loans to Small Scale Enterprises
As shown in Table 2 and Figure 6, lending to the SMEs has

been declining, despite the introduction of financial
liberalisation policy. Commercial banks were reluctant to
give loans to the private sector, especially SMEs, not
because the sector is not viable, but due to the perceived
risky nature and lack of government guarantee schemes.
Thus, there was a decline from 48.8 per cent in 1992 to 2.7
per cent in 2005. The implication of the information
depicted in Figure 6 is that financial liberalisation policy
has not generated enough funds for the development of
private sector-led economy. This means that government
objective of using private sector as a catalyst of
development may not be easily achieved
Series
GDP
CRP
DGD
MCU
MLR
SGD
Commercial Banks Total Credit
ii. Regression Results of the Performance of the

Economy, 1985 2006
In order to induce stationarity, the data were transformed by
taking the first differences of all the variables that appeared
to have unit root problem, until a stationarity of the series
was achieved. This involves an assessment of the degree of
integration of the relevant variables and a check on whether
or not they cointegrate.
Table 3: Unit Root Test

Order of integration
1(0)
1(0)
1(2)
1(0)
1(0)
1(0)
Source: Data Analysis, 2008

Result of the stationarity test (Table 3) indicated that all the variables (GDP, CRP, MCU, MLR, SGD) are stationary at level,
except the DGD that demonstrated the problem of unit root (random walk), but became stationary at the second difference.
Because of this, there is the need to check whether the linear combination of the residual is stationary or not. This led to
finding the cointegration using both the trace statistic and max-eigenvalue, as reported in Tables 4 and 5.
Hypothesised
No of CE(s)
None *
At most 1 *
At most 2 *
At most 3
At most 4
At most 5
Table 4: Cointegration Test (Trace Statistic)

Eigenvalue
Trace
Statistic
0.986697
0.900372
0.684002
0.521174
0.429320
0.076770
183.1068
96.71106
50.58480
27.54444
12.81608
1.597545
5 percent
Critical Value
94.15
68.52
47.21
29.68
15.41
3.76
* Trace test indicates 3 cointegrating equations at the 5 per cent level

Table 5: Cointegration Test (Max-Eigen Statistic)
Hypothesised
No of CE(s)
Eigenvalue
Max-Eigen
Statistic
None *
0.986697
86.39579
At most 1*
0.900372
46.12626
At most 2
0.684002
23.04036
At most 3
0.521174
14.72836
At most 4
0.429320
11.21854
At most 5
0.076770
1.597545
* Max-Eigenvalue test indicates 2 cointegrating equations at the 5 per cent level
5 percent
Critical Value
39.37
33.46
27.07
20.97
14.07
3.76
The result of the trace statistics shows that there is the probability that at most two cointegrating vector cannot be rejected
and this is corroborated by the result of max-eigen statistic. From this, it means that there is long run equilibrium among the
variables. The error correction model was used to verify the long run linearity of the model (Table 6).
Table 6: Error Correction Results
Variable
Coefficient
t-statistic
C
-0.078358
-0.427077
DLOG(CRP)
-0.235768
-1.199898
DLOG(DGD)
0.133181
0.491906
DLOG(MCU)
2.169096
0.945819
DLOG(MLR)
-0.471960
-0.585291
DLOG(SGD)
-1.121171
-0.876187
ECM(-1)
-0.259899
-2.078814
From the error correction model result, it was found that this coefficient agrees with theory since it came up with negative
value (-0.259899) indicating that the equilibrium property of the model is ensured. The regression analysis in Table 7
showed the effect of credit to private sector, manufacturing capacity utilisation and other performance indicators on
economic growth, measured by the gross domestic product, during the periods of financial liberalisation in Nigeria.
Table 7: Regression Results of the Performance of the Economy, 1985 2006 Dependent Variable: GDP
Independent Variables
Coefficient
t-statistic
Sign. Level.
C
3.027247
0.973743
0.3447
CRP
-0.145549
-4.139093
0.0008*
MCU
0.151906
3.005900
0.0084*
MLR
-0.038164
-0.428762
0.6738
SGD
-0.001035
0.019842
0.9844
DGD
-0.0061918
0.781316
0.4460
R2
0.642438
Adj. R2
0.530700
F
5.749494
*Significant at 5 per cent level

Table 7 shows that two of the variables (manufacturing
capacity utilisation and credit to private sector) significantly
influenced economic growth, measured by gross domestic
product (GDP) during the period of financial liberalisation.
For instance, the coefficient of manufacturing capacity
utilisation (MCU) is positively and statistically significant,
which implies that an increase in MCU will lead to increase
in gross domestic product (GDP). This result is consistent
with economic theory, since higher economic growth is
achievable with increased capacity utilisation induced by the
financial liberalisation. Surprisingly, the coefficient of credit
to the private sector (CRP), although, statistically
significant, was negatively signed, contrary to economic
theory of positive relationship. While this counter-intuitive
result calls for further investigation, it may implies that
credits to private sector are used mainly for commerce
(buying and selling), or diverted to some unproductive
ventures, rather than production activities, which would
have increased economic growth. This emphasised the issue
of moral hazards in most of the private sector lending in
Nigeria. The result also suggests that the amount of credit to
the private sector, as a proportion of the total credit to the
economy, is too negligible to contribute positively to
economic growth. The share of private sector credits in the
total credits remained very low, averaging 27.6% from
1985- 2006. Therefore, to reverse the trend, the government

needs to encourage banks to increase their lending to the
private sector, especially small and medium enterprises, in
the real sector of the economy for investment in productive
activities. This will make the private sector to be responsive
and contribute to economic growth. However, the private
sector must be monitored to avoid diversion of funds to
unproductive ventures.
Based on the data analysis, it was found that the contribution
of the financial liberalisation policy to economic growth was
only marginal. This implies that the expectation of increased
flow of funds to the private sector through financial
liberalisation policy in order to achieve higher economic
growth could not be justified. Thus, the private sector,
especially SMEs, did not feel the impact of financial
liberalisation policy
iii. Constraints to the Growth of Private Sector in
Nigeria
This study sought the opinions of the private sector
operators and asked them to identify the most problematic
factors constraining private sector development in Nigeria.
They placed high priority on poor infrastructure, high level
of corruption, political and economic instability, and high
cost of finance as affecting the growth of the private sector
(Figure 7). These factors have the tendency of lowering
investment and productivity in the private sector.
45
40
Percentage
35
30
25
20
15
10
5
0
Poor
Inf rasruct ure
Polit ical and

economic
uncert aint aint y
Low ef f ect ive

demand
Regulat ory
inconsist ency
High cost of
f unds
Corrupt ion
Constraints
Figure 7: Constraints to Private Sector Development in Nigeria
Inadequate infrastructure, especially electricity, was

reported by more than 1 in 3 businesses as contributing to
high cost of doing business and high mortality rate of SMEs
in the country. This problem has been compounded by high
level of corruption and the festering economic and political
crises in the country. The high level of corruption and
economic instability ranked as second and third most
important constraints on the activity of private sector. The
high level of corruption, as reported by almost 1 in 5
businesses, has made many firms to fold up prematurely in
the country. Utomi in Solanke(2007) noted that the private
sector corruption in Nigeria was now beginning to compete
with public sector corruption. The World Bank has
estimated that because of corruption in Nigeria, 80 per cent
of energy revenues benefit only one per cent of the
population (Wikipedia 2007). It was the attempt to reduce
the level of corruption in Nigeria that the government
introduced the Independent Corrupt Practices and Other
Related Offences Commission (ICPC) and the Economic
and Financial Crime Commission (EFCC). Similarly, the

high cost of funds ranked fourth as affecting business
performance, which has reduced competitiveness of the
Nigeria private sector. Finally, the objective of high growth
in the private sector may be frustrated by the wave of
organised crimes and robbery attacks on banks. In recent
times, there have been frequent attacks on many banks by
armed robbers, in which many police officers and customers
were killed. As Soludo (2008) observes, without security,
the aspirations of a private sector-led economy will not be
realised.
VI
CONCLUSION AND POLICY IMPLICATIONS
The paper has contributed to the growing discourse on the

need for the government to fine-tune her financial
liberalisation policy to encourage the flow of funds to the
private sector, considered critical for economic
development. Specifically, the study provides insights into
the impacts of financial liberalisation policy on private

sector development in Nigeria. It shows that financial
liberalisation has led to increased manufacturing capacity
utilisation necessary for economic growth, but needs to be
complimented by an increased flow of funds to the private
sector for investment in the real sector of the economy.
Therefore, to ensure successful outcome of the policy for
private sector development, there must be an integrated
approach that guarantees private sectors access to finance,
especially small and medium enterprises. Specifically, the
study has policy implications for the government and private
sector as follows:
The Government {at all levels}: Government must provide
enabling environment for the other key players in the
financial industry. This involves facilitating the growth of
micro, small, medium, and large-scale industrial enterprises
through the reduction of regulatory impediments and injects
capital into infrastructure for industrial development. The
high level of corruption, which has negatively affected
business environment in Nigeria, must be tackled by the
relevant government anti-corruption agencies.
Private Sector: There is need to adopt value re-orientation
approach by the private sector towards banks borrowing
and encourage investment in the real sector of the economy
to enhance its performance, especially in developing
countries.
9) Granger, C.W. and Newbold, P.(1974). Spurious

Regressions in Econometrics. Journal of
Econometrics, 2(111-120)
10) Federal Ministry of Industry (2007). Industrial
Policy of Nigeria: Target, Policies, Incentive,
Guidelines
and
Institutional
Framework.
<http://www.tips.org.za/node/1211-14k>.Accessed
on March 5, 2008.
11) Mckinnon, R.L.(1973). Money and Capital in
Economic Development. Washington, D.C.: The
Brookings Institution.
12) Mills, T. C. (1990). Time Series Techniques for
Economists. Cambridge University Press
13) Mullin, S. P.(2002). Public-Private Partnerships
and Local Economic Development: Leveraging
Private Investment. Review of Economic
Development Literature and Practice, 16
14) Nigerian Banking Report (2008). Nigerian Banking
Sector: Macro-Economic Play on Africas Largest
Emerging Market. Lagos: Afrinvest(West Africa)
Limited
15) Shaw E., (1973). Financial Deepening in Economic
Development. New York: Oxford University Press.
16) Skyscraper City (2006).New Goldman Sachs
Research: Nigeria to be among the 20th Largest
Economies
Worldwide.<http.www.skyscrapercity.com/showt
hread.php?t=346465-38k>. Accessed on March 4,
2008.
17) Soludo, C. C.(2006). Beyond Banking Sector
Consolidation in Nigeria, paper presented at the
Global Banking Conference on Nigerian Banking
Reforms, London, March.
18) Soludo, C.C. (2008). Security Lapses Threaten
Vision
2020.
http://www.punching.com/Articl.aspx?theartic=Art
20080228216462>.Accessed on March 4, 2008.
19) Solanke, O. (2007). Vision 2020: Need for a
Purposive
Approach.
<http://www.bsjournal.com/.\opinion\commentvision2020.html>. Accessed on March 4, 2008.
20) The Times of Nigeria (2008). FEC Approves
Final framework for the Implementation of Vision
2020.
February,
07:
<http://www.allafrica.com/stories/200802070613.h
tml>. Accessed on March 5, 2008.
21) Wikipedia(2007).Economy
of
Nigeria<http://en.wikipedia.org/wiki/Economy
of_Nigeria>. Accessed on March 7, 2008.
22) World Bank (2002). An Assessment of the Private
Sector in Nigeria: Pilot Investment Climate
Assessment.
<http://www.usaid.gov/ng/downloads/reforms/ds00
1-assessmentoftheprivatesectorinnigeriaworldbank.pdf >.Accessed on March 7, 2008.
23) World Bank (2007). Nigeria Data Profile. World
Development Indicators Database, April.
VII
REFERENCES
1) Ajayi, A. (2007). Financial Sector Reform yet to

Impact on SMEs. Vanguard Newspaper,
Thursday, 25 October.
2) Business Economy (2008). China to be Worlds
Biggest
Economy
by
2025.
<http://www.biz.thestar.com.my/news/story.asp?fil
e=/2008/3/4business/20080304151851&sec=busine
ss-29k>. Accessed on March 5, 2008.
3) Cameron, R.(1967). Banking in the Early Stages of
Industrialisation: A Study in Comparative
Economic History. New York: Oxford University
Press.
4) Central Bank of Nigeria (2005). Annual Report and
Statement of Accounts, 31st December
5) Dickey, D.A. and Fuller, W.A.(1979).Testing for
Serial Correlation in Least Square Regression.
Biometrical, 58:20-35
6) Dickey, D.A. and Fuller, W.A.(1981).Likelihood
Ratio Test for Auto Regressive Time Series with a
Unit Root. Econometrical, 49: 1057-1072
7) Gibson, H. and E. Tsakalotos(1994). The Scope
and Limits of Financial Liberalisation in
Developing Countries: A Critical Survey. The
Journal of Development Studies, 30(3), 578-628
8) Goldsmith, R. W.(1955). Financial Structure and
Economic Growth in Advanced Countries. in
Capital Formation and Economic Growth. Ed. M.
Abramovitz. Princeton, NJ: Princeton University
Press.
Oil Politics and the Crisis of Development in the

Niger Delta
Dr. Samuel C. Ugoh
Department of Political Science, University of Lagos
Akoka, Yaba
Lagos.
Email: Samugoh@yahoo.com
Abstract- Oil has become a dominant element in power
capability profile of any nation. Nations go to war because of
oil. The Gulf war in 1991 is a good example. In Nigeria, the
crisis is between the federal government and the oil producing
communities in the Niger Delta region. In spite of the abundant
oil wealth, there has been an unimaginable mass poverty and
negligible development in the region. Efforts by the federal
government and the oil companies to improve the quality of
human lives and provide infrastructural development were too
little to ameliorate the problems. Today, the insensitivity of
government and oil companies have created more tensions and
crises threatening not only the industry but also the national
security. In fact, youths of the area through association of
various ethnic militia groups have become restive in their bid
for greater control of their natural resources. The paper
therefore examines the developmental issues in the oil
producing communities against the background of government
setting up an internal security task force to deal with the
youths. The paper concludes that the federal government and
oil companies must change their hostile approaches and work
towards infrastructural development of the region.
Keywords- Economy, Oil Politics, Policy

I
INTRODUCTION
n the last two decades, the Niger Delta region of Nigeria

has been enmeshed in crisis arising from total neglect and
lack of infrastructural development. It is estimated that
about 2.5 million barrels of crude oil is produced daily from
the region. According to CBN report, the production
contributes almost 95 percent of Nigerias foreign exchange
earnings and 90 percent of its revenue (CBN: Annual Report
2003). In spite of this, little substantive progress has been
made in addressing development issues in the region. Thus,
the region continues to witness unimaginable mass poverty
and low level of human development, environmental
degradation, social inequalities, unemployment, etc. It is
therefore an irony of fate that the area, which produces the
bulk of the oil, is the least developed in the country.
This situation may be attributed to the nature of revenue
allocation formula, which has been dysfunctional. It may
also be traced to the non-performance of the contented
disposition of the political leaders who ordinarily should
have been the voice of the masses. As a result, every effort
to develop the region through policy reforms and socioeconomic and political measures has yielded little or no
result.
The absence of any meaningful development has

necessitated the glamour for the control of resources that
endowed to the region. As expected, the youths through
various ethnic militia groups have become restive in their
bid for greater control of their natural endowment. Today,
the restiveness has manifested in activities like kidnapping,
pipeline vandalization, bunkering, and other anti-social
behaviors that are the direct result of failed leadership. As a
result, the country has witnessed not only economic crisis
but also political instabilities. The paper is therefore
motivated by the contradictory roles played by Nigerian
state; first, as the allocation of the resources and second, as
the major recipient of the oil revenue. Thus, the paper
examines the rate of development in the oil producing Niger
Delta area whether it is commensurate with the
environmental damage as a result of oil exploration. It also
highlights the oil industry and the politics that have
impinged the development in the region.
The paper is divided into five parts. The first is the
introduction while the second part deals with the analytic
framework. The third part examines the oil industry and the
state of economy. The fourth part evaluates the oil politics
and the crisis of development while the last part is the
suggestions and conclusion.
II
ANALYTIC FRAMEWORK
Different scholars give different definitions to the term

development. Obasanjo and Mabogunje (1991) define
development as a process concerned with the peoples
capacity in a defined area over a defined period to manage
and induce positive change; that is to predict, plan,
understand and monitor change and reduce or eliminate
unwanted or unwarranted change. In other words,
development is about people in that they constitute a
repository of energy for development and it is the careful
release of this energy that constitutes development.
According to them, development entails so many things. It is
not just about consuming, it is about producing. But it is
concerned with the creation by the people themselves, of the
technology needed for development as well as the
development by the people of the capacity to manage their
own affairs. Relating this to the Niger Delta, the rape that is
still visited on the oil communities because of their outcry
against neglect and marginalization by federal government
is an epitome of contradictions to development.

Some scholars argue that development is a qualitative and
quantitative improvement in the life of the people.
Soyombo, (2005) for one, while explaining national
development define it as qualitative and quantitative
improvement in the living conditions of the people of a State
in line with national objectives as indicated in the national
development plans. He argues that rapid improvement of the
standard of living of the average Nigerian has always been a
major objective of countrys national development plans. To
him, other key objectives of the development plans include:
reduction in the level of unemployment, even distribution of
income, reduction in the incidence of poverty, improvement
in the quality of life of the people, more employment
opportunities, greater access to and ownership of houses and
access to basic necessities of life, such as, qualitative health
services, potable water, education and electricity. It is when
these objectives are achieved that one can talk of national
development. National development goes beyond growth in
economic indicators such as the Gross Domestic Product
(GDP) and Per Capita Income. It concerns itself with
discrepancy between economic indicators and quality of life
that led to the development of the Human Development
Index as alternative indicators of development (Soyombo
2005: 210). However, he concludes that at all levels of
development the three essential developmental concerns are,
for people to lead a long and healthy life, to acquire
knowledge and to have access to resources needed for a
decent standard of living.
Accordingly, Afonja and Pearce (1986) believe development
is aimed at fulfilling four conditions of stabilities, which
includes the stability of normative patterns; level of
commitment of the acting units; the acceptance of a
common definition of the situation and integration of the
system itself to the large system of which it is part. They
argued that these four conditions are given because of the
fact that traditional societies resist innovations, so that
fulfillment of any condition does not necessarily mean that
growth and development has taken place. Similarly, Sanda
(1985: 1-3) puts development as the transitional process
sustaining a multifaceted improvement in human condition
resulting from structural and functional changes in the
social, economic, political, techno-scientific and every
conceivable sphere of human endeavor. To him,
development entails normative and organizational changes
in the society resulting in:
i. The improvement and expansion of the mental
horizon of the population arising from functional
education and
ii. The sustenance of positive and highly functional
values, customs, and practices to all aspects of life
and living.
Wilnesky and Lebeaux (1995) therefore, explain
development as something formally organized and socially
sponsored institutions, agencies, programmes that function
to maintain or improve the economic conditions, health, or
inter-personal competence of some part or all of a
population.

Kundan (1997) cited in Akintoye and Awosika describes
sustainable development as a construct, which envisions
development as meeting the needs of the present generation
without compromising the needs of the future generation. It
implies that while development meets the need of the
present it does not compromise the ability of the future
generation to meet their own needs. However, this ability to
meet the need is determined by the human capital (through
education, technological advance, etc.) and physical capital
(machine, tools etc.). He argues that continued sustainable
development could only be possible or assured when it is
agreed and indeed concrete steps are taken to raise the level
of literacy in any society. He further laid emphasis on good
governance. He stated that it depends on the extent to which
government is perceived and accepted as legitimate,
committed to improving peoples well being and responsive
to the needs of its citizens, competent to guarantee law and
order and to deliver public services able to create an
enabling policy environment for productive activities and
equitable in its conduct. Relating this to the Niger Delta, the
statement of the former Governor of Rivers State, Dr. Peter
Odili really comes to mind. He opined that if the federal
government has lived up to its responsibility and sufficiently
focused on the awful neglect of the Niger Delta, its difficult
environment and the needs of its people would have been
transformed into sustainable development.
Nyerere (1971) comes close to this view. He argued that in
developing nations, the tendency has always been to
conceive of development in terms of socio-economic alone
and that there is need to look beyond mere economic indices
and put emphasis on human development, i.e., the full
realization of the human potential and maximum use of the
nations resources for the benefit of all. This realization was
echoed by leaders like late Indira Gandhi that we need
development policies, which benefit all strata of the
population and not just a favoured minority.
Development according to Adedeji cited in Onimode and
Synge (1995) means a process of bringing about
fundamental and sustainable changes in society. He noted
that development transcends as well as encompasses growth
and embraces such aspect of the quality of life as social
justice, equality of opportunity for all citizens, equitable
distribution of income, and the democratization of the
development process. Eze (2005:1) refers development to
the goal that must precede development actions, whether it
is about people, organizations, or nations. When it is about
people, the goal is human development; when it is about
organizations, the concern is organizational development,
and, when it is about societies, the goal is national
development. In each of these, the goal of development must
first of all be clearly set out in the form of directions,
destinations and action plans, followed by implementation
of the action plans, and finally by the realization or
otherwise of development itself. Accordingly, he opined that
it is quite certain that a society in a state of learned
helplessness cannot meaningfully embark on genuine
national development without first achieving successful
emancipation.

In Africa however, the lives of confrontation are often
drawn over issues of exclusions, identity, frustrations, and
denial of basic needs to particular area of communities by
those who maintain the forces of coercion. According to
Anyadike, (1997), conflicts in Africa arises as a result of a
global economic system that keeps the continent locked in
vicious circle of poverty and domination, aggravating local
conflict over power and wealth. This seems to hold true in
the Niger Delta. Since the Nigerian state lacks autonomy, it
simply expropriates, using coercive instruments to sustain
its dominance. This leads to penury, acute environmental
degradation and gross underdevelopment in the oil
producing areas. Thus, in the area, conflict occurs because
of protests against injustice such as environmental damages
and displeasure with successive government policies over
programmes of oil companies perceived to be unjust,
inadequate and repressive. As a result, the peoples
economic future has led to an intensification of the struggle
for survival at the individual and group levels. The
consequence is the social-conflict profile of the country.
Every society is expected to improve the conditions of its
people especially their quality of life. It should be concerned
with the provision of the basic needs such as food, water,
education, good healthcare, shelter, etc. for all the people.
Any concerted effort to achieve this is called development.
Our discourse therefore when situated within the theoretical
realm of distributive justice provides analytical framework
in understanding the situation in the Niger Delta. The
theory on rights asserts that basic rights should be enjoyed
in a state and protected through legal and extra- legal
instruments. Rights can be categorized into political, social
and economic rights. The denial of social rights explained
the pervasive poverty and underdevelopment in the area.
The Niger Delta agitation is premised on right denial
especially, access to oil wealth to boost living standard.
Drawing from this theoretical argument of what
development is all about, the present study argues that the
basic problem in the Niger Delta region is lack of
development. The neo-liberal scholars see development
beyond the economic indices, but the totality of changes that
occur on the social system within a given period of time,
which can impact on the life of the people. It is therefore
imperative that the government should design a more
comprehensive development package that will be peopleoriented in the region.
III
THE OIL INDUSTRY AND THE STATE

OF NIGERIAN ECONOMY
Oil was discovered in southeastern part of Nigeria in the

1950s, and by 1958, it began to be exported (Europa;
1988:2016). Today, oil exploration and exploitation is by
the British company, the Shell/BP, (along with other foreign
companies is undertaken by) Agip/Phillips, Safrap, Mobil,
Texaco and Chevron. The Nigerian government has major
shares in these companies, which operate the joint stock
ventures. During the late 1960s and 1970s, the development
of oil industry transformed the entire economy of the
country as the nation earned considerable foreign exchange.

With oil, Nigeria became a strategic and important
international actor.
In 1971, Nigeria joined the Organization of Petroleum
Exporting Countries (OPEC), a body which regulates oil
price and production among oil producing nations. Later in
1973, it became Africas leading Petroleum producing
country (Europa,1984:2164). As a member of OPEC and as
the worlds seventh largest producer of petroleum, Nigeria
has benefited enormously from oil. The Nigerian economy
expanded at an estimated annual rate of 8.0 percent between
1971 and 1977. the quantum of foreign aid was reduced and
a large number of jobs created (Europa,1984:2164). The
average production of petroleum from 1975 to 1980 was
about 2.2 million barrels per day (b/d), which earned
$23,405 million by 1980 when the price was $32.00 per
barrel. In the fiscal year 1981-82, the price of oil rose to
$40.00 per barrel before falling to $30.02 per barrel in 1983
(Europa, 1986:1976). Table 1.1 below provides the detail of
oil selling prices during the selected years 1981, 1982, 1991,
1992, 2001 and 2002.
Table 1.1 Oil Selling Price in Nigeria: A comparative
figures.
YEAR
SELLING PRICE IN US$
1981
40.00
1982
30.02
1991
18.60
1992
25.44
2001
25.85
2002
28.90
Source: i) OPEC Bulletin, Vol. xxiii, No. 9, October 1992,

pp. 41 and 45;
ii) OPEC Bulletin, Vol. xxiv, No. 1, January 1993,
p. 32;
iii) Yomi Onakoya, EU Adopts Energy Efficiency
Policy to Counter High oil
Prices New Age, February
23, 2005, p. 25.
As the table shows, the selling rate in the years 1981 and
1982 recorded the highest per barrel when compared to the
1991 and 1992. In the first quarter of 1991, the selling price
recorded the lowest of US $ 18.60 per barrel. The reason for
the drop in price was the pressure from the developed
countries on OPEC due to recession in the world economy.
However, the price of oil rose to US $ 25.44 per barrel in
1992 and further increased to US $25.85 and $28.90 in 2001
and 2002 respectively. The reason was attributed to the Gulf
war and the Middle-east crisis. The gradual increase in the
selling price may not be unconnected with the high demand

of oil from Asian countries especially China and protracted
industrial action by Venezuelan oil workers (CBN: Annual
Report 2003: 70). The improvement in the levels of prices
boosted the foreign exchange earnings and thereby enabled
Nigeria to achieve high economic growth at an average rate
of 9.7 percent
In spite of this, the external debt has remained an albatross
on Nigerias neck. In fact, the external debt had increased
from $12.91 billion in 1982 to over $ 20 billion in 1985 and
by 2003, it was $36.33 billion. Also, it has been observed
that over 30 percent of the countrys earning was spent each
year on debt servicing and in 1992 alone a total of $5.655
million was spent over it. This has resulted in deficit
budgets. In 1988, the country recorded a deficit of over 12.6
billion Naira, which further increased to 15.4 billion Naira
in 1989. In fiscal year 1990-1991, the total deficit exceeded
17.5 billion Naira while the inflation rate was 53.1 percent
during the period (Africa Guardian, 1990: 29; Punch 2004).
The truth of the matter is that the nations leadership is not
linked to collective purpose. The extent to which resources
are adequately and judiciously mobilized for development is
mainly attributed to leadership just as the level of
development also influences leadership qualities. An
illustration of the relationship is the fact that certain nations
under transformative leadership have risen above the natural
limitations of their environment to achieve sustainable
development. For example, Japan has developed in spite of
the fact that 50 percent of its area is mountainous and lies in
one of the highest earthquake active regions of the world. In
contrast, Nigeria which is greatly endowed with natural
resources have failed to achieve a level of development
commensurate with her level of endowment because of poor
leadership characterized by short-sightedness, corruption,
self-centeredness and political instability (Bammeke, 2005;
277-278). Nigeria has not produced a national leader. So far,
what the country has is ethnic based leaders. As such, there
is no meaningful development.
IV
OIL POLITICS AND THE CRISIS OF DEVELOPMENT

IN THE NIGER DELTA
Niger Deltas struggle for economic survival first hit the

boiling point in 1965. The period was when late Isaac Boro
and his group took up arms to fight for a separate political
entity for the region. It was the first military coup of January
15, 1966 that ended the uprising. At the centre of the Niger
Delta crisis has been the region is long standing history of
marginalization or exclusion from the mainstream of
Nigerias social, economic, and political activities. The
other predisposing factors accounting for the crisis are the
regions poor performance on human development indicespolitical instability, social/communal conflicts, poor
governance,
environmental
degradation,
economic
deprivation arising from unhealthy influences of
competition for economic resources made worse by the
general paucity of infrastructural development such as
electricity supply, safe drinking water, roads, health
facilities, education, etc. (Akpabio 2009: B8). These are the
issues taken for granted in the region. As a result, poverty

level becomes the highest in the oil communities where the
wealth of this country is produced. The people of the area
are poor and social infrastructure equally unavailable in
their towns and villages. The youths have taken to crime and
their female counterparts into prostitution as profession.
Today, the area is riddled with the much- dreaded Acquired
Immune Deficiency Syndrome (HIV/AIDS). It is on record
that the Niger Delta has one of the highest prevalent rate of
the disease in Nigeria (NACA, 2003). These problems are
compounded by the ecological problem created by the
production of oil, which grows by the day. Given the
abundance of crude oil in this area, the people should have
corresponding wealth and development.
The federal government has been widely accused as the
major culprit in the under development of the oil states. It
extracts oil resources through the enabling laws and decrees
thereby depriving the oil communities from claims over
royalties. For example, the Petroleum Act of 1969 and Land
Use Decree of 1978 permit the multinationals to explore for
and expropriate natural resources in a manner that
impoverish and under-develop the host communities while
enriching the ruling class and their collaborators (Setelu,
2001:143-144). Under the Land Use Decree, ownership of
land in any state of the federation is vested in the state
Governor in trust for the people of the state. It means the
federal government has no direct claims to land in the state.
Still, the federal government has continued not only to
prescribe how much rent is paid by the oil companies for
land used but also to collect these rents. The apparent
justification for the federal governments action is the
Petroleum Act. It gives the federal government control of all
minerals and gas in, under, or upon the land and territorial
waters of Nigeria (Suberu1999:28). The acts, however,
refers to ownership of mineral wealth and not ownership of
land which remains vested in the states. In essence, the
states are clearly entitled to these rents but the oil
communities have also asserted their rights to what may be
regarded as rents on communal lands. As MOSOP
remarked, oil royalties and rents are the property of
Landlords and that the federal government must return to the
oil communities all royalties (Suberu, Ibid: 28). In the words
of Eteng (1977), the Nigerian rentier State is perceived as an
unconscionable usurper and landlords and the oil
companies as exploitative illegal tenants. The major
problem here is that the laws that govern the oil industry
addressed only operational issues, which serve the interest
of oil companies and the federal government, as against the
interest of the oil communities. The general perception
particularly among the oil communities is that the laws are
the fundamental causes of under development of the areas.
The contradiction between oil communities and non- oil
communities over the control of oil rents is another factor
which undermined development in the region. The reason is
attributed to interclass struggle over which part of the
states would maximize the benefits from oil rents. Since the
oil is found in the coastal areas of the country and the
adjoining offshore areas, the process of states creation and
the growing profile of oil have made the issue of revenue
distribution to be a sore point in inter- state relations. As

observed, while the oil producing states dominated by the
minority groups insist on derivation, the non-oil producing
states dominated by majority ethnic groups insist on the
principles of the equality of states and the size of population
among other allocating principles. The non-oil producing
states therefore, accused oil-producing states of greed, and
argued that they do not have sole right to the oil within their
territory. On the contrary, the oil states have not shifted
ground, as they demand on equity, justice, and fair play.
They complain of being marginalized by the numerically
dominant groups who continue to feed fat on the oil revenue
with little or no contribution to federal revenues. The oil
communities argued that a significant percentage of the
federally collected oil revenue should be returned to them
based on derivation principle. Derivation is, of course, a
long-standing principle of revenue allocation in Nigeria. It
stipulates that a significant proportion of the revenues
collected in a locality should be returned to that locality or
segment. It featured prominently when cocoa; palm oil and
groundnuts were the main sources of revenue for Nigeria.
As Okilo remarks, it has continued to be deliberately
suppressed since crude oil became the mainstay of the
countrys wealth. A nation that recognized 100 percent
derivation as the basis for revenue allocation in 1950; but
reduced it to 50 percent at independence in 1960; to 45
percent in 1970; 20 percent in 1975; 15 percent in 1982 and
3 percent in 1992 as crude oil became the main source of
national revenue (cited in Suberu,1999: 29-30). In fact,
derivation has been progressively de-emphasized as mineral
exploration replaced agricultural exports as the principal
source of government revenues and foreign exchange
earnings in Nigeria. The change in the principles of
distribution, have been denounced by ethnic minority groups
as a politically motivated assault by the majority
nationalities on the economic rights of minority oil
communities who are perceived as too small and weak to
threaten the stability of the federation (Suberu, 1999; 29).
The situation has been aggravated by the kind of politics in
the country. Politics in Nigeria has been degenerated to
warfare where winners control federal power and all
resources associated with such control. Given, the centric
tendencies and the political dominance of the three ethnic
groups, (Hausa-Fulani, Yoruba and Igbo), oil made the
federal government the conducts of socio-economic
struggles, thereby institutionalizing the tyranny of the major
ethnic groups and subjugation of the minorities mostly in the
Niger Delta area. The Walkout of the South south
delegates in 2005 from the National Political Reform
Conference depicts how politicized the oil resource has been
in the country. In the conference, delegates belonging to the
oil communities demanded for 25 percent special oil
allocation, which was turn down by members representing
majority ethnic groups. Members belonging to majority
groups however, agreed to 17 percent from the present 13
percent. On protest, the South- south delegates staged a
walkout thereby ending the conference in an abrupt manner.
The general perception is that the Nigerian State and its
ruling class are more engrossed in the rent collecting
activities and thus negating the need for development

planning and the issue of development of technology of
labor. Hence, the struggle for and control of power at the
centre becomes the bone of contention among diverse
interest groups.
The crisis in the Niger Delta is understood not only as interclass struggle but also as intra-class rivalry because of its
backwardness. The federal government has resorted to elite
manipulation through recruitment and appointment of local
and active individuals from the area against the entire
people. In other words, the crisis is the struggle between the
liberal elites (traditional rulers, politicians, top government
officials, oil company executives and businessmen) and the
radical group (human rights activists, journalists, youths,
students, workers, women and the peasantry). These groups
have strong justifications for their various positions. Thus,
in every community, the leadership and in fact the entire
people is divided along these lines. It is no longer a secret
therefore to notice the privileged members of the region
working for peace conceived as tolerance of the unjust
system. The killings of the Ogoni four otherwise known as
Vultures by their radical youths which resulted into the
arrest and killing of Ken Saro-Wiwa and eight others by the
federal government is an ample example of the intra-class
struggle in the region. The radicals are the new comers who
are trying to take over the leadership of the Niger Delta.
They believed that the liberals are compromising with the
federal government and therefore corrupt. It is therefore
believed that any programme for solving the crisis will be
doomed to failure if the federal government continues to
adopt this policy.
Another dimension to the crisis is the insensitivity of the oil
companies. Although, it is important to acknowledge the
contributions of the oil companies in the setting of projects
that have helped to ameliorate the harsh consequences of
neglecting and deprivation suffered by people from the
region. However, there is also need to state that it is futile to
expect these oil companies to be agents of development in
the region. They cannot go beyond a certain limit because
their primary responsibility is to make profit for themselves.
In the real sense, the oil companies have not adequately
addressed environmental problems such as gasflaring and oil
spilling. As the regions economies are trained by pollution,
there is hardly any meaningful development. This is visible
through environmental devastation, which has distorted
socio-economic development without the provision of
commensurate
developmental
infrastructure.
The
implications of the above are that the oil companies have no
legal obligations towards their local host communities and
also the host communities have no say in how and what
happens to oil revenue. In fact, there is nowhere else in
Nigeria has the impact of the Land Use Decree manifested,
in all its imperfections and inequalities as in the Niger Delta
region (Onuoha 2005: 124). However, the oil companies
have shifted the blames to the federal government. The Shell
Petroleum Development Company (SPDC) in particular
claimed that the federal government gets 55 percent of the
revenue whereas 30 percent, 10 percent and 5 percent go to
Shell, Elf and Agip respectively (SPDC Report, 1996).
According to SPDC, since the federal government owns

majority shares in the oil companies in addition to
collecting petroleum royalties and profits tax, it is the
responsibilities of the federal government to provide and
maintain social infrastructure.
The federal government, however, locates the roots of the
underdevelopment of oil communities to their difficult
geographical terrain, bad leadership and the people
themselves. It claims that due to the fragile ecology of the
Niger Delta, oil production has the impact of upsetting the
delicate balance between the land, water and life.
Notwithstanding, the federal government has tended to
respond to the inevitable crises in the Niger Delta. The
adjustments in the revenue allocations indicate the
impression that the federal government is sympathetic to the
plight of the Niger Delta region. For example, General
Babangidas administration raises the derivation fund from
1.5 percent to 3.0 percent. It also set up Oil Mineral
Producing Areas Development Commission (OMPADEC)
to administer the fund. The establishment of the
Commission in 1992 was a genuine intension to develop
the neglected oil producing areas of the Niger Delta by
using the quota of production for employment, projects
distributions, and contract awards. The federal government
through the Commission has spent billions of Naira in these
oil communities for development. According to some
observers, the federal governments initiatives reflect its
magnanimous and godly spirit in sympathizing with the lot
of the suffering and impoverished oil communities. These
observers therefore advised the people to give OMPADEC a
chance (Suberu1999:37). However, OMPADEC in its
operations neglected the very important provision in sharing
projects, contracts, and employment. The body also used the
huge amount of money to create hundreds of uncompleted
jobs, most of them not having directed relevant to the lives
of the oil communities. Therefore, no significant impact was
made.
In view of this, President Obasanjos administration in 2000
replaced the OMPADEC by establishing the Niger Delta
Development Commission (NDDC) with similar mandate.
The government also provides for 13 percent derivation to
the oil states. Given the years of denial experienced by this
region, it is worth wise to describe this development as
positive. The truth is that 13 percent does not address the
issue of dependency and resource control, which were
identified as being the major causes of the Niger Delta
crisis. Besides, the composition and operations of the
Commission was faulty. The inadequate representation of
the oil communities is offensive in view of the inclusion of
persons from the non- oil producing areas. The result is that
while the oil communities are being starved of projects and
the people getting poorer, persons from non-oil producing
areas are getting richer. Without prejudice to the enormous
efforts of NDDC to reach the oil communities with projects
and programs that will lift peoples standard of living, the
crisis in the region cannot be resolved in any meaningful
way by institutions like NDDC. Thus, the establishment of
the Commission was action rooted in exploitation,
authoritarianism and the survival of the fittest.

Accordingly, the arrogant treatment and deprivation by the
federal government to the oil communities engendered the
feelings among them that they are perpetually disinherited
and expendable as people. The effort to fight the perceived
injustices and exploitation led to the formation of ethnic
associations such as Movement for the Survival of the
Ogoni People (MOSOP), Association of Mineral Producing
Areas of Rivers States (AMPARS), Association of Minority
Oil States (AMOS), Ethnic Minority Rights Organization of
Nigeria (EMIRON), the Ethnic Rights Organization of
Africa (EMIROAF), the Movement for Reparation to Ogbia
or Oloibiri (MORETO), and recently, the Niger Delta
Peoples Volunteer Force (NDPVF), Niger Delta Vigilante
Service (NDVS), Movement for the Emancipation of Niger
Delta (MEND) among others (Ugoh 2004:68). These groups
are therefore demanding the restructuring of the federation
in a manner that would give more autonomy to the states - a
sort of self-determination within the federation. In addition,
they insisted that oil companies must contribute to the
creation and expansion of infrastructural facilities such as
basic amenities, community development projects,
employment of indigenes, etc. indeed, the intensity of their
demands are often expressed in the vandalisation of
pipeline, bunkering, kidnapping and hostage taking of not
only oil workers but also children and other people who are
not associated with the oil industry. Lately, the hostagetaking has become an alternative to robbery and cannot be
anything more than sheer banditry and brigandage. At
present, small arms and more sophisticated weapons are
being smuggled into the region from regional and
international markets that led to the increased arming of the
militias. Undoubtedly, the government has responded to the
restiveness with a military solution, an action perceived by
majority of the people across the country as evidence of a
failed state. Today, there is a Joint Task Force (JTF) in the
region instead of the regular police to deal with the militant
youths.
In realization to this, President Musa YarAdua set up the
ministry of Niger Delta. The ministry was mandated to
among other things formulate and coordinate policies for the
rapid socio-development and security of Niger Delta region.
In addition, the government has proclaimed amnesty for the
militants youths and urged them to surrender all illegal
arms in their possession unconditionally within 60 days
from May 5, 2009 to October 6, 2009. Amnesty was a
process to ensure peace in the region. Meanwhile, the partial
acceptance of the amnesty deal was to give the government
the benefit of doubt. In other words, the amnesty deal is an
exercise in futility if the people failed to see any seriousness
of purpose by the government in terms of development. As
aptly put by former US Ambassador to Nigeria, Mr. Walter
Carrington, until the basic infrastructure needed to hasten
the social and economic development of the Niger Delta
were put in place, any other approach to the crisis was
merely scratching it on the surface.

V
ANY PROSPECT FOR DEVELOPMENT?
From the analysis, there is no effort towards bringing

development to the Niger Delta. The issue of resource
allocation has been politicized and become a cause of
disagreement among the oil states and non-oil states. Every
attempt by various administrations to resolve the issue has
failed and the present governments effort is too early to
conclude. Evidently, the key to achieve a permanent
solution is a return to allocation principles of derivation
where revenue accruing from the endowments of various
regions was used to develop the areas.
In addition, the state that is capable of reshaping the nature
of crisis in the Niger Delta cannot be a parasitic state. The
state must represent the overall will of the citizenry and
not the will of those in power or sections of the country. The
state must be oriented towards development in a sustainable
way. Such a state must strive to end dependency at both the
center and state levels.
Logically and rationally, real development will not come in
Niger Delta unless there is good leadership in Nigeria. There
is need for the country to produce a good leader
characterizes with self discipline, loyalty, modesty,
humility, good human relations, ability to listen and
willingness to make sacrifices for the sake of the people. At
present, the custodians of state power is deeply involved in
the appropriation of the wealth from the region through
brazen corruption and any opposition is visited with
summary punishment.
The federal government should go beyond the pretensions of
the NDDC that is directly under the apron strings of
politicians who use the outfit for unnecessary political
patronage, frivolous and unsubstantiated claims and visions
that negate the whole essence of community development.
The government should set up a visitation committee to
assess periodically what the NDDC has done for the oil
communities. The federal government needs to change its
old and negative ways, and embrace those attitudes and
behaviour that enhance development by embracing a full
democratization of the centre, politically and economically.
The concentration of power at the centre has to be broken
down with emphasis on the decentralization of power. In
essence, there should be commitment towards true
federalism as it was done before independence. There is
need for the federal government to set the fundamental rules
that will promote fair and responsible operations of the oil
multinational companies towards pro- development
approach.
The government must set up labor-intensive establishments
in the region to absorb the hordes of unemployed youths that
might graduate from the skills centre and educational
institutions. In other words, the youths must be empowered.
The use of military option to solve the problem would be
counterproductive because no amount of military operation
could suppress the genuine feelings of the people. Finally,
the various policies including the Land Use Decree of 1978,
Petroleum Act of 1969, the 1999 constitution, etc. that have
allowed the oil multinationals to ignore the demands and

agitations of the oil communities should be abrogated or
reformed.
VI
CONCLUSION
In this paper, we have argued that underdevelopment of the

Niger Delta area is largely shaped, influenced, and
fashioned by the character of the Nigerian state. The country
is not democratic in the real sense of the term and not truly
federal. The ingredients of good governance can hardly be
associated with its management. Both the centre and the
state governments are dependent on the oil resources from
the Niger Delta. The degree of dependency implies the huge
resource flow from the region leaving the people in poverty,
frustration, and deep crisis. The people without any option
confront both the federal government and the oil
multinational companies. The result of this state of affairs is
instability. It is happening because the people of the areas
are minorities and are suffering under the dictatorship of the
majority groups under both the military and democratic
dispensation. Indeed, true federalism and resource control
by states are the surest ways of bringing development to the
people. In other words, the development aspirations of the
people will be best served if the custodians of the state, civil
society and the ordinary people are mobilized towards
fundamental reform of the Nigerian state. This target will
remain a failure until appropriate policies are put in place to
reduce if not eliminate the over bearing dependence of oil.
VII
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Eccentric Turnover Behavior among the Working

Students of Pakistan
Zirgham ullah Bukhari
Abstract- The study is focused on measuring the effects of
Conflicting Work Life Policies (CWLP) on Turnover
Intentions (TI) with a mediating role by Job Satisfaction (JS).
The sample population will be the employees who are
maintaining their jobs along with their education. According to
the previously conducted studies on different populations, the
chosen constructs are interlinked but JS was not found to
mediate the relationship between CWLP and TI. The primary
purpose of this study is to look at the psyche of the working
students in a manner that may help in the reduction of job
turnover in Pakistan. The findings of this study suggest that JS
mediates the correlation between CWLP and TI; as firstly
CWLP was not identified as a strong determinant of TI and
secondly CWLP only resulted in TI among working students
through the mediation of JS.
Keywords- Turnover intentions (TI), conflicting work

life policies (CWLP), job satisfaction (JS), working
students, Pakistan
I
INTRODUCTION
ob turnover is a dismal crisis for the managements of

todays businesses because of the costs connected with
it (Lucas, Parasuraman, Davis & Enis 1987 and Soon,
Quazi, Tay & Kelly 2005). This research was mainly
concerned about finding the relationship among conflicting
work life policies (CWLP), job satisfaction (JS), and
turnover intentions (TI). The respondents for this study were
the working students who were completing their
professional education while simultaneously working in
some organization, as they are the ones more likely to
turnover because of the difficulty to maintain a balance
between their education and jobs at the same time i.e. they
faced greater work life spillover as compared to the
employees who have their whole attention concentrated and
dedicated to their jobs only.
The study conducted by Oi-ling and Phillips (2006) and
Kenexa Research Institute (2007) suggested that those
employees who favoured their organizations effort to
support work-life balance also indicated a much lower TI,
greater pride in their organization, a willingness to
recommend it as a place to work and higher overall JS.
Acknowledgements
The author would like to pay homage to Mr. Sajid Bashir
his faith augmented my continuous self-assurance in this
project and Ms. Sara Yaqoob whose advice and critiques
helped me in all aspects of this venture and beyond.
Furthermore, this research was anticipated to provide a

helping hand in controlling the turnover trends, as
mentioned earlier it is costing todays businesses a lot and
can be much a blessing for the organizations if reduced. As
Yasbek (2004) cite that turnover reduction leads to lower
costs, as recruiting new staff is a costly process. Therefore
in the light of the findings of this research, it can be inferred
that the TI among working students caused by CWLP can be
controlled by addressing factors that enhance the JS level.
The results of this research conformed to the previously
conducted studies as far as the presence of a relationship
between the chosen constructs is concerned. But unlike the
previously conducted studies by Karatepe and Kilic (2007)
and West (2007) who found the CWLP directly affecting
TI, this study identified CWLP as a weak determinant of
TI. Moreover, contrary to the findings of Camp (1993), it
was found that JS besides being a comparatively stronger
determinant of TI; mediated the relationship between CWLP
and TI among the working students of Pakistan.
II
LITERATURE REVIEW
A. Turnover Intentions
Morrell, Loan-Clarke and Wilkinson (2001) defines
turnover as a discontinuous variable characterized by
abrupt change, and a delay rule which reflects the idea that
employees try to stay in employment for as long as possible.
Once employees feel they can no longer stay, they abruptly
change from retention to termination (voluntary turnover).
Karatepe and Kilic (2007) find that workfamily conflict or
familywork conflict had a detrimental effect on job
performance, job satisfaction, affective organizational
commitment, and turnover intentions directly or indirectly.
Richer, Blanchard and Vallerand (2002) posit that work
satisfaction and emotional exhaustion, originating from
work motivation leads to turnover intentions. Batt and
Valcour (2003) adds to the determinants of turnover
previously identified, as their study finds that flexible
scheduling practices, supportive supervisors, job security
and high relative pay were all associated with lower
turnover intentions. West (2007) elucidates that conflict
with a supervisor or management leads to higher turnover
levels and by managing the conflict properly, organizations
may in fact be able to reduce the turnover level. Thaden
(2007) also advocates the need to curtail turnover practices
as per his view, organizational culture change is an
expensive endeavor; however high turnover and poor
performance is likely to cost organizations more over time,
especially as performance measures become harder to
meet. Tenures contribution to the equation emphasizes

that time variables need to be examined in turnover
research (Mitchel 1981). Age however, was not found to
have a significant restraining effect on turnover intentions
(Lachman & Diamant 1987). But dissimilar to the
aforementioned view Birdseye and Hill (1995) argues that
not surprisingly perhaps, age was negatively correlated
with turnover.
B. Work Life Policies
Thompson, Andreassi and Prottas (2003) define work life
policies as artifacts or surface level indicators of an
organization, prioritizing work over family or family over
work. Work-life conflict refers to the difficulties in
reconciling work and other domains of life (McGinnity &
Calvert 2008). Study by Konrad and Mangel (2000) implies
that work and family life conflicts may lead to employee
turnover and withdrawal. Research carried out by Karatepe
and Kilic (2007) and West (2007) suggests that greater
workfamily conflict results in higher turnover intentions.
Konrad and Mangel (2000) also suggest that work-life
programs can reduce employee withdrawal behaviors by
reducing the impact of work-family conflict and by
increasing motivation to exert discretionary effort.
Likewise, the research by Marks and Scholarios (2001)
elucidates that lower negative work-to-nonwork spillover,
directly affected employees intentions to remain with the
company - excessive spillover reduced likelihood to remain;
(i.e.) increased the possibility to turnover. In addition Hom
and Kinicki (2001) cite that other types of interference
besides work-family tension initiate the separation process;
(i.e.) the work life conflicts are not the sole stressor behind
employee turnover. Richer, et al. (2002) differ by
maintaining, Bad working conditions do not always lead to
actual turnover. Results of Oi-ling and Phillips (2006)
show that the longer the working hours, the higher were
levels of perceived work stress and turnover intentions.
Birdseye and Hill (1995) add; as per their findings,
workload was consistently and negatively related to their
turnover variables. The result of Bashir and Ramay (2008)
indicates that work life policies determine organizational
commitment; which is identified to be a predictor of
turnover intentions. The findings of Batt and Valcour (2003)
institutes that, job security predicted lower work-family
conflict and lower turnover probability. Resilient
employees perceived lower levels of work stress,
experienced fewer physical/psychological symptoms and
less turnover intention, and even reported higher levels of
job satisfaction, work-life balance, and higher levels of
family satisfaction and job performance (Oi-ling & Phillips
2006).
H1: Conflicting work life policies are positively related to
turnover intentions.
H2: Conflicting work life policies are negatively related to
job satisfaction.

C. Job Satisfaction
Okpara (2004) defines job satisfaction as an affective
reaction to a job that results from the persons comparison
of actual outcomes with those that are desired, anticipated,
or deserved. According to Perie and Baker (1997) job
satisfaction is an affective reaction to an individuals work
situation. Birdseye and Hill (1995) based on their study
find job satisfaction to be negatively related to all three
turnover variables. The studies by Shields and Price (2002),
Riley (2006), Karatepe and Kilic (2007) and Rahman, Naqvi
and Ramay (2008) yield that, employees who are satisfied
with their jobs are less likely to have turnover intentions.
Moreover, the research work by Shalley, Gilson and Blum
(2000) further indicates that individuals reported higher
satisfaction and lower turnover intentions when their work
environments complemented the creativity requirements of
their jobs. As per Ct and Morgan (2002) the
containment of unpleasant emotions decreased job
satisfaction, which in turn increased intentions to quit.
Likewise McConnell (1998) hypothesizes that when an
employee's values were attained, job satisfaction rated
higher and job turnover was less frequent. Okpara (2004)
adds that dissatisfaction may have an impact on
performance, absenteeism, and staff turnover. Camp (1993)
differs to the above discussed notion, as per his findings
job satisfaction does not even demonstrate a significant
relationship with turnover. The research work by Yasbek
(2004) also yields that job satisfaction does have a clear
negative relationship to absence and turnover. The
consequences of low job satisfaction could lead to higher
work absence rates, lower work performance, and most
importantly, lower quality of services (Abu-Bader 2005).
Balfour and Wechsler (1996) yield whether dissatisfaction
with supervision will lead to increased turnover intent
depends on individual perceptions of opportunities for
advancement and on how much the job contributes to
personal growth and learning. The findings of Lucas, et al.
(1987) reveal that most sales managers attempt to reduce
turnover through measures such as improving the job
satisfaction of salespeople. The study of Bhagat (1983)
purports that behavioral consequences of reduced job
involvement, impaired performance effectiveness, and
reduced job satisfaction would lead to absenteeism,
tardiness, and turnover. Bloom and Michel (2002)
maintains that high-pay-dispersion organizations may
experience higher turnover because their pay structures
violate this equilibrium, which in turn, creates
dissatisfaction among managers forced to accept both lower
status and substantially lower compensation.
H3: Job satisfaction is negatively related to turnover

intentions.
IV
VARIABLES INCLUDED
(QUESTIONNAIRE APPENDED)
A. Turnover Intentions
FI GU RE 1 - S CHEMATIC REPRES EN TA TI ON
RES EA RCH MO DEL
Conflicting
Work Life
Policies
H
2
O F THE
H
3
Job
Satisfacti
on
Turnover
Intentions
Turnover intentions were measured using a two-item

questionnaire developed by Par, Tremblay & Lalonde
(2001). For this questionnaire, the responses were rated on a
five point Likert type scale format. The first item of the
questionnaire ranged 1=never and 5=always. And the
second item varied from 1=most unlikely to 5=most likely.
B. Work Life Policies
This study used the questionnaire developed by Par,
Tremblay & Lalonde (2001) for the inputs on work life
policies. The Likert type scale used a choice from 1 to 5
(with 1=never and 5=always).
H
1
III
PARTICIPANTS
C. Job Satisfaction
For this study, sample respondents were randomly chosen

from among the population of students completing their
professional education while being an employee of some
organization. The cities of Rawalpindi and Islamabad were
the geographical limits of the study. Participants were
presented the questionnaires along with an affixture, in
which they were assured of confidentiality to minimize the
probability of any data contamination. To avoid any further
oversights due to any non-serious attitude, we tried to utilize
the time off of employees to fill the questionnaires.
The response rate was not quite encouraging; as many of the
respondents even being assured of confidentiality were shy
considering that some of the survey items were somewhat
sensitive, consequently only 101 employees out of an
aggregate of 350 agreed to fill up and return the
questionnaire.
VI
TABLE 1 - DESCRI PTIVE S TATIS TICS
Me a n
AND
The survey items developed by Brown & Peterson (1994)

were used to assess the job satisfaction level among the
respondents. In this questionnaire the continuum again
ranged from 1 to 5 (with 1=strongly disagree and 5=strongly
agree)
V METHODOLOGY
After the collection of data, scores were developed for the
chosen constructs by averaging the responses to items
comprising each dimension i.e. CWLP, JS and TI. Then on
acquired means, different analyses were employed
particularly correlation and regression, to study the presence
of relationships (if any) and their strength and significance
along with the direction of the relationship between:
i. CWLP and TI (H1),
ii. CWLP and JS (H2) and
iii. JS and TI (H3).
RESULTS
CORRELA TIONS
C onf lic t ing Wor k
L if e Polic ie s
S.D.
J ob
S a tisf a c tion
Conflicting Work Life

Policies
2.576
.728
Job Satisfaction
2.817
.756
-.687(**)
Turnover Intentions
3.292
.389
.388(**)
-.543(**)
** Correlation is significant at the 0.01 level (2-tailed)

#
Number of Respondents = N = 101
T ur nov e r Inte ntions
A look at Table 1 illustrates that CWLP holds a positive

correlation with TI (H1) (Konrad & Mangel 2000, Par,
Tremblay & Lalonde 2001, Karatepe & Kilic 2007 and West
2007). Moreover validity of H2 can also be observed as
CWLP maintains a negative relationship with JS (Oi-ling &
Phillips 2006). Contrary to the findings of Camp (1993) the
table also admits the practicability of H3 i.e. JS has inverse
correspondence with TI (Randall, Cropanzano, Bormann &
Birjulin 1999, Shields & Price 2002, Riley 2006, Karatepe
& Kilic 2007 and Rahman, Naqvi & Ramay 2008); among
the working students in Pakistan.
T A B L E 2 R E G R E S S IO N M O D E L
FOR
H1
R square = .151
= .388
t = 4.195
Adjusted R square = .142

F = 17.595
Significance = .000(a)
(a) Predictors: Turnover Intentions (Constant), Conflicting Work Life Policies

The value of R square in Table 2 depicts that CWLP
explains nearly fifteen percent of TI among the working
students of Pakistan; which is contradictory to the findings
of earlier researchers (Karatepe & Kilic 2007, West 2007,
and Kenexa Research Institute 2007) who identified CWLP
as a worthy determinant of TI.
FOR
H1
R square = .151
= .388
t = 4.195

F = 17.595
(a) Predictors: Turnover Intentions (Constant), Conflicting Work Life Policies

Table 3 suggests that CWLP accounts for almost forty seven percent of variation in JS among the sample population.
FOR
R square = .295
= -.543
t = -6.438
H3

F = 41.453
(a) Predictors: Turnover Intentions (Constant), Job Satisfaction

Finally, a glance at Table 4 reveals that JS predicts
approximately thirty percent out of the remaining eighty five
percent, of the reasons for developing TI among the sample
population.
VII
DISCUSSION
The eccentricity in behavior among the working students

can be observed in the relationship between CWLP and TI.
According to the study not only the relationship between the
two is a weak one but also the potency of CWLP to
determine TI among the chosen sample population. The

research model with a strong backing from results suggests
that CWLP can only lead to TI through the mediation of JS
and its solo status in this particular model is not of
considerable importance and worth.
A plausible explanation in authors view for the
aforementioned eccentric behavior among working students
is that in the chosen geographical context, the financial
outlook of many does not suggest higher education to post
graduate or even the graduate level. This situation calls for
students to earn to make their ends meet, they may go for
jobs which demand extra fatigue and are comparatively

more strenuous in nature which may include call centre
attendants (catering American and European markets), sales
representatives and commission agents etc. Although this
disturbs their JS levels (because of work life conflicts) but
this situation rarely is escalated to a point where they
develop TI because they are bound to work to earn their way
out. Even in cases where TI develops, they seldom lead to
actual turnover.
Moreover, another reason for CWLP to be unable to
strongly predict TI among the sample population is that
some of the working students think of work life conflicts as
an inevitable by-product of their job. This understanding is
somehow pragmatic in the chosen geographical context as
there are numerous openings in the market but there is
hardly a job for a student that does not result in a clash
between education and work life.
VIII RECOMMENDATIONS
Griffeth & Gaertner (2001) suggest, Organizations that
want the turnover rate low are advised to pay close attention
to their human resource management systems with
perceived fairness. Although the root cause for TI in this
particular research model is CWLP that is mediated by JS
but the irony of situation is that working students develop TI
more because of lower levels of JS than the anticipated
CWLP. Even though the CWLP cannot be completely
avoided in the case of working students but their effects can
be countered by improving the JS level using
methods/techniques like:
i. Just distribution of work load,
ii. Counseling and empathetic discussions,
iii. Making the work place environment congenial and
affable,
iv. Incorporation of flexible benefits and flextime at
the job (Hill, Hawkins, Ferris & Weitzman 2001),
v. Introduction of any kind of motivational packages
e.g. pay increments, bonuses or job involvement
and management by objectives techniques etc.
IX
CONCLUSION
There is no-one-size-fits-all solution to the issue of work

life conflict (Higgins, Duxbury and Lyons 2007), therefore
different strategies can be engaged to satisfy heterogeneous
employees. It is also important for western readers to bear in
mind that some of the above mentioned recommendations
are considered to be an implicit and understood part of an
organizations daily routine in the developed countries, but
are not considered worth implementing in organizations, in a
developing country like Pakistan which as per Aycan,
Kanungo, Mendonca, Yu, Deller, Stahl and Khurshid (2000)
is an under researched country.
Moreover students in developed countries who are unable to
meet their expenses go for any available job ranging from
being a paperboy, a bartender, to even being a janitor due to
a common level of acceptance among the public. But the
acceptance level for such jobs among students themselves in
general and masses in particular in the chosen geographical

context amounts to almost nil. As there are a limited job
slots available for students in an economy like Pakistans
therefore the students in order to meet their expenses must
stick to a job at hand which however is strenuous,
demanding fatigue and have a conflicting nature but has a
common acceptance among the masses and students
themselves.
X
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XI
APPENDIX
Job satisfaction (Brown and Peterson 1994)

i.
ii.
iii.
iv.
I sometimes feel my job is a waste of time (R).

My job is very worthwhile.
My job is better than most.
My job is worst than most (R).
Work-life policies (Par, Tremblay & Lalonde 2001)

i.
ii.
iii.
iv.
v.
vi.
Managers allow generally enough time for the

completion of projects so that employees can do
good quality work with limited stress.
I often feel like there is too much work to do (R).
My organization provides work conditions (e.g.,
flexible schedules, child care facilities, and
telecommuting programs) which take into account
the emergent needs of employees.
My work schedule is often in conflict with my
personal life (R).
My job does affect my role as a spouse and/or a
parent (R).
My work has negative effects on my personal life
(R).
Turnover intentions (Par, Tremblay & Lalonde 2001)

i.
How often do you feel like quitting your job in this

organization?
ii. How likely is it that you will actually leave your
organization within the next year?
(R): items needed to be reversed
Impact of Brand Placement in Films- A Viewers

Perception
Padma Singhal*
Mandeep Mahendru*
Neha Nigam**
Abstract- Recently, several factors such as consumer
tendency to avoid television commercials by zipping and
zapping them, audience fragmentation due to the rise in the
number of cable channels, and commercial clutter driven by
increasing time allocated to advertisements and a simultaneous
decrease in commercial length have caused marketers to
develop innovative advertising techniques. These changes have
led manufacturers and marketers to seek newer ways product
placement to reach the consumer. From the mere fact that
product placement exists, one can determine that corporate
India has found this advertising practice to be a useful tool, or
at least an avenue to explore. Even with the risk involved,
marketers and advertisers find that product placement can be
a valuable marketing tool for creating greater exposure for
their products. Product placement can be viewed as an
alternative to traditional advertising, and marketers are
looking for new ways to gain awareness among consumers.
Films and television offer product exposure to millions of
consumers, making product placement a rapidly growing
advertising medium. By subtly weaving a product into a scene,
marketers hope audiences will connect their brand with the
stars or story they are seeing on the screen. When product
placement works, the message can be more effective than a
traditional commercial. The impact is greater because the
audience is involved in the plot of the movie. The current study
explores the viewers perception regarding brand placement in
films. It further explores the gender as determinant of ad recall
capability.
INTRODUCTION
rand placement refers to the practice of including a

brand name, product, package, signage, or other
trademark merchandise within a motion picture, television
or other media vehicles for increasing the memorability of
the brand and for instant recognition at the point of
purchase. According to Maninder P. Singh (2006) Product
placement is a marketing practice designed to intentionally
insert products into the content of entertainment programs,
such as movies and television programs. In most cases, the
placement is subtle so as not to divert significant attention
from the main content of the program or media outlet. Patric
and Julia (2002) argued that Product placement in its very
sense means the presentation of branded goods on screen,
either visually (if the product is shown), or verbally (if it is
mentioned or described).
*Senior Lecturer- Gian Jyoti Institute of Management and
Technology, Mohali
** Alumnus- Prestige Institute of Management and
Research, Indore
Balasubramanian (1994) defines product placement as paid

messages, which seek to influence audiences through the
planned and unobtrusive entry of a branded product into a
film or television programme. Wells (2001) argued that
many advertisers considers product placement as a targeted
and a cost effective way to reach consumers. Gould et al
(2000) are of the view that in certain ways it is a hybrid of
advertising and publicity as it involves using movies or
other media content to place or incorporate a brand in return
for money or some other promotional consideration.
Balasubramanian (1994) stated that usually advertising
agencies are involved in placing the clients product in TV
shows or films, but at times a specialist firm act as a liaison
between agency and studio. Advertisers are looking for
newer methods and media to reach the consumers for
various reasons. Placement can be in the form of verbal
mentions in dialogue, actual use by a character, visual
displays such as a corporate logo on a vehicle or billboard,
brands used as set decoration, or even snatches of actual
radio or television commercials. Commercials may even be
specially developed for use in a specific film.
Balasubramanian (1994) stated that moviemakers are also
benefited from products placements in films. Sometimes
movie marketing costs remain equal to the cost of making it,
and product placements in such movies helps in subsidizing
such costs. Some of the major advantages that product
placement offers includes no mute button, low cost, less
obtrusive, does not interrupt programming, viewers captive
attention and global reach. When these elements are
combined it allows companies to strengthen their brand
awareness, improve their image, and gain exposure for their
products.
Stogel (1992) said that in todays competitive market,
advertisers are placing traditional TV and print ads in
unconventional places. Friendly (1983) mentioned that most
of the marketers pays fees of $50,000 to $100,000 or even
higher so that their brands can make a remarkable presence
in movies and on television programmes. This practice has
been existed from long but got a boost from 1982. The use
of feature films as a strategy for introducing new products
has grown increasingly sophisticated. Savvy marketers now
build elaborate marketing communication plans crosspromoting films and brands. While some new brands have
been successfully launched with placement strategies, many
brands featured in films are already familiar to viewers.
Understanding the consumer psyche, the triggers and
barriers to a product category, achieving brand credibility
and respect takes years together. And this is the stage when

these brands need some additional support for their
promotion. In this case, placement may best serve as a
means of maintaining visibility and top-of-mind awareness
among target markets. Placement may be successful in terms
of developing or strengthening brand preference, or viewers
might perceive the brand to be endorsed by the star.
Recently, several factors such as consumer tendency to
avoid television commercials by zipping and zapping them,
audience fragmentation due to the rise in the number of
cable channels, and commercial clutter driven by increasing
time allocated to advertisements and a simultaneous
decrease in commercial length have caused marketers to
develop innovative advertising techniques. These changes
have led manufacturers and marketers to seek product
placement as a means to reach the consumer.
Balasubramanian stated that product placement is a paid
product message aimed at influencing movie or television
audiences via the planned and unobtrusive entry of a
branded product into a movie or television program, and
this paper will analyze product placements under that
definition in both film and television.
A. Ethical Concerns
Although product placement is a well-known and widely
accepted practice today, controversy has not disappeared.
Critics perceive product placement to have an inherent
element of deception in that placements are not clearly
labeled as advertisements and therefore may be viewed as
hidden but paid subliminal messages. A study of product
placements conducted by Nebenzahl and Secunda (1999)
found that most of their respondents did not object to overt
product placements, but those respondents who objected, did
so on ethical grounds. There have been failed attempts to
ban product placement, but the First Amendment has
thwarted those efforts and protected product placement as
free speech. He also found that the various strategies of
product placement impact differently on consumers
evaluative and ethical judgments and their effects interact
with the type of program. Brennan et al (2004) investigated
the attitudes and perceptions of Australian moviegoers in
respect to the acceptability of product placement and
audience attitudes towards the placement of ethicallycharged products, such as alcohol, guns and cigarettes. they
observed that Australian consumers found ethically-charged
products to be less acceptable than neutral products. Gender
comparisons revealed that males are more accepting of both
ethically charged and neutral placements. The study
depicting the comparisons to the previous American,
Austrian, and French findings showed a similar pattern of
individual influences on product-placement perceptions. The
present paper aims to analyze the viewers response towards
brand placements in films with reference to male and female
gender.

II
METHOD
A. The Study
The study is exploratory in nature and makes an effort to
understand the consumer responses to brand placements in
films with respect to male and female population. It aims to
understand the impact of Gender on the difference in
opinions.
B. The Sample
A total sample of 200 respondents was taken for the study
(100 Male & 100 Female). The sample has been drawn from
varied socio-economic groups representing a cross-section
of the population of Indore city. All the respondents were
keen towards the films and had their own views to every
aspect related to films.
C. Data Collection
Primary data has been collected through self- designed,
structured questionnaire, constituting of 26 statements on
non-disguised 5 point Likert Scale.
D. Data Analysis
Z-test has been applied for data analysis. Z values were
calculated to study whether males and females differ in their
perception regarding brands placed in films. The following
null hypothesis was developed.
i. There is no significant difference amongst the
female and male respondents perception
regarding easy identification of brands placed in
movies.
ii. There is no significant difference amongst the
female and male respondents perception of
purchasing the brands/products after watching
the movies.
iii. There is no significant difference amongst the
brand placement actually promotes the
band/product.
iv. There is no significant difference amongst the
promoting brand awareness through brand
placement.
v. There is no significant difference amongst the
regarding the product placement in movies
receives a higher processing motivation on the
part of the viewers due to intentional exposure.
vi. There is no significant difference amongst the
regarding the success/ failure of the movie
affects the brand.

vii. There is no significant difference amongst the
changing their preferences when their favorite
star promotes any particular brand in a movie.
viii. There is no significant difference amongst the
regarding, product placement has switched from
a practice that helped make scenes more
authentic to a successful tool in product
promotion.
ix. There is no significant difference amongst the
regarding, prominent product placements elicited
higher recall than subtle placements.
x. There is no significant difference amongst the
regarding, low value brands placed in a big
banner movie helps in its promotion.
xi. There is no significant difference amongst the
female and male respondents perception in
recognizing the brands placed in movies in the
background.
xii. There is no significant difference amongst the
regarding, brands placed in movies gives a
competitive edge to the company.
xiii. There is no significant difference amongst the
regarding, movies are an appropriate medium for
brand promotion.
xiv. There is no significant difference amongst the
regarding the brands / products placed in movies
sometimes target the wrong segment of viewers
xv. There is no significant difference amongst the
female and male respondents perception that
movies provoke children to buy high
involvement goods like cars and bikes, which
are, for some people not affordable.
xvi. There is no significant difference amongst the
regarding movies promotes the wrong brand/
product sometimes.
xvii.
There is no significant difference amongst
the female and male respondents perception
regarding alcohol and cigarette brands placed in
movies gives the negative social impact.
III
i.
RESULTS AND DISCUSSION
There is no significant difference amongst the

female and male respondents perception regarding
easy identification of brands placed in movies,
because the value of Z-computed < Z-critical i.e.
(0.3025<1.96). The null hypothesis is accepted.
ii. There is significant difference amongst the female
and male respondents perception of purchasing the
brands/products after watching the movies because

the value of Z-computed > Z-critical i.e.
(2.565>1.960). The null hypothesis is rejected.
iii. There is significant difference amongst the female
and male respondents perception of brand
placement actually promoting the band/product
because the value of Z-computed > Z-critical i.e.
(4.46>1.960). The null hypothesis is rejected.
iv. There is no significant difference amongst the
brand placement promotes brand awareness
because the value of Z-computed < Z-critical i.e.
(1.404 < 1.960). The null hypothesis is accepted.
v. There is no significant difference amongst the
the product placement in movies receives a higher
processing motivation on the part of the viewers
due to intentional exposure because the value of Zcomputed < Z-critical i.e. (0.667<1.960). The null
hypothesis (H0) is accepted.
vi. There is significant difference amongst the female
and male respondents perception regarding the
success/ failure of the movie affects the brand
because the value of Z-computed > Z-critical i.e.
(3.582 > 1.960). The null hypothesis (H0) is
rejected.
vii. There is no significant difference amongst the
changing their preferences when their favorite star
promotes any particular brand in a movie because
the value of Z-computed < Z-critical i.e.
(1.236<1.960). The null hypothesis (H0) is
accepted.
viii. There is no significant difference amongst the
female and male respondents perception regarding,
product placement has switched from a practice
that helped make scenes more authentic to a
successful tool in product promotion because the
value of Z-computed < Z-critical i.e. (0.338 <
1.960). The null hypothesis (H0) is accepted.
ix. There is no significant difference amongst the
prominent product placements elicited higher recall
than subtle placements because the value of Zcomputed< Z-critical i.e. (1.9498<1.960). The null
x. There is significant difference amongst the female
and male respondents perception regarding, low
value brands placed in a big banner movie helps in
its promotion because the value of Z-computed >
Z-critical i.e. (3.362 > 1.960). The null hypothesis
(H0) is rejected.
xi. There is no significant difference amongst the
female and male respondents perception in
recognizing the brands placed in movies in the
background because the value of Z-computed <Zcritical i.e. (0.4481<1.960). The null hypothesis
(H0) is accepted.
xii. There is significant difference amongst the female
and male respondents perception regarding, brands
placed in movies gives a competitive edge to the

company because the value of Z-computed > Zcritical i.e. (3.80 >1.960). The null hypothesis (H0)
is rejected.
xiii. There is no significant difference amongst the
movies are an appropriate medium for brand
promotion because the value of Z-computed < Zcritical i.e. (0.2122<1.960). The null hypothesis
(H0) is accepted.
xiv. There is significant difference amongst the female
and male respondents perception regarding the
brands / products placed in movies sometimes
target the wrong segment of viewers because the
value of Z-computed > Z-critical i.e. (2.1453
>1.960). The null hypothesis (H0) is rejected.
xv. There is no significant difference amongst the
female and male respondents perception that
movies provoke children to buy high involvement
goods like cars and bikes, which are, for some
people not affordable because the value of Zcomputed < Z-critical i.e. (1.447<1.960). The null
xvi. There is no significant difference amongst the
movies promotes the wrong brand/ product
sometimes because the value of Z-computed < Zcritical i.e. (1.2485 <1.960). The null hypothesis
(H0) is accepted.
xvii.
There is no significant difference amongst
the female and male respondents perception
regarding alcohol and cigarette brands placed in
movies gives the negative social impact because
the value of Z-computed < Z-critical i.e. (1.2485 <
1.960). The null hypothesis (H0) is accepted.
Table 1: Showing Mean, SD and Z Values at 5% significance level (1.960) of with reference to female & male
respondents
FEMALE RESPONDENTS
(n1=100)
MALE RESPONDENTS
(n2=100)
HO
MEAN(X1)
S.D.( p1)
MEAN(X2)
S.D. (p2)
HO1
4.33
0.964574539
4.37
0.90626328
0.3025
HO2
3.24
1.111191916
3.66
1.20788654
2.565
HO3
3.66
1.207886542
2.91
1.17288387
4.46
HO4
3.49
1.150274451
3.26
1.16878595
1.404
HO5
3.46
1.122947061
3.56
0.99818016
0.667
HO6
2.91
1.172883867
3.49
1.15027445
3.582
HO7
3.26
1.168785954
3.46
1.12294706
1.236
HO8
3.34
1.065719276
3.29
1.02784466
0.338
HO9
3.29
1.027844661
3.57
1.0075974
1.9498
HO10
3.57
1.007597402
3.62
1.09894348
3.362
HO11
3.62
1.098943478
3.69
1.11640657
0.4481
HO12
3.41
1.215181742
3.36
1.14168049
0.2122
HO13
3.36
1.141680491
3.6
1.18065211
1.034
HO14
3.37
1.001564433
3.68
1.04330477
2.145
HO15
3.68
1.043304773
3.3
1.14150353
1.447
HO16
3.3
1.141503527
3.52
1.3444987
1.248
HO17
3.52
1.344498705
3.73
1.08110493
1.2195
Astous et al (1999) studied the impact of different strategies

of product placement on consumer reactions in the context
of television sponsorship. They evaluated four factors viz.
type of placement, sponsors image, type of television
program and sponsor-program congruity. They found that
strategies of product placement impact differently on
consumers evaluative and ethical judgments and that their
effects interact with the type of television program. They
also suggested that the evaluations of product placement are
most negative in the context of mini-series/drama television
programs. Furthermore, product placements that play a
passive role and are not clearly expressed within the
program are generally perceived as less ethical, especially
when they appear in information/services magazines.
Although product placement is a well-known and widely
accepted practice today, controversy has not disappeared.
Critics perceive product placement to have an inherent
element of deception in that placements are not clearly
labeled as advertisements and therefore may be viewed as
hidden but paid subliminal messages. Gupta et al (1997)
has cited concern for product placements of ethically
charged products such as guns, alcoholic beverages, and
tobacco. Placing such products and brands in a film is seen
as an alarming way to get around. An even larger group is
opposed only to certain types of products being placed.
Wake (2002) mentioned that according to The American
lung association and the Canadian cancer society, there
should be a new movie rating system that must includes
tobacco use in the calculation to reduce the number of
young people exposed to such messages. Hudson et al
(2008) studied the ethics of advertising in children movies.
For the purpose of the study, he studied the ethical
evaluations of parents regarding product placements in
childrens films and found that parents wanted more
regularity on the use of product placements, especially
placements of alcohol, tobacco, and fast foods.
One of the studies by Jodi Burman (2005) establishes a
foundation for examining the relationship between product
placement and arousal, pleasure, and brand recall finds out
that suggest that arousal, as a single factor does not affect
brand recall of product placement. However, with optimal
levels of arousal and pleasure mentioned earlier, product
placement can be seen as a positive marketing tool. Rupert

Howell, MD, ITV Brand and Commercial said that Product
placement could be an innovative and important new
revenue stream for ad-funded, commercial broadcasters,
further enabling investment in original UK content, at a time
when advertising revenues are declining. Tapan K. Panda
and (2005) studied the rationality of the brand placement,
the possible congruity that can be built in the story line and
the image of the brand in creating a positive impact in the
usage through the characterization in the story. This may be
proved to be the indicators of success of effective brand
placement in films and if so, as variables in bringing the
desired change in consumers attitude. Auty and Susan
(2004) observed that the implicit memory (i.e. repetition) is
more important than explicit recall in terms of childrens
brand choices. Baerns Barbara (2005) measured the future
viability of the principle of separating advertising and
programme content in advertising, journalism, and public
relations. Research results of Brennan et al (2004) found
that brand placement recognition levels achieved by audiovisual prominent placements exceed the recognition rates
achieved by visual-only prominent placements. Galician and
Mary-Lou (2004) argues that so many aspects of the
American culture have been connected to advertising,
marketing, and consumption that it becomes difficult to find
any other form of discourse or ideas that are not connected
to consumption or branding. The study of Gupta et al (1998)
illustrates common product-placement strategies in
Hollywood films and attempts to draw conclusions about the
kinds of placements and the recall of products among
audiences. Jacobson1995, M. and Mazur A1995 examines
the process, discusses costs, and lists examples of
placements in feature films. Ong and D. Meni (1994)
investigated the associations among moviegoers purchase
evaluations, brand recall patterns and ethical judgments of
the medium. Moonhee & David (2007) found that product
placements within a movie are often either treated as a
binary variable, it is present or absent. However, placements
can occur at many different levels ranging from a simple
background prop to the product being an instrumental part
of the story. The influence of 3 different levels of brand
placements on explicit and implicit memory for the brand,

implicit choice behavior, and attitudes toward the brand
were examined. The results confirmed that levels of brand
placements influence recognition of the target brand and
attitudes toward the brand. On the other hand, simple
placement of the brand within the movie influenced implicit
memory and the implicit choice task. One of the studies by
Kohli et.al (2004) highlights that advertisements on
television need not necessarily work, because the viewers
invariably switch over channels or mute the sound when
commercials crop up during shows and even cricket
matches. On the other hand, a viewer is glued to his theatre
seat no matter what the situation in the film is, but also feel
that there could be certain barriers in such cases, because of
uncertainties whether a film would run or not, unrealistic
pricing, exaggerated expectations from the advertiser and
lack of professionalism and finds out that if both filmmakers
and advertisers take one step towards each other and realize
that this relationship could be symbiotic, it would make a lot
of sense. Sung et al (2008) examines to the extent and
context of brand placement in Korean films over the past
nine year period. He found that brands are prevalent and
occurrences have increased over time. Comedy and action
were the most popular genres for placement. In terms of
product/service categories, non-alcoholic beverage,
alcoholic beverage, automobile, clothing, and food brands
appeared most often, and Coca Cola was the most frequently
occurring brand. Wenner and Lawrence (2004) emphasise
on the the ethical propriety of current trends in product
placement in television and film entertainment. He analyzed
three distinct "genres" of contemporary placements viz
Product Placement, Product Integration, and Video
Insertion.
IV
CONCLUSION AND IMPLICATION
Product placement has become a big business and it is

because of the growing importance of entertainment in the
lives of modern viewing audiences. Our society spends an
increasing amount of time in front of the big and small
screen alike, and advertisers are finding more ways to reach
viewers. While some experts argue that the public is not as
susceptible to advertising when it is aware of the tactic, the
majority of audiences do not seem to be protesting the use of
product placement. Marketers can use product placements in
films and television programs as a way to bring about more
awareness for their products. As placements have become
more prevalent, they have also become more accepted by
the consumer. In addition, product placements are a proven
way to reach the consumer. Even so, caution should be
taken as the marketer has little control of the message
surrounding the product, or the audience. Since product
placement is seen as an acceptable communications tool,
corporate marketers should feel relatively comfortable
utilizing this advertising method but should assess the
opportunities for their individual effectiveness in the
promotion mix.
The current study has been carried out on a sample of 200
respondents. Further it can be administered on a larger
population to increases accuracy of findings. The study has

been conducted in Indore City only; it can further be
administered on a larger geographically dispersed sample
across various other demographic variables. In the study the
responses of viewers were taken, which can also be
conducted by taking the views of the brand promoters.
V
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Regulating Bank Systemic Risk: New Principles in

Macroprudential Management
Moorad Choudhry and Gino Landuyt *
I
INTRODUCTION
he art of banking remains unchanged from when banks

were first established. At its core are the two principles
of asset-liability mismatch and liquidity risk management.
The act of undertaking loans and deposits creates the
mismatch, because while investors like to lend for as short a
term as possible, borrowers prefer to borrow for as long a
term as possible. This also gives rise to liquidity risk, and
bankers are therefore required to take steps to ensure that
liquidity, the ability to rollover funding of long-dated loans,
is continuously available.
The fact that all banks irrespective of their size, approach, or
strategy must manage these two basic principles means that
they are, ultimately, identical institutions. They deal within
the same markets and with each other. That means that the
bankruptcy of any one bank, while serious for its customers
and creditors, can have a bigger impact still on the wider
economy because of the risk this poses to other banks. It is
this systemic risk that posed the danger for the worlds
economies in 2008, after Lehman Brothers collapsed, and
which remains a challenge for financial regulators. Terms
such as too-big-to-fail (TBTF), lender-of-last-resort (LoLR)
and moral hazard are closely related. They are connected
with the overall objective of safeguarding the publics
deposit money should a financial institution collapse. In
essence, they refer to how the government, or more
specifically its central bank, would come to the rescue of a
bank in financial crisis, because a bank on the brink of
bankruptcy would have a destabilising effect on the entire
financial system. Spillover effects are closely related to
systemic risk. Hence this kind of protection afforded to a
bank may make it TBTF for the system.
In this article, we consider the role of government in the
financial system in the post-credit crunch era. We describe
how moral hazard and the risk of the TBTF bank will
remain in the system, and provide recommendations for how
to mitigate this risk exposure. We also examine the nature of
bank systemic risk, and present suggestions on to how to
manage it most effectively.
II
SYSTEMIC RISK
A. Defining Systemic Importance

The economic importance of banks is evident from the
reaction of western governments to the crisis following the
collapse of US firms AIG and Lehman Brothers. Banks such
as Citibank, Royal Bank of Scotland, UBS and KBC Bank
were partly nationalised and/or received large cash
injections from their governments. These were the
Institutions deemed too big to fail (TBTF), and whose

bankruptcy, it was viewed, would have been catastrophic for
the world economy because of the high systemic risk such
bankruptcy represented.
This raises the question as to exactly which banks are
systemically risky. The events of 2007-08 suggest that not
only large banks present systemic risk. Prior to September
2008, the experience of Bear Stearns in the USA and
Northern Rock in the UK had shown that banks not
necessarily defined as TBTF could nevertheless create
significant market turbulence when they failed. This implies
that in a globalised economy with many interconnections,
the collapse of almost any bank, and certainly any bank with
cross-border interests, can destabilise the economy. Banks
therefore must not only manage their own risks adequately,
they also have to be aware of the potential risk exposure of
their counterparties. Bear Stearns for example had large
exposure to hedge funds that had invested in low-grade
assets.
The UKs Financial Services Authority (FSA) has suggested
that a firm be defined as systemically important as follows:
when its collapse would impair the provision of credit
and financial services to the market with significant negative
consequences for the real economy. 1
Thus the precise definition of systemic importance is no
longer purely a reflection of the size of the bank. The FSA
view of the factors that make firms systemically important
is:
i. Systemic by size: the absolute size of the bank is
relevant, but so is its size relative to a particular
financial market or product;
ii. Systemic by interconnection: the importance of the
firm to the interbank market and clearing systems;
iii. Systemic by association: where the market views
one company as representative of a group,
whereupon failure by one is seen as a potential
failure by all (an example would be the UK
building society sector).
The above is a logical approach. However, it remains the
judgement of financial regulators to determine the extent to
which a particular firm falls into one or more of the three
categories and can be specified as systemically important.
For maximum risk mitigation, it is necessary to minimise
the amount of judgement required. In this regard therefore,
there is a strong case for suggesting that almost all banks fall
into at least the last category above, making virtually all
banks potential areas of material systemic risk. If we accept
1
FSA, Policy Statement 09/16, October 2009

this, then there are significant implications for bank
supervisory authorities.
B. Living With Moral Hazard
One result of the 2007-08 financial crises is that
governments and central banks are now playing a pivotal
role in maintaining moral hazard. A reaffirmation of their
position as LoLR creates a dual principle. First, it gives a
strong signal to deposit holders not to withdraw their money
from banks, as they should expect that the central bank
would place unlimited resources at the disposal of private
banks to keep the credit process going. Secondly, it
encourages deposit holders to place their money at the bank
with the highest deposit interest rate.
Banks in turn compete against each other to attract deposits.
The bank that is able to pay the highest deposit rate will, all
else being equal, attract most deposits. This is only
sustainable from a bottom-line viewpoint by taking on more
risk on the asset side of the balance sheet.
This happened with the UK bank Northern Rock plc. In part
due to its more aggressive credit portfolio, the bank was able
to pay out a higher rate on its clients deposit accounts
compared to that paid by the big high street banks, noted
in Cooper (2008). At the US Federal Reserve, this moral
hazard principle was emphasised by a number of comments
from Alan Greenspan. He gave the market the impression
that the Federal Reserve would put a floor under financial
markets in general. During a speech at the Economic Club
of NY in December 2002, he stated:
Asset bubbles cannot be detected and monetary policy
ought not to be in any case used to offset them. The collapse
of bubbles can be detected, however, and monetary policy
ought to be used to offset the fallout. This and other similar
utterances became known as the Greenspan Put.
The latter has come under criticism as this safety net gives
the impression that profits within the banking industry will
remain privatised, but any losses will be socialised at
taxpayers expense. Protecting the publics money is a valid
objective, but bailing out banks comes with a cost for the
taxpayer. For example, the bill for rescuing the banking
sector and injecting stimulus packages into the global
economy has risen to just below $20 trillion, the majority in
the US (see Figure 1). These numbers are unprecedented,
even compared to inflation-adjusted levels seen during the
1930s
Figure 1 Global bailout bill
Global Overview
Country
$ bln
US*
14,499.00
EU**
1,972.80
Japan
375
UK***
2,888.20
IMF
140.20
Total
19,875.20
* excluding Fannie Mae and Freddie Mac
** EURUSD rate 1.40
*** GBPUSD rate 1.60
Source: US Treasury, Federal Reserve, FDIC, IMF

The existence of a safety net creates an unconscious reflex
in bank senior management to take on more risk. Perhaps
not currently, because in the immediate post-crisis
environment investors remain risk averse; but as the
economy recovers the issue becomes more problematic. Due
to competitive pressures in banking a higher risk-reward
profile becomes a self-fulfilling prophecy, as banks seek to
generate more customer business and attract deposits.
Continuing moral hazard is an issue that needs to be
resolved if we are to avoid a re-occurrence of the crisis.
However, this is not an easy task. The principle of LoLR has
merit. The Great Depression in the 1930s could have been
more contained if the central bank had played a more
dominant role. In essence, we have a conundrum that is not
easily solved.
For the near future, the LoLR concept will not disappear. It
is necessary for the safe operation of the financial system.
We observed during the Lehman collapse the effects when a
government and central bank let market forces act freely: at
one stage in October 2008, it appeared as if the entire
Western banking system might collapse, with disastrous
consequences for the global economy, if governments had
not stepped in to guarantee liabilities. It is an economic law
that in this case the fall in asset prices relative to current
output prices would have been greater but for state
intervention. Furthermore, the drop in investments and
consumption would be substantial and the decline in income
and employment would be larger as well. So it appears
apparent that the public sector must step in for the greater
good, in a way that does not apply to other industrial
sectors.
C. Mitigating moral hazard risk
Thus, moral hazard has seemingly become an inescapable
fact of life. The ultimate solution to the problem may be no
more ambitious than reducing (rather than attempting to
eliminate) moral hazard, without curtailing risk taking. To
that end, we require new regulations. Three major issues
around moral hazard and the TBTF issue need to be
addressed:
i. Transparent communication by central banks about
moral hazard;
ii. The interconnection of financial markets and the
systemic risk related to it;
iii. Consolidation trends and the risks of too-big-tofail.
We discuss each of these points in turn.
1. Transparent Communication By Central Banks
About Moral Hazard
As we noted above the crisis was underpinned by a false
perception that unsecured institutions, for example those
that do not fall under US FDIC protection, would
nevertheless be regarded as TBTF by the US government.
This perception was first created by frequent interventions
by central banks during the past four decades, and
exacerbated by the rhetoric of Federal Reserve Chairman

Alan Greenspan. The current Chairman, Ben Bernanke,
recognises this issue however, stating,
Market discipline may erode further if market participants
believe that, to avoid the risk of a financial crisis, the
government will step in to prevent the failure of any very
large institution the too-big-to-fail problem.2
The implication of this is that central banks need to modify
their rhetoric and persuade the market that there is no
absolute floor under the markets, and that their expectations
of being rescued must be diminished. If not, market
discipline will not change. Of course, this is not a short-term
solution, but something that can only take place over time.
Perceptions built up over 20 years do not evaporate
overnight. This suggests that governments and central banks
begin the process now, rather than wait until the next crisis.
The opportunity can be taken on a regular basis when
communicating monetary policy, for example during the
press conference after Bank of England, ECB or Federal
Open Market Committee meetings, and at the Humphrey
Hawkins testimonies.
In addition to the frequency of communication, its quality is
an issue for consideration. Generalised comments along the
lines of banks are at risk of losses due to excessive risk
taking cannot be expected to change market mentality.
Central banks and other institutions such as the FDIC would
instead be required to disclose more information on the
research they are conducting on maintaining financial
stability. For example, the results of research on procedures
and methodologies in identifying which depositors to protect
and which can suffer losses is worthy of general release.
Another aspect of communication towards the market could
include explaining how central banks undertake market
stabilisation efforts.
2.
The Interconnection Of Financial Markets And

Systemic Risk
Transparent communication on its own could not be

expected to address moral hazard risk. Further measures are
needed to reduce the frequency with which central banks
and governments bail out banks.
The reason why a LoLR facility is put in place is to avoid
spillover effects towards other banks and to prevent a bank
run. Banking is ultimately a business based on confidence.
The instant that customers start withdrawing their deposits
on a large scale, banks are in trouble and will need to be
bailed out (either by takeover or merger with another bank
or by outright support from the LoLR). The basic bank
business model relies on advantage, with only a small
fraction of a banks liabilities held in reserve at the central
bank. As bank funding is based on borrowing in the
interbank market, systemic risk is inherent in the model.
Addressing this risk is a current management issue for banks
and regulators. The focus extends to the following:
i. Setting strict liquidity ratio limits, imposed by the
regulator, as well as requirements to diversify
funding sources, reduce reliance on single funding
2
See Bernanke (2007).

sources, and increase the average tenor of
liabilities; for example, the UKs FSA has started
the process to implement a much stricter liquidity
regime for banks (FSA 2008);
ii. The establishment of a global central clearing
agency for OTC derivatives; efforts are already
underway to set this up for credit derivatives, and
such a system would help to reduce bilateral
counterparty risk. An alternative is for regional
clearing centres based on currency;
iii. The establishment of a clearing house for the
money markets, a so-called International Money
Exchange for the interbank market that would
work similarly to an exchange clearing house
(Choudhry 2009); such a facility would serve to
make the interbank market more robust during
times of crisis or illiquidity, because it is at these
times that banks withdraw credit lines with other
banks. A central clearing mechanism that
eliminated bilateral counterparty risk would make
it less likely that banks would withdraw lines;
iv. Reducing leverage, if necessary by regulatory fiat,
through the imposition of leverage limits on banks.
This has been recommended by the Basel
Committee on Banking Supervision (BoE 2009);
v. Imposing higher capital ratios than currently in
place under Basel II, tailored according to the
banks size, its extent of risk exposure and the
amount if systemic risk it represents;
vi. Developing new capital instruments which absorb
losses in distressed situations. Our recommendation
is that banks promote a product which has similar
features to a classic reverse convertible bond.
Banks would issue so-called reverse convertible
debentures, which would automatically convert
into equity once the minimum capital ratio level of
a bank is breached.
The above measures all address moral hazard, and so
collectively could be expected to reduce the likelihood that a
central bank or government would have to bail out the banks
during the next economic downturn.
3.
Consolidation Trends And The Risk Of TooBig-To-Fail
The current debate on TBTF raises the issue that such banks
should be made smaller. The case for this is strong when
considering the Icelandic banks, which could not be rescued
by their government since they had outgrown their own
countrys GDP. In the last decade, these banks grew from
being domestic lenders to international lenders. During the
expansion, they acquired foreign assets of almost ten times
the countrys GDP (from two times GDP in 2003).
Furthermore, almost 80% of these assets were in foreign
currency, making them extremely vulnerable to foreign
exchange volatility. When the bubble burst the only course
of action available to prevent the collapse of the banking
system (and thereby the economy) was an IMF emergency
loan. However, these banks were not a major threat to the

international banking system. European banks did make
writedowns on the collapse of Kaupthing, Glitnir and
Landsbanki; nevertheless the impact was not on the scale of
the Lehman collapse.
The case of Ireland, which is a member of the euro-zone,
provides stronger backing for advocates of making banks
smaller. Unlike the Icelandic banks, which chose to expand
overseas, the Irish banks focused mainly on their home
market and the UK? The Irish banking industry grew
concurrently with the domestic real estate boom. Between
1998 and 2007 house prices nationally quadrupled in real
terms. When the housing bubble burst, Irish banks were
heavily exposed and as Figure 5 shows their capital ratios
were not robust enough to survive the shock. As large-scale
losses became evident, the Irish government intervened to
provide explicit backing for the banks; one impact of this
was that the Ireland sovereign rating was cut from AAA, on
fears that the public sector debt liability created by the
guarantees would become unsustainable. Ultimately, the
majority of Irish banks were effectively nationalised. The
Irish situation was not as dramatic politically as the
Icelandic one because Ireland had the safety net of the eurozone. This raised another issue however as it exposed eurozone taxpayers to potential losses if the Irish government
itself needed to be bailed out.
Some international banks remain bigger than their own
countrys GDP. For example there are the Swiss banks UBS
and Credit Suisse. At the end of 2008 the Credit Suisse
balance sheet was 2.72 times, and UBSs balance sheet 4.18
times, the GDP of Switzerland (see Figures 2 and 3). Figure
2 also shows that European banks were and still are more
leveraged than American banks, and that no UK or German
bank outgrew its countrys GDP. However, in countries
such as the Netherlands and Belgium there is a similar
pattern to that in Switzerland. The Dutch bank ING was in
effect TBTF for the government as its total assets were 1.53
times the GDP of the Netherlands. This was also the reason
why, in the case of Fortis Bank, the Benelux countries
implemented a joint rescue plan to save it from collapse, and
KBC Bank received large cash injections from the Belgian
government.
Figure 2 Bank overview of advantage and total assets, 2001-2008

Bank
2000
2001
2002
2003
JPMorgan Chase & Co
Total Assets
715,345
693,575
758,800
770,912
Financial Leverage
18.62
17.41
17.85
17.7
Tier 1 / Core
8.50
8.29
8.24
8.50
Bank of America Corp
Total Assets
642,191
621,764
660,951
719,483
Financial Leverage
13.87
13.16
12.99
14.06
Tier 1 / Core
7.50
8.30
8.22
7.85
Citigroup
Total Assets
902,210 1,051,450 1,097,190 1,264,032
Financial Leverage
14.05
13.55
13.02
12.96
Tier 1 / Core
8.38
8.42
8.47
8.91
Royal Bank of Scotland
Total Assets
320,004
368,859
412,000
454,428
Financial Leverage
18.64
16.65
17.04
18.55
Tier 1 / Core
6.90
7.10
7.30
7.40
HSBC Holdings
Total Assets 674,129.90 696,079.60
758,605 1,034,216
Financial Leverage
15.69
14.9
14.82
14.2
Tier 1 / Core
9.00
9.00
9.00
8.90
Wells Fargo & Co
Total Assets
272,426
307,569
349,197
387,798
Financial Leverage
10.31
10.87
11.44
11.38
Tier 1 / Core
7.29
6.99
7.70
8.42
Mitsubishi UFJ Fin Group
Total Assets
No data
No data 99,489.26 99,175.32
Financial Leverage
No data
No data
No data
No data
Tier 1 / Core
No data
No data
5.27
5.68
Santander Central Hispano
Total Assets 348,871.90 358,116.20 324,193.30 351,780.40
Financial Leverage
19.43
16.51
14.86
13.8
Tier 1 / Core
7.64
8.44
8.01
8.26
Goldman Sachs
Total Assets
289,760
312,218
355,574
403,799
Financial Leverage
20.25
17.32
17.94
18.69
Tier 1 / Core
No data
No data
No data
No data
BNP Paribas
Total Assets
693,315
825,288
710,305
782,996
Financial Leverage
33.62
32.86
30.09
27.31
Tier 1 / Core
7.10
7.30
8.10
9.40
Barclays Bank
Total Assets
316,190
356,612
403,062
443,262
Financial Leverage
26.35
24.31
25.59
26.8
Tier 1 / Core
7.20
7.80
8.20
7.90
Mizuho Financial Group
Total Assets
N/A
N/A
N/A 134,007.20
Financial Leverage
N/A
N/A
N/A
N/A
Tier 1 / Core
No data
No data
No data
4.87
Morgan Stanley
Total Assets
426,794
482,628
529,499
602,843
Financial Leverage
22.6
23.26
23.95
24.22
Tier 1 / Core
No data
No data
No data
No data
Uncredit
Total Assets 202,655.50 208,388.10 213,349.30 238,255.60
Financial Leverage
23.45
22.77
19.53
18.06
Tier 1 / Core
6.37
6.79
7.21
6.96
Sumitomo Mitsui Fin Group
Total Assets
N/A
N/A
N/A 104,586.80
Financial Leverage
N/A
N/A
N/A
N/A
Tier 1 / Core
No data
No data
No data
5.50
ING Bank
Total Assets
650,172
705,119
716,370
778,771
Financial Leverage
19.1
28.97
35.74
37.77
Tier 1 / Core
No data
7.03
7.31
7.59
Deutsche Bank
Total Assets
928,994
918,222
758,355
803,614
Financial Leverage
26.29
22.02
23.89
26.84
Tier 1 / Core
7.80
8.10
9.60
10.00
Societe Generale
Total Assets
455,881
512,499
501,265
539,224
Financial Leverage
33.7
32.9
32.2
32.07
Tier 1 / Core
8.91
8.36
8.14
8.66
Credit Suisse Group
Total Assets
979,121 1,016,078 1,027,158 1,004,308
2004
2005
2006
2007
2008
1,157,248
12.82
8.70
1,198,942
11.09
8.50
1,351,520
11.44
8.70
1,562,147
12.19
8.40
2,175,052
14.48
10.90
1,110,432
12.37
8.20
1,291,803
11.94
8.25
1,459,737
11.77
8.64
1,715,746
11.55
6.87
1,817,943
12.54
9.15
1,484,101
13.4
8.74
1,494,037
13.56
8.79
1,884,318
14.68
8.59
2,187,480
17.53
7.12
1,938,470
22.37
11.92
588,122
18.26
7.00
776,827
19.68
7.60
871,432
21.78
7.50
1,840,829
29.08
7.30
2,401,652
37.91
10.00
1,279,974
14.46
8.90
1,501,970
15.63
9.00
1,860,758
16.75
9.40
2,354,266
17.82
9.30
2,527,465
22.01
8.30
427,849
11.27
8.41
481,741
11.63
8.26
481,996
11.23
8.95
575,442
11.41
7.59
1,309,639
16.4
7.84
106,615.50 110,285.50 187,046.80

31.07
25.74
26.62
7.15
7.62
6.80
187,281 192,993.20
25.05
24.18
7.59
7.60
664,486.30 809,106.90 833,872.70

17.09
19.86
19.41
7.16
7.88
7.42
912,915
17.46
7.71
1,049,632
17.4
9.10
531,379
20.02
No data
706,804
24.12
No data
838,201
26.21
No data
1,119,796
27.05
No data
884,547
22.88
15.60
1,002,503
29.49
7.50
1,258,079
30.95
7.60
1,440,343
31.46
7.40
1,694,454
34.03
7.30
2,075,551
42
7.80
538,181
30.44
7.60
924,357
43.93
6.90
996,787
51.61
7.70
1,227,361
51.62
7.80
2,052,980
54.76
8.60
137,750.10 143,076.20 149,612.80

503.63
129.51
62.49
5.76
6.20
5.89
747,334
25.44
No data
1,121,192
31.83
No data
1,045,409
33.63
No data
658,812
27.56
17.90
265,406.20 787,000.30 823,284.20

18.81
21.44
21.86
7.94
6.89
5.82
1,021,835
19.19
6.55
1,045,612
18.35
6.66
102,215.20
108.7
6.03
898,523
28.68
No data
149,880 154,412.10
36.81
38.85
6.96
7.40
99,731.86 107,010.60 100,858.30 111,955.90

89.01
51.84
31.7
31.38
5.39
7.11
6.44
65.73
876,391
36.46
7.30
1,158,639
33.47
7.32
1,226,307
31.8
7.63
1,312,510
33.64
7.39
1,331,663
40.97
9.32
840,068
30.38
8.60
992,161
32.81
8.70
1,584,493
41.1
8.50
2,020,349
51.64
8.60
2,202,423
62.33
10.10
601,355
32.46
7.69
835,134
34.64
7.57
956,841
34.4
7.82
1,071,762
36.04
6.62
1,130,003
34.77
7.88
1,089,485
1,339,052
1,255,956
1,360,680
1,170,350
Bank
2000
2001
2002
2003
2004
2005
UBS
Total Assets 1,087,552 1,253,297 1,181,118 1,386,000 1,737,118 2,058,348
Financial Leverage
27.49
26.49
29.5
34.49
45.01
48.69
Tier 1 / Core
No data
11.60
11.30
11.80
11.90
12.80
Commerzbank
Total Assets
454,904
501,312
422,134
381,585
424,877
444,861
Financial Leverage
34.85
39.38
44.9
44.9
42.79
38.73
Tier 1 / Core
6.50
6.20
7.30
7.30
7.50
8.10
Fortis Bank
Total Assets 438,082.70 482,875.10
485,668 523,364.20 614,085.30 728,994.50
Financial Leverage
29.41
31.82
39.49
44.68
41.9
39.2
Tier 1 / Core
7.30
8.50
8.20
7.90
8.30
7.40
HBOS
Total Assets
N/A
312,071
355,030
408,413
448,165
540,873
Financial Leverage
N/A
N/A
27.42
26.99
26.91
28.92
Tier 1 / Core
No data
7.90
7.90
7.60
7.90
8.10
Dexia
Total Assets
257,726
351,250
350,692
349,463
388,787
508,761
Financial Leverage
42.6
41.28
40.82
38.42
33.46
32.98
Tier 1 / Core
9.30
9.30
9.30
9.90
10.00
10.30
Lloyds TSB Group
Total Assets
219,113
235,793
252,561
252,012
284,422
309,754
Financial Leverage
21.24
22.32
26.69
28.72
25.95
27.97
Tier 1 / Core
8.20
8.40
7.70
9.50
8.20
7.90
KBC Group
Total Assets
187,658 227,759.20 221,730.50 225,586.80
285,163
325,801
Financial Leverage
34.42
31.21
28.16
25.45
23.78
21.76
Tier 1 / Core
9.50
8.80
8.83
9.54
10.07
9.40
Allied Irish Bank
Total Assets
80,250
89,359
85,821
80,960
101,109
133,214
Financial Leverage
17.14
17.27
19.34
18.28
17.04
18.87
Tier 1 / Core
6.30
6.50
6.90
7.10
8.20
7.20
Anglo Irish Bank
Total Assets 11,047.30
15,776 19,417.80 25,520.10 34,339.80
48,413
Financial Leverage
32.27
32.75
29.29
27.73
21.32
20.56
Tier 1 / Core
32.27
32.75
29.29
27.73
21.32
20.56
Bank Of Ireland
Total Assets
68,017
78,875
87,298
89,303
106,431
127,780
Financial Leverage
20.09
20.79
20.84
21.56
23.58
27.41
Tier 1 / Core
7.40
7.80
7.60
8.00
7.20
7.90
Irish Nationwide Building Soc
Total Assets
No data
No data
5,574.75
5,953.20
8,554.10 10,994.50
Financial Leverage
No data
No data
12.29
11.01
10.97
11.60
Tier 1 / Core
No data
No data
11.00
11.59
10.07
13.71
Source: Bloomberg L.P.

Figure 3 GDP per country, 2008
Country
GDP $ millions
US
14,264,600
Japan
4,923,761
Germany
3,667,513
France
2,865,737
UK
2,674,085
Italy
2,313,893
Spain
1,611,767
Netherlands
868,940
Belgium
506,392
Switzerland
492,595
Ireland
273,248
Source: IMF
A strong conclusion from this experience is that any
potential TBTF bank needs, in effect, either to be capped in
size or otherwise divested of some of its business lines.
There are practical difficulties with doing this. The first is
selecting the metric to use to determine whether a bank is
2006
2007
2008
2,396,511
47.54
11.90
2,274,891
53.97
9.10
2,014,815
61.81
11.00
608,278
39.09
6.70
616,474
41.7
7.00
625,196
36.11
10.10
775,229
38.01
7.10
871,179
30.66
No data
92,870
24.2
No data
591,813
29.94
8.10
666,947
29.87
7.70
689,917
40.08
6.00
566,743
37.15
9.80
604,564
40.29
9.10
651,006
67.66
10.60
343,598
30.6
8.20
353,346
29.92
8.10
436,033
36.66
8.00
325,400
19.86
8.70
355,597
19.81
7.40
355,317
22.53
7.20
158,526
19.74
8.20
177,862
19.29
7.50
182,143
20.26
7.40
73,290
25.29
25.29
96,652
25.23
25.23
101,321
24.21
24.21
162,212
30.67
7.50
188,813
29.47
8.20
197,434
29.24
8.10
14,629
11.61
No data
16,099.10
11.18
8.60
14,429.30
11.31
7.40
too big. A measure looking at the total size of assets on

the balance sheet may be too simplistic. It is plausible that a
banks total assets increase via organic growth. In this case
from an orthodox free market view it would be unfair to
penalise this development, certainly where the assets are
matched with high-quality liabilities. To extend the
comparison, one would not necessarily break up the US
retail distributor Wallmart or the UK supermarket chain
Tesco simply because either had a dominant market
position. That said, neither of these corporate institutions is
relying on the LoLR, and neither represents any kind of
systemic risk to the economy.
Where regulators have a stronger case is in the area of
growth through mergers and/or acquisition. When this takes
place, regulators must look closely at how the transaction is
funded. The experience of Royal Bank of Scotland and
Fortis, in the aftermath of the ABN Amro takeover, is
instructive: the acquiring banks had not put in place a robust
funding strategy behind the transaction. A smaller bank is
also no guarantee of diminished systemic risk. Some banks
have a relatively small asset base but still impose the risk of
a potential run on the banking system; as we noted, Northern
Rock and Bear Stearns were good examples of this.

This suggests that a range of quantitative and qualitative
assessments need to be made before one can decide that a
bank is TBTF. Central banks, which receive detailed
information on a confidential basis from banking entities,
may be able to make this judgement call. However, a
policymaker who needs to streamline this into a simple
metric legal framework is less capable of doing this.
There is also the issue of how to deal with banks that are
already too big. The simple recourse would be to break
them up. This then raises questions about who will buy the
assets and at what price they should be sold. These are not
insurmountable problems, but they require consideration.
We recommend that as far as possible, viable business lines
are hived off into stand-alone operations under existing
management. This would be feasible in the case of most
multinational banking groups, which often take over
overseas banking chains as a complete whole.
When governments succeed in breaking up big banks, they
will face substantial pressure not to allow these companies
to grow too large again. There is precedent for this in other
industries; for example the break-up of AT&T in the US.
This triggered subsequent mergers among other
telecommunication firms, which subsequently became large
organisations. In the US there is legislation in place to block
a merger or acquisition if the bank is left with more than
10% of the total deposit base of the market. A similar cap
could be adopted in other countries.
It is evident that certain banks became too big during the last
10 years, to the extent that the prosperity of a country and its
citizens was placed in jeopardy. The best examples were
Citigroup and RBS. Given the cost of saving these two
banks in 2008, the experience suggests that banks that
become this large must either be downsized or otherwise
forced to operate under severe restrictions, to prevent their
failure.
Keeping the size of banks in check could be first achieved
by keeping quantitative measures, such as liquidity and
advantage ratios, under strict limits as we suggested above.
However if regulators do not succeed in keeping banks in
line using these restrictions, then downsizing the total asset
size of a bank below a certain percentage of the GDP of its
own country must become the solution of last resort.
III
MACROPRUDENTIAL REGULATION
The events of 2007-08 demonstrated clearly how the failure

of one bank can have significant implications for other
banks as well as the entire market. As a generalisation,
banks are identical entitites. Large numbers of them operate
in the same markets, with the same customers and with each
other. It is this interconnection that means that when one
bank fails, the entire industry (and by extension the
economy) is at risk. Hence, it is not sufficient for financial
regulators to aim to ensure that each bank is properly
managed and has sufficient capital and liquidity
arrangements in place. They also have to oversee the
soundness of the industry as a whole. Thus
macroprudential regulation is now the main focus for
bank regulators.

The framework within which macroprudential regulation
would be undertaken remains under discussion, for example
see BoE (2009). The broad objective of such regulation is to
ensure the continued safe running of the financial system in
the event of individual bank failure. A number of steps can
be taken by regulators to assist with this.
In the first instance, bank business activity would benefit
from being controlled by regulators to the extent that it
becomes less cyclical, or less susceptible to the ill
disciplines of a bull market. When the economy is growing
steadily and risk aversion is decreasing, banks fall into a
pattern of lowering loan origination standards and easing the
supply of credit. A booming economy and tightening credit
spreads alter bank risk-taking behaviour. The typical
reaction is a lowering of loan origination standards and a
change in banks strategy to the extent that market share and
higher return-on-equity (RoE) targets become emphasised,
sometimes to the detriment of liquidity and capital
management. This was the error made by UK banks such as
Northern Rock, Bradford & Bingley and HBOS. 3
Because banks operate in the same markets and with each
other, this cyclical pattern is exacerbated during any
significant market event. The supply of plentiful and cheap
credit helps boost the price of assets such as equities and
real estate. At the end of the cycle and in a recession, banks
then as a group withdraw credit on a large scale, widening
the impact of the recession and also causing a fall in asset
prices.
The first requirement in macroprudential regulation
therefore is for banks to operate in less cyclical a manner.
This can be enforced by altering bank capital and liquidity
requirements. At any time when the market is viewed as
pursuing ever more risky asset generation, and/or credit is
seen as too easily available, the regulator can require banks
to:
i. Increase their level of capital, particularly Tier 1
equity capital;
ii. Adjust their liquidity ratio to ensure that there is
less reliance on short-term funding and wholesale
interbank funding.4
Both of these steps would increase the cost of doing
business for a bank, and thereby lead to decreased lending
levels during a boom period.
The difficulty of course is the judgement call of when
exactly a bull market is underway, or the precise moment
when a market is, to borrow an earlier phrase, irrationally
exuberant. While it is easy to see in hindsight at what point a
market crash began, it is harder to call such an event
beforehand. Measures that regulators may wish to consider
include:
i. The overall level of lending in the economy, both
as an absolute level and as a percentage of GDP;
3
It is noteworthy that the Chief Executive Officers of the last two firms
had backgrounds in retail and not banking.
4
The liquidity ratio is essentially the asset-liability gap. A good idea
of this gap can be determined by calculating the ratio of average maturity
of assets to average maturity of liabilities. A higher ratio is indicative of a
higher gap and higher liquidity or funding rollover risk.

ii. The rate of increase in retail lending, for example
credit card and residential mortgage approvals, as
well as the rate of increase in lower-credit-quality
lending;
iii. The rates of return on equity on bank capital, and
whether this is running at above long-run averages;
In practice the regulator may wish to use a combination of
these measures when making this assessment, which will
always remain a judgement call. It would also need to
monitor aggregate economic indicators such as the rate of
growth of GDP and asset prices, compared to medium-term
average rates.
The Bank of England has suggested that particular types of
loan activity need to be targeted when capital requirements
are raised.5 Otherwise, there is the risk that bank
will merely pull back from lower-risk business lines and use
the capital saving created to continue business in higher-risk
activity. This is logical, and we would suggest that it may be
addressed by focusing not at the macroprudential level but
at the direct individual bank level on RoE targets and
leverage levels. If regulators place limits on these two
values, and alter them to suit the business cycle, this will
also drive more counter-cyclical behaviour. What is
apparent is that a reliance on higher capital requirements
alone may not be a sufficient safeguard against systemic
risk, because it would be difficult to ascertain what level of
capital was enough.6 The liquidity ratio for a bank is a key
risk measure and regulators can use it to influence
macroprudential behaviour. By setting a more conservative
liquidity ratio requirement for banks that run large assetliability gaps, and therefore greater liquidity risk, the
regulator can ensure that asset origination cannot exceed by
too much the ability of the bank to fund such assets more
robustly.
Notwithstanding the view that essentially all banks pose a
systemic risk of a kind, due to their interconnectivity, as the
case of Citigroup and RBS showed, the risk from larger
multi-national banks may be mitigated by specific stringent
treatment. The FSA has suggested that each legal entity in a
banking group could be required to set up a living will so
that it could be easily and safely unwound without affecting
the capital base of the rest of the group. This is not a risk
mitigant however, merely a means by which the impact of
failure can be concentrated into a shorter timescale. To
effectively control the risk of TBTF banks, one approach
could be to require them to ensure that their overseas
operations are separately capitalised and liquidity selfsufficient. This would reduce the risk that an economic
crisis in one country was not imported into another via the
banking system.
In this last regard, the requirement to have separately
capitalised trading and retail divisions would be beneficial.
A large group entity that relies on the central bank LoLR is
a direct risk to the taxpayer, and its failure has significant
5
Ibid.
Lehman Brothers was capitalised at 11% at the time of its collapse, a
level that was acceptable to regulatory authorities while it was still in
operation.
6

impact, as we noted with the examples of Citibank, RBS,
KBC Bank and UBS in the US, UK, Belgium and
Switzerland respectively, during 2008. Figure 5 showed the
growth in size, advantage, and potential risk of these banks
in the build-up to the Lehman bankruptcy, following which
they all had to be bailed out by their governments. We can
observe the steadily increasing risk exposure, particularly
with regard to leverage ratios.
If a banking, groups risk-taking arm gets into difficulties, in
theory if it is a separately capitalised entity it can be
unwound or allowed fail without endangering the retailbanking arm. Its subsidiarisation would also enforce funding
discipline, as lenders would lend to it at a premium over the
parent entity-funding rate. There is therefore a strong case
for requiring the trading arm to be a separate subsidiary with
its own capital base.
A. Recommended Policy Approach
Effective macroprudential regulation requires that banks
also take specific measures as part of the effort to maintain
systemic stability. We suggest that best-practice thinking is
for measures along the following lines:
i. Reducing market exposure to large systemically
important banks by requiring them to trade a
larger proportion of their trades via a centralised
clearing system. This would reduce contagion
across the market when one bank failed, as a
central
clearing house
reduces
bilateral
counterparty risk;
ii. The trading arms of all banks should be required to
hold more capital than the retail arm. This is
expected in a new Basel III regulatory capital
regime;
iii. Requiring a higher capital ratio for large banks, and
enforcing a leverage ratio;
iv. Cross-border stability arrangements: given that
uniform arrangements worldwide are unlikely to be
implemented, enforce regulation that the home
country of a banking group structured across
subsidiaries in different national jurisdictions
should not be responsible for saving the whole
group. The practical impact of this is that
subsidiaries must be stand-alone entities, both
capital and liquidity self-sufficient, and which
could be allowed to fail without endangering the
entire group.
More stringent macroprudential and micro-level regulation
would provide for greater financial market stability at the
time of the next recession, more so because the nature and
size of the next crisis cannot be estimated with any certainty.
At the micro level, systemic risk will be mitigated by
requiring all banks to adhere to a more stringent capital and
liquidity regime, and one that has a counter-cyclical
emphasis. Both of these requirements will increase the cost
of doing business, and thus reduce lending volumes in the
long run, but regulatory authorities and governments will
view this as a desirable result because it will reduce the
ability for a bank to grow rapidly during a bull market as

well as reduce the need for it to cut lending during a
recession. As the natural inclination for a private company is
to maximise return and minimise operating costs, countercyclical behaviour would not occur in a completely free
market. To enforce it will therefore require regulatory fiat.
IV
CONCLUSIONS
The 2007-2008 financial crash and recession, and its

aftermath, demonstrated that governments deem the banking
system to play an important role in the development of the
worlds economy. This places the industry outside the realm
of a purely private free enterprise, because of the significant
impact of individual failure on the wider economy. The
current state of affairs combines government guarantees of
the Western banking system alongside potentially
significant moral hazard. This arrangement became
necessary to prevent collapse in the global economy
following the Lehmans default, when it appeared that many
Western banks were about to fail. In the foreseeable future
we do not expect that the current market structure will
change.
Given the risks that such moral hazard implies, which
essentially allows banks to take as much risk exposure as
they wish to maximise profit in the knowledge that should
they incur large losses they will be bailed out, it becomes
important for governments and regulators to act decisively
to mitigate these risks. The conclusion from this is that
regulators need to review the adequacy of macroprudential
regulation, enforced by the central authorities, to ensure the
stability of the banking sector throughout the business cycle.
We have proposed three areas in which policy makers
should implement strict rules as part of a new bank business
model, which will reduce the likelihood that the LoLR has
to intervene during the next economic downturn. The key to
efficient macroprudential regulatory oversight is to require
banks to follow counter-cyclical behaviour with regard to
capital, liquidity, and loan origination. In addition,
infrastructure must be enhanced to reduce the level of
interconnectivity in the system, via centralised clearing
houses. This would help to reduce counterparty risk and
lower the impact of bank failures.
V
REFERENCES
1) Bank of England, The role of macroprudential

policy, November 2009 --- ---, Financial Stability
Report, November 2009
2) Ben Bernanke, Financial Regulation and the
Invisible Hand, remarks at the NY University Law
School, April 11, 2007
3) Choudhry, M., A clearing house for the money
market?, Europe Arab Bank Treasury Market
Comment, Vol 1, No 9, 6th March 2009
4) George Cooper, The Origin of Financial Crises:
Central Banks, credit bubbles and the efficient
market fallacy, Harriman House Ltd 2008
5) United Kingdom Financial Services Authority,
Consultative Paper 08/22, December 2008
Clinical Trials: A Branding Opportunity?

Dr. Lynn L. K. Lim, Dr. Professor T C Melewar, T. C. Sorensen
Abstract-Pharmaceutical companies face major communication
challenges to ensure Health Care Practitioners (HCP) are
knowledgeable about their products. The marketing and
branding of prescription medicines are constrained by the
restrictions on messaging, products complexity, and short
product lifecycles. Branding overcomes some communication
limitations of prescription medicine marketing. Opinion
leaders are also viewed as powerful communicators of brand
value to the HCP. Through structured qualitative interviews,
we examined how the clinical trial process supported branding
and how this process might be modified to optimize such a
benefit. Evidence generated during clinical trials demonstrated
that prescription medicines were competing with existing
alternative therapies. Sound clinical trial data, while essential,
is therefore often not enough to ensure that quality medicines
are commercially successful.
Keywords- Pharmaceutical, branding, marketing, clinical

trial and opinion leader
I
INTRODUCTION
n the pharmaceutical industry, branding is complicated by

the short product life cycles and the regulatory authorities
on the officially sanctioned basic benefits of the drug.
Though the market for prescription drugs is unusual in many
ways, essentially, the product is worthless without a
certification of safety and efficacy to sell and promote it.
The drug as a product is, however, unique in that all its
properties are rarely known at the time of license. This may
be related to long-term benefits of the drug and safety data
that may take years of use to identify. However, there may
also be benefits in relation to other diseases or patient
populations, which hitherto have not been contemplated or
studied.
The evolution of drugs (possessive) known properties
makes them highly complex and increasingly so with new
generations of more targeted therapies. In addition to this
complexity is the recognized information overload on
medical dealers and HCP. This means that they increasingly
rely on peers and industry for education and guidance. The
customers need not just to be medically qualified but
increasingly need additional training to gain an
understanding of the products to ensure optimal use
(especially truly new products).
Corresponding Author Ph.D, Reader in Business and Marketing,
School of Business and Social Sciences, Roehampton University,
80 Roehampton Lane, London SW15 5SL, United Kingdom
Telephone: +44 (0) 208 392 3358
PhD, Professor of Marketing and Strategy, School of
Management and Law, Zurich University of Applied Sciences,
Stadthausstrasse 14, 8400 Winterthur, Switzerland
Telephone: +41 (0) 58 934 6678
Researcher, Warwick Business School, University of Warwick,
Coventry CV4 7AL, United Kingdom
Telephone: +44 (0) 2476 523 523
The selling to the prescribing physician is limited for the

product, as physicians are not the end-users and a
beneficiary of the product. Moreover, advertising directly to
the patient is not permitted in Europe (unlike in America)
where drug companies turns to devise and build stronger
brand names when the new products reach the early clinical
trials (The Economist, 2003) in hope to convey more than
the scientific benefits of the product. Thus, these issues
point to the central element of customer education via
multiple communication channels in the pharmaceutical
industry.
One communication tool available is branding. In most
industries, branding plays an important role in conveying
product benefits to the customer via symbols or names
which trigger positive associations as well as sometimes
rational and sometimes irrational. In addition to the
complexity of the products, the role of branding in the
pharmaceutical industry has particular complications due to
the official designation of product properties (the label)
advertising directly to HCP is prohibited and the product
cycles are short. Communication strategy does not mean that
communication should drive science but supports the role in
trial planning (Chicco and Chandler, 2002). This helps to
clarify the messages that derive from planned trials and to
differential a companys values in the marketplace.
Historically, clinical trials are required by local and
international health regulatory bodies or authorities for
diagnostic, screening, treatment, prevention and improving
quality of life. Though clinical trials and brands effect have
been published by academic scholars (Branthwaite and
Cooper, 1981; Urde, 1994; McAdam and Barron, 2002),
clinical trials and branding literatures have been
concentrated in general medical and pharmaceutical journals
(Delagneau, 2004; Miles, 2005; Radulescu, 2005). Clinical
trial activities and studies are central to the industry to
provide the data for registration and to inform the HCP on
target patients and optimal treatment. The role of global
marketing and maximizing products commercial and
therapeutic value to increase branding and efficiency are
still limited in pharmaceutical companies (Delagneau,
2004).
The research addresses (1) how the clinical trial process
itself supports branding and (2) to identify how this process
might be modified to optimize such a benefit. The study was
conducted using qualitative interviews with key senior
management of a leading biomedicines company in Europe.
This paper will concentrate on prescription drugs in the EU,
since prescription medicines contribute around 90% of
global pharmaceuticals revenue (Blacket and Harrison,
2001) despite the prohibition against direct to consumer
advertising.

II
BACKGROUND AND REVIEW
A. The Pharmaceutical Industry

Two key developments have contributed to the current state
of the modern pharmaceutical industry. First, technological
and scientific developments have enabled the discovery and
production of drugs. Second, escalating concern over the
role of pharmaceutical companies and the safety of
medicines in their production and use has generated an
increasingly restrictive and regulatory environment. Both
developments have, undoubtedly, improved the safety and
efficacy of medicines used on patients, but they have also
increased prices. Thus, clinical trials have become larger
than ever due to increasing demands of licensing agencies
for safety and efficacy data.
The marketing mix, often used to facilitate meaningful
measurement of marketing efforts and their worth, continues
to be one of the predominant marketing theories in
pharmaceutical and medical marketing (McCarthy, 1960;
Stibel and Kapoor, 2002; James, 2004; Kolter, Armstrong,
Saunders and Wong, 2005). In a pharmaceutical study to
review and identify the customers value perceptions of a
clinical trial process, attention focused on communication
and branding.
The brand of a product triggers specific responses in the
minds of the customer (e.g. aspiration, expressive and
imaginative) (Kolter et al, 2005). A product is made in a
factory while a brand is sold in a shop. Brands have core
customers who remain loyal even after occasional
(redundant) problems, as brands can be positive or negative.
Brands usually build on quality products and theoretically,
they are very difficult to imitate. Often viewed as part of the
product, brand is also a part of communication strategy
and in fact serve as a useful integrative force bringing
product policy and communication closer (Shapiro, 1985).
Van Waterschoot and Van den Bulte (1992) recognize that
promotion is not a sole preserve of communication, and but
also includes persuasion.
For analysis of the value of clinical trials to the customer,
this study employed the Van Waterschoot and Van de Bulte
(1992) model, which incorporates many of the criticisms
identified in the original McCarthy model (McCarthy, 1960)
while retaining a simplicity which made it ideal for this type
of analysis. Kotlers et al (2005) perception of product
levels and the incorporation of branding were included in
the analysis. Alongside these models, this study also
employed the relationship marketing concept because of the
interactive process of a clinical trial as in a social context
and the importance of relationship to the healthcare
marketing (Gronroos, 1994; English, 2000; MacStravic,
2000; Moller and Halinen, 2000; Wright and Lundstrom,
2004). Logistics is noted as an important part of the process
but it has little direct effect on the clinical trial outcome, so
we do not discuss it in detail.

B. Brand And Communication
Brand and communication provide the level of benefit that is
suggested or believed by a customer either to exist or felt to
be imminent in the future, including faith and trust.
Nevertheless, these elements are not necessarily being
delivered to the customer. Despite being a data orientated
and evidence-based industry, physicians are still customers
who are as prone to perceived benefits as other customers.
Brand is also about feelings, a relationship with the drug and
the company behind it. Brand is not an easily imitable
differentiator because relationships are experiences and
experiences are unique. In an industry that produces
products that could potentially harm patients, the use of such
emotional communication with physicians raises some
ethical questions.
Diseases that are not yet formally studied by the company
use drugs where only anecdotal or small-study evidence is
available. This is where faith could play a role. If the drug is
successful with other diseases, there may be faith by
physicians that the drug is likely to work with other
diseases. Even diseases that are formally studied in Phase II
by companies, who have no intention of pursuing
registration, can still add to a general perception of
efficiency for the drug concerned. There are often aspects of
diseases and drugs, which might take too large a study to
conduct, but performing small studies, which even address
the issue, is enough to raise awareness of even the
possibility that there is potential for this non-proven quality.
Physicians in the 21st century are faced with the daunting
challenge of keeping abreast with these medical advances.
There is an enormous volume of scientific information in
medical journals (almost 4,000 titles) making it impossible
for practitioners to keep up with all the research, even in
specialties. Medical education programs are therefore
essential to help practitioners try to stay on top of the
literature. Whether the education sponsor is a
pharmaceutical firm or an academic source, each has the
same goal of enhancing the practice of medicine. The best
practice of medicine requires collaboration between the
pharmaceutical industry, which develops new medicines,
and practitioners who prescribe new medicines to their
patients.
In the pharmaceutical industry, major means of mass
communication are through journals, conferences and local
hospital educational forums which are the natural
communication channels used by the medical community.
Local medical community has a small cadre of readily
identifiable physicians who are influential in facilitating new
learning and adoption of advances. Hence, clinicians
respond to new clinical interventions by seeking information
and opinions from peers and opinion leaders rather than
assessing the scientific merits by themselves (Dumovic and
Vries, 2004). Opinion leaders are perceived as technically
competent, authoritative, independent, dedicated and
esteemed members of a local group. Industry plays a role in
development of these guidelines by supporting the meetings
of experts or opinion leaders (Dumovic and de Vries, 2004).

The communicating of information from companies also
plays an important role in patient care. During one study in
the United Kingdom, general practitioners were asked to cite
the most important sources of information for drugs and
42% referred to pharmaceutical industry education and 36%
referred to hospital consultant recommendations (Dumovic
and de Vries, 2004, Wright and Lundstrom, 2004). This
highlights the quality of sources of information from the
industry, respected colleagues, peers, opinion leaders and
their influence on customers in the medicines market.
Publicity communication ensures that third parties have a
positive and informed view of the product and company.
Third parties increasingly have a greater influence over
industry in the form of regulations that come about via
press, pressure groups and politicians. The public and press,
due to its associations with profiteering from illness, often
see the pharmaceutical industry in a negative light. Patients
are becoming increasingly organized as pressure groups that
exert force on companies, which can have a negative effect
on business. They can also pressure governments to release
funds for treatment, which can have a positive effect on
business. Some marketing guides to the pharmaceutical
industry make a particular point in this aspect of the industry
by adding patients and politics to the marketing mix.

The pharmaceutical industry has not yet recognized that the
management of brands- intangible values, not just productsaffect efficacy or tangible (Moss and Schuiling, 2004). The
industry has to remind itself that customers stock, dispense,
prescribe, buy and use brands, not products (James, 2004).
The brand is an integral part of the benefit process central to
the business of customer satisfaction and to build and retain
customer loyalty. People have a deep emotional connection
to their health. Brands add a greater sense of purpose to the
treatment experience, as brands are trusted and are
something in which the patient or physician puts their faith.
Therefore, there may be a need for the pharmaceutical
industry to invest in long-term corporate and product brands
(Corstjens and Carpenter, 2000; Moss and Schuiling, 2004).
Stibel and Kapoor (2002) point out that only Pfizer and
Johnson & Johnson have managed to make products and
corporate brands benefit each other. Schroff (2003) argues
that as the pharmaceutical industry currently maintains a bad
image, hence, corporate branding is unlikely to be
beneficial. He argues that few consumers would be able to
answer the pharmaceutical company that has the best record
on reporting safety to authorities and a physician will rarely
be asked by a patient about the maker of a drug.
Nevertheless, corporate branding may help a drug
representative gain access to physicians.
C. Pharmaceutical Branding
III
Thomas Beecham is accredited with one of the first

pharmaceutical branding exercises when he affiliated his
own name with an effective new laxative in 1842 in order to
make it stand out from a plethora of other products on the
pharmacists shelves (Anderson and Homan, 2002).
Branding of prescription medicines has often been perceived
as little more than a convenient naming of a product. This is
due to the short life cycle of the products, the patent system,
and a prevailing thought that the products could be sold
based on their technical merits alone.
For pharmaceutical manufacturers, the traditional sources of
value creation have laid in successful research and
development. Blacket and Harrison indicate that the industry
continues to maintain various conventional supply-driven
characteristics overlaid with government paternalism
(Blacket and Harrison, 2001). One symptom of this is the
observation that mergers and acquisitions in the
pharmaceutical industry take place to acquire pipelines but
not brands. The pharmaceutical companies are
conspicuously absent from inter-brand leagues.
Corstjens and Carpenter (2000) argue that there is increasing
competition between drugs. The practicality and literal
aspects of pharmaceutical products are generally not
allowing customer to feel something for them (Hoarse,
2003). None of the top ten selling pharmaceuticals have
been judged by the Food and Drug Administration (FDA) to
suggest vital therapeutic gains and existing therapies.
Pharmaceutical industry, perhaps, should take a lesson from
the fast-moving consumer goods industry. Consumer goods
manufacturers have responded to product proliferation and
falling margins by building strong brand identities and
preserve brands.
THE STUDY AND FINDINGS
This research was conducted via structured qualitative

interviews with seven key senior managers of a leading
biomedicine company in Europe as part of our initial study.
The seven interviewees held positions as Vice Presidents
(Interviewee 4 and 5), Executive Director (Interviewee 7),
Senior Director (Interviewee 2), Director (Interviewee 6),
Associate Director (Interviewee 1) and Senior Manager
(Interviewee 3) of global marketing development, medical
affairs, medication group, and therapeutic areas and
franchise departments.
During the primary research, there was no attempt to
quantify data but it was utilized as an attempt to trigger
opinions on specific subjects. The questions were identical
in content and order, since a standard script was utilized.
Prior to the interview, all participants were given a
PowerPoint presentation, which provided background and
definitions, and guided the participants through the
interview questions. All interviews were audiotape recorded
and then transcribed.
A. Importance of Product Branding
The literature has previously highlighted the debate on the
value of product branding for pharmaceutical products.
Examples of product brand value statements were put before
the interviewees for this project and all agreed with the
statements. Interviewees 1, 2, 3, 4 and 7 strongly agreed
with the value of product branding of pharmaceuticals.
You have to appeal to [doctors] not only as scientists but
as consumers we sometimes shy away from the emotional

elements because we think they just want the facts, I think
its a balance. (Interviewee 4)
[I could] not think of anything more emotional than ones
health. (Interviewee 7)
Interviewees suggested that it is not possible to separate fact
from emotion when selling medicines but emphasis was
made on the trust aspect of medicine branding. After all,
doctors are also consumers in their private lives. Although
it was highlighted that branding is only possible if you are
not misleading the customer (Interviewee 6). Branding is
considered less important if there is no competition but is a
very effective way to reduce barriers to entry (Interviewee
3). It was also highlighted that brands can be positive as
well as negative (Interviewee 1).
B. Importance of Corporate Branding
Wright and Lundstrom (2004) identify three values of a
sales representative, with which a physician forms an overall
impression. These values include a representatives
characteristics, ethics and perception of the pharmaceutical
corporation . Hence, corporate image and branding could be
seen as important competitive tools for medicines.
Interviewees were asked if they thought that corporate
branding was important.
Pharmaceutical companies have done very little or nothing
over the years to identify themselves either corporately or
pharmaceutically by product although that has changed in
the last decade or so with drug to consumer advertising,
certainly in the US. Instead of creating our own image and
how we want to be perceived we have let [the media] do this
for us and thats the worst thing that can ever happen
(Interviewee 4).
I like to think that people looking at us from the outside
think That guys from [the company], thats the ethical
company that tells me about problems before I read about it
in the news. If people think good things about our company
because they know what we are about then that obviously
makes our products more attractive and powerful its all
about honesty (Interviewee 7).
In summary, it was agreed that the corporate brand is seen
as a way to encapsulate the companies ethical position
which is good for all of its products. It was additionally
pointed out that to have a good reputation a corporation will
also enhances relationships with opinion leaders
(Interviewee 3).
C. Importance of Opinion Leaders as Communicators
of Brand
As discussed earlier in the literature, opinion leaders are
used by pharmaceutical companies to communicate
information about drugs but they are specifically sought out
by peers for advice. Since doctors are unable to stay on top
of the medical literature, they rely on well-informed peers to
guide them. Opinion leaders convey the messages that
companies should seek to communicate through their brands
as they represent value and trust to the customer.
Interviewees were introduced to the concept that opinion

leaders are in fact in many ways communicators of brand
value. This notion was accepted.
Ultimately [with] third party people [such] testimonial
has high value. A trusted personality conveys trust on to the
product. (Interviewee 7)
Opinion leaders are huge their reputation and their
credentials and their credibility in the medical community
they are the most important people to have on your
side.(Interviewee 4)
I agree that opinion leaders convey features of brand but
positively and negatively, its about trust and how data gets
interpreted. (Interviewee 5)
However some interviewees did raise caution on the value
of opinion leaders, pointing out that they often try to
advocate several products (Interviewees 1 and 3).
In summary, it was felt that opinion leaders are sought out
for assurance. Although this may take the form of hard
clinical data, it also involves trust and faith in their opinion.
These intangible features reflect the value that brands seek
to communicate. It can be concluded from this that opinion
leaders are human manifestations of brand value with the
limitation that in a competitive environment they might
represent several companies and will therefore seek to
maintain these relationships by remaining as impartial as
possible.
D. The Process of Clinical Trials Supports Corporate
and Product Brand Value
The brand value comprises the benefits of the product for
which there is not necessarily direct evidence but which the
customer, though confidence and trust in the drug and/or
company, believes exist. This is a powerful differentiator
which is hard for competitors to imitate. Both corporate and
product brands may benefit from both the processes and the
outputs of a study. This exposes the opinion leaders or
future opinion leaders to regular contact with both the drug
and the company. This achieves familiarity with the drug
under the safe conditions of an ethically approved clinical
trial and also allows a quality relationship to develop with
the people behind the product. Knowing the people behind
the drug on a personal basis is preferable to building a
relationship with a faceless pharmaceutical company. The
interviewees comment on the above:
Its a chance for a physician to see inside a company they
get a good view as to the kinds of people that we hire, the
kinds of philosophies that we live by, the ethics the
scientific credentials of [employees] (Interviewee 4).
You need to have an important question to ask if you
are doing a trial with an important endpoint and important
healthcare question, being involved with it brings people up
to speed. [Doctors in a trial] become from neutral to very
passionate to what [the drug] and [the company] are about.
(Interviewee 7)
[The brand value lies] much more in the innovation of the
questions you ask. Product branding has a significant value
if it has been built on strong clinical data. I do not believe
that corporate brand value translates into competitive
advantage for a product. Customers use a product due to the

product, not the company. Corporate branding can have a
negative value if the company has been associated with
something negative, eg a safety scandal. Positive corporate
branding may help the launch in new products (Interviewee
5)
[The] clinical trial is the best opportunity for a bad or very
good first impression (Interviewee 2)
The process plays an important role in the product brand.
One of the best ways to build Brand equity is through
experience and the clinical trial allows clinicians to get that.
The effect on the corporate brand is huge and impacts how
they feel about [the company]. We are judged on whether
we are performing cutting edge science or not (Interviewee
5)
In summary, the interviewees agreed that there are clear
corporate and product-branding opportunities, which can be
created by encouraging physicians to participate in clinical
trials and by being exposed to the clinical trail, process it.
This view supports Dumovic and de Vries (2004) suggestion
about clinical researchers expertise and knowledge.
E. Execution of Clinical Studies
Since the opportunity for opinion leader development has
been identified. Interviewees were asked whether all
investigators should be developed into opinion leaders and if
so, are the current organization structures appropriate for
this to take place in their company. Typically clinical studies
are out-licensed to CROs to take on the operational task of
executing the research and the staff members of the
company are not necessarily in touch with the study itself.
When the interviewees were questioned with the dilemma of
being in contact with the actual study to develop the
corporate and product brand with the investigator versus the
practicality of running the study offered by a CRO, the
following responses were obtained:
The main contact I think that should be [the company] to
ensure full branding value however for the monitoring I
do not see the need to have that done by a [the company]
person (Interviewee 3)
[Taking on trial operations is] not practical. You can still
realize the brand value without being connected at every
step (Interviewee 4)
CROs are agents of us. Companies do need to take an
active role. A company that hires a good CROs that acts as a
third party that is known for quality is a good reflection on
the company But at the end of the day we are [the
company] not [the CRO] (Interviewee 7)
I think companies will always care more about their
customers than imported vendors (Interviewee 6)
It is critical that marketing, clinical operation and medical
affairs are aligned to build and execute strategy. Each group
adds value to opinion leaders development (Interviewee 5)
Relationship marketing literature stipulates that all parts of
an organization must embrace the conversation with the
customer (Gronroos, 1994; English, 2000; MacStravic,
2000; Moller and Halinen, 2000). Therefore, if full
responsibility of the clinical study process is not practical,
the company may benefit from closer liaisons between the

departments in the company. Blacket & Harrison (2001) and
Redmond (2001) suggest that the commercial team of a
company must be involved with the clinical team to position
the vision of branding from the early phase of the products
life cycle. Several interviewees suggested:
Internally we should communicate optimally about who is
doing what with which opinion leaders but not everyone
needs to know everything. Medical affairs and marketing
should work very closely together medical education is
really a marketing tool (Interviewee 3).
If we do not have a process in place on how Medical
Affairs, Marketing and Clinical Operations should engage
we will fail (Interviewee 1)
The opinion leaders have many needs and no one can serve
all those needs. It really takes a highly unified team to
service the need of the customer. It is a combination of
marketing, medical affairs and clinical operations working
as a unified consolidated team leveraging every resource
that they can that delivers the highest value to the
customer(Interviewee 4)
Everybody needs to made aware and wear the [company]
cap... to external people we are all the one and the same.
You want to encourage everyone, as appropriate for their
role, to work with [opinion leaders] to appropriately direct
their questions and queries in a prompt fashion
everybody bears this burden. I think in industry sometimes
opportunities are lost because they are not really seeing their
role as supporting what the company as a whole is doing but
have a very siloed approach (Interviewee 7)
Why dont [companies engage in customer relations]?
Marketing drugs is immensely complex. The reasons
companies do not have joint customers relation strategies
[between departments] is that it is too complicated, people
simply do not have the time to build customer relations
(Interviewee 2)
There is thus a clear sentiment of the need for relationship
marketing, coupled with a realistic acceptance that
perfection may not be attainable due to resource
practicalities.
IV
CONCLUSIONS
In the pharmaceutical industry, corporate brand supports

product brand. Product branding of medicines or
pharmaceutical products is generally seen as an important
aspect of communication. Opinion leaders personify brand
values and augment the communication mix at all levels.
Interviewees in this study accepted the role of the opinion
leader as a communicator and as an important aspect of
brand value. So the opinion leader is a key medium to
transmit intangible faith in the product and they can do this
at all levels of the communication mix: personal, mass and
publicity.
Branding as a concept is thought to be within the companys
credo as long as its messages do not deviate from the
evidence. Product brand equity is generally felt to be built
on the initiation of good scientific questions. Corporate
branding is thought to be supportive of the product brand
and help communicate the trust that is needed to sell the

products. Corporate brand equity is built by activities that
generate respect for the company.
The outputs of clinical studies identify three aspects. Firstly,
the registration studies are generally seen as forming the
foundation of the product brand. Non-registration studies if
scientifically sound and addressing unmet needs can also be
significant contributors to brand equity. There is a natural
progression from the registration studies, where the brand is
established, to post registration studies where non-licensing
trials can continue to deliver significant brand value.
Secondly, for sound clinical studies, there is clear brand
equity to be gained from the output of studies whether they
are registered or not. Thirdly, negative outcome studies are
not necessarily detrimental to the brand as long as it is not
very unexpected. The corporate brand can indeed even
continue to be built from a negative outcome of a study that
has been conducted in a rigorous scientific fashion.
The process of a clinical study as far as the participating
physician is concerned should be a highly positive
experience and builds a close relationship between the
physician with both the product and the company. The value
that an opinion leader conveys as a communicator at all
levels can in many ways be compared to the features that
brands themselves seek to convey to its audience: faith, trust
and value. It is therefore an inescapable conclusion that the
physicians participating in clinical trials are great candidates
for opinion leader development. A negative study outcome
does not necessarily harm a product brand but a negative
study experience will. Physicians with a negative impression
of the company may convey this through peers and other
communication forms and as a result harm the product
brand.
V
LIMITATIONS OF THIS STUDY AND

FUTURE STUDY RECOMMENDED
This paper is only based on a small number of interviews.

Ideally, the target of the brand messages and the customer
should also have been questioned. A larger study could
include customer surveys on the influence of clinical study
participation on brand values and on the branding in general
of prescribing habits. It is difficult to generalize across
therapeutic indications as the benefit-risk considerations
made by physicians differ and as such the influence of
brands may vary. The nature and size of clinical studies also
varies greatly across different medical disciplines.
A clear extension of this study could include an analysis of
the types of clinical studies required for different phases of
the product life cycles. The registration studies establish the
brand, but it would be interesting to explore whether there
are different strategies of brand building through clinical
studies that might be pursued at different stages of the life
cycle. Included in this could be the consideration of patent
extension strategies. The extent to which the conduct of
clinical studies could be used to create barriers against
patent claims on new therapeutic use of a medicine is also
an important angle to explore.
Another aspect which has not been covered in this analysis
is the important question on the return of investment on

clinical studies. A strategy of multiple smaller clinical study
programs also raises the possibility of using venture capital
style portfolios in order to ensure risk is balanced across the
studies. This may also involve the building of models to
guide companies on what clinical study opportunities to take
up in terms of fit with existing corporate activities, demand
on existing resources and the contribution to corporate
goals.
VI REFERENCES
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Strategies to Increase E-Government Take-Up:

Looking Beneath Statistics
Dr. Chittoo Hemant B., Finance, University of Technology, Mauritius (UTM)
Dr. Nowbutsing Baboo. M, University of Mauritius
Abstract- E-government is about making the full range of
government activities available electronically. Essentials for egovernment are investments in Web-based electronic
government systems and telecommunication infrastructure,
with an educated population providing some obvious
advantages. Surprisingly, however, some governments with less
developed ICT infrastructure seem to have a higher level of
government online transactions than others with more
developed infrastructure. This paper examines the supply and
demand side barriers to e-government from a multidisciplinary perspective to identify the possible strategies to
overcome those barriers. It concludes that, besides investing in
ICT, it is equally important to increase the Technology
Readiness of people and ease of access to ICT, in and out of
government if e-government uptake is to be effectively
increased.
KeywordsE-government,
Technology-Readiness
I
Demand
and
Supply,
INTRODUCTION
-Government, through the adoption of Information and

Communication Technology (ICT) in government, is
being hailed as the new government of the 21st century.
Policymakers at all levels of government embrace its
promises of efficiency, better services, and more responsive
government (Cai Li-hui, 2003). However, despite this
enthusiasm, there is little agreement about what egovernment is7. For the purpose of this paper, e-government
is about making the full range of government activities
internal processes, the development of policy and services to
citizens available electronically. Electronic interactions
have astonishing potential for transforming the internal
activities of all kinds of organizations and dramatically
altering the relationships between organizations and those
who use them in particular, firms and their customers.
Information and Communication Technology is not a
supporting technology, but coincides with the primary
process and touches government at its core. Yet in many
countries the potential of web-based technologies are taking
much longer to be realized in government and in spite of
massive investments in ICT, different countries score
Whats E-Government? How Do We Do It? Government

Computer News, 23 July 2001. Based on interviews in the
U.S, the article makes clear that different people interpret egovernment in their own ways. Full transcript of the
interviews
can
be
accessed
at
http://www..gcn.com.pdf/egov.pdf
differently with regards to e-government. Why? What are

the obstacles to the development of e-government - do they
come from within government organizations themselves, or
from society? Are they ingrained in organizational structures
and societal interactions - or can they be overcome and if so,
how? This paper first briefly gives a picture of the realities
of e-government in a few selected countries. It then goes on
to review and categorize the supply and demand side
barriers to e-government, drawing on experiences from
different countries and the private sector; institutional
theory; cultural theory; social psychological research into
societal use of information and communication
technologies; and organizational research into the
relationship between such technologies and organizational
change. Finally, it considers how these barriers can be
overcome for governments to develop effective egovernment.
II
AN OVERVIEW OF E-GOVERNMENT REALITIES

IN SELECTED COUNTRIES
The tables below refer to some of the numerous egovernment reports and rankings produced by global
consultancy firms eager for government-related work and
extract some pertinent statistics. These statistics, however,
have to be treated cautiously, due to the great variation in
methodology and purpose of such reports.
Table 1 below clearly shows that the rankings achieved by
different countries as regards e-government readiness is a
clear function of their respective investments in developing
Web-based Government, investment in Telecommunications
Infrastructure and the quality of their human resources. The
low rankings of China and India are understandable by
virtue of their being developing countries with much to
catch up in terms of Web development, investment in
Telecommunications and in their human resources. The
relatively backward position of Japan vis--vis other
developed countries, however, clearly explains the
hypothesis that these 3 ingredients (i.e. investment in Webbased government, telecommunications and human
resources) being essential for any substantive progress to be
achieved for e-government to really pick up. These 3
fundamental factors together may in fact have a mutually
supportive and multiplier effect on e-government take-up
both by government departments and their citizenscustomers.
Table 1. Global E-Government Rankings 2003 for Selected Countries
Table 2. Taylor Nelson Sofres assessment by country of What is the level of government online use in 2002?
Source: Taylor Nelson Sofres (Brand Strategy, 2nd January, 2003)

Table 2 depicting the level of government online use in the
same set of countries as in table 1, also confirms the analysis
from table 1 but allows for two very interesting
observations. The first observation is that having a high
level of e-government readiness is not a guarantee to have
a proportionately high penetration of government
transactions being undertaken online .
2
The E-government Readiness Index is a composite index

comprising
the
web
measure
index,
the
telecommunications infrastructure index and the human
capital index. It shows the state of e-government readiness.
3
The Web Measure Index is a quantitative index, which
measures the aptitude of governments to employ egovernment as a tool to inform, interact, transact and
network.
4
The Telecommunication Infrastructure Index is a
composite weighted average index of primary indices based
on basic infrastructural indicators that define a countrys
ICT infrastructure capacity. These are PCs/1000 persons,
Internet Users/1000 persons, Mobile phones/1000 persons
and TVs/1000 persons.
5
The Human Capital Index is a composite index of the
adult literacy rate and combined primary, secondary and
tertiary gross enrolment ratio, with 2/3 of the weight given
to adult literacy and 1/3 to gross enrolment ration.
Even the U.S with an e-government readiness index of

nearly 1.0 has a level of government online use of only
about 43%, being surpassed by Canada and Australia which
have lower e-readiness indices. Interestingly also, a second
observation is that a countries like Canada, Netherlands,
New Zealand with e-government readiness index lower than
that of the U.K have levels of government online use 3 to 4
times than in the U.K. The point emerging is that, while
investments in Telecommunication Infrastructure and
Human Resources as well as the acquisition of ICT by
Public Sector Organizations are prerequisites for egovernment development, they will not by themselves lead
to an increase in government online transactions, and worse
so, to the transformation of public sector, which in any case
is beyond the scope of this paper.
6
Insignificant does not mean there is no e-government

transactions in China and India. In fact both have very
innovative and creative and successful projects. The
Gyandoot project in India and the Beijing Zhongguancun
e-Park are live examples of how third world countries are
excelling with the creative adoption of ICT. But they remain
only pockets of excellence as opposed to the enormous
unexploited potential of e-government.

We are therefore far from the rhetoric of e-government, like
100% government transactions to be done online or the
paperless environment that are usually commonly heard
from politicians or techno-economic utopian views on egovernment. The realities of e-government take-up seem to
confirm previous research findings like the one by Margetts
(1999) about the inadequacies of techno-determinist
approaches7. There is, however hope, as there is emerging
evidence of governments carrying out more and more of
their transactions online although there are disappointments
as in the case of the U.K. Developing countries like China
and India have more to gain by learning from the experience
from other countries. Starting late is not necessarily a bad
thing as Gao Cai (2003) rightly pointed out. China, which
has planned to invest RMB 250 billion (U.S.$ 30 billion)
annually in electronic government over the coming years
(Zhou Hong Ren8, 2004), has to make sure that this
investment does not create a stock of dormant computers in
government offices.
So what explains the disparity between e-government
readiness index and the actual level of government online
use. The answer should surely lie within government as
suppliers of electronic services and with the public as those
who demand and get involved in government transactions.
So by analyzing the supply and demand sides barriers I
intend to identify the measures that can be taken to
overcome these barriers to e-government take-up.
III
SUPPLY SIDE BARRIERS TO E-GOVERMENT
Government organizations are - to varying extents different from other types of organizations. While the
precise nature of such differences - and the extent to which
they have changed with public management reforms of the
last twenty years - might be debated - most commentators
would concur upon a general list which would include size;
the lack of a 'bottom line' in terms of threat of bankruptcy;
accountability; separation of policy and administration;
public visibility; and the monopoly of some functions. One
may expect that these characteristics could lead to
distinctive barriers to the 'supply' of e-government. In the
1950s and 1960s, in many countries, government
organizations led the field in information technology (IT)
provision but progressively slipped from that role and
have - in general - experienced more problems with largescale IT systems than other types of organization (Bellamy
and Taylor, 1998). This troubled history could shape their
approach to technology in general and to the development of
web-based technologies in particular. Apart from the
historical perspective, this section of the paper identifies a
number of 'supply-side' barriers to the development of egovernment that are particularly applicable to government
organizations. First, it identifies barriers deriving from
organizational cultures, second barriers derived from
7
Techno-determinist approaches forecast that the advance

of computers and automation would by themselves produce
pre-determined common organizational responses.

organizational values (which also foster distinctive
approaches to technology) and third, two further supply side
barriers, which seem to offer a particular challenge for
government - lack of organizational demand and channel
rivalry.
I
Bad Historical Experience With Information

Technology
The history of government information technology can lead

to a poor Information Technology culture for many
government organizations, arising from previous bad
experiences with IT projects or procurements. Such a culture
can mean that organizations approach web development in a
'fatalist' way. Previous experience of ICT projects that ran
over budget, brought few cost savings or even failed to work
altogether can lead to reluctance to invest in web-based
technologies. For example, many in the UK, National Health
Service managers were scared off entering into ICT
contracts in the 1990s after a series of high profile failures
and became increasingly reluctant to spend even budgets
already allocated. The poor reputation of National Health
Service computing led to an extremely low interest for ICT
expenditure in the sector, further exacerbating the problem
(Wainright and Waring, 2000). Such a background is
unlikely to foster an environment in which managers
explore possibilities for innovation via web-based
technologies. This barrier to e-government is ironic, because
web-based technologies tend to be cheaper and easier to
develop than earlier technologies and lend themselves to a
'build and learn' technique quite distinct from the high-risk,
big project approach most commonly applied to earlier
information and communication technologies. Organizations
that can develop a more technology-welcoming approach
will be more likely to develop the more appropriate 'trial and
error' methods as is normally the approach in the relatively
more successful Australian case (More and McGrath, 2002).
II
Response to Bad Historical Experience With

Information Technology
Alternatively, the organizational response to previous bad

experiences with IT can be a 'hands-off' approach by all staff
outside the IT department; because they do not want to have,
their careers tainted through association with any more
disasters. A common response may be a tendency to almost
completely rely on technical experts to deal with the
problems presented by technology. In such an organization,
a traditional style IT department will tend to dominate all
the agency's technological developments - including egovernment. Widespread private sector experience has
shown that traditional IT departments can be the worst unit
to lead electronic service initiatives - partly because they
have a large amount of intellectual capital invested in earlier
technologies and may be resistant to the potential of webbased technologies to render their existing expertise and
training obsolete (Davenport, 1992). Dominance of the IT
department can result in the kind of techniques used for
earlier technologies being applied inappropriately to Web-

technologies, for example, an attitude that e-government
should be delayed until some future 'big bang' release of the
organizations entire IT infrastructure - which is deemed to
necessitate the postponing of low-cost developments of the
agency Web site and learning about customers' behavior
until very high-cost IT investments have been made as is
normally the disappointing case of U.K. (Margetts, 1999) .
III
Over-Dependence on Private Sector Providers
Such Technology perverse attitude can also lead to a

different organizational response - again the organization
places complete reliance on experts but this time on a
contractual relationship with a private sector computer
services provider. This is particularly likely in UK, US,
Australian and New Zealand government organizations,
most of which have a strong relationship with at least one
major private supplier after a series of initiatives during the
1980s and 1990s, including market testing and the Private
Finance Initiative (Dunleavy et al., 2001). These
relationships or partnerships shape the context within which
departments try to develop e-government. For example,
departmental personnel can be unaccustomed to instigating
technology-based innovations themselves and they may not
know what is possible in terms of electronic services. If the
contractor is the dominant party in the relationship, then it
can be difficult for the government organization to demand
Internet-ready equipment without incurring huge additional
costs. Contracts (particularly large ones) can take years to
negotiate by which time the requirements specified in the
contract is already out of date. Technological constraints
like not being able to access the Internet from the office can
in turn shape the culture of the Department with respect to egovernment - web-based solutions are less likely to occur to
senior managers if the Internet is almost entirely absent from
their working life. In addition, there are few incentives for
companies to provide up-to-the-minute equipment when it is
not requested - particularly in the case of the large global
providers undertaking much of the systems integration and
development work for governments.9
IV
Staff Perceptions of Client Group
Perceptions of client group are also important. If staffs in an

organization view possible e-government developments with
extreme suspicion, believing that technology-induced
change will be minimal, that benefits at best will be modest
and that the safest response is to ignore it. They will be
inclined to believe that for example 'our clients don't have
access to the Internet' and therefore will be unlikely to think
of the Web site when planning how to communicate with
them. Likewise, if organizations are not accustomed to value
customer contact per se - and in general, government
organizations do not - then they are unlikely to appreciate
the new possibilities for developing government-citizen
8
Dr. Zhou Hong Ren is Deputy Director of the China

National Information Generalization Experts Committee

relationships that web-based technologies provide. In
general, government organizations tend to have a rather
fatalistic approach to thinking about what their citizens
want, partly because they do not think it is possible to find
out. In contrast, private sector companies greatly value the
potential of the Internet to provide them with information
about what electronic services their customers will and will
not use - because the alternative has always been to spend
large amounts on advertising, the benefits of which are hard
to assess and take a long time to materialize. Changes to
web based services however, can be assessed almost
immediately via easily obtainable usage statistics and the email responses of customers. Government's reluctance to
institutionalize this method of assessing the value of
electronic offerings is a clear cultural barrier to the
development of e-government and is illustrated by the
(significant) proportion of UK government departments and
agencies that do not collect usage statistics (Dunleavy and
Margetts, 2002). In the U.S. and the Netherlands, on the
other hand where electronic communications are
encouraged, the level of government online use is more
pronounced as shown in Table 2.
V
Organizational and Administrative Values of

Webers Bureaucracy
In addition to organizational cultures and their negative

effects and responses towards technology, organizational
values may work against the development of electronic
services. It has been suggested that government
organizations have distinctive administrative values (Hood,
1991), which have moved throughout the 1980s and 1990s
to what Hood calls 'sigma' type values of economy and
parsimony, where the priority is the matching of resources
to narrowly defined tasks. Although many government
organizations have changed over the last twenty years of
'New Public Management', it is still possible in most
government organizations to discern the values of formality,
uniformity, hierarchy, and robustness. These values all make
it more likely that an organization will develop a negative
approach towards technology adoption, especially by trying
to regulate against unusual occurrences. All are threatened
by, and can work against, web-based developments.
i.
VI
Formality
First, with respect to formality, widespread use of e-mail in

particular challenges formal notions of how government
correspondence should be dealt with - seeming to fall
somewhere between a telephone call and a letter, but at the
same time blurring the distinction between the two. Many
government organizations may try to treat e-mails as letters,
for example by filing all e-mails on paper. There is in any
case a widespread sense that for certain matters,
communication by e-mail is inappropriate e.g. using email to dismiss a colleague would be considered insensitive
(Spears et al, 2001: 24) - and this is a particular problem for
government organizations, which tend to see its use for

many activities inappropriate. And the informality of e-mail
addresses creates another problem - it seems unlikely that
government officials will become comfortable with the idea
that an e-mail address is 'official' enough to be appropriate
for government communications. Yet if e-mail addresses are
not seen as official, moves towards proactive service
delivery will be almost impossible to implement. Formality
as an administrative value can also lead to lack of
willingness to 'have a try' an attitude to which the 'build
and learn' nature of web-based technologies is best suited.
This cultural characteristic of civil service organizations
seems to be country specific. UK government organizations,
for instance, have a strong tendency to insist that
innovations are fully developed before they can be used
while Australian civil servants point to their own 'try it and
see' approach to technological innovation as pointed out
above.
ii. Uniformity
Uniformity is a second administrative value, which is
particularly applicable to governments. Differential levels of
Internet penetration across different societal groups and the
multi-channel approach essential to developing web
channels challenge uniformity which is the perceived need
to communicate with all citizens in the same way. A more
flexible approach, which recognizes that an initiative that
would not work with the elderly might work for students, for
example, maximizes the potential of web initiatives.
Information on the Internet can be more easily individually
targeted and personalized than other mass media (Spears et
al, 2000: 15; Cooper, 2000). The increasingly sophisticated
segmentation, targeting and customization to which webbased strategies are best suited work against uniformity.
iii.
Hierarchy
Hierarchy is the most traditional of cultural values of

government bureaucracy, its defining feature. In particular,
intranets and the sharing of information throughout
organizations can challenge hierarchies - and can only really
benefit an organization that develops a more networked
approach. ICT is distinguished by its network character.
Networks - rather than hierarchies - are the defining feature
of the Dutch government (Dutch ICT and Government
Advisory Committee, 2001: 10), which could be one reason
why government online use is more developed in the
Netherlands than in the UK. A hierarchical approach can
lead to a very centralized kind of web development. Thus
the UK health site www.nhs.uk does not make use of or
even link to the numerous useful private sector health sites,
such as www.patient.co.uk or even the excellent Web site of
the British Medical Journal at www.bmj.org - yet the whole
relationship between doctors and patients is being
challenged by citizen use of these and countless other sites
(Wainright and Waring, 2000). A hierarchical culture can
also be particularly threatened by, and develop strategies of
resistance against, the more advanced use of web-based
technologies by some pressure groups. Disabled groups, for
example, see the Internet as a major tool for challenging

policy-makers. Hierarchical approaches can also work
against one of the key benefits to be derived from egovernment - its contribution towards 'joined-up'
government. In particular, one-stop shops where citizens
receive a variety of government services have been
advocated since the 1970s - to overcome the disadvantage to
both citizens and government of data being held in several
places at once and citizens having to deal with several
departments. In the Netherlands talk is now of 'zero-stop
shops', where customers do not even visit a counter but are
reminded of their rights to a particular benefit or service by
the appropriate government agency. But cultural resistance
within departments can work against joined-up government.
In particular, in the post-NPM British and New Zealand
governments where larger departments have been broken up
into agencies, agencies as well as departments can have
difficulties working together on technology-based initiatives
- in spite of the efforts of central co-coordinating agencies
(Margetts, 1999).
iv. Robustness
Another traditional defining characteristic of government
organizations is 'robustness' (Hood, 1991). The dangers to
government sites from electronic hackers pose a particular
barrier to government's image of itself as 'robust'. There is a
perception within government that transactions with
government must be particularly secure - making the
introduction of e-government more technically difficult and
expensive than it might otherwise have been. Hence
governments all over the world tackle the design and
development of a public key infrastructure (PKI), which will
guarantee secure transactions between organizations and
individuals. The Government Gateway, for example, a
business portal for UK government currently under
development relies on the notion of digital certificates,
which organizations have to purchase in order to undertake
electronic transactions with government. The Government
Secure Intranet (GSI) provides top-level security for
officials within government to communicate -and the fact
that security levels are set so high works against some of the
potential advantages of e-government - GSI might help
'joined-up government' more, for example, if local
government personnel were able to use it too. Such
initiatives can fail to recognize those government
transactions that just do not need a level of security higher
than non-government transactions; for example, what is the
likelihood that individuals or businesses will make tax
returns on another's behalf?
VII
Lack of Organizational Demand
Lack of organizational demand can also constitute a supply

side cultural barrier to innovation - both intra-and interorganizational. In some governmental organizations, as
noted above in section 3.3, web development can be
hampered by the fact that staff themselves do not have
Internet access and cannot see their own web sites while at
work. Civil servants in some countries (for example, those

countries with higher societal rates of Internet penetration)
might find such a situation unthinkable. Although tables 1
and 2 above do not give statistics about the Scandinavian
countries Sweden, Norway, Finland, and Danemark, they
are the countries that are presently leading the world in
terms of Internet penetration and government online use.
The U.S has dropped to the 5th position (Lucas Van
Grinsven, 2004). It is indicative that countries which allow
for more easy access and use of ICT by its public officers
are performing better than others which allow more
restrictive use as is the case in the U.K.
VIII
'Channel rivalry': Competition Between Old and

New Ways
Channel rivalry has been a problem for private sector

companies seeking to introduce Web and Internet models of
selling and organization - and it is an especially important
potential barrier for government. The key cause of channel
rivalry is that people and organizations that make a good
living out of doing things one way will be understandably
reluctant to imperil their livelihoods. And in some
circumstances their resistance may be able to slow down
radically or even stop altogether the development of new
Internet-based models. Providing government services
online is like asking public officials to create new internetbased channels and put their own jobs at risks. But we do
not need to posit conscious opposition ('sabotage') by public
officials to envisage a possible channel rivalry problem in
asking a non-e-administration to become an e-agency. Only
a degree of lack of positive enthusiasm allied with a very
natural tendency for peoples fear to lose their jobs and not
want to embark on courses of action that are unfamiliar can
become big obstacles. For the channel, rivalry problem in
government to become so severe that progress on egovernment slows to a crawl it may only be necessary for
officials to show a degree of reluctance and lack of
initiative. Research by Dunleavy and Margetts in the U.K
(2002) has shown that key symptoms of this kind of reaction
could be several or all of the following:
i. A general reluctance to experiment with e-based
methods of delivery, until and unless the agency is
conspicuously 'lagging' behind other agencies;
ii. Tendency to find reasons for inaction and for
exaggerated risk-averse behavior on Internet or
Web issues;
iii. An unwillingness to divert resources from
established ways of doing things to developing
Internet communications or transactions;
iv. A tendency to regard putting services on the
Internet as something that must be added on to all
the activities that the agency does already;
v. A related attitude that any progress on egovernment demands the commitment of
accompanying additional resources by the
government or by higher-tier agencies, without
which nothing can be done;
vi. An attitude that no e-government innovation at all
can be responsibly entered into until the clearest

possible financial case for it can be made, including
a high rate of return, but without making any effort
to map the consequences of not developing Web or
Internet-based interactions, to cost the risk of
growing obsolescence in the agency's IT
infrastructure, or methods of working, or to see that
a reluctance to develop e-government can lead to a
cumulative lag in the agency's progress;
vii. A chronic refusal to calculate the marginal costs of
dealing with clients via office visits, or via letters
and correspondence, or via phone calls and call
centers, compared with the marginal costs of
Internet or Web-based interactions. This stance is
usually justified by the claim that since these other
modes of interaction are required by law or are
already established they cannot be reduced or run
down in any way in favor of Web- or Internetbased interactions.
viii. An insistence that because of some unique feature
of the agency's business its methods of working can
become seriously out of line with those used in
other agencies or related areas of the private sector;
and
ix. A belief that methods of working in electronic
services delivery will soon 'settle down', allowing
laggard agencies to catch up with the current
leaders in a once-and-for-all and low cost way or
that e-government is a 'fashion' that will soon pass.
IV
DEMAND SIDE BARRIERS
E-government services will not justify the investment if

citizens do not use them and as Kester et al. (1997) so
rightly assert, the success of a system is always in the hands
of its users. Clearly, not all barriers to the development of
e-government come from within government organizations.
In society, there is inevitably a resistance to using the
Internet in general and government offerings on the Internet
in particular. Hayday (2003) even notes that such uptake is
unlikely to be reality until todays tech-literate younger
generation grows up. Issues such as ability to use ICT,
access, affordability, and trust in e-government have direct
bearing on societys propensity to use ICT in their dealings
with government. This section goes on to identify demand
side' barriers to e-government.
A. Social Exclusion and the Digital Divide
The most obvious cultural barrier to e-government from the
demand side is the problem of social exclusion caused by
the problem of unequal access to the Internet per se. Even
while Internet penetration continues to rise across all social
groups, the 'digital divide' between those with Internet
access and those without seems to be widening; the latest
release of the US Department of Commerce's survey 'Falling
Through the Net' (2001) suggest that the digital divide
between rich and poor, white and non-white, well-educated
and poorly educated, has widened significantly during the
last five years. Some have argued that an e-elite (Castells,

1996) is emerging as well as an e-underclass (e-Economist,
24 June 2000), which replicate those of non-Internet society.
The e-underclass may end up believing either that egovernment initiatives will make no difference to them, or
that they will have some kind of damaging effect. And there
is evidence that on the web, previously marginal groups may
continue to be marginalized when they are connected
(Burrows, 2000; Spears et al, 2000; Thomas and Wyatt,
2001). All these characteristics of the Internet society have
the potential to work against e-government - particularly as
those groups with whom government organizations deal are
often the most likely to be excluded.

1999). This level of trust (comparable to levels in France
and Germany but 25 per cent lower than in the Netherlands)
surely shapes the extent to which citizens trust an 'egovernment'. Even in the U.S. which is normally viewed as
the country with the most sophisticated privacy laws just
witnessed Congressmen improperly accessing 4, 700
personal files of their Democrat counterparts (Ferraro,
2004). Where individuals are accustomed to a conflictual,
inflexible relationship with a government organization on
paper, they are likely to expect that an electronic version of
the organization will be the same and are likely to be less
willing to divulge information electronically than they
would be to their bank, for example.
B. Inability to Use ICT Competently

E-government initiatives have to be capable of
domestication (i.e. being harnessed). Social psychological
research into how people accept technological innovations
show that innovations that cannot be domesticated into
personal, everyday routines, are unlikely to be used (Frissen,
2001)). E-mail, described by many commentators, as 'the
killer application' is a good example of a technology that has
been domesticated and is being used on a widespread basis.
In contrast, although many households in developed
countries contain PCs with a wide range of applications, in
the majority of households most of these applications
remain used and have not been domesticated. Many
innovations just do not have this domestication potential. A
look by anyone around himself will show that many
educated people can use the PC only for routine typing and
normally they cannot use the full potential of the technology
at hand. If educated people find it difficult to domesticate
technology, the problem is logically more pronounced for
people with less education and who may be in more need of
government services. Lifelong guaranteed employment in
public sector organizations may also not motivate public
officers to upgrade their technological proficiency level.
C. Low Citizen Expectation and Trust in Government
Citizens'
existing
relationship
with
government
organizations will obviously affect their approach to egovernment services offered by that organization. If they
have a low expectations from a government organization then they will not look for that organization on the Internet
and will continue to use traditional methods to deal with it.
Low expectations can be further lowered by early, bad web
sites with very limited functionality, which make it even less
likely that citizens will look for such services on the web in
the future. Likewise, if citizens do not trust government
organizations in general, they are less likely to want to
transfer information to government electronically and less
likely to believe information that the government transmits
electronically. In the UK, trust in national government is
low in comparison with other institutions: in 1999, 41 per
cent of respondents said that they trusted the national
government when presented to them in a list of institutions,
whereas 71 per cent said that they trusted television and 67
per cent that they trusted the radio (Euro barometer, Spring
D. Solemnity of Government
Government Exclusion
Web
Sites
and
`Solemnity (i.e. the state of being very formal) is another

characteristic that can pose a problem to web development.
In some cultural contexts there is an automatic association
of the Internet and web-based technologies with fun or
enjoyment. As one marketing consultant put it, Japanese
people buy more gadgets than in any other nation because
'technology has been translated into enjoyment in Japan for
many years' and mobile telephones are marketed to
schoolgirls as fashion jewelry. Officials in the city
government of Amsterdam, one of the more advanced of
Dutch municipalities in terms of e-government, stressed 'fun'
as the most important design element of their web services.
But belief in seriousness - rather than fun - runs straight
through virtually all UK government organizations'
approach to the Web. Government sites are conservatively
designed, use bureaucratic language and contain no
incentives other than strict functionality for users to explore
the site. Seriousness as opposed to fun web sites could be
one of the factors that encourage or discourage Web site
visits and may be account for more government online use
in some countries than in others. Along the same line,
governments may, by trying to have everything of their own
forego the opportunity to take the goodwill of already
established Websites, and better-known to the public. Non
Governmental Organizations Web sites, for instance, may be
better-known by the public than a new Government
Website. There should no harm that government tries to
reach its audience through such web sites instead of being
completely ignored by the public.
E. Unclear Citizen Benefits
There must be clear citizen benefits for what is being
offered electronically - citizens have to need or want it and
see clear benefits for using electronic media rather than
more traditional means of communication or transacting.
Government organizations may interpret low usage figures
as sign of low demand for electronic services - but they are
more likely to signify lack of demand for the given service
in particular (or a badly designed website). During a recent
housing shortage in Amsterdam, one of the social housing
corporations put all available homes on the Internet - and

immediately received 30,000 hits a day. After one week,
they had to put advertisements on the TV to say the servers
were overloaded. When the demographics of users were
analyzed, there was no difference found between poor/rich,
ethnic minorities, low/high education - only in age.
Evidence like this suggests that where citizens really want
something, they are willing to try electronic communication.
In Singapore, on the other hand, the government passes on
some of the savings made from electronic transactions by
lowering the cost of fees to citizens (IDA, 2003). Of course
one has to be careful, because Singapore is a not a full
liberal democracy in the proper sense of the word. If
however, services are not available, another barrier to their
development might be a lack of proactively 'demanding'
citizens. In countries with high rates of Internet penetration,
government organizations may be under more societal
pressure to provide services electronically. Therefore,
increasing Internet penetration could well be a strategy to
increase pressure for government to offer their services
online.
F. High Transaction Costs of Change
The transaction costs of change, of transition to using an
electronic medium, can create a strong initial barrier for
citizens to adopt electronic communication with
government. For people to change an established way of
doing something (such as filing a paper income tax form)
and instead to adopt a new technology or channel of
communication (such as sending in an electronic tax form)
there is a substantial immediate cost - the cost of finding
relevant information, the time and possibly frustration costs
of learning a new way of doing things, the cost of putting
right any mistakes produced by unfamiliarity, and so on.
Studies of human behavior have repeatedly shown that very
small, up-front transaction costs like these may stop people
from making an investment of time or energy that would
pay them back many times over in the slightly longer run.
Once electronic services have been introduced and are being
used, government agencies also need to look out for possible
costs or 'negative incentives' that can result from disparities
developing between electronic and non-electronic service
delivery. For example in the US, electronic filing of taxes
actually fell by 3 per cent during 2000-2001, as taxpayers
became aware that electronically filed forms were
scrutinized more thoroughly than those filed in paper form.
Such disparities clearly work against citizen benefits from
electronic initiatives and can make citizens more reluctant to
enter into electronic transactions.
V

A. Incentives to Staff
Incentives for change are important for staff, in order to
overcome the channel-rivalry problem (section 3.7 above).
Where non-electronic means of administration are still
predominant, then it is important to recognize that existing
staff can see their whole future as bound up in the
continuation of paper-based systems of administration.
Older staff and perhaps staff in the most senior positions can
especially feel threatened if large-scale changes of work
practices are in prospect, perhaps feeling that they are 'too
old to change their ways now', and also finding Web and
Internet based models of administration unfamiliar and
technically threatening. Even if staff have assurances of job
security or any downsizing in staff taking place through
voluntary redundancies or natural wastage, it is important to
appreciate that an organization transitioning towards a 'fully
digital' model will not be the same. The systems of control,
the hierarchy of management roles, the kinds of people who
rise to the top - all these may change quite quickly. This
may mean improvements in job satisfaction for many.
Private sector experience has shown that moving to
electronic processes can remove routine tasks while
allowing staffs that remain to become more skilled - but
such changes have to be carefully presented.
B. Show Benefits to Citizens
Likewise, citizen benefits of e-government can be
maximized by using incentives to encourage citizen uptake
of electronic services. If government can cut costs by
delivering services electronically, it must seek to pass on as
much of that cost-reduction as feasible to citizens - which in
turn may increase take up, and further reduce the cost of
government service delivery. To achieve this spiral,
government organizations needs not just to look to save
money itself but to add incentives that help citizens
overcome the considerable change or transition costs of
learning how to do something electronically. Financial
incentives can be offered for citizens to file taxes
electronically. In the Netherlands and Singapore, for
instance, taxpayers are promised any refund by a certain
date if they file via the Internet. Such incentives have to be
realistically designed so that they really are incentives - if
financial incentives are offset by additional expenses (such
as buying appropriate security measures, like digital
certificates) then they may obviously not work.
C. Organizations Should Be
Transition Costs
Ready
for Initial
OVERCOMING BARRIERS TO E-GOVERNMENT
Identification of barriers is one step towards e-government the second is, of course, to overcome them. Overcoming
barriers may have to involve tackling the barriers at the
heart of resistance to e-government. This section includes
some suggestions for ways round the obstacles outlined
above.
To overcome the initial barrier of transaction costs (section

4.6), the introduction of incentives may need to follow
private sector business models and practices, recognize
explicitly that there are transaction and transition costs and
then plan in an active way to overcome them. For instance,
when banks introduced new technologies, they ran special
campaigns in which staff take people through in a personal
way how to use the new arrangements, whether ATM

machines, or phone/correspondence based accounts without
counter service, or Internet banking. Another similar
example concerns airlines trying to get passengers to use
automatic ticketing and check-in machines in order to cut
queuing times and allow them to cut down on staff costs of
operating so many check-in desks. Even though passengers
who make the transition will be much better off, people may
be very reluctant or unsure whether they can switch and
need counseling and active help to do so. So agencies may
need to go through a higher cost transition phase in the short
term, with more personal interactions with customers by
staff or more extended average interactions for a time, in
order to be able to reap the longer term advantages of
electronic interactions.
D. Bridging the Digital Divide and Increasing Social
Inclusion
With regard to the question of unequal access to the Internet
and therefore the possible 'social exclusion' barrier to egovernment (section 3.1), central government has to think
hard about ways of widening Internet access in general
through centrally sponsored local initiatives or otherwise.
Important is to make ICT accessible to sections of the
population who otherwise on their own can never afford
same, either because of cost, illiteracy, fear of new
technology etc. Having an intermediate level of egovernment may also be a plausible solution in developing
countries where the masses are still illiterate. In Brazil for
instance, there are mobile government offices fully equipped
with ICT and they move from one village to another
allowing people to engage in online transactions through
public officers operating these mobile vehicles. There
hundreds of such creative solutions being used around the
world and which can be accessed in the E-Government
Handbook for Developing Countries (Khalil et al.,, 2002).
E. Overcoming Solemnity of Government Websites
Solemnity (4.4) of government web sites might be overcome
by a more casual approach to Internet use within
organizations. Many government organizations (particularly
in the UK) insist that their employees do not use the Internet
for any kind of non-government use, which in the case of
some departments can apply to almost all sites (one
department, for example, prohibits its employees from using
sites connected with travel, leisure, sport, entertainment of
any kind and indeed the overwhelming majority of nongovernment sites) (Dunleavy and Margetts, 2002 ). Yet
creativity can be required to develop web-based solutions to
government problems and it may be that organizations full
of staff actively using the Internet may be better placed to
think in this way. For this reason, when the intranet of the
Australian social security organization, Counterpoint,
crashed after a significant proportion of employees were
checking cricket scores on the ABC network during a
crucial match, it was interpreted as a positive indication that
staff were using the intranet (Broughton and Chalmers,
2001). Such a positive attitude to Internet use by staff might

actually encourage a more technology positive attitude and
contribute to development of e-government. To successfully
develop Internet services, the Internet has to 'embedded' into
everything the organization does. If we want technology to
be domesticated allowing freer use of ICT rather than
controlling their use may be advisable.
F. Overcoming Government Exclusion
Finally, in order to overcome the 'government exclusion'
barrier, government organizations have to think creatively
about increasing their 'nodality' - the extent to which they
are at the center of social and informational networks
(Hood, 1983). This may actually require a substantive
change to thinking about web development - rather than
focusing on their own Web site, organizations might have to
think in a 'de-centered way' about the extent to which their
services are offered on the sites of other organizations. So an
environmental agency that gives advice on sustainable
products might need to liaise with a variety of retailers to
ensure that their information is presented. In the same way,
to make innovations acceptable to citizens, government
organizations have to develop ways of understanding how
citizens use the Internet, what they use it for, what underpins
societal myths about technology - and what innovations
could be 'domesticated' (see 4.2). This kind of thinking
about web development can mean overcoming the barriers
of hierarchy and formality and accepting that a centralized
and controlling strategy may not make the most of what the
Internet has to offer.
VI
CONCLUSIONS
The tools of e-government have created a new technological

environment for both citizens and governments. Different
institutions and societal groups - with different
organizational cultures - will have different cultural
responses to the possibilities that these new technologies
provide. As Hood (1998: 199) put it, 'a cultural theory
analysis suggests that any given technological change can
lend itself to very divergent visions of social modernization'.
This paper supports that claim and makes clear the
inadequacy of techno-determinist approaches that forecast
that, in and of themselves, the advance of computers and
automation would produce pre-determined and common
organizational responses.
The point made in this paper is that investment in
Telecommunication infrastructure and Human Resources as
well as the acquisition of ICT by Public Sector
Organizations are pre-requisites for the development of egovernment. They are, however inadequate, in that they will
not by themselves lead to an increase in government online
transactions. What may be required are strategies to
overcome the institutional, organizational, cultural, social,
and psychological barriers to e-government both in and out
of government. The greatest resistance or barrier remains
people leading some researchers to claim that the potential
of e-government can only be tapped when the present
technology-savvy generation takes over from the old and

present generations of public officers and citizens. I disagree
with this overly pessimistic view.
What may be required is to increase the Technology
Readiness of public officers and citizens alike. By
Technology Readiness I mean peoples propensity to
embrace and use new technologies for accomplishing goals
in home life and at work. People as consumers
simultaneously harbor favorable and unfavorable views of
technology, and the relative dominance of favorable will
vary across individuals. Peoples/Consumers propensity to
embrace technology may vary widely, resulting from an
interplay between drivers (optimism, innovativeness) and
inhibitors (discomfort, insecurity) of technology readiness.
Indications are that massive investments will be required not
only in physical ICT infrastructure, but also in terms
education and training of both public officers within
government and of citizens outside government. IT literacy
may not be adequate. What may be required are IT
proficient public officers and citizens. Increased access to
ICT by the largest possible number of people is another very
important strategy increasing the number of access points,
decreasing cost of access, increasing the number of people
having access and also the ease with which access may be
obtained, may be important ingredients. We may very well
be in a process of social re-engineering of government and
society/citizens in trying to increase the uptake of egovernment by increasing the Technological Readiness of
the population of a country and its access to ICT.
VII
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
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The Innovation Process under the View

Denise Barros de Azevedo1 Eugnio vila Pedrozo2 and Guilherme Cunha Malafaia3
Abstract- This essay demonstrates the interaction between
the innovation process and stakeholders based on the principle
of sustainable development. The goal is to verify to which point
the pressure of stakeholders generates innovations, as well as to
investigate how the stakeholders power of influence in the
innovation management process works. As a conclusion, it
became possible to review all the concepts of sustainable
development in search for sustainable products. It could also
be noticed that when integrating sustainable development and
innovation, values are created that insert the logic of
environmental thought to sustain the results in a short,
medium and long term for different stakeholders.
Keywords- Stakeholders, Innovation Process, Sustainable

Development.
I
INTRODUCTION
he term stakeholders has been used to identify the main

agents responsible for the strategies of innovation and
changes in organizations, as well as to try to understand how
they use their power to make the changes and innovations
socially legitimate. Since then, there have been many
indicatives that the stakeholders possess great potential to
influence the environment as well as the organizational
structure according to the nature of the institutional context
and the available resources (Freeman, 1984). Stoner and
Freeman (1989, p.46) also affirm that the survival of the
firm frequently depends on the ability of the stakeholders to
adapt to the changes that have occurred in the world around
them. However, the stakeholders have substantially changed
in the last years.
8
PhD.Student - Post Graduate Program Center for Research and

Studies in Agribusiness (PPGA/CEPAN) at the Federal University
of Rio Grande do Sul (UFRGS) Porto Alegre RS. CNPQ
Bursary. Group Studies in Organizations Member (GESTOR).Ms
Rural Economic.E-mail: deniazevedo@hotmail.com. Street
Washington Luis, 855. Centro.Cep 90010-460. Porto Alegre-RS,
Brazil. FONE/FAX: 55 51 3308 3727-3484
2
Director of Post Graduate Program Center for Research and
Studies in Agribusiness (PPGA/CEPAN) and Professor of Post
Graduate Program, School of Management (PPGA/EA) at the
Federal University of Rio Grande do Sul (UFRGS) Porto Alegre
RS. Coordinator of Group Studies in Organizations (GESTOR).Email:
eapedrozo@ea.ufrgs.br. Street Washington Luis,855.
Centro.Cep 90010-460. Porto Alegre-RS, Brazil. FONE/FAX: 55
51 3308 3727-3484
3
PhD in Agribusiness. Lecturer at University of Caxias do Sul
(UCS)- Post Graduate Program in Management - Brazil . E-mail:
gcmalafaia@gmail.com Caxias do Sul-RS,Brazil.
9
Electronic Data Serives (EDS) is an American company,

the biggest multinational company in the world providing
government services on a contractual basis. See
www.eds.com for facts about the company
Innovation also involves the creation of habits and structural

arrangements as well as the formalization of policies and
procedures (Tolbert and Zucker, 1983:2001;Meyer and
Rowan, 1991; Bunn et Al,2002; Weisenfeld, 2003; Hall and
Martin, 2005). An innovation process also comprehends
meanders in which it can become accepted and exercised not
only due to its own merits but also due to the influence of
powerful actors interested in them and due to creative
initiatives led by institutional entrepreneurs with their own
styles and approaches imbued with great discipline, ability
to take risks and concrete implementation perspectives
(Landberg and Simeone, 2002).
According to Probst et al. (2002), changes destabilize and
threat old norms and beliefs that must be sacrificed before
any certainty that the new solution will work out. For these
authors, this issue regards the fact that innovations change
the power structures because they change traditional abilities
and strengthen the positions of those who new abilities.
Contrary interests or defensive expectations in relation to
the innovation are predictable and therefore natural, being
that it is not surprising that they delay the formulation and
development of new ideas (Probst et. al., 2002: p. 111).
Companies are going through a moment of redefinition of
their capabilities. Innovation companies focus their model of
change in their immersed, monitored and reinforced
environments and opportunities and then explore their
competitive advantages. These changes have caused strong
impacts to the companies development to create their
strategies. Along with the new rules of the game, demands
for new approaches of company management in their
strategic capabilities and innovations are emerging. A new
market of opportunities has emerged and the companies
need to learn how to clear out their old capabilities and have
more innovations in the path that succeeds the capture of
new opportunities for competition (Birchall and Tovstiga,
2002).
On the other hand, it is reasonable to consider that firms that
face great uncertainties, despite the fact that they face high
rates of technological changes, must anticipate and favor the
adoption of arrangements that are characteristic of organic
forms, adopting more flexible, decentralized and less formal
patterns, although with this they face resistance to the
appearance of organizational formats that challenge the
status quo (Laursen and Mahnke, 2001).
The IBIE (Instituto Brasileiro de Intra-Empreendorismo), an
institute that promotes corporative enterpreneurism has
listened to around 5000 employees and verified that the
factors that most stimulate innovation in companies are:
34% personal satisfaction, 22% company image and growth,
17% possibility to facilitate their own work, 12% moral
recognition from bosses and teammates, 9% salary increase,
6% job promotion (IBIE, 2007). It can be observed that the

factors related to human issues are much stronger than other
elements.
The concept of Sustainable Development was developed due
to the acknowledgement of an increase of the environmental
problems and their relations with social-economic issues
such as poverty and inequality in face of the need to assure a
healthy future for humanity. The 1980 Brundtland Report
can be considered the milestone of this consciousnessraising. In this report, the need to develop in the present
without compromising the resources available to attend the
needs of future generations (anthropocentric concept) is
observed. The ecological problems are not local, but global,
in a way that the actions and impacts should be considered
internationally. Many authors consider the discussion of
environmental conservation and economic growth extremely
ambiguous (Opwood et al., 2005).
It can be verified in sustainable development that there is a
process of integration of environmental criteria in the
economic practice in order to guarantee that the strategic
plans of organizations satisfy the need of continuous growth
and evolution and at the same time conserve the natural
capital for the future. It is about not only air pollution,
depletion of the ozone layer, water conservation, use of raw
material and residue management but also about a truly
international problem which affects transactions cross
borders, commerce, finances and political agendas (Gilbert,
1995).
When searching for new ways to interact with sustainability,
the companies discover new forms of competition by using
innovation and sustainable development as strategic tools.
At the same time, the stakeholders pressures are making the
companies seek this interaction between sustainability and
competitivity.
The goal of this essay is to verify to which point the
stakeholders pressure generates innovations, as well as to
investigate the stakeholders influence power in the
innovation management process. It is also an objective of
this essay to verify how sustainable development can
provide elements for the innovation process and stakeholder
satisfaction in a highly competitive market.
Along with this introduction, the article will present at first a
bibliographical review of the stakeholder approaches. In the
second part of the article, a discussion of the innovation
process will be presented and in the third part, a view of
sustainable development. In the fourth part, the construction
of the related interconnections between Stakeholders,
Innovation Process, and Sustainable Development will be
carried out. And at last, the article will present its final
considerations.
II
IDENTIFYING THE STAKEHOLDERS
The Introduction to the Stakeholder Theory was first

developed by Freeman in 1984 in his work entitled Strategic
Management: A Stakeholder Approach, in which he
declares that the same is originated by the Firm Theory. He
explained the relations between firms, the external
environment, and the behavior of the firms without contact
with the environment. He then delimitated the space of

social responsibility to a more restricted dimension with the
following definition of Stakeholder: it includes any group or
individual who can affect or is affected by the organizational
goals. Therefore, this opens space for any one who can
affect or is affected by the organization, creating an infinite
possibility for the action of stakeholders, for even climatic
factors exercise this role (Mitchel et al., 1997; Key, 1999;
Freeman, 1984).
The studies about stakeholders were presented from several
different perspectives. The basic difference among them is
the degree of importance given to the organizations. There
are two main lines of thought. Atkinson, Waterhouse and
Well (1984), Shankam (1999) and Berman et al. (1999)
define the importance of the stakeholder through the degree
of its contribution to the organizational performance. On the
other hand, Freeman (1984), Donaldson and Preston (1995),
Jones (1995), Metcalfe (1998) and Moore (1999), affirm
that the goal of the companies is to attend to its
stakeholders interests.
Freeman indicates that the term stakeholder intends to
generalize the notion of the shareholder as the only group to
whom the management has to respond to. He also affirms
that the modern organization is affected by a great number
of powers. These powers comprehend shareholders,
partners, clients, employees, suppliers and the management
(Freeman, 1984), which are frequently consulted by the
stakeholders. These groups characteristics are vital for the
survival and success of the organization. The list of
stakeholders can be easily increased by other possible
stakeholders (secondary) such as the local community, the
mediums, the government, groups with special interests, the
general public, and society. When some of these groups are
not formally part of the organization, they affect or are
affected by its internal policies and external behavior. From
this observation, the author derives the managers
responsibility in verifying the interests of different clients,
or in other words, every group or individual that is affected
by or affects the organization in search of their objectives.
The concept of stakeholders includes what the administrated
know, think, and are generally important for the
organization. This is the function of the administrator, since
the stakeholders can be used to enrich the comprehension of
these strategic tasks. Managers and researchers can use and
comprehend the stakeholders through strategic questions in
turbulent environments in which many multinationals have
to operate in nowadays (Freeman, 1984).
Therefore, the attempts of many researchers to entirely
define the stakeholder theory require certain attention
because it is a misguided theory (Freeman, 1984, p. 413).
The managerial version of the stakeholder theory is
particularly influenceable. This version affirms that the role
of management is to gather information regarding the
interests of all individuals and groups, which without their
interests the organization would cease to exist.
In todays tougher and tougher markets, the innovation
process is an instrument that the organizations and the
stakeholders are using to establish competitive advantages.

III
THE INNOVATION PROCESS
The perspective of the interactive innovation process has

obtained greater popularity in recent years because it
investigates the nature of the innovation process by
examining how the innovations emerge, develop, grow, and
finish as well as how the nature of the relations between
producers, users, and institutions occur. Innovation
represents more and more the development and
implementation of new ideas by people and organizations
that have transactions with different stakeholders. Such
interpretations reflect the growing interest in the processes
by which the ideas and practices are created, developed and
reinvented (Slappendel, 1996). The interactive perspective
of innovation is the base for many conceptual elaborations
related to the innovation process. It considers the increase of
complexity, the importance of external knowledge sources
and the intra and inter-institutional relations for the success
of the innovation. Some models are considered references in
this area, as is the case of those that deal with the national
innovation system (Lundvall, 1992), local innovation
systems (Cassiolato and Lastres, 1999) and those related to
production chains, clusters and company networks (Porter,
1998).
Innovation is defined as the development and
implementation of new ideas by people committed
throughout time in transactions with other people inside an
institutional order. This definition is focused on four basic
factors, which are: new ideas, people, transactions and the
institutional context. A comprehension of how these factors
are related leads to the four basic problems faced by the
administrators: a) a human problem to manager the
attention; b) a problem in the process of administrating new
ideas; c) a structural problem to entirely administer the
relationships; d) a strategic problem of institutional
leadership. This article discusses these four basic problems
and concludes suggesting how together they can form a
structure to guide longitudinal studies of innovation
administration (Van de Ven, 1986).
Regarding the stages of an innovative process, the first
refers to the recognition of opportunities. After a potential
opportunity is observed, the formulation of an idea occurs.
By formulating an idea, it is sought to solve a problem by
placing it in practice through the development of a prototype
in order to then commercially develop and diffuse it, putting
this new technology in use.
The key to this process is the research for answers to
different managerial questions faced in each of the different
phases. For example, in the initial phase, a good
management experience involves a looser control so that
several ideas can be elaborated while in the final stage,
which involves the coordination of innumerable engineers
with different backgrounds a more rigid control becomes
necessary. Therefore, opposite management forms are
necessary depending on the phase of the process (Robert,
1988).
It can still be affirmed that an inventor does not invent
anything, for he uses the training, culture, intuition,
experience, and background that allow him to recognize a

need. Many times a necessity exists without being perceived
and will only be perceived once there is a problem. The
capability to create a problem with the appropriate solution
is a greater invention than merely solving an existing
problem.
Henderson and Clark (1990) present a structure with four
different types of innovation and their impacts on the
competitive capacity of the organizations. The authors
characterize the types of innovations as: a) Incremental
Innovation; b) Radical Innovation and c) Architectural
Innovation. The authors also point out that the innovations
can generate impacts along the value chain, differently
affecting the different stakeholders, and propose the
Innovation Hypercube. The vertical axis allows the
classification of the innovations as radical (4), architectonic
(3), modular (2) and incremental (1) and the horizontal axis
allows the identification of the impacts of these innovations
in the different agents of the aggregated value chain.
Studies such as those of Green and Vergragt, 2002; Bunn
and Savage, 2002;Walter(2002); Lethonen (2004); Gao and
Zhang (2006); Silva and Lezano .(2005) affirm that the
collective initiatives allied with the principles of sustainable
development are related to the nature of the human being,
work and society, inside a new perspective of economy,
being that economical globalization allows the demands of
the stakeholders to gain relevance as emerging demands
such as the need pf political and private interventions that
accompany the growth of implications of the environment in
the lives of the stakeholders.
IV
SUSTAINABLE DEVELOPMENT
The principles of sustainable development involve the

process of integrating environmental criteria in the
economic practice in order to guarantee that the
organizations strategic plans satisfy the needs of continuous
growth and evolution and at the same time conserve the
natural capital for the future. It is not only about air
pollution, depletion of the ozone layer, water conservation,
the use of raw material and residue management; it is also
about a truly international problem that affects the
transactions and crosses borders, commerce, finances and
political agendas.
The Brundtland propositions include changes in the quality
of growth and incorporation of the environmental issue in
the decision-making processes. However, such objectives
have not been reached and the fact that economic interests
always win when confronted with environmental interests
can be verified (Banerjee, 1999).
Considering the variety of definitions for sustainable
development, Mebratu (1998) summarizes the versions in
three groups: institutional, ideological and academic, in his
search to answer the following questions: a) what can be
identified as the source of the crisis?; b) what is the central
approach to this solution?; c) what is the proposed solution
platform?; d) what is the key instrument for the solution?; i)
Institutional version the three institutions are based on the
satisfaction of needs; ii) Ideological version presents three
ideologies (eco-theology, eco-feminism and eco-socialism)

and iii) Academic version the conceptualizations of
disciplines such as economy, ecology and sociology reflect
the response the scientific community gives to the
challenges of the 21st century environmental crisis.
In contrast, the organizations that have chosen as target
niches segments of the green market can be requested to
significantly modify their environmental activities through a
wide range of functional areas. Although many
organizations view the governments requisites to become
green as a restriction, organizations that think ahead view
this as an opportunity to preserve a sustainable competitive
advantage (Porter, 1998; Van der Linde, 1995).
This issue is restricted to the study of sustainable
development under the environmental perspective.
V
INTERCONNECTIONS BETWEEN STAKEHOLDERS,

INNOVATION PROCESS AND SUSTAINABLE
DEVELOPMENT
Innovation is perceived as a process of Discover and

Development that creates new products, production
processes, organizations, technologies, institutional systems,
and arrangements. Innovation is an inventive process
applied to new ideas. The result of innovation has an
economic meaning. Van Kleef and Roome (2007) argue that
innovation is not necessarily related to solving problems, but
is usually related to the improvement of the economic and
competitive success and this is carried out by technology.
However, the innovation process can be seen as a sequence
of exploration through research. The same author states that
the Firm Theory is too limited for the Innovation Theory.
In case of orientation problems, the diversity of actors is
important to help identify and specify the necessary
objectives to be conducted by the innovation. This is the
intention of progress that, through a sustainable action,
involves collective problems, development of future
perspective systems and other necessary innovations to
reach these perspectives. These steps can be taken in the
beginning of the innovation processes by using actors such
as consumers, suppliers, NGOs and other stakeholders
(Rome, 2001; Garcia and Vredenburg, 2003). Networks of
actors can be created through a combined platform to
exchange ideas and information. These platforms can be
selected as opportunities to create and discuss sustainable
objectives (Roome, 2001). The strategy that allows the
company to guide or participate of these platforms is
consistent with the creation of competitive advantages and
can help the companies acquire legitimacy trough
transparency and the collaboration of the external
stakeholders (Hart, 1995).
Through sustainability, the participation of many
stakeholders can be organized, especially people involved in
the location through networks expanded in organizational
levels (Shilling and Osha, 2003). The stakeholders are
shifting from the traditional reunion with the public format
to methods that involve relatively intensive small groups
and offer collaborations based in general consensus with the
group. Considering that the term stakeholders denotes a
gap, it is much more personalized in the public decisions

than its predecessors. It can still be noticed that the
stakeholders contain more evidences and provide better
decisions, contributing with new technologies and ideas and
using technical resources in their decision-making
processes. There is logic between capturing stakeholder
information and translating it in innovations that can propel
the companies. Such innovations can preserve the
stakeholders preferences and satisfactions.
Technology should interact with the interests of the relations
of different stakeholders. With propositions concerning
social responsibility parting from the stakeholders, the study
about the relations between society and organizations gain a
new dimension. Table 1 demonstrates the connections
between Stakeholders, Innovation Process and Sustainable
Development in a way that 4 types of common factors can
be perceived: agents, strategies, product management and
change process.
There is a natural link between the conception of
stakeholders in the companies and the strategical-cultural
formulations. In order for innovation and stakeholders to
interact, it becomes necessary to visualize the pluralistic
point of view of the organization: the supposition that the
stakeholders are attracted to the organization for the
satisfaction of personal aspirations and the reason different
people desire different things for the organizations, once
conflicts and policies are natural aspects of the
organizations life.
Once the power of the stakeholders is understood, it can be
noticed that this particular development helps the leaders
emphasize the pertinent gains or losses. This assists in
clearly noticing the development of the intensity of how
people adhere their positions toward the changes.
Conceptually, to develop products consists in carrying out a
range of activities by which, through the needs of the market
and the technological possibilities and restrictions and
considering the companys competitive and product
strategies, it is sought to obtain products that the
organization has the conditions to fabricate (Rozenfeld et
al., 2005). This process is extended until the post-release of
the product with the objective of obtaining information that
improves the project of a given product and the production
process common to other developments, which foments the
post-project learning process (Clark and Wheelwright,
1993). For this reason, Mundim et al. (2002) affirms that
product development is one of the most complex
organizational processes and can be related with practically
every other managerial function.
Authors such as Berry and Rondinelli (1998) and Marjolijn
et al. (2001) demonstrate the importance of sustainable
development as a change of strategic principles in
organizations. Environmental sustainability and the need to
protect the environment and conserve natural resources are
now a value comprised by more competitive and prosperous
multinational companies. Seeking to face the environmental
crisis, society has to deal with a continuous flow of
information, knowledge and interest perception regarding
the environmental problems as well as options of solution.
Therefore, the search for environmental sustainability is a
Table 1. Interaction between Stakeholders, Innovation and Sustainable Development.

Factors
Stakeholders
Innovation Process
Sustainable Development
Agents
- Main agents to develop

strategies with the decision.
- Influences environments.
- Environmental changes
through the agents.
Strategies
Development
and
implementation of new ideas
from the stakeholders.
- Transaction and interactions with

Stakeholders.
- Provides the orientation to breach

the nature of the strategies,
including those connected to society
as a whole.
- Main signalizers for new

products
- Co-production:
Active
participation
innovation process
adapt
Manage
more
responsible
the production with the insertion of
Environmental Responsibility.
I - Insertion of in the products of
attributes that are not only economic.
- Growth/ incorporation of the - Turning the organizations Green.
- There is a need of a transformation
Change Process
environmental issue.
of the behavior of individuals,
groups,
organizations,
interorganizations and society based on
the double learning or inside the
learning.
Integrations and paradoxes: Stakeholders, Innovation Process and Sustainable Development.
Product
Management
in
- Environmental issues are integrated in the process of product development generating competitive advantages;
Not only economic and financial gains in every business
Accept economic-financial losses in the short term in order to have gains in the long term radical changes
The stakeholders demands impute to the organizations legal sanctions or forms of explicit or implicit manifestation of non-conformity
to their expectations;
- Increase of the continuous flow of information, knowledge and perception of interests regarding environmental problems as well as
options of solutions;
- Sustainable development as a change of the organizations strategical principals;
- Progress of the sustainable action involves collective problems and the identification of technologies and other necessary innovations;
- Organizations that seek or not an understanding with their stakeholders and incorporate the issues of sustainable development and
innovation process can be built and implemented although with radical changes. but with radical changes.
Source: Elaborated based on the research.

continuous progression of desired goals, which requires a
permanent changing process.
This does not mean a simple transition to an
environmentally
correct
technology.
Fundamental
adaptations and changes of the technological systems are
necessary. However, technological systems tend to remain
inactive and resist to changes.
In spite of the great potential that the SPD (Sustainable
Product Development) presents for companies and for
society as a whole, the exploration of this segment seems
restricted (Baumann et al., 2002). In practical terms, reality
demonstrates that the release of new environmentally
sustainable products has passed from a proportion of 1.1%
in 1986 to almost 15% in the beginning of the 1990s, a level
that is considered insufficient in face of the current and
forthcoming environmental challenges (Pujari et al., 2003).
According to Jones (1998), the concept of stakeholders is
central for the creation of an innovative culture. Such
innovative culture, which will reside in every organizational

level and completely compromise the innovation if the
employees believe as much as the organizations that they
will probably benefit in the long term (Kay, 1993). At the
same time, it evidences the importance that everyone in the
organization accepts the responsibility of improving
products, services and processes.
Over the past decades, researchers have dedicated
themselves to the investigation of how the firms respond to
the challenges of the environmental issues. Some firms seek
a commitment with the cause and others only observe the
legislation. Understanding in this manner the reasons that
lead to the promotion of ecological responsibility in the
companies can be criticized for two reasons: first, the
organizational theories do not predict this type of
ecological behavior and second, it is necessary to create
mechanisms that measure the efficiency of command and
control, as well as market procedures and voluntary
procedures that ecologic sustainability can promote to the
organizations. Several studies have verified that the
becoming green of certain companies is motivated by the

pressure of stakeholders, apparent competitive advantages
and administrative tendencies such as ethics and criticisms
(Bansal and Roth, 2000).
VI
CONCLUSION
The development of new products originated from the

stakeholders capability to innovate through sustainable
elements opens a gap for the organizations to seek
competitive advantages. This essay has sought to answer if
the stakeholders pressures generate innovations and what is
the power of the stakeholders in the act of innovation.
It was noticed that the stakeholders pressures create
conditions for innovation due to the fact that the innovations
derive from an environment where the organizations seek
competitivity around solutions to remain in the market.
However, from the moment the organizations seek an
understanding with their whether or not relevant
stakeholders, they discover solutions that, when worked in
the principles of sustainable development and the innovation
process, can be built and implemented.
When they search for innovations, the organizations face
sustainable development as a way to interact with the
pressure of stakeholders that are concerned with the
environment. The innovation will be accepted the moment
the stakeholders interests are materialized.
In order to innovate, the organizations must invest in their
relevant stakeholders due to the fact that the act of
innovating and being competitive together with the
principles of sustainable development is altering according
to world changes. Such changes cause new products to
become surpassed even before arriving at the shelves. The
future administrator must develop tools that keep him
always cautious and concerned and that incentive their
stakeholders to give out signs of the needs that will then be
catalyzed by innovators.
This essay allowed a revision of all the concepts of
sustainable development in search for sustainable products
and to demonstrate that these products are already reality in
some organizations. To conclude, it can be noticed that
when integrating sustainable development and innovation,
values are created to insert the logic of an environmental
perspective to sustain the results in short, medium and long
term for different stakeholders. In face of this conclusion,
the aggregated values of innovation and sustainable
development preserve the organization in different
scenarios. Underlining what Williams (1992) affirms,
innovation can result in competitivity and profit, but not
forever.
VII
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Knowledge Management: Promises and Premises

H. Chittoo University of Technology, Mauritius
B. M. Nowbutsing University of Mauritius
R. Ramchurn University of Technology, Mauritius
Abstract- Although knowledge management is a fairly new
concept, there has been a rise of its application in the private
sector, public sector and even NGO. In this paper we present
the premises and promises of knowledge management. We
focus on the various definitions of knowledge management, the
different knowledge management models and processes, the
application of knowledge management in the private sector,
public sector and NGO.
INTRODUCTION
ver the previous decades there has been major

improvement in business philosophies and approaches.
This has led to the emergence of many sub fields such as
Business Process Re-engineering (BPR), Total Quality
Management (TQM) and Organizational Learning (OL)
among others. Although Knowledge Management (KM) is a
relatively nascent field of study, its body of knowledge has
grown substantially over the past few years. During the mid
nineties the KM movement started gaining momentum with
a rapid increase in its body of knowledge (McAdam and
McCreedy, 1999). Matennson (2000) is of the opinion that
the growth of knowledge management occurred as a direct
result of two major shifts. First, the impact of downsizing
strategies of the 1980s and the subsequent loss of human
capital as people walked out the door with their knowledge.
Second, the explosion in information and related
technologies led organisations to search for ways to cope
with the complexity and volumes of information. This paper
attempts to synthesize the premises and promises of KM and
goes further to categorise the areas of KM applications. In
order to attain our objectives; section 2 provides various
definitions of KM as per the theoretical literature, discuss
the different KM models and KM processes; section 3
considers KM applications; section 4 considers the critiques
of KM and we conclude in section 5.
University of Technology, Mauritius, La Tour Koenig,

Pointe Aux- Sables, Republic of Mauritius. Email:
schittoo@utm.intnet.mu
University of Mauritius, Reduit, Republic of Mauritius,

Email: b.nowbutsing@uom.ac.mu
University of Technology, Mauritius, La Tour Koenig,

Pointe Aux- Sables, Republic of Mauritius. Email:
rakeshramchurn@yahoo.co.uk
II
KNOWLEDGE MANAGEMENT: DEFINITION, MODELS,

PROCESSES
In this section we provide the various definitions of KM

which is very vast in the literature, we survey the various
KM models and we provide the KM processes as per Alavi
(2000).
A. Definition of Knowledge Management
The literature on knowledge management indicates the
existence of multiple definitions of knowledge management.
Alavi and Leidner (1999) define knowledge management as
a systematic and organizationally specified process for
acquiring, organizing, and communicating both tacit and
explicit knowledge of employees so that other employees
may make use of it to be more effective and productive in
their work.
Beckman (1999) defines knowledge management as the
formalization of and access to experience, knowledge and
expertise that create new capabilities, enable superior
performance, encourage innovation and enhance customer
value. Malhotra (2001) asserts that knowledge
management caters to the critical issues of organizational
adaptation, survival and competence in face of increasingly
discontinuous environmental change. Essentially it
embodies organizational processes that seek synergistic
combination of data and information processing capacity of
information technologies and the creative and innovative
capacity of human beings.
The American Productivity and Quality Centre (APQC)
define knowledge management as the strategies and
processes of identifying, capturing and leveraging
knowledge (Atefeh et al., 1999). APQC concluded that
many companies mostly valued the transfer of knowledge
and best practices in order to improve internal operations or
to embed such knowledge in products and services. In this
context, the emphasis is on teams, relationships and
networks by which knowledge can be transferred. Specific
benefits cited from the introduction of knowledge
management projects include operational improvements,
money saved or earned (Atefeh et al., 1999).
Despite the rapid growth of KM and the euphoria that is
apparent when one considers the above findings by the
APQC, Wainwright (2001) notes that there is no single
definition to adequately describe knowledge management.
The next discussion is aimed at reviewing some of the
definitions, including those by both classical and
contemporary KM authors.

In fact, knowledge management is a set of things involving
various activities. It encompasses theories, models,
processes and technologies that support the protection and
development and exploitation of knowledge assets. By
managing intellectual capital that exists in both explicit and
tacit forms, knowledge management enhances an
organisations ability to learn from its environment and to
incorporate knowledge into business processes.
To clarify the scope of knowledge management and
understand its premises, Mc Adam and McCreedy (1999)
evaluated several definitions and classifications relating to
knowledge. They argued that the various definitions and
classifications reflect a wide spectrum of viewpoints; from
mechanistic type orientations (knowledge as an asset) to
approaches that reflect the notion that knowledge is
constructed through social relationships. There are various
common aspects in the definitions. First, IT is regarded as a
useful enabler, but is not regarded as the essence of KM.
Second, people and learning issues are central to KM. Third,
KM has strong multi-disciplinary influences with
practitioners holding a wide array of perspectives. Fourth,
KM and Intellectual Capital (IC) are used interchangeably
and there are traces of confusion regarding the two concepts.
Similarly, Firestone and McElroy (2003) analyse what they
describe as typical definitions by various contemporary KM
authors9. Firestone and McElroy (2003) assert that the
definitions exhibit the following weaknesses. First, failure to
distinguish between knowledge and information. Second,
failure to reflect the notion of validation of knowledge
claim. Third, failure to demonstrate how knowledge could
be managed. Fourth, failure to define activities that
comprise KM and fifth, the failure to adequately treat the
concept of management in knowledge in KM Firestone
and McElroy (2003) after firstly, examining information
management and knowledge management and secondly,
drawing a distinction between information processes and
knowledge processes, offer their own definition: KM is a
management discipline that seeks to enhance organizational
knowledge processing
Firestone and McElroy (2003) in fact, argued that KM is an
ongoing persistent, purposeful interaction among humanbased agents through which the participating agents manage
(handle, direct, govern, control, coordinate, plan, organise,
facilitate, enable and empower) other agents, components,
and activities participating in basic knowledge processing
(knowledge production and knowledge integration), with the
purpose of contributing to the creation and maintenance of
an organic, unified whole system, producing, maintaining,
enhancing, acquiring and transmitting the enterprises
knowledge base.
According to Stewart et al (2000), there are four basic
assumptions that underline KM. First, knowledge is worth
managing. This assumption recognises the importance of a
knowledge economy. In this context, there are many
knowledge management initiatives in various organisations.
1
The definitions analysed are Malhotra (1998), Sveiby

(1998), Knapp (1998), University of Kentucky (1998), Wiig
(1988), Wenig (1998), Murray (1998) and Devenport (1998)

However, while much effort has been put in managing
explicit knowledge, tacit knowledge has been ignored.
Second, organisations benefit from managing knowledge. In
this context, effective data mining is crucial. Third,
knowledge can be managed. Many companies have
appointed knowledge officer in their organization. However,
the fact that many organisations have embarked on KM
projects does not indicate whether knowledge is worth
managing. Fourth, little risk is associated with managing
knowledge. In this context, many companies have set up
organizational structures for knowledge management.
However, tacit knowledge may contain incorrect
assumptions.
Martennson (2000), having surveyed a number of literature
sources concerning the goals and expected outcomes of KM,
lists a number of such outcomes (1) a way to improve an
organisations performance, productivity, competitiveness
(2) acquiring, sharing and usage of information (3) a tool for
improved decision making (4) a way to capture best
practices (5) a way to reduce research costs and delays (6) a
way to become more innovative
The various nature of the definitions of knowledge
management is evidence that KM is a body of knowledge
which is still not stabilised and that it is an area of growth
which will attract research to inform practice about
knowledge in the years to come.
B. Knowledge Management Models
This sub-section investigate the current understandings of
the theory and practice of the some of the existing
knowledge management models
i.
Boisots Knowledge Category Models
In the Boisots Knowledge Category models, knowledge is

considered as either codified or uncodified and as
diffused or undiffused within an organization or
institution.
Thus, there are six types of knowledge. First, codified
knowledge, it refers to knowledge that can be easily to
knowledge that can be easily prepared for transmission
mechanism such as economic data. Second, uncodified
knowledge is knowledge that cannot be easily transmitted
such as experience. Third, the combination of codified and
diffused knowledge is referred to as public knowledge;
examples include library, journals, books, newspapers etc.
The fourth type of knowledge is a combination of codified
and undiffused knowledge which is referred to as propriety
knowledge. This codified undiffused deliberately
transmitted to a small group of people on a need to know
basis. The fifth type of knowledge which is the combination
of uncodified and undiffused knowledge is known as
common sense, normally gathered through the process of
socialization and externalization. Lastly, personal
knowledge is a combination of uncodified and undiffused
knowledge.

ii. Nonakas Knowledge Management Model
According to Nonaka and Takeuchi (1995), knowledge
consists of tacit and explicit elements. Like Boisots
Knowledge Category models, this model consist of a 2 x 2
matrix with four elements. First, tacit knowledge can be
transferred into tacit knowledge in others through
socialization. Second, tacit knowledge can be transferred
into explicit knowledge by forming a body of knowledge or
through externalization process. Third, explicit knowledge
can be transferred into tacit knowledge in others by
translating theory into practice, a process of internalization.
Fourth, explicit knowledge can be transferred into explicit

knowledge in others by combining various theories, a
process known as combination.
iii. Demerests Knowledge Management Model
Demerests knowledge management model emphasise on
the construction of knowledge within an organization. This
construction is limited to scientific inputs but is seen as
including the social construction of knowledge. The model
assumes that constructed knowledge is then embodied
within the organization, not just through explicit programs
but through a process of social interchange (Mc Adam and
McCreedy, 1999).
Figure 1: Demerests Knowledge Management Model
Source: McAdam and McCreedy, 1999

Figure 1 presents the Demerests knowledge management
model. It shows that there is a process of dissemination of
the espoused knowledge throughout the organization and its
surrounding. Ultimately, the knowledge is seen as being of
economic use in regard to organization outputs. The solid
arrows in figure 1 show the primary flow direction while the
plain arrows show the more recursive flows. The model
does not assume any given definition of knowledge. Instead

it invites a more holistic approach while, in reality, the flows
of knowledge transfer may be extremely rapid and
circulatory, as in the case for some forms of action learning.
Demerests model has been slightly modified and seeks to
address these limitations by explicitly showing the influence
of both social and scientific paradigms of knowledge
construction (see Figure 2).
Figure 2: Modified version of Demerests KM Model
Source: McAdam and McCreedy, 1999

This model emphasises the creation of knowledge within the
organization. This construction is not only dependent on
scientific input, but also includes the social construction of
knowledge. This constructed knowledge is then embodied
within the organization by explicit means, e.g. codification,
and through social interchange. Once the knowledge is
embodied in the organization, it must be disseminated
throughout it. The disseminated knowledge is then used in
the production of organizational outputs.
The solid arrows in Figure 2 indicate the primary flow
direction, while the plain arrows indicate recursive flows.
The recursive arrows show that the flow of knowledge in the
organization is more complex than a simple sequential
process (McAdam and McCreedy, 1999). The model shows
that knowledge construction is influenced by both scientific
(older, rule-based) and social (newer, people-based)
paradigms. The use element of the model is expanded
upon in order to address both business and employee
benefits. These issues should be seen as complementary

rather than mutually exclusive.
Skandia Intellectual Capital Model of Knowledge Management
(Source: Edvinson, 1997

The intellectual capital school of thought (particularly
prevalent in the Scandinavian countries) equates knowledge
with intellectual capital. According to this model knowledge
management is not seen as the transfer of tacit and explicit
knowledge but also consists of intellectual capital.
Intellectual capital is made up of two main components,
namely human capital and structural/organizational capital
(McAdam and McCreedy, 1999). The model focuses on the
importance of equity, human, customer and innovation in
managing the flow of knowledge within and externally
across the networks of partners. The intellectual capital
school of thought takes a scientific approach to the
management of knowledge with a strong emphasis on
measuring each intellectual asset in the organization.
However, this intellectual view of knowledge management
ignores the political and social aspects of knowledge
management.
Frids Knowledge Management Model
Frid (2003) divided the knowledge management maturity
assessment and knowledge management implementation
into five levels.
Level 1 Knowledge Chaotic
Knowledge chaotic suggests that organizations at this level
are in the process of understanding and implementation of
Frid framework for knowledge management which includes
knowledge management vision, knowledge management
objectives and knowledge management indices.
Level 2 - Knowledge Aware
Organisations at this level are a step higher than those at
knowledge chaotic. Also, to understand and implement
Frids framework for knowledge management; advocating

and adopting departmental knowledge management vision
and goals; and performing Frid framework maturity
assessment. Organisations at this point should focus on
developing a knowledge management road map and
working collaboratively with knowledge management
office.
Level 3 Knowledge Focused
Knowledge focused indicates that organizations should have
covered the implementation aspects as in the lower two
levels and start focusing on five new activities namely (1)
process engineering (2) providing initial knowledge
management infrastructure, services and training (3) support
early adopters and knowledge community (4) monitor and
report on management indices and (5) knowledge
management in budgets.
Level 4 Knowledge Managed
Knowledge Managed adopt the fundamental activities in
level one, two and three other than organizations should
attempt to embed knowledge management in performance
reviews and also in business plans apart.
Level 5 Knowledge Centric
This is the highest of all knowledge management
implementation maturity level based on Frids model. The
distinctive and differentiating activities that organisations
should focus on are institutionalizing successful initiatives
and valuing intellectual assets. These activities differentiate
knowledge from other levels. Moreover, all knowledge
management activities should be given equal emphasis at
this level.
C. The Knowledge Management Process

Alavi (2000) notes that organisations continuously engage in
certain knowledge management processes. Alavi (2000)
identifies four processes that are depicted in Figure 3.
Figure 3: Generic Knowledge Management Processes by Alavi
Knowledge
Creation
Knowledge
Storage and
Retrieval
Knowledge
Distribution
Knowledge
Application
(Source: Alavi, 2000)

i.
Knowledge Creation
A discussion of knowledge creation will be lacking if it does

not consider the contribution of Nonaka. Alavi (2000)
draws special attention to the emphasis that Nonaka places
on appropriate organizational mechanisms to support and
nurture each of the modes of knowledge creation discussed
earlier. For the sake of convenience, Nonakas modes of
knowledge conversion are again listed; they are
socialisation,
externalization,
combination
and
internalization. Davenport and Prusak (1998) propose five
options available to organisations through which knowledge
is created:
Acquisition: refers to knowledge acquired by the
organization from external sources including knowledge
internally generated. This is not necessarily new. It includes
knowledge copied from competitors or other industries as
well as also knowledge bought via mergers. Rental; for
instance through an external research unit or hiring a
consultant with specific expertise. Dedicated resourcesutilising resources exclusively for this purpose like for
instance R&D units. Fusion- the deliberate introduction of
complexity, diversity, and conflict to create new synergy.
Adaptation- external changes causes organization to adapt
or die; warns against the complacency, core rigidities or
the tendency to stay on well-known paths. Some
organization sometimes generate a crisis in order to
stimulate creativity. Networks- informal, self-organizing
networks of people that might become formalized, e.g.
Community of Practice (COP)
Davenport and Prusak do not explicitly refer to learning as a
result of the knowledge creation process. Liebowitz and
Beckman (1998) regard learning of the individual, the team
and the organization as an integral part of knowledge
creation. The two authors cite Kolbs learning cycle as a
framework to understand the effects of participation in new

experiences, reflective activity, concept formulation and the
development of hypotheses (Kolb, 1983). Liebowitz and
Beckmans arguments show glimpses of second-generation
KM thinking when they cite Cougers work on the Creative
Problem Solving (CPS) method (Couger, 1996). The six
problem solving steps proposed by Couger are: define the
problem, analyse the problem, generate solution ideas,
evaluate and select the solution test and implement the
solution and lastly, document and share the results (Couger,
1996).
All the above refer to the different perspectives on the way
knowledge may be created in and for an organization.
ii. Knowledge Storage and Retrieval
Alavi (2000) asserts that to create new knowledge is not
enough; people and organisations simply forget and
mechanisms are needed to store acquired knowledge and to
retrieve it when needed. One such mechanism identified by
the knowledge management community is organizational
memory (Alavi, 2000). Organizational memory includes
individual memory (individual experiences) as well as
shared knowledge and interpretations resulting from social
interactions, including organizational culture, work
processes and procedures, structure, ecology and archives
(Alavi, 2000). It is fair to assume that the organization that
keeps track of its experiences, e.g. by recording and
retrieving knowledge about best practices, internal and
external to the organization, stands to benefit as opposed to
one that keeps on reinventing the wheel. However, citing
the work of Argyris and Schon (1978), Alavi (2000) warns
about the negative effects associated with organisational

memory. Organisations have to constantly guard against
rigidity in terms of structure, capabilities, outlook and
current knowledge. A complacent attitude can prevent the
organization from engaging in continuous learning and
innovation as a result of inability to adapt to change. This
above phase of KM has traditionally been a fertile ground
for proponents of codification strategies, which include,
amongst others, efforts to extract tacit knowledge from
experts using a combination of elicitation methods and
technology systems and to make that knowledge available to
the organisation in some form.
iii. Knowledge Distribution
Alavi (2000) is of the opinion that the knowledge
distribution process, despite its importance, is under-studied.
Alavi (2000) postulates that the knowledge distribution
process is subject to the same influences as the
communication process that is often neglected in
organisations. The communication process involve the
following: source; of crucial importance is the perceived
value of source units knowledge stock as well as the
motivational disposition of source; message-the nature of
the message can be either tactiness or explicitness; receiverof crucial importance is the perceived value of source units
knowledge stock as well as the motivational disposition of
receiver; channel, the existence and effective transmission
channels should exist for knowledge distribution;
coding/decoding, this relates to the absorptive capacity of
the receiver.
The distribution of knowledge is arguably where most of the
knowledge management activities occur. It is also in this
sphere that technology is playing a significant role, referring
to the use of intelligent agents to customise information
delivery, email, data mining, Intranets, and Web portals
(Liebowitz, 2000).
III
KNOWLEDGE APPLICATION AND USE
Having critically reviewed various models of KM, the next

section deals with areas of KM applications
According to the knowledge- based theory of the firm,
knowledge itself does not constitute a competitive
advantage; it is the application and integration thereof with
business processes that makes a difference (Alavi, 2000).
Grant (1996) identified three following mechanisms for
integrating knowledge into the organisation:
i. Directives; sets of rules, standards, procedures and
instructions converted from tacitly held specialist
knowledge into explicit forms for communication
to non- specialists.
ii. Organisational routines; relate to patterns for task
performance
and
coordination,
interaction
protocols and process specializations
iii. Self-contained task teams; refer to the creation of
teams to attend to tasks where a high degree of
uncertainty exists and where group synergy can be
exploited. Group problem solving often requires

coordination and facilitation of frequent interaction
and intense collaboration
Liebowitz and Beckman (1998) state that knowledge can
be applied by people or machines to perform work The
researchers disagree with the notion that a computer or some
type of machine is able to apply (directly or indirectly)
knowledge in a business activity.
Gauging from an analysis of various knowledge
management approaches followed in Europe, the European
KM Forum EKMF (2001), concluded that with few
exceptions (Davenport and Nonaka), most approaches have
the same basic structure and identifiable modules, stages or
phases. Most approaches considered by the EKMF include
the phases identifiable modules, stages or phases. Most
approaches considered by the EKMF include the phases
identified by Alavi above. Notably, Davenport and Prusak
do not describe a knowledge management process (EKMF,
2001). Davenport and Prusak (1998) provide a detailed
discussion of knowledge markets, compelling the reader to
view knowledge markets as a framework for understanding
and improving the transfer of knowledge. Knowledge
Managements, according to authors, is an effort to improve
the efficiency of such knowledge markets.
For Davenport and Prusak (1998), as the organization
interacts with its environment, it absorbs information, turn it
into knowledge and takes action based on experiences,
values and internal rules. Davenport and Prusak (1998 cited
in EKMF, 2001) highlight knowledge generation,
knowledge codification and coordination and knowledge
transfer as key focus areas in a knowledge management
initiative.
Nonaka, who did not adopt Knowledge Management as an
approach in the first place, focuses solely on knowledge
creation. However, certain concepts used by Nonaka in his
popular SECI model, correspond with some of the
knowledge management phases identified by the various
other KM approaches in the EKMF study. Martennsons
(2000) research, referred to earlier, revealed results that are
consistent with those found by the EKFM study. He
identified the following four stages: knowledge acquisition,
storage, providing access, and knowledge use
A. Knowledge Management and Corporate Sector
Many organizations look at knowledge management as a
solution to challenges due to the information age. In the
information age, traditional methods of accounting and
monitoring systems design to deal with tangible inputs and
outputs are no longer adequate. Firms have to share
knowledge internally more efficiently and learn to adapt
more quickly to the changing external environment in order
to retain their competitive edge. According to McElroy
(2000), the first generation of knowledge management
aimed to improve knowledge sharing within organizations.
Thus, the focus was on the use of information technology.
The second generation of knowledge management
emphasizes more on the use of organizational processes and
creation of knowledge. This helps organizations to have an
upper hand on their competitors. Savage (2000) argued that

successful organizations are shifting from strategies based
on prediction to strategies based on anticipation of surprises.
They are also shifting from utilization of already known
knowledge to the creation of new knowledge, from pure
technology KM applications to also include process
applications.
When and how these shifts should be undertaken depends on
the type of organizations in questions. Four types of
organizations can be identified namely - process,
systems, network and competence- based on the
different levels of interdependence and complexity that are
required in different work situations. The competence
model describes a workplace that is highly reliant on
individuals expertise in order to carry out evaluation and
judgment-oriented work. The network model denotes a
workplace that depends on the fluid deployment of flexible
teams in order to improvise and meet new challenges as they
arise. Thus, the competence model concentrate on low
level of interdependence and high level of interpretation
while the network model concentrate on high level of
interdependence and high level of interpretation.
Levitt and March (1988) doubted the capacity of
organistions to manage knowledge effectively and to learn
from past experience. There are many constraints in an
organization that impede learning. These includes:
organisational complexity, human habits, hierarchal
structure, routines and differing interpretations by sub
groups within an organization. However, Schein (1992)
argued that such constraints can be avoided if there is
presence of good leadership. Good leadership implies the
ability of the leader to guide the organization in the right in
the face of changing environment; to contain anxiety and to
influence the organisations structure in a positive way.
B. Knowledge Management and NGOs
i.
Northern NGOs
A parallel development occurred with the emergence of the

information age in the nineties, the rise of NGOs. The role
of Northen NGOs has change in considerable ways. Fowler
(1992) argued that the legitimacy of NGOs is no longer
guaranteed; in fact they have to prove legitimacy. Thus, they
have to build credible relationship with Southern partners.
Edwards (1994) postulated that Northern NGOs are taking
the role of information broker and advocate in the interface
between Southern communities and national/international
policy processes. According to Keeble (2002) another role
of NGOs to build the capacity of Southern civil society
organizations to process knowledge and engage effectively
in national/international development debates and decisionmaking processes. All this requires NGOs to have high
quality internal learning and information processing
systems. In addition, calls for knowledge-based aid and the
globalization of knowledge require NGOs to reflect on how
their internal KM and learning systems interact with
external KM and learning systems interact with external
information flows and policy trends.

ii. Southern NGOs
Hailey and James (2002) build on the case studies of nine
successful South Asian NGOs in order to comment on how
NGOs learn. They conclude that the single most important
factor affecting organisational learning is a learning leader.
The most important features of learning leaders in South
Asia was their ability to understand and work within a
complex and changing environment. Uphoff (1992)
examined the success of a large-scale irrigation system and
argues that it worked well because it was not planned
according to a predictable and fixed model but rather
evolved organically as farmers gradually engaged in flexible
systems of cooperation.
ICT projects in Southern institutions frequently fail or
remain functional for only a brief period of time. Heeks
(2002) attributes this gap between the design of Northern IT
systems and the reality of Southern institutions, which on
the whole do not have same level of technological
infrastructure.
C. Knowledge Management, Public Sector and Public
Administration
Viability and success of any society is largely a function of
how its resources can be leveraged. They include natural
resources, geographic location, capability of people, and
resources like intellectual
capital (IC).
Public
Administration (PA) in any society is important and
complex. It affects most aspects of society. Its approach and
effectiveness determine the societys culture, quality of life,
success, and viability. It also acts as pace setter, planner,
implementer, educator, peacemaker, and disciplinarian, all
with different emphases depending on the societys culture
and agendas. A competent PA with sufficient capacity and
influence can provide for a great society. An incompetent or
dysfunctional one can lead the society into severe decline,
even ruin. To be successful in fulfilling its functions in a
democracy, the citizenry must cooperate in many ways and
have confidence in the societys capabilities, directions, and
actions. Successful citizen participation and confidence
depend largely on broad understanding of, and agreement
with actions by public entities and acceptance of
implications of those actions. An ignorant citizenry is a poor
public policy partner. A vital aspect of the societys success
is the knowledge that its citizens possesses, is made
available to its public servants, and is embedded in
structural and other intellectual capital assets that can be
leveraged internally and in the global market.
PA shares responsibility to assure that its society provides
the quality of life intended for its citizens. From a societal
knowledge or IC perspective, this implies participation in
building and leveraging societys IC to obtain the necessary
economic foundation. It also implies long-term
responsibilities to foster development of a competitive work
force that can compete in regional and global economies.
These issues are well known to public administrators (PAs).
However, the past has not offered opportunities to address
them with powerful and systematic approaches. This is

changing. The broad field of knowledge management
introduces new options, capabilities, and practices to assist
PA to great advantage. It becomes a new responsibility to
manage knowledge to strengthen public service
effectiveness and improve the society it serves.
The goals of knowledge management are to improve the
effectiveness and sustained viability of any enterprise be it
a commercial corporation, a part of society, a country, or a
single individual. KM must be fully aligned to the
enterprises central objectives. The KM objectives for PA in
a democracy may be expressed as the intent to provide:
i. Effective PA services and functions to implement
the public agenda. Public services must address
issues and requirements relevantly, competently,
and timely and consume minimal resources. They
should also deal appropriately and expeditiously
with unexpected challenges and disasters.
ii. A stable, just, orderly, and secure society. This
includes preparing citizens, organizations, and
public agencies to be effective policy partners to
create sound public opinions to engage in public
debates and policy formation to participate in
processes to conceptualize, plan, decide, and
implement public actions to observe society
policies and to provide support for the
administration.
iii. Acceptable level of quality of life, particularly
through building, maintaining, and leveraging
commercial and public intellectual capital.
iv. A prosperous society by developing its citizens to
become competent knowledge workers and its
institutions to be competitive.
IV

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
CONCLUSION
12.
This paper presents the promises and premises of knowledge

management. Knowledge management is becoming crucial
in almost every sectors of an economy. We present the
various definitions of knowledge management. Some are
complements to each other while others competing. The
various models of knowledge management show knowledge
are created within organization and institution. The
knowledge management process by Alavi (2000)
concentrate on knowledge creation, knowledge storage and
retrieval, knowledge distribution and knowledge application.
Over the years knowledge management has been applied in
many organizations and institutions whether private, private
or NGO. In the age of technology, we reckon that the
application of knowledge management in various
organizations will continue to rise.
13.
14.
15.
16.
V
REFERENCES
17.
1.
Alavi M. & D. Leidner (1999). Knowledge

Management Systems: Issues, Challenges and
Benefits, Communication of the Association for
Information Systems, 1(7):2-41.
Alavi M. (2000). Systems for Managing

Organisational Knowledge, the Organisational
Change Program for the CGIAR Centers.
Atefah S., L. McCamble, C. Moorhead & S. H
Gitters (1999). Knowledge Management: the New
Challenge for the 21st Century, Journal of
Knowledge Management, 3(3), pp. 172-179.
Beckham T. (1997) Knowledge Management: A
Technical Review. GWU Working Paper,
Washington.
Davenport T.H. & L. Prusak (1998). Working
Knowledge: How Organisations Manage What
They Know. Harvard Business Press, Boston,
Mass.
Edvinsson L. (1997). Developing Intellectual
Capital at Skandia, Long Range Planning, 30 (3):
366 - 373.
Firestone J. M. & M. W. McElroy (2003). Key
Issues in the New Knowledge. KMCI
Press/Butterworth-Heinemann, Burlington.
Frid R. (2003). A Common KM Framework for the
Government of Canada: Frid Framework for
Enterprise Knowledge Management, Canada
Institute of Management, Ontario.
Grant R. M. (1996). Prospering in Dynamically
Competitive
Environments:
Organisational
capability as knowledge integration, Organisation
Science, 7 (4): 175-387.
Liebowitz J. & Beckman T. (1998). Knowledge
Organisations What Every Manager should know?
St Lucie Press.
Liebowitz J. (2000). Building Organisational
Intelligence: A Knowledge Management Primer.
Crc Press LLC. Bota Raton
Malhotra Y. (2001). Knowledge Management and
Business Model Innovation, Idea Group
Publishing, London.
Martennson M. (2000). A Critical Review of
Knowledge Management as Management Tool,
Journal of Knowledge Management, 65(3): 204216.
Mc Adam R. & S. Mc Creedy (1999). The Process
of Knowledge Management within Organisations: a
Critical Assessment of Theory and Practice,
Knowledge and Process Management, 6 (2): 101113.
McElroy M. (2003). The New Knowledge
Management:
Complexity,
Learning
and
Sustainable Innovation. Butterworth-Heinemann,
Burlington.
Nonaka I. & H. Takeuchi (1995). The Knowledge
Creating Company, Oxford Press, Oxford.
Steward K., R. Baskerville, R. Storey, Senn V.C &
Long C. (2000). Confronting the Assumption
underlying the Management, the Data Agenda for
Understanding and Investigating Knowledge
Management, The Data Base for Advances in
Information Systems, 31(4): 41-60.
The Role of Life Skills Training on Self-Efficacy,

Self Esteem, Life Interest, and Role Behavior for
Unemployed Youth
Muafi, Anis Siti Hartati and Hendri Gusaptono*
Abstract- The impact of global crisis has a big effect on
unemployed rate and poverty in Indonesia generally and in
Lamongan Regency particularly. This research investigates the
role of life skills training in influencing self efficacy, self
esteem, life interest and role behavior for unemployed youth in
Paciran sub district.
It is a survey research by experiment research type. The
respondents are participants from youth drop of school
particularly unemployed youth in Paciran sub district,
Lamongan regency, East Java. The technique of sampling
utilizes purposive sampling. The amount of sample, which
required the criteria to be examining, is 73 respondents. The
technique of statistics applied in this research is paired samples
t test. The result of hypothesis examining explains that there is
differences of self efficacy, self esteem, life interest and role
behavior before and after training.
Keywords- life skills, self-esteem, self-efficacy, life
interest, role behavior.

I
INTRODUCTION
The quality of human resources is a challenge that should be

face in this 21-century and the next centuries. A nation
which has qualified human resources will win the global
competition and survive in the future. Therefore, the
paradigm of qualified educational system must orientate on
the increasing of community life skills. Indonesia is still
buried cause of neglecting educational development in the
past. Through the life skill program, it is hoped the quality
of Indonesian human resources will be better (Tampubolon,
2002; Satori, 2002; Galib, 2002). Skill education becomes a
need, in order they will have relevant life skill with the
occasion of work opportunities (Tampubolon, 2002). By
acquiring life skill the unemployed youth will arouse their
self esteem and self efficacy with the result that increase
their life interest and role behavior.
*Dept.of
Management
Economic,
University
of
Pembangunan Nasional Veteran Yogyakarta (UPNVY),
SWK 104 Ringroad Utara Condong Catur Yogyakarta
Indonesia 55283
Tel: +6181328058966, +618122747563, +618122717294
Email: muafipaciran@gmail.com
We would like to thanks to Direktorat Jenderal Pendidikan
Tinggi (Dirjen Dikti) Indonesia which had give grant to this
research with scheme Hibah Kompetitif Penelitian Sesuai
Prioritas Nasional 2009.
There is a manpower problem in Lamongan regency. The

problems are the increasing number of work force while
limited volume of field of work, the less of skills on
someone looking for a job and the tight and limited
competition in the market of manpower. Moreover, the one
of objectives in the Work Plan 2010 in Lamongan Regency
is decreasing unemployed rate in the community as 97%.
According to the data, in Lamongan regency the biggest
population density rate is in Paciran sub district (Lamongan
dalam Angka, 2009). By developing Wisata Bahari
Lamongan (WBL), Maharani Gua and Zoo, along with
industrial growing in Paciran sub district may have a
significant contribution for the government in wiping out
poverty (pro poor), industrial sector (pro growth) and the
community itself (pro job). Wisata Bahari Lamongan
(Lamongan Maritime Tourism) and Maharani Gua Zoo are
near Sunan Drajat Grave, these are crossed Paciran, Kranji,
Sendang and Blimbing villages. These villages have
abundant potentiality in natural resources from maritime and
tourism. Based on the researcher observation, maritime
produce and tourism potentiality have not arousing life
interest and role behavior of youth particularly unemployed
youth in the villages. It is supported by Dhuha (2008)
research; it explains that the existing of WBL, Lamongan
Integrated Shorebase (LIS) and other economic
potentialities may not be experienced by surrounding youth.
There are not many Paciran youth take strategic position.
Furthermore, this problem can be solved through together
moving by community empowering such as life skills. It is
believed that life skills can give positive influence toward
individual self-efficacy and self esteem and then it implied
to life interest and role behavior from unemployed youth.
II
LITERATURE REVIEW
Global life gives a challenge and open opportunities

automatically for economic development and qualified
Indonesian human resources taking competition for work
opportunity in Indonesia and abroad (Tampubolon, 2002). In
community development, an educational discourse often
cannot follow acceleration of community dynamics.
Community exchange caused by knowledge and technology
discoveries cannot be anticipated soon. The educational
institution will be left in creating a relevant study process.
Heterogeneity of educational level in Indonesia can be seen
in Indonesian archipelago community. In rural area, there
are some graduated and literate inhabitants however; some

of them still illiteracy too. Moreover, at elementary school
grade there are graduated and drop out students but it still
many uneducated children who never feel the elementary
school. The same thing is also happened on junior and
senior high school. The main causes are poverty and
parents inability to finance their children goes to higher
school grade. The other causes are: (1) limited opportunity
in formal education and other technical skills for children
(youth), (2) increasing of drop out youth and uneducated
youth, (3) limited functional illiterate youth and (4) the
worse quality of youth human resources (Tampubolon,
2002).
Recently, to solve this problem the community is acquainted
with the concept of life skill education. Life skill education
has orientation on students acquiring ability and having
based capital to live autonomy and surviving in their
community. Kurnia (2002) points that life skill education
applied in Indonesia because the curriculum content tends to
only academic-theoretic skills. It is also lack attention to
many needs and empirical problems surrounding the
students growth. It causes students cannot be able to apply
their study ability with their needs and community
problems. The essence of school as a development vehicle
of individual personality to be smart intellectually, morally
and socially has reduced becomes a means for social statue
only. Therefore, it is not surprised that although the output
seem smart they lack of experience and creativity. Since the
knowledge they studied cannot give much utility moreover
to do some exchange toward deviation in society.
To solve this problem it is necessary a skill education that
appropriate to work opportunity needed by the society by
considering a talent and interest, and probability they can
work autonomy or to be employee. This approach is human,
it means that an acknowledgment they have potent to
develop. The problem of work opportunity for youth work
force caused not only by the limited of job vacancy but also
they are not already to work since lack of expected skill
qualification. It can be happened because most of them
graduated from public school not vocational school. In fact,
a graduated from a vocational school is not guarantee to be
already working. If development is meant a plan exchange
to raise society life quality, the development must focus on
preparing field of work and qualified human resources
(Tampubolon, 2002).
The above reality causes increasing the amount of
unemployed youth directly. They do not have skills to work
autonomy particularly in informal sector. The last choice is
work seasonally as manual laborer with lower-paid,
however there are some of them work as family worker in
the farm. The consequences are majority unemployed and
live in many cities. Live in-unemployed causes decreasing
of self-efficacy, self esteem life interest and role behavior.
They usually get frustration and involved in juvenile
delinquencies, crime, a gang fight and the worse in drug
abuse. Some facts show empirically that dissatisfaction,
frustration and not conducive environment stimulate them
involved in the above problems. Why do they get frustration
and dissatisfaction? Since their parents compel them or they
force themselves to go to junior or senior high school that

the curriculum are only understood by smart students, but
they are not able to follow it. As the result, they do against
the good values and norms. Looking for a job they do not
have any skills so they escape from the facts and performing
destructively.
Creed et al. (1996) observes the importance of skill
programs from trainings that have relation to self-esteem
and self-efficacy for unemployed youth. It will have impact
for a long term. Creed et al. (2001) explains that an
unemployed youth will be eagerly looking forward to offer
training. They hope eagerly the training will influence their
self-esteem and self-efficacy to search for a job. Eden and
Aviram (1993) concluded that individuals of low general
self-efficacy should be given priority access to scarce
behavioral-modeling training resources.
Kreitner and Kinicki (2007) explain that self-efficacy is a
persons belief about his or her chances of successfully
accomplishing a specific task. Self-efficacy arises from the
gradual acquisition of complex cognitive, social, linguistic,
and/or physical skills through experience. Researchers have
documented strong linkages between high self-efficacy
expectation and success in widely varied physical and
mental tasks, anxiety reduction, addiction control, pain
tolerance, illness recovery, avoidance of seasickness in
naval cadets, and stress avoidance. Oppositely, those with
low self-efficacy expectations tend to have low success
rates.
Several studies have also evaluated self-esteem outcomes
for unemployed people who attend training programs (Creed
et al., 2001). Muller (1992 in Creed et al., 2001) studied the
effects of personal development courses on unemployed
womens level of self-esteem and depression and fond that
participants improved significantly more on both than the
control group. Self-esteem benefits from the course were
maintained at follow up.
Gist and Mitchell (1992) examine the significance of selfefficacy, which has close relation to one skill level. Some
training held by an organization will be able increasing one
self-efficacy. It is supported by an argument that some
training methods can arouse self-efficacy in the selfmanagement areas (Frayne and Lathan, 1987), cognitive
model (Gist, 1989) and behavior model (Gist, Schwoerer
and Rosen, 1989). Self-efficacy is associated with work
related performance, coping with difficult career-related
task, career choice, learning achievement and adaptability to
new technology (Gist and Mitchell, 1992).
Related to life interest, it is defined as a relative long wish in
life but difficult explaining through one personality. It is not
only a hobby or a moment enthusiasm toward a job but also
it more than that (Butler and Waldroop, 2004). Life interest
is not examining where the best performance, but it is very
determining a kind of job that make someone feel in longterm satisfaction and happiness. A way to understand one
life interest can be through job sculpting, it is an art to
explore and understand one life interest so it can conform to
ones job in order they can express their life interest from
the deeply embedded life interest (Budiadi, 2004; Butler and
Waldroop, 2004). These interests are not hobbies opera,
skiing, and so forth nor are they topical enthusiasms, such

as Chinese history, the stock market or oceanography.
Instead, deeply embedded life interest are long held,
emotionally driven passion, intricately entwined with
personality, and thus born of an indeterminate mix of nature
and nurture. Deeply embedded life interest does not
determine what people are good at they drive what kinds
of activities make them happy. At work, that happiness often
translate into commitment. It keeps people engaged, and it
keeps them from quitting (Butler and Waldroop, 2004).
In their research, Butler and Waldroop (1999) found only
eight deeply embedded life interests for people drawn to job
careers. The following is a summary of each: application of
technology, quantitative analysis, theory development and
conceptual thinking, creative production, counseling and
mentoring, managing people and relationship, enterprise
control, and influence through language and ideas. Someone
can have one or more interests on those field, where he feel
enjoy and happy doing his job.
In this research, life skills will be implemented by giving
trainings that it will have significant role toward selfefficacy, self esteem, life interest and role behavior for

unemployed youth in future. Generally, The result of
research shows that there is a positive relation between self
efficacy and behavioral intention (Ramayah and Harun,
2005; Kristiansen and Indarti, 2003; Zhao et al., 2005;
Linan, 2008), and behavioral intention toward behavior
(Dharmmesta, 1992; 1998; Wijaya, 2008; Lin and Lee,
2004; Muafi, 2008). While self esteem also has positive
influence to behavioral intention in changing behavior
(Peterson, et. al., 2008). Self-esteem is a belief about ones
own self worth based on an overall self-evaluation (Kreitner
and Kinicki, 2007). In this research the examined behavior
is role behavior from unemployed youth. Noe et. al., (2006)
states that role behavior are the behavior required by an
individual in his or her role as a jobholder in a social work
environment. Grundy and Wensley (1999) give a name to
role behavior by strategic behavior, like an attempt to make
a better life quality than others. Strategic behavior is also
significant as it helps to understand the behavioral process.
This literature has been used to develop the conceptual
framework for this study as shown in Figure 1.
Figure 1. Research Model of The Role of Life Skills Training on Self Efficacy, Self Esteem, Life Interest and Role
Behavior for Unemployed Youth
Hypothesis
Based on the research model, this study hypothesis that:
H1. There is difference of self-efficacy from unemployed
youth before and after training.
H2. There is difference of self-esteem from unemployed
H3. There is difference of life interest from unemployed
H4. There is difference of role behavior from unemployed
III
RESEARCH METHODOLOGY
Based on the characteristics of research problem, this

research is an experiment research. In the experiment
research, the researcher takes manipulation or control
toward at least one independent variable that is the
implementation of life skills, looking at the influence of the

treatment toward dependent variable like self efficacy, self
esteem, life interest and role behavior.
The research implies the experiment quasi method with
control group by One Group Pretest-Posttest Design
Approach. This design utilizes one sample group with twice
questionnaire; they are before experiment questionnaire
(before training) (01) called pretest, and after experiment
questionnaire (after training) (02) called posttest. Pretest and
posttest are conducted by the determined questionnaire
(Hair, et. al., 1998).
This research is called a longitudinal survey research
because the research sample is certain population members
during the survey taken. They are unemployed youth that
drop out of school and their age between 15 and 25 years
old. The names of sample are listed, and they do not change

their position along the survey carried out, and then it will
be collecting information from them is directed.
This study applies non-probability sample design (purposive
technique). The amount of respondent who involved in the
training is 73 respondents. The type of questionnaire is
closed questionnaire and asking the perception of drop out
school youth in Paciran sub district Lamongan East Java.
The scale arrangement technique applied to asserting selfefficacy, self esteem, life interest and role behavior is Likert
scale by scale 1 (strongly disagree) until 7 (strongly agree).
The result of validity and reliability examining conclude that
for each indicator in examined variable points out
significant or loading factor >0,5 (valid) (Appendix A).
However, in reliability examining points out cronbach alpha
>0,6 (reliable) (Appendix B). The technique of statistics

utilized in this study is paired sample t test used for
differentiate self-efficacy, self esteem, life interest and role
behavior before and after training.
IV
EMPIRICAL RESULT AND DISCUSSION
A. Sample Profile
In relation to sample profile, Table 1 shows that the majority
respondent characteristics were females (80,0%), ages
between 24 to 25 years old (70,6%) and drop out
diploma/university 56,2.
Table 1. Profile of Respondents (N = 73)
B. The Analysis of Difference among Self-Efficacy,

Self Esteem, Life Interest and Role Behavior before
and after Training.
The result of data processing of difference examining of

self-efficacy, self esteem, life interest and role behavior
before and after training can be seen in Table 2.
Table 2Comparison Group: Self Efficacy, Self Esteem, Life Interest and Role Behavior t test Pre and Postintervention
Based on table 2 it can be seen that the examining result of

paired sample t test for self-efficacy variable shows t test 2,132 by significance 0,036. It means that there is a
significant difference of self-efficacy before and after
training (Hypothesis 1 accepted). It defines that an
individual who involved in the training has different level of
self-efficacy than who do not involved. An individual with
high life skills will form a strong self-efficacy compared

with an individual with low life skills.
The examining result of paired sample t test for self-esteem
variable shows t test -2,660 by significance 0,010. It means
that there is a significant difference of self-esteem before
and after training (Hypothesis 2 accepted). It defines that an
individual who involved in the training has different self-

esteem than who do not involved. An individual with high
life skills will form a strong self-esteem compared with an
individual with low life skills.
The examining result of paired sample t test for life interest
that there is a significant difference of life interest before
individual who involve in the training has different life
interest than who do not involved. An individual with high
life skills will form a stronger life interest than who has low
life skills will form a weak life interest.
The examining result of paired sample t test for life interest
that there is a significant difference of life interest before
individual who involve in the training has different role
behavior than who do not involved. An individual with high
life skills will form a stronger role behavior than who has
low life skills will form a weak role behavior.
C. Discussion
The result of research finds that there is a significant
difference among self-efficacy, self esteem, life skills and
role behavior before and after respondents involved in the
training. It affirms once more that training for unemployed
youth will has close relation to self-esteem and self-efficacy
in a long-term period (Creed, et al., 1996; 2001).
Respondents in this research are very enthusiasm
participating in the training and they hope will get
advantages from the training. Based on interview, they tend
to hope that the implementation of life skills through the
training can be held regularly. In facts, from the training the
participants have more self-esteem and self-efficacy to look
for a job. An unemployed youth with lower self-esteem and
self-efficacy before get the training will have different
response than after training. Self esteem, self-efficacy, life
interest and role behavior from the respondents tend to be
increasing. It is proved that there is a difference result of
mean from respondents response before and after training.
Life skills like explaining previously has main goal to
accommodate society education needs who cannot go to
higher school level. Therefore, unemployed youth in this
research and got the training are hoped they have cognitive
and effective skills at least, on the taxon level they can apply
their knowledge and respond to do the job they studied, and
they have psychomotorics skill that they can do all the work
they have studied correctly (mechanism) (Kibler et al.,
2002). Albion et al. (2005) explain the role of age in
influencing the relationships among general self-efficacy,
proactive attitude, and proactive coping in unemployed
people. The general self-efficacy, proactive attitude, and
proactive cooping scores were found to be correlated, and a
moderating effect for age was found on the relationship
between proactive attitude and general self-efficacy. Their
research result indicated that the moderation process could
be explained by a mediating effect of proactive cooping.
Furthermore, result from a research by Turner et al. (1991)
stated that individuals could take a proactive approach to

reducing the negative aspects of unemployment by adopting
cognitive coping strategies. It means proactive individuals
regard the journey of their life as being determined by
individual factors, not external ones, and take responsibility
for changing their situation.
This research affirms that the measurement of literacy and
life skills can do by arising competency so someone may
have success in his life and useful for his community
(Murray, et al., 2005). The unemployed youth who got the
training if they have worked be expected they get earnings
to meet their needs. The definition of earning here is not
only for comply their daily needs but also they can be more
survive for better life quality. The ideal is respondent with
skills and knowledge able to work autonomy and open field
of endeavor for others. The developing program of life skills
is expected can help respondents having prestigious and
confidence in earning in the opportunity context in their
social environment.
A high life interest will be able to arouse role behavior with
strategic orientation. Role behavior with strategic orientation
can be created by innovative and conservative role (Schuler
and Jackson, 1987; Snell, 1992; Muafi, 2009). The complex
environment and pressure demand respondents having
innovative role behavior. The research result shows that the
complex and volatile environment demand will appropriate
to innovative behavior (Muafi, 2009). Innovative behavior
according to De Jong and Kemp (2003; Irianto, 2006) and
is principally an individual ability to exchange the way of
work in procedure, work practice and technique in work
finishing or applied some new advantage ideas. All of them
will give advantages for individual having innovative role
behavior by creative behavior, championing, exploring
opportunity, and always applying innovative role in every
action. According to Buhler et al (2007), life skills program
aim to prevent problem behavior by promoting abilities for
adaptive and positive behavior that enables us to deal
effectively with the demands and challenges of everyday
life.
V
CONCLUSION, IMPLICATION AND LIMITATION
OF THIS STUDY AND
Conclusion of this research states that there is difference

among self-efficacy, self esteem, life interest and role
behavior before and after training. Self efficacy is necessary
be increased since a close relation between expectation of
high self efficacy and success in working physically or
mentally at last it imply in life interest and role behavior.
Self-esteem is also be aroused actively in order using life
more meaningful, acceptable, responsible, distinct and
having integrity.
To increase the core activity in one life interest, it can be
done by expressing their life interest through; technology
application, quantitative analysis, conceptual thinking,
creativity, counseling, human relationship, entrepreneurship
control and idea expending. If one or more points from the
eight core activities increased partially or together it is
predicted will influence to strategic role behavior.
Meanwhile one role behavior can be increased by:
willingness to change for better life, innovative in life,

willingness to take risk for better life, work autonomy for
better life, creative and innovative, a long-term thought for
better future, quality and best work orientation, work target,
be autonomy and competence in life and responsible to
work.
This research has some limitations, they are: (1) having
sample or respondents of unemployed youth in Paciran sub
district that taken purposively so be worried the result has
not describe or generalize the entire unemployed youth in
Paciran sub district yet, (2) do not taken in depth interview,
so it is worried lack of problem exploration and in depth
information, particularly related to each dimension of
variable and (3) using perceptual measure that needs stimuli
processes from respondent to be selected, organized and
interpreted. But actually, respondent perception on the same
stimuli can be interpreted differently. This implication
causes perception on each respondent very subjective since
one perception on an object will be differently.
VI
12)
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Assessing of the SMEs Financial Competitiveness

Nicoleta Brbu-Miu
Abstract - This paper evaluates the financial competitiveness
or performance of SMEs acting in the building sector in
Romania. The financial performance is evaluated using a
model of determining the financial performance developed
especially for features of the Romanian business environment
in the construction sector. This model of prediction of the risk
of bankruptcy was achieved by using the information from
balance sheets of 11 enterprises acting in the building sector in
the period 2001-2006. In this approach, for assessing the
financial competitiveness has been used data from the balance
sheets of these SMEs in the period 2007-2008. The conclusions
show the relevance of the model in forecasting the financial
performance and ranking the SMEs by their performance.
The first sample includes 11 enterprises to which data on the

period 2001-2006 were used to determine the variables and
coefficients of the model mentioned above and the second
sample of 10 enterprises that were used for testing the same
model. The prediction of the bankruptcy in this paper was
achieved by using information from the balance sheets of
the enterprises of those 2 samples on the period 2007-2008.
This prediction is used for ranking the enterprises by the
financial competitiveness.
Keywords- financial competitiveness, risk of bankruptcy,

capital structure, returns on equity, financial performance,
retained profit ratio, financial modelling, general leverage
JEL Classification: G32, G. 33
The financial performance prediction for enterprises, banks

and not only, the lack of ability in paying the contracted
debts, is a topic of great interest, which for decennials
continues to be of great interest for researchers and
practitioners. Setting up a model for bankruptcy prediction
was, and continues to be today, the subject of many
scientific papers presented at national and international
levels. The models proposed until today have the
disadvantage that they may be applied only in the economies
of the countries where the statistical study was performed,
or within the branch or sector of activity studied, their use
unable to be extended to a greater area. Furthermore, the
periods marked by economic instability determine the
alteration of the correlations examined by the developed
score function, which limits in time the use of these models.
This situation requires an update at regular intervals of time,
or development of other models valid for the new conditions
(Siminic, 2005).
By studying the intervals found for the score function, some
enterprises are classified as presenting a high bankruptcy
risk, or a lower one, or without bankruptcy risk. From this it
results that the enterprises that show a high bankruptcy risk
obtain lower financial performances, and vice versa, the
ones that fall outside the bankruptcy risk obtain a high
financial performance. Researchers of the statistical models
have used the financial rates for building some predictive
functions of bankruptcy. All the predictive studies of
enterprises bankruptcy are based on original contribution of
Beaver's (1966) and Altman (1968).
Beaver has brought the most important contribution to the
univariate analysis of bankruptcy for an enterprise. The
technique of the univariate analysis implies the use of a
single financial rate in a model of bankruptcy prediction.
Beaver separately analysed few financial rates and selected
the critical point for each rate, so as to maximize the
prediction accuracy.
Altman realized a multivariate analysis of bankruptcy that
supposes to develop a multiple discriminate analysis. The
main idea of the multivariate analysis is represented by
INTRODUCTION
his study evaluates and predicts the enterprise financial

performance of the enterprises acting in the building
sector using the model of determining the financial
performance by financing designed in the paper Modelling
the Financial Performance of the Building Sector
Enterprises Case of Romania (Brbu-Miu, N., 2009a).
Unlike those models known in the literature, that were
designed taking into account the characteristics of
economies in which they were performed, this model takes
into account the specificity of the Romanian building sector.
The bankruptcy prediction of the enterprises as well the
financial performance is a great interest issue, which has
continued such attention to researchers and specialists for
several decades.
The development of many bankruptcy prediction models,
which made and still made the subject of numerous works of
specialty in the country and abroad show the importance of
the bankruptcy models. Sharma and Mahajah (1980) present
a general pattern of bankruptcy in which the ineffectual
management doubled by the inability of anticipating events
cause a systematic deterioration of performance indicators.
In the absence of the corrective actions, this deterioration to
the financial conditions determines the bankruptcy (Sharma
S. and Mahajah V., 1980).
In this approach has been started to the model of
determining the financial performance by financing that was
used for 2 samples of enterprises
Manuscript received 29.01.2010
Lecturer PhD, Department of Finance and Economic
Efficiency, Dunarea de Jos University of Galati, Address:
47 Domneasca Street, Galati, ROMANIA, Zip Code
800008, Phone: +40336130172, Nicoleta.Barbuta@ugal.ro
II
THEORETICAL AND EMPIRICAL LITERATURE

combining information related to few financial rates in a
single function (weighted index).
Beaver and Altman had many successors who developed the
performances of models for analysis the bankruptcy risk,
initiating alternate analysis methods. Thus, for bankruptcy
prediction had been shown by two schools (Anghel, I.,
2002): the Anglo-Saxon school represented by the Beaver
model, the models developed by Altman, the Edmister
models (1972), the Diamond model (1976), the Deakin
probabilistic model (1977), the Springate model (1978), the
Koh and Killough model (1980), the Ohlson model (1982),
the Zavgren study (1983), the Fulmer model (1984), the Koh
model (1992), the Shirata model (1999) designed in Japan
on the basis of Anglo-Saxon school studies; the continental
school represented by the Yves Collongues model (1976),
the Conan and Holder model (1979), the model of Balance
Exposure of France Bank, the model of the French
Commercial Credit (CCF), Chartered Accountants model
(CA Score 1987), the Score Function AFDCC 2 (1999).
Unlike the Anglo-Saxon school and continental school, the
Romanian school is more distinguished by theoretical
contributions. The economic and financial modelling made
history in traditional domains: multi-criteria models for the
financial and macroeconomic equilibrium and for the
quantification of this equilibrium (Brbu-Miu, N.,
2009b). The Romanian school (Anghel, I., 2002) is
represented by following empirical models: Manecuta and
Nicolae model (Mnecu C., Nicolae, M., 1996) proposed
in the metallurgical industry, Model B Bailesteanu
(Bileteanu Ghe., 1998) and Model I Ivonciu (Ivonciu P.,
1998). Siminica, M. I. has achieved a Model for analysis of
bankruptcy risk in the Romanian industrial firms (Siminic,
M. I., 2005). Also, I designed an aggregate index of
financial performance for the building sector enterprises
from Galati (Brbu-Miu, N., 2009a) that will be used for
financial performance prediction in this paper.
Bankruptcy risk prediction models have a predominantly
statistical character, being designed with a starting point that
takes into account the past financial status of bankrupt
enterprises (thus with very low financial performance) and
of some enterprises that experienced no financial difficulties
(thus, with high financial performance). As the obtained
results will be generalized for all enterprises showing the
same features with those under focus, mention must be
made from the start that the features and the activity sector
of the selected enterprises for the study must be presented.
III
THE MODEL OF DETERMINING THE FINANCIAL

PERFORMANCE DESCRIPTION
This study asses the enterprise financial performance of the

enterprises acting in the building sector using the model of
determining the financial performance by financing
(Brbu-Miu, N., 2009a). The main conditions that must
be met by all enterprises from the sample are: to be included
in the building sector; to grasp the evolution in time of the
financial performance of the enterprises under study; to have
a continuous activity throughout the analysed period; the
selected sample must include not only enterprises showing

high financial performance, but also low financial
performance.
The time period considered for data collection from the first
sample of enterprises is of 6 years that is 2001 2006,
which means that we managed to grasp the time evolution of
financial performance for the enterprises under study.
One essential condition taken into account when
establishing the sample was that the enterprises active in this
sector to show continuous activity during the chosen time
interval. This condition greatly reduced the number of
potentially sampled enterprises, as a great number of
enterprises closed their activity while other was only
beginning it. The greatest problem we faced was to identify
the building sector enterprises active in Galati County, for
which the site of the Ministry of Finance has yet to give a
solution. Thus, searching for these enterprises was mainly
based on their notoriety. Thus there were identified 11
enterprises.
The selected and analysed enterprises are representative for
Galati County. In the year 2006, they represented 0.93% of
the total number of active enterprises in the building sector,
with a turnover of 100.61 million euros, respectively
35.85% of the turnover obtained in the Galati county
building sector and, respectively, 5.78% of the total turnover
of the Galati county. Within the sampled enterprises in 2006
there were 3.639 employees, that is 29.55% of the
workforce employed in the building sector of the county,
and, respectively, 3.28% of the total employed in Galati
County.
The collection of data required to the study was provided by
the Register of Commerce by studying the balances filed by
those 11 enterprises. The financial information was
extracted individual, for each enterprise above the period
2001-2006 and aggregate to the building sector.
After a long analyse of many financial rates the enterprises
from sample were grouped in two categories: performant
enterprises or with a low risk of bankruptcy and nonperformant enterprise or with a high risk of bankruptcy. The
discriminate analysis had shown significant differences
between the two groups of enterprises (performant and nonperformant), for each ratio employed. Thus, was proved the
representativeness of the chosen sample for setting up the
model of determining the financial performance.
From the financial diagnosis of the enterprise, in Romanian
and foreign literature and also in financial practice, can be
derived a plethora of ratios that can be used as variables for
various models. From the whole of the financial ratios
presented in the literature, were selected only 8 for the
discriminate analysis, which were thought the most
significant. Finally, out of these were selected just 5 for the
model variables: return on equity, general leverage, retained
profit ratio, general liquidity and the weight of financial
debts within the total debts.
The return on equity measures the profitability of owners
capital that is the financial investment made by shareholders
when buying the enterprise shares (Stancu, 2002) and is
influenced by the way of asset securing and, thus, by the
financial structure of the enterprise (La Bruslerie, 2002).

The return on equity ( R f ) is calculated in accordance with
Rf
Net result
Owners' capital
the formula:
and quantifies the
remuneration of capital invested by shareholders, including
the net profit at the disposal of the enterprise for self
financing (Lumby, Jones, 2003).
The reasons for which were chosen the return on equity as
first variable took into account the fact that, as the intention
was to design a parameter of financial performance, we
appreciate it as being the most relevant parameter of this
variable, ensuring the best predictions, a fact demonstrated
also by Zmijewski (1983) in a study performed on 75
enterprises filing for bankruptcy, and 3.573 non-bankrupt
enterprises; also, for the owner, this is the most expressive
parameter for measuring the result as it is superior (as
compared to owners concern) to economic profitableness,
to expenses or turnover. On the other hand, it is a parameter
widely used by Romanian banks when performing the
analysis of enterprise worthiness, for example Raiffeisen
Bank and the Commercial Bank.
General leverage ( Gig ) calculated as follows:
Gig
Total debts
Own assets
reflects the degree in which own assets ensures the financing

of the enterprise activity. This parameter can be also
interpreted as a ratio of financial autonomy of the enterprise,
as it indicates the degree in which its long and short term
commitments are guaranteed by own assets.
The majority of Romanian banks use as trust indicator the
general leverage, but many times this is calculated as a ratio
between total debts and total liabilities (Raiffeisen Bank,
Commercial Bank, Romanian Bank for Development). As
the intention was to set up a model of financial performance
by financing, the general leverage mentioned in the above
formula is considered the most relevant parameter of the
decision for financing.
R
The reinvested profit ratio ( pr ) is a ratio less used in the
Romanian literature and in banking, but it was chosen to use
it within the model as Romanian enterprises used
extensively the profits for reinvesting. The reasons for doing
this refers to enhancing the enterprise position on the
competitive market, increasing the degree of capitalization,
redimensioning the social asset, and even taxation.
The retained profits are an alternative and cheaper method
of increasing owners capital in comparison with new shares
issued and is the most important source of capital used for
financing intangibles. More frequently, the literature deals
with the ratio of dividends distribution ( RDv ) by the
shareholders (Krainer, 2003), computed as: ( 1 R pr ). This
is because the investors, especially the ones who speculate,
are interested mainly in the level of earnings on short term
and in the time of recovering their investment by cashed
dividends.

The
general
liquidity
( Rlg )
computed
as:
Circulatin g actives measures the capacity of cash

Short term debts
flow of the enterprise that is short term solvency and reflects
the degree in which the turning into cash flow of circulating
actives can satisfy the exigible payment obligations.
There was chosen the ratio of general liquidity as it reflects
the short-term financial balance of the enterprise, although
this has proven to be a bad bankruptcy predictor, in
accordance with Zmijewski study. Yet, it is a parameter
widely used by banks, for example Raiffeisen Bank. With
the Commercial Bank and the Romanian Bank for
Development, in the above mentioned formula, the
circulating actives are corrected (diminished) with the value
of non valorised stock and of uncertain clients.
The weight of financial debts within the total debts ( D f % )
Rlg
is computed as: D f % Financial debts and reflects the ratio

Total debts
of financial debts with a view of pointing out the nature of
enterprise financing. This parameter shows the dependency
of enterprise towards banks and other business partners.
This is not a ratio that is used by banks, but it was
considered useful as a relevant indicator in what concerns
the temporal stability of financing sources used by the
enterprise.
Using these variables, the model for financial performance
assessment (Brbu-Miu, N., 2009a) obtained is:
Pf 0,32 R f 0,4554 Gig 4,0207 Ri 0,8787 Rlg 10,7815 D f %
This model allows for framing an enterprise with the

characteristics of those enterprises selected for the sample,
in a certain performance area. For this there are firstly
calculated the 5 financial ratios involved in the analysis, on
the basis of which the score P f is determined. In
accordance with its value, the enterprise will fall in one of
the following 5 performance areas:
- if Pf 4,25 the enterprise has a very high
financial performance;
- if 2,75 P f < 4,25 the enterprise has a medium
- if 1,25 P f < 2,75 the enterprise has a satisfactory
- if -0,25 P f < 1,25 the enterprise has a low
- if P f < -0,25 the enterprise has a very low
financial performance.
The limits agreed for setting up the intervals represent the
simple arithmetic average of scores granted for two
consecutive groups of enterprises.
The higher the value of score P f determined for an
enterprise, more than the value of 1.25, (the limit that
mathematically separates the enterprises with high financial

performance apart from the low financial performance
ones), the greater the possibility of obtaining a higher
performance. To always have a higher financial
performance, the recurrent calculation of the score P f is
needed, as its reduction in value implies a reduction in the
financial performance and, in these conditions, the managers
should take measures for recovery.
This model was later tested both for enterprises from the
first sample under study, and also for other enterprises in the
posterior sample, obtaining an average success ratio. Thus,
the following results were obtained after model testing for
the 11 enterprises in the initial sample:
In 2006, for performant enterprises, the success ratio
(comparing the predictive classification with the known data
on the initial sample enterprises) being of 85.71%, and
based on medium financial ratios (calculated for the latest
six years) 71.43% of enterprises were correctly included. In
2006, for enterprises with low performances, the success
ratio was 50%, and based on medium financial ratios 100%
of enterprises were included correctly. Overall of tested
enterprises included in the initial sample, the success ratio of
establishing the financial performance (calculated on the
basis of medium values of the financial ratios involved in
our analysis) was of 81.82% and for the year 2006 was of
72.73%.
Furthermore, the model was tested for also enterprises in the
same sector, which were not included in the first sample. In
the given conditions, it was noticed a prediction success
degree lower than the aprioric one, where only 60% of the
performant enterprises, and, respectively, only 60% of
enterprises with low financial performance, were correctly
grouped for the year 2006 and 80% of the performant
enterprises and 60% of non-performant enterprises were
correctly grouped for 2001 - 2006 period.

In conclusion, comparing the well-known models to the
international level for assessing the risk of bankruptcy with
this model for determining the financial performance
adapted to the specificity of the Romanian economy there
are clear the significant differences, and it results as models
for assessing the risk of bankruptcy are relevant only if there
are satisfied conditions related to the presence of some
similar economic characteristics in the analyzed period and
enforceability on some enterprises in the sector of activity
had referred to.
IV
METHODOLOGY AND DATA PREDICTION
The capacity of prediction of this model was tested on those

2 samples of enterprises in the period 2007-2008. The first
sample includes 11 enterprises to which data on the period
2001-2006 were used to determine the coefficients and
variables of the model for determining the financial
performance (Brbu-Miu, N., 2009a) and the second
sample of 10 enterprises that were used for testing the
mentioned model. The data for period 2007-2008 were
collected from the balance sheets of the enterprises. There
were calculated the values of the variables considered and
determined the P f score for both samples.
Firstly, starting to the model of determining the financial
performance it was achieved the prediction of financial
competitiveness for the period 2007-2008 for the first
sample (a priori). The ranking and appreciation of
enterprises after the financial performance in 2007 and 2008
are presented in the Table 1 and 2.
Table 1. Ranking of the enterprise after the financial performance in 2007 (a priori sample)
Enterprise
Appreciation
Interval P f
P f score
CONSTRUCII AVRAM IANCU SRL
ARCADA COMPANY SA
CONFORT SA
ARCADA SRL
SOREX SA
VEGA 93 SRL
CONSAL SRL
MOLDOVULCAN SA
CONSTRUCII I REPARAII SA
ICMRS SA
CONSTRUCII FEROVIARE SA
10.693
6.688
5.872
5.708
4.879
2.449
1.852
1.788
1.047
0.945
0.028
Pf
4,25
Enterprise has a very high financial

performance
P
1,25 f <
2,75
Enterprise has a
financial performance
P
-0,25 f <
1,25
Enterprise has a low financial

performance
Source: Calculus performed by author
satisfactory
If in 2006, the enterprises Arcada Company and Sorex, were

classified as having a high financial performance (BrbuMiu, N., 2009), the Table 2 show that in 2007, when was
the largest development of the building market, both
enterprises are maintaining to the same level of
performance, as well as in 2008. In 2007, the enterprises
Construcii Avram Iancu, Confort and Arcada were included
in this range of performance and in 2008 only Arcada
maintain this position. In 2006 and there wasnt any
enterprise classified as having a medium financial
performance but in 2008 Construcii Avram Iancu is framed
in this range of performance. The most fluctuating evolution
of the financial performance was registered by Confort that

in 2006 was in the uncertainty area, with a satisfactory
performance, in 2007 registered a high financial
performance and in 2008 was ranged in the enterprises with
low financial performance, that proves the significant
changes that took place in the building sector caused by the
effects of the economic and financial crisis.Also, we can
observe in the Tables 1 and 2 that if in 2007, there were only
3 intervals of performance, in 2008 the financial
performance of the enterprises was dispersed in all 5 ranges
of the model.
Table 2. Ranking of the enterprise after the financial performance in 2008 (a priori sample)
Enterprise
Appreciation
Interval P f
P f score
ARCADA SRL
CONSAL SRL
VEGA 93 SRL
ARCADA COMPANY SA
SOREX SA
9.555
6.565
6.131
5.934
5.021
Pf
CONSTRUCII AVRAM IANCU SRL
3.865
2,75
Pf
< 4,25
MOLDOVULCAN SA
1.792
1,25
Pf
< 2,75
CONFORT SA
ICMRS SA
CONSTRUCII FEROVIARE SA
1.093
0.428
-0.332
-3.463
-0,25
Pf
< 1,25
CONSTRUCII I REPARAII SA
Pf
4,25
< -0,25

performance
Enterprise has a medium financial
performance
Enterprise has a satisfactory
financial performance
Enterprise has a low financial
performance
Enterprise has a very low financial
performance

Studding the individual values of the model variables we
can conclude that more affected by the crisis effects were
enterprises that have established large debts unpaid or with
large terms of collection (that means a low current
liquidity), those enterprises who have several works in
progress and need more source of financing to complete the
work (a high degree of debts). This is an explanation for
enterprise Confort that in 2008 presents a high risk of
Enterprise
Table 3. Ranking of the enterprise after the financial performance in 2007 (a posteriori sample)
Appreciation
Interval P f
P f score
DRUMURI I PODURI SA
VIVA CONSTRUCT SRL
TRIPLEX SRL
COMTIEM SRL
KATY SRL
CIVICA SA
BAZA SRL
12.177
8.210
6.774
5.014
3.960
3.766
3.385
BRICO SRL
VLCEANA SA
UNICOM SA
bankruptcy in conditions which in the preview period had a

risk of bankruptcy less. The enterprise Moldovulcan has
passed from a high competitiveness in 2006 to the
uncertainty area in 2007 and 2008. The whole analyzed
period, the enterprises ICMRS, Construcii feroviare and
Constructii i reparaii where within the range with high
bankruptcy risk.
Pf
4,25
Enterprise has a very high financial performance
2,75
Pf
< 4,25
Enterprise has a medium financial performance
1.667
1,25
Pf
< 2,75
Enterprise has a satisfactory financial performance
-0.477
Pf
< -0,25
Enterprise has a very low financial performance

The return on equity that has been significantly reduced due
to the economic crisis there is another cause that has
generated the increasing of the bankruptcy risk to the
assessed enterprises.
Secondly, the same model was applied for prediction the
risk of bankruptcy on the period 2007-2008 for the second
sample of enterprises (a posteriori) used in the testing of the
above model. The ranking and appreciation of enterprises
after the financial performance in 2007 and 2008 are
presented in the Table 3 and 4.
If in 2006, the enterprises Katy and Baza were classified as
having a high financial performance (Brbu-Miu, N.,
2009a), the Table 3 show that in 2007 both registered a
medium performance, and in 2008 (Table 4) only enterprise
Baza returns to the same class of competitiveness. This
proves that the enterprises acting in the building sector were
affected by the economic and financial crisis as well as the
first sample. This situation appears to be a generalized
evolution in the building sector and not only. The enterprise

Unicom, classified in 2006 as having a high risk of
bankruptcy becomes bankrupt and from 2007 was removed
from the Register of Commerce.
If in 2006, the enterprises Viva Construct and Comtiem
were classified as having a medium performance, in 2007
and 2008 progressed, entering in the class of companies
with high financial performance, despite of the financial and
economic crisis, which did not affect its activity. These
companies were involved in small-scale works, which no
required important sources of funding or had worked with
materials provided by the client.
Brico is the enterprise that overall period maintained in the
uncertainty area, but from one year to another, the
performance index slow down. A very fluctuating evolution
had the enterprise Drumuri i poduri that in 2006 and 2008
had a high risk of bankruptcy and in 2007 had a financial
performance very high to the sample level.
Table 4. Ranking of the enterprise after the financial performance in 2008 (a posteriori sample)
Enterprise
Appreciation
Interval P f
P f score
VIVA CONSTRUCT SRL
11.056
BAZA SRL
9.231
TRIPLEX SRL
7.345
COMTIEM SRL
5.225
CIVICA SA
4.346
KATY SRL
3.531
VLCEANA SA
1.598
BRICO SRL
DRUMURI I PODURI SA
UNICOM SA
P f 4,25

performance
2,75 P f <
4,25
Enterprise has a medium financial

performance
1.472
1,25 P f <
2,75
Enterprise has a satisfactory financial

performance
-2.191
P f < -0,25
Enterprise has a very low financial

performance

V
CONCLUSIONS
In conclusion, the model for determining the financial was

created using financial data of the enterprises in the period
2001-2006, a relatively stable period that generated some
exigency in assessing the financial performance of the
enterprises. If the model had taken into account and the
period 2007-2008 or 2009 (when the effects of economic
and financial crisis had made felt this) then the model
exigency would be lower. Under these conditions, it is
possibly that some companies evaluated in this paper having
a low financial performance may actually be in the area of
uncertainty and the enterprises from uncertainty area may be
in fact assessed having a high degree of competitiveness.
This means that such models requires an update at regular
intervals of time, or development of other models valid for
the new conditions
Anyway, the capacity of prediction of this model was
proved and the most important advantage of it is that
provide a way of ranking of the enterprises after their
financial performance. Also, the model provide the financial
performance forecasting for an enterprise in the case in
which we can make a prevision as real as possible of the
financial rates that constitute the model variables.
The model may offer some other benefits: listing enterprises
in certain performance areas according to the value of the
financial performance aggregated index; at a certain
moment, the management of the enterprise can take
decisions related to the activity, investments, financing etc.,
according to the values of the financial performance index;
starting from a sought level of financing rates that constitute
the model variables, the enterprise management can timely
acknowledge the performance level their enterprise will
take, and can take corresponding decisions.
VI
ACKNOWLEDGEMENTS
This research was performed on the base of the model

proposed in the doctoral thesis Enterprise Financing within
the National Strategy of Development Converging to the
European Integration Process and published in the article
Modelling the Financial Performance of the Building Sector
Enterprises Case of Romania, in Romanian Journal of
Economic Forecasting, No. 4/2009. The author is grateful
for the comments and recommendation provided by the
Scientific Coordinator, Professor PhD Radu Stroe from
Bucharest Academy of Economic Studies.
VII
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A Study of the Integrity of Internet Financial

Reporting: Empirical Evidence of Emerging
Economy
Mahdi Salehi (Corresponding author)
Assistant Professor of Accounting Department, Ferdowsi University of Mashhad, Iran, Tel. +989121425323, Email: Mahdi_salehi54@yahoo.com
Mehdi Moradi
Assistant Professor of Accounting Department, Ferdowsi University of Mashhad, Iran, Email:
mhi_moradi@yahoo.com
Arash Ariyan Pour
Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad, Iran
Abstract- Dramatic development in presenting internet
information is attributed to this fact that companies can put
more information at their websites by spending least expenses,
and internet enables them to access to different users and
scattered information. Although companies may have websites,
the kind of information presented on the internet is different.
In this study, descriptive research investigates the quality and
manner of internet financial reporting. The main purpose of
this study is to conduct an investigation of the integrity of
internet financial reporting of the corporations listed in Tehran
Stock Exchange. To do this, a check list of 34 attributes was
prepared; after referring to companies websites, this check list
was completed. Findings indicate that the companies
investigated in this research are weak in presenting financial
statements at the website of their corporations, compared to
the similar researches in other countries. Also, the archive of
financial statements of the companies exists in Tehran stock
exchange is incomplete on the companies websites, and in
many cases companies are lacking in that.
Keywords- Internet financial reporting, Portable document

format, and Hypertext markup language.
I
INTRODUCTION
uring last years, internet has provided new situations

to different print information, including financial
statements and annual reports (Xiao, Jones, and Lymer,
2005). Since internet is able to uniform other information
and communication technologies, so its convergence with
data base technology, can create many opportunities to
improve reporting. Making the browser technology that
makes more access to the internet has led to increasing the
dissemination of big companies reports at their websites.
Internet Financial Reporting (IFR) describes one of the other
existing printed information distribution channels and
provides complementary and extended information, which
are not economically worth of printing (Smith and Pierce,
2005).
IFR points to the use of corporations websites to print
information related to their financial function. When
corporations use IFR, there is a comprehensive set of
financial statements (including notes and auditors report) at

their websites, and a link has been created to their annual
report in everywhere of the internet. The content of IFR can
include annual reports, quarterly reports, press releases (to
print in newspaper), share price information, analysis reports
and management discussions of operations (Poon and Tak
Yu, 2003). In general, corporations that use IFR, their
annual report is together with and authors report. In
addition, most countries use the form of portable document
format (PDF) to print reports (Ashbaugh, Johnstone and
Warfield, 1999), also acquired experimental information
show that, corporations which use IFR, are generally larger
and more profitable than other corporations (Pervan, 2005),
this from of reporting can be presented through video or
audio files, too (Kelton, 2006).
Features and Advantages of IFR
Todays, many corporations regardless of their size, put the
information at internet websites and in access of the public.
At those sites by linking from one site to others, people may
in few seconds access to very much information.
Developed methods of information presentation consist of
using audio, video and graph, (FASB, 2000) among the
motivation on which, corporations present their financial
information, we can refer to decreasing time and expense of
printing information, (Lymer and Tallberg, 1997; Louwers,
Pasewark and Typpo, 2000; Haasbroek, 2003; and
Khadaroo, 2005) accessing to up-to-date information
(Rhein, 2000), contact with unfamiliar customers and
information background (Lymer, 1996; Gaved, 1997)
completing traditional disclosure methods, increasing the
amount and kind of disclose information, improving the
access to potential investors, existence of hyperlinks to other
information, increasing the investors exchanges, improving
the manner of presenting corporations function, forthcoming
prospect and corporations value, ability of downloading and
manipulation of data, increasing international addressees
and possibility of global marketing, (Conosco, 1999) and
possibility of dynamic information up to dating (Haasbroek,
2003). It cause access to potential investors in all some
companies encountered to increase information exchanges

to improve how the investment performance of future
corporations downloading and manipulation of data and
available interested international marketing to global
(Russell, 2000; and Xiao, Jones, and Lymer, 2002) and
available up-to- date dynamic cited (Lymer, 1997).
Okelly (2000) expresses some features of this, like:
i. Access: accounting information users have
unlimited and clear access to financial information.
ii. Immediacy: accounting information users are on
time in searching information, and this is possible
through IFR.
iii. Richness: users are searching for full content video
and media on world web.
iv. Connectivity: users ask for accessing to accounting
information regardless of geographical places.
v. Interactivity: information users want to use
accounting model for their personal interests.
vi. Beattie (1999) regarding immediacy indicates that
from ancient times, external reporting had periodic
nature and because of lacking the on time feature,
has always been criticized, while internet
connection can provide the possibility of
immediate reporting.
II
REVIEW OF RELATED LITERATURE
IFR is a new technology that has been introduced in

financial reporting domain. Researches related to
corporations reporting based on internet were begun in
1996 and 1997 (Allam and Lymer, 2003). Earlier
investigations indicate that first put their financial
information on the internet, among these investigations can
be referred to the researches of Petravick and Gillett (1996);
Lymer, (1997); Louwers et al, (1996); Debreceny and Gray
(1997). Louwers et al, (1996) investigated 150 companies in
the United States.
They concluded that, 97 companies investigated had
websites, but only 35 companies showed all information
(complete annual report) at websites and 42 companies
although having website, did not present information at
websites. Following these investigations, some of the next
researches extended these exploratory researches through
investigating other geographical domains or through
developing the breadth of examined features to broaden the
standards and criterions considered in earlier researches.
Among those, it can be referred to Gowthorpe and Amat
(1999), Hedlin (1999), Pirchegger and Wagenhofer (1999),
Ashbaugh et al, (1999), Oyelere et al, (2000), and Ettredge
at al, (2001). For example, in Austria a research was
directed by Pirchegger and Wagenhofer (1999) about using
the internet to present final information, then they analysis
these results and compared them with their corresponding
corporations in Germany. They expressed that, on average,
the level of internet use in both countries is the same.
Recent investigations by Canadian institute of chartered
accountants (CICA) and Financial Accounting Standards
Board (FASB) developed this way by considering other
aspects like the form of moving annual reports in internet
and access ability. For example, CICA was responsible for

doing a research in North America to reach an insight into
the amount of using web for financial reporting. This
research was done by Trites (1999). In this study, it was
cleared that the level of using World Wide Web to present
financial information is high, that is 69 per cent of these
corporations have websites and 35 per cent, have some
forms of presenting financial information at their websites.
In this research kinds of profession reporting (financial and
non-financial) were discussed about, and implications of
electronic online reporting for accounting standards were
referred to.
FASB (2000) conducted a study about variety of IFR,
among the objects of this research design, which it can
referred to listing the variety of IFR, considering the current
and forthcoming needs of users of disseminated electronic
information, and summarizing the existing noticeable webbased information. This board prepared a checklist of
attributes related to investment, financial reporting, audition
and other attributes.
Results showed that 99 companies had websites. In recent
years, the form and certain features of corporations internet
reporting and certain features of corporations internet
reporting and their impact on institutes and users reporting,
are discussed about. Among these we can refer to research
by Ettredge et al, (2001). In the research by Debreceny and
Gray (1999) about 45 big corporations investigated in
England, France, and Germany, 36 corporations presented
their annual statements in the form of portable document
format or hypertext markup language, the committee of
international accounting standards conducted a study by
direction of Lymer et al, (1999). This research was
investigated in 42 different countries, through investigating,
it was cleared that 86 percent out of 660 companies
investigated had websites. Marston and Polei (2004)
directed a study which in this research a checklist was used
to evaluate corporations websites. This check list was based
on Pirchegger and Wagenhofer (1999) checklist items
existing in Marston and Polei (2004) were generally 53
cases, and 18 other cases were added too. Another study was
done by Allam and Lymer (2003) about very big
corporations in 5 countries of the world, including America,
England, Canada, Australia, and Hong Kong. They
investigated sample included 50 big corporations of each
country, in general consisted of 250 corporations. The
checklist used in this research to evaluate integrity of IFR is
based on research by financial accounting standards board
and committee of International Accounting Standard (IAS).
Results indicate that all American, English, Canadian,
Australian corporations have websites; however, in Hong
Kong corporations do not have websites.
Researchers stated that, there was no meaningful difference
between IFR methods used in American and English
corporations. They also stated that the level of IFR in
America, England, and Canada is better than other countries.
Also in this research, the relation between size of
corporations and amount of internet reporting was
investigated. Except Australia, in 4 other countries, no
meaningful relation was found.

Allam and Lymer (2003) after investigating the size of
corporations, level of reporting methods and difference
between reporting methods of big corporations listed in
different countries, concluded that reporting methods is
different in countries of different domains. In the same
sense, Khadaroo (2005) also concluded that reporting
methods is different in Singapore and Malaysia. Khadaroo
(2005) stated that although there was increase in number of
corporations and kinds of information provided in the
internet. The quality of information reported in the internet
is low for users, because auditors have little control on the
content of web and changes resulted from audited
information Malarvizhi and Yadav (2008) conducted an
empirical study in India. Results show that Indian
corporations use different methods for IFR. This sample
include 24 the best corporations of India that consists of 16
industrial corporations and nonindustrial corporations. They
concluded that corporations at chemical and pharmaceutical
industries have better environmental reporting than other
corporations. Dutta and Bose (2007) conducted a study in
Bangladesh. They directed the research on 268 companies in
Dhaka Stock Exchange and Chittagong Stock Exchange.
Purpose of their research was investigating the access ability
of the corporations websites in Bangladesh Stock Exchange
and presenting a complete snapshot from the integrity of
IFR of these corporations. Results showed that only 104
corporations (38.81%) had websites. Also 143 corporations
had no websites, access to other websites (21 corporations)
was impossible.
Researchers stated that only 64 corporations (61.54%)
showed their financial information on their websites, also
only 4 corporations (3.85%) presented their last financial
year footnotes. Among other results we can refer to,
corporations use of portable document format to present
reports, most companies made use of this framework.
In short, IFR is a new and broad research topic, which
develops day by day, and many factors like social, cultural,
organizational factors can influence the acceptance of the
IFR, nevertheless in Iran this reporting system has not still
been publicized, but is discussed about as new topic.
III
RESEARCH METHODOLOGY
A. Preparing the checklist of IFR

Allam and Lymer (2003) in their study about IFR on 5
countries of the world made use of a checklist shows
attributes were used in FASB or CIAS researches. Also in
Germany, Marston and Polei (2004) made use of a check
list, which was used in many researches to evaluate
corporations websites. Based of their checklist is the same
checklist prepared by Pirchegger and Wagenhofer (1999)
and was used to investigation the integrity of financial
information at corporations websites. Already, CICA
(2008) have presented a check list on internet financial and
commercial reporting domain. It is necessary to say that
most of classifying these attributes is different in different
researches. For example, the attribute of current share
price in Allam and Lymers (2003) research is classified in

general attributes, while in Marston and Polei (2004)
research and CICA, this attribute is in Timeliness of
information and share information classes respectively.
In this study, attributes of said checklists were matched with
Iranian situation and finally a checklist of 34 attributes was
prepared.
i.
The manner of gathering information to complete

IFR checklist
In this research, we needed the websites of corporations

listed in Tehran Stock Exchange (TSE) to complete the
checklist prepared.
To finding out websites of corporations, some methods were
used.
Regarding
to
the
investigation
done
in
www.iranbourse.com, corporations websites were listed.
However, these websites were not complete and in some
cases were wrong. Therefore, a list was received from TSE.
In this received list, corporations websites were incomplete
too, and included only 210 corporations websites, for every
corporations websites acquired from www.Iranbourse.com
and list were controlled to determine whether these websites
are true or not. In some causes the websites were wrong;
also information acquired from the website of this
organization was in conflict with information received from
office of this organization. Corporations that accessed to
their websites were impossible Internet explored browser
Internet explorer 7 and, Google searching engine were
used. In this section some of the other corporations website
was listed, finally for other corporations whose website
added was not found so far phone call was made, then
featured so said corporations were matched with the
checklist.
ii. Items constituting the checklist and results of its
completion
This section related to a checklist prepared on the basis of
researches to determine the characteristics of IFR for every
corporation in TSE. In investigation related to finding
website of corporations listed in TSE, for 342 corporations
(84.20%) were acquired websites and 64 remaining
corporations (15.80%) had no websites. Among all
corporations having websites, only the website of 303
corporations (74.60%) were accessible and out of remaining
websites, and websites were in reconstruction (2%) and 31
websites (7.60%) were inaccessible with matching the
attributes of checklists, finally the checklist of this research
was classified in 6 sections:
A. General attributes;
B. Corporations overview;
C. Accounting and financial information;
D. Corporations governance information;
E. Timeliness of information; and
F. Contact details and other information.

A. General Attributes
First class of the checklist attributes in this research includes
following cases:
1) Site Map: usually site Map shows more details of
the site information. This map consists of
hyperlinks. That user can directly crawl to a certain
page or section of the website. Regarding to the
investigation done in TSE 106 corporations
(26.10%) had site maps.
2) Search Box: search box helps to identify the
location of certain information, and users can reach
to a certain term or clause by entering that
regarding to the investigation done in TSE, 121
corporations (29.80%) had search box.
3) News summaries
Links to News summaries:
News summaries section on the websites, for
instance, includes press release to print in
newspaper and general news about the
corporations. One of the reasons, corporations
reflex links to the information in other resources of
their website, is that, through which they guarantee
the rightness, completeness and timeliness of the
corporations
information.
Regarding
to
investigation done in TSE; 106 corporations
(25.40%) had news summaries. Also 103
corporations (25.40%) had Links News summaries.
B. Corporations Overview
The second class of checklist includes the following
attributes
1) Information related to corporations activities and
objectives-This
section
includes
general
information
about
the
corporations like
corporations headquarters and corporations
mission and objectives. Objectives discuss can
include the summaries of corporations successes in
the past, among other things we can refer to
overview of the industry. Regarding to the
investigation done in TSE, 242 corporations
(59.60%) present information and goals of the
corporations at websites.
2) Customer profile-among cases related to customer
profile we can name details of important customers
like their location.With relation to investigation
done in TES 10 corporations (2.50%) presented
their customer profile information at the websites.
3) Employee profileAmong cases related to
employee profile we can refer to the number, age,
sex, and duties of employees in each section, with
relation to investigation done in TSE 12
corporations (3%) presented their employee profile
information at the websites.
4) Introduction or advertising the products and
services of the corporations- Introduction or
advertising products and services at the
corporations website is a method corporations use

to sell their products and introduce their services to
others. With relation to investigation done in TSE
252, corporations (62.10%) introduced and
advertised their products at corporations website.
C. Financial And Accounting Information
Third class of the checklist is a set of attributes which show
the accessibility to financial and accounting information.
This class includes following attributes
1) Audited balance sheet of last financial period:
regarding to investigation done in TSE, 56
corporations (13.80%) have presented audited
balance sheet of last financial period at their
websites. Among these, 42 corporations (10.30%)
have presented in form of portable document
format, 11 corporations (2.70%) in form of video
file.
It is essential to say that, to determine download
ability of financial statements presented at the
websites, financial statements of corporations
presented, were downloaded.
The form of presenting financial statements is often through
portable document format hypertext markup language and
video files are other format.
In rare cases both Excel and Word files have been used.
Later, statistics related to the presentation of financial
statements will be provided.
2) Profit and loss statements of last financial periodRegarding to the investigation done in TSE, 54
corporations (13.30%) have presented audited
profit and loss statements of last financial period at
their websites. Among these 43 corporations
(10.60%) have presented in form of portable
document format, and corporations (2%) in form of
hypertext markup language and 3 corporations
(0.70%) in form of video file.
3) Audited cash flow statement of last financial
period-Regarding to the investigation done in TSE,
42 corporations (10.30%) have presented audited
cash flow statements of last financial period at their
websites. Among these, 3 corporations (0.7%) have
presented in form of hypertext markup language,
36 corporations (0.7%) in the form of video file.
4) Notes related to the audited financial statements of
last financial period- Regarding to this matter, 38
corporations (9.40%) have presented the attached
notes relates to audited financial statements of last
financial period at their websites. Among these 36
corporations (8.90%) have presented in form of
portable document format, 2 corporations s (0.5%)
in form of hypertext markup language.
It is necessary to say that, the archive of corporations
financial statements in uncompleted,and in many cases
corporations are lacking in that. Result overview of financial
archive for industries that put them on the website is
presented in Table 1. Table 1 illustrates that none of the
corporations have completely presented financial statement
in year of 2007. Among other important cases, we can say

that the number of archives were low during different years.
For example, 25 corporations (6.20%) have presented their
financial statements of 2006 in form of portable document
format, but only 17 corporations (4.20%) have disclosed the

attached notes of that year in form of portable document
format on the websites.
Table 1: results related to financial statements archive exiting at the websites of corporations listed in TSE.
Name of
Total number of corporations
Total number of corporations having
industry
having basic financial statements
attached notes with financial statements
Coal
extraction
Metal
are
extraction
Mass
production of
properties
banks,
institutes and
other
organizations
automobile &
construction of
segments
Computer &
related
activities
other products
of nonmetal
other financial
mediators
Financial
investments
cement, lime,
chalk
Industrial
multifold
oil products,
coke nuclear
fuel
basic metals
sugar & cube
sugar
Tile
and
ceramic
Machinery &
equipment
Wooden
products
Chemical
products
Food
&
beverage
products
2001
and
before
2002
2003
2004
2005
2006
2001
and
before
2002
2003
2004
2005
2006
1p
1p
1p
1p
1p
1p
1p
2p
1p
1p
1p
1p
1J
1P
1J
4P
1J
3P
1J
1J
1J
4P
1J
2P 1J
2P
2P
2P
2P
2P
2P
2P
2P
2P
2P
1J
1J
1P
1P
2P
2P
1W
2P
1W
2P
1W
2P
1W
2P
2P
2P
2P
2P
2P
2P
1P
2P
3P
2P
1P
1P
1P
2P
2P
1P
1P
2P
1P
1P
2P
2P
3P
1P
1P
1P
1P
1P
1H
1P
1H
1P
1H
3P
1H
1P
1H
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1P
1H
1H
1H
1H
1H
1P
1P
2P
1P
1P
1P
2P
1H
1H
1H
1P
1P
1P
2P
5P
3P
1P
1P
1P
2P
4P
3P
1J
1J
1H
1J
1P
1H
1P
1H
1J
1P
1J
1P 1J

except sugar &
cube sugar
Textile
materials
pharmaceutical
products
Total
1P
1P
1P
1P
1P
1P
1P
1P
2P
2P
3P
2P
1P
1P
1H
1H
2H
3H
16P
19P 33P
8P
25P
3H
6H
6H
11P
13P
24P
7P 1J
1J
6H
6P
6P
17P 1J
2J
2J
2J
1J
2J
1J
1W
1J
1W
1W
1W
Notes; p =Portable Document Format; H=Hypertext Markup Language; W= Word; and J=IPEG
-
It is necessary to say that among industries having complete

archives of financial statement, Tile and Ceramic industry
has the least amount of presentation, for example only one
corporation of this industry had financial statements archive,
and only for 2006.
5) Interim financial statements of 2008: regarding to
the investigation done in TSE, 8 corporations
(1.90%) have presented interim financial of 2008 at
their websites. Among these, 7 corporations
(1.70%) have presented in form of portable
document, 1 corporation (0.20%) in form of excel.
i. Auditors report about financial statements of last
financial period
ii. Auditors signature on audit report of last financial
period.
iii. Legal inspectors report about financial statements
of last financial period.
iv. Legal inspectors signature on inspector report
related to financial statements of last financial
period.
Auditors report is an important source of making annual
reports credible and assuring, legal inspector expresses his
idea of financial statements and of boards activities report.
Regarding to investigation done in TSE, 34 corporations
(8.40%) have presented the auditors and legal inspector
report at the website. Among these, 32 corporations (7.90%)
have presented in form of portable document format, 2
corporations (0.5%) in form of video, for corporations
presenting auditors report, auditors report and legal
inspector report are in same report.
In all cases, the signature of auditor and inspector has been
scanned.
i. Overview of financial ratios related to last financial
period. Regarding to investigation done in TSE,
only 1 corporation (0.2%) has presented financial
ratios of last financial period in summary at its
website and the form of presentation was hypertext
markup language.
ii. Link to www.iranbourse.com : Regarding to
investigation done in TSE, 60 corporations
(14.80%) are linked to www.iranbourse.com
through their corporations websites. Only 23
corporations (5.70%) show the share prices of last
year on their websites.
D. Corporations Governance Information

Items related to this class of checklist includes following
cases:
Name and characteristics of members of board.
Name and characteristics of management.
Regarding to the investigation done in TSE, 74 corporations
(18.20%) present information of the board, like
characteristics, manner of contact, background and in some
cases the name of their representative, presented the
information related to corporations management at their
websites.
The boards report of last characteristics of period.
The signature of the board on boards report of last
characteristics of period.
With relation to investigation done in TSE, 26 corporations
(6.40%) have put the boards report at the website of
corporations. In 24 corporations (5.90%) the form of
presenting report is portable document format and in 2
corporations (0.5%) it is in form of hypertext markup
language. It is necessary to say that, in 21 cases (5.10%), the
signature of members of the board was seen on the report.
Results of annual general congress related to last
characteristics of m period: the investigation done
in TSE shows that 14 corporations (3.40%) have
presented the results of annual general congress of
last characteristics of m period at the website. In 8
corporations, the form of presenting these results is
portable (0.2%).
Document format, for 5 corporations (1.20%) is in form of
hypertext markup language and for one corporation (0.2%)
is in form of Word file.
Prediction about corporations operations: in this
section, some information has been presented about
buying & selling, budget and each shares profit
related to forthcoming financial period. Regarding
to the investigation done in TSE, the website of 40
corporations (9.80%) includes information related
to corporations; forthcoming operations. It is
noticeable that one corporation has presented the
audited forth coming financial statements at the
website.
E. Time Lines Of Information
3) Post and phone number
This class of checklist includes the following cases:

1) Determination of last updating: regarding to this
matter in TSE, 20 corporations (4.90%) show the
updating of information at the corporations
website.
2) Current share price or share price at last day of
transaction regarding to investigation done in TSE,
32 corporations (7.90%) show the share price at
that day. In some corporations that no transaction
has done, the price of share have been considered
base on last day of transaction.
3) Financial calendar: Among cases registered in
financial calendar we can refer to date of annual
congresses or results of forthcoming quarters.
Regarding to in TSE, none of corporations have
presented this attribute at their websites.
F. Contact Details And Information
Corporations should present their contact information

completely so that investors and beneficiaries could contact
with the corporations and receive their essential information.
Regarding to the investigation done in TSE, 262
corporations (64.50%) have presented e-mail of corporations
at the website. Other necessary information for investors to
make contact includes fax & phone number and postal
address. Regarding to the investigation done in TSE, the
website or 251 corporations (61.80%) includes fax & phone
number, and website of 252 corporations (62.1%) present
the corporations post address.
4) English version of website: since corporations can
have different users in the countries, so it is better
to present their websites information in different
languages.
Regarding to the study in TSE 246 corporations (60.60%)
have English version for their website. Overview of results
acquired from investigation the websites of corporations
listed in TSE is shown in Table 2.
Last class of the checklist includes following cases.

1) E-mail to contact
2) Fax and phone number
Table 2. Results of integrity of IFR of corporations listed in TSE

Name of industry
Total number of corporations
Number of accessible websites
Number of corporation that dont have websites
Number of the websites in reconstruction
Number of inaccessible websites.
Total
Site map
Search box
News summaries
Links to news summaries
Information related to corporations activity
Customer profile
Introduction or advertising the corporations
products ad services
Audited balance sheet of last financial period
Audited profit & loss statements of last financial
period
Audited cash flow statements of last financial
period
Attached notes of last financial period (LFP)
Interim financial reporting
Auditors report of last financial period
Signature of auditor report of (LFP)
Legal inspectors report of (LFP)
Signature of legal inspector report of (LFP)
Overview of financial ratios related to last period
Links to www.iranbourse.com
All industries
Number
406
303
64
8
31
406
106
121
106
103
242
12
Per cent
252
62.10
42 p+11 H+3 j
10.30 P+2.70H+0.7 J
43 P+8 H+3 J
10.60 P+20.00 H+0.7 J
36 P+3 H+3 J
8.90 P+0.7 H+0.7 J
36 P+2 H
7 P+1 X
32 P+2 J
34
32 P+2 J
34
1
60
8.90 P+0.5 H
1.70 P+0.2 H
7.90 P+0.5 J
8.40
7.90 P+0.5 J
8.40
0.2
14.80
100.00
74.60
15.80
2.00
7.60
100.00
26.10
29.80
26.10
25.40
59.60
3.00
corporations share price

23
5.70
Name and arrangement of board of director
74
18.20
Name and managements information
77
18.90
Letter / board report (LFP)
24 P+2 H
5.9 P+0.5 H
Signature on boards report
21
5.20
Results of general annual meeting of (LFP)
8 P+5 H+1 W
2 P+1.2 H+0.2 W
Prediction of analysts (buying/selling,
40
9.80
operations/EPS/Budget)
Determination of last updating
20
4.90
Current share price
32
7.90
Selling or weekly/monthly operations
2
0.50
Financial calendar
0
0.00
e-mail to contact
262
64.50
Fax and phone number
251
61.80
Post address of corporations
252
62.10
English version of the page
246
60.60
Notes: Notes; p =Portable Document Format; H=Hypertext Markup Language; W= Word; J=IPEG; and X= Excel
Table 2 showed that, among 406 corporations listed in TSE,
the website of 303 corporations (74.60%) was accessible. It
is noticeable that the amount of presenting financial
statements at the corporations website is low. For example,
the amount of balance sheet presentation, profit & loss
statements, cash flow statements, notes attached to financial
statements in the form of portable document format is 10.3,
10.6, 8.9 and 8.9 respectively. Of course the most attributes
observed at corporations websites include e-mail, postal
address of corporations, introduction or advertising
corporations products & services and fax & phone number
that are 64.50, 62.10, 62.10, 61.80 per cent respectively.
Also the attribute corporations website are lacking in that, is
financial calendar.
IV
COMPARING THE INTEGRITY OF IFR IN TSE

WITH SIMILAR RESEARCHES
In this section, the results of the study are compared with

Allam and Lymer research (2003), Committee of
International Accounting Standard (CIAS) (1999), Marston
& polie (2004), and khadaroo (2005). Table 3 shows the
summaries of this comparison. Table 3 shows that 84.20 per
cent of corporations listed in TSE, have websites while all
corporations investigated in America, Canada, Australia,
and Germany have websites. It is interesting to note that
amount of presenting financial statements and audit report at
the websites of corporations of this study is low in
comparison with similar researches (Except Australia
related to research of CIAS, 1999).
Table 3. Comparison of integrity of IFR in TSE with similar researches

Items
Results Research
of this
study
Iran America
Percent Percent
of 84.20 100
Existence
website
site map
search box
News summaries
Links to news
summaries
Information
related
to
corporations
activities
Customer profile
employee profile
Introduction or
advertising
corporation
products
and
services
Balance sheet
Profit & loss
statements
Cash
flow
Allam & Lymer (2003)
Research of CIAS (1999)
research of
Marston &
polie (2004)
England Canada
Percent percent
100
100
Australia American
percent
Percent
100
100
England
percent
96.67
Canada Australia
percent percent percent
100
100
100
research
(2005)
of
khadore
Malaysia Singapore
percent
percent
75
87
26.10
29.80
26.10
25.4
74
86
100
24
52
82
98
10
74
66
100
10
60
64
98
2
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
77
70
Un
Un
19
47
Un
60
82
38
Un
64
59.6
98
96
100
98
83.3
36.7
93.3
73.3
Un
84
87
3
2.5
62.1
4
2
Un
6
40
Un
4
4
Un
0
0
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
11
Un
Un
Un
71
Un
Un
46
13.7
13.3
98
98
98
98
100
100
100
100
70
70
46.7
46.7
76.7
83.3
20
23.3
98
98
63
60
80
80
10.3
92
96
100
100
70
46.7
73.3
16.7
98
59
67

statements
Attached notes
Interim financial
reporting
Auditors report
auditors signature
Legal inspectors
report
Overview
of
financial
statements
Links
to
www.iranbourse.
com
corporations
share price
Name
&
arrangement of
board of director
Name
and
information
of
management
Letter / boards
report
Signature
on
boards report
9.4
1.9
90
92
96
10
100
98
100
10
70
Un
46.7
Un
73.3
Un
16.7
Un
98
95
57
25
80
21
84
8.4
8.4
96
Un
Un
98
Un
Un
100
Un
Un
98
Un
Un
60
Un
Un
43.3
Un
Un
56.7
Un
Un
13.3
Un
Un
98
Un
Un
48
Un
Un
69
Un
Un
0.2
68
56
62
60
Un
Un
Un
Un
Un
Un
Un
14.8
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
5.7
90
90
74
66
Un
Un
Un
Un
93
Un
Un
18.2
98
98
100
98
Un
Un
Un
Un
84
63
80
18.9
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
6.4
98
94
96
96
70
56.7
70
33.3
48
67
5.2
Un
Un
Un
Un
Un
Un
Un
Un
Un
28
33
Results of annual
general congress
3.4
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Prediction
of
analysts (include
buying / selling /
operations/EPS
/Budget
Determination of
last updating
Current
share
price
Weekly monthly
selling
of
operations
Financial
calendar
e-mail to contact
9.8
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
4.9
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
7.9
96
96
92
68
Un
Un
Un
Un
93
25
38
0.5
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
Un
64.5
60
74
68
40
Un
Un
Un
Un
100
33
41
Fax &
number
phone
61.8
Un
Un
Un
Un
Un
Un
Un
Un
98
37
38
Post address of
corporation
62.1
Un
Un
Un
Un
Un
Un
Un
Un
80
35
38
English version
of the page
60.6
Un
Un
Un
Un
Un
Un
Un
Un
95
Un
Un
Notes: Un= Unknown or incomparable with other studies

V
CONCLUSION
By matching the checklist complete in TSE with similar

researches, it is clear that in Iran, there is weak in
presentation some items like balance sheet, profit & loss
statement, cash flow statements, and notes attached to
financial statements compared to similar researches of other
countries. Also the archive of corporations existing in TSE
is in complete, and in many cases corporations are lacking in
that. In other words, based on researches we can conclude
that integrity of IFR in corporations listed in TSE is not
good in comparison with other countries.
Research limitations
The limitations of the study as follows
1) Items of the checklist are limited in comparison
with basic researches like, research of (FASB).
2) The websites of 39 corporations were inaccessible
because websites of some corporations were in
reconstruction and because of problems related to
the disconnection of internet and servers this was
very different.

VI
RECOMMENDATIONS
1) It is recommended that a standard should be

determined by TSE organization to present IFR.
2) In order to IFR, some legal necessities should be
determined by TSE to presenting information on
the corporations websites.
3) Users should be informed of internet use
advantages as a auditing & reporting tool, to
improve IFR.
4) In educational schedule of management and
accounting fields and other related fields, one
course named accounting & IFR should be
included.
12)
13)
14)
15)
VII
REFERENCES
1) Allam, A. and A. Lymer (2003). Developments in

Internet Financial Reporting: Review and Analysis
across Five Developed Countries, the International
Journal of Digital Accounting Research, Vol.3,
No.6, pp.165-199.
2) Ashbaugh, H., K.K, Johnston and T.D, Warfield
(1999). Corporate Reporting on the Internet,
Accounting Horizons, Vol. 13, No. 3, pp. 241-257.
3) Conosco (1999). A Relations-effective online
investor
relations,
Available
at:
http://www.conosco.com
4) Debreceny, R. and G. L., Gray (1997). Corporate
Reporting on the Internet: Opportunities and
Challenges Proceedings of the Seventh AsianPacific Conference on International Accounting
Issues, Bangkok, November.
5) Dutta,P. and S., Bose (2007). Web-Based
Corporate Reporting in Bangladesh: An
Exploratory Study, The Cost and Management,
Vol.35, No.6, pp.29-45.
6) Ettredge,M., V. J. , Richardson and S., Scholz
(2001). The Presentation of Financial Information
Corporate Web Sites, International Journal of
Accounting Information Systems, Vol. 2, pp. 149168.
7) FASB (2000). Business Reporting Research
Project: Electronic Distribution of Business
Reporting information, Steering Committee Report
Series, Norwalk, pp. 1-84.
8) Gaved, M. (1997). Closing the Communications
Gap: Disclosure and Institutional Shareholders,
Available: http://www.icaew.co.uk.
9) Gowthorpe, C. and O., Amat (1999). External
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Brand Decisions and Brand Influence:

A Comparison of Rural and Urban Consumers
Jagwinder Singh and B B Goyal
Abstract - Indian economy has witnessed a significant growth
in recent years. Rural India offers a huge potential for
marketers who are battling in the saturated urban markets.
The study has been carried out in Punjab state of India with a
view to understand the differences between rural and urban
households in terms of their brand decisions and brand
influence on the buying of select durable goods. In-depth
interviews have been conducted to look into insights of the
consumers behaviour with the help of a bilingual
questionnaire that was served to the respondents. Overall there
have been considerable differences between rural and urban
consumers for the buying of television and refrigerator.
However these differences have been found moderate for the
buying of an automobile10.
Keywords- Rural, Urban, Households, Durable, Brand.

I
INTRODUCTION
ne-sixth of the worlds population lives in India.

Therefore, India is an attractive market (Ling and
Dawn, 2004). The economy witnesses increased potential
for consumption, increased competition, availability of
products both in terms of quality and quantity, and increased
level of awareness among consumers. A large urban middle
class and upper class, which constitutes one-third of the
population, is a huge market for branded goods. The market
for branded goods is increasing at 8 per cent per annum and
in certain consumer goods, it is increasing at even 12 per
cent. The Indian economy is the third largest in Asia. It is
expected to grow at 7 per cent. The decrease in import
tariffs has allowed large inflow of products from the other
nations. Besides this, the Indian companies are entering into
strategic alliances with the foreign reputed brands (Kinra,
2006). There is a tremendous potential in the rural areas.
However many companies had not been successful in rural
areas due to lack of adequate knowledge about rural
consumer and consequently failure of the companies to
develop sustainable strategies. According to Sinha (2005),
rural India in which more than 74 per cent of the population
of the country resides; generates one-third of countrys
GDP, and accounts for 38 per cent of two-wheelers sales of
the country. Not all people are engaged in agriculture; about
Manuscript received on January 17, 2010.

Ist Author is Assistant Professor, Dept. of Humanities and
Management, Dr B R Ambedkar NIT Jalandhar, India. Ph:
91-98885-03708. Email: jagwinpandher@yahoo.co.in.
IInd Author is Reader, UBS, Panjab University Chandigarh.
Ph: 91-94173-07276. Email: ubschd@yahoo.co.in.
25 percent have non-farm occupations. Disposable income

again is not low. According to report of Ace Global Private
Limited (2001) for The Commercial and Economic Section,
Embassy of Italy in India, on Overview of Consumer Goods
Sector: Market Potential and Prospects for Italian Goods;
the rural population is spread all over India in close to 0.6
million villages. Nearly 45 per cent of rural Indians are
literate (men 59 per cent, women 31 per cent). The rural
share (%) for refrigerators is 25, black and white television
63, washing machine 15, color television 29, scooter 29, and
48 in motorcycle. Due to heavy dependence on agricultural
output, rural consumers are highly sensitive to price, prefer
small consumption packages, and tend to discount intangible
benefits to more functional product attributes. The
competition has tremendously increased in urban areas due
to the emergence of more players and they are battling for
market share in terms of gaining or regaining by reducing
prices.
II
REVIEW OF LITERATURE
A brand is a set of mental associations, held by the
customer, which add to the perceived value of a product or
service. These associations should be unique (exclusive),
strong (salient), and positive (desirable). In practice, brands
have always provided a competitive advantage to
companies, which sought to understand the wants of their
target market in order to develop a package of attributes to
meet these wants (Ind, 2003). Furthermore, brands have
been perceived as providing a greater security and a higher
level of performance while eliminating alternatives by
providing a better overall customization of perceived
preferences (Jiang, 2004; Keller, 2003; Temporal and Lee,
2000; Bahmanziari et al, 2003; The Economist, 2005). As a
result, consumers more often choose branded products when
given the choice between products with similar features and
benefits, fully prepared to pay a premium price (Temporal
and Lee, 2000; The Economist, 2005). But not only that,
now-a-days consumers have also started building an
emotional bond with brands, becoming friends with them,
and are even said to be seduced to look alike, eat alike and
be alike (McFadden and Train, 1996). Temporal and Lee
(2000) added that not only mass customization became a
reality that brands have to face, but also, because of the
global village we are living in, everything physical can be
copied with amazing speed, which leaves only a little room
for the traditional USP brands that were built on originality.
It is important to make a distinction between a decision to
buy a car (product) and a decision to buy a particular brand
of a car, as the two decisions will be influenced by different
considerations. The former decision will be affected by
income, liquid asset holding, hire-purchase terms and other

economic and sociological factors. The later decision is
taken subsequent to the former decision and is influenced by
price, size, color, design, capacity, and all other attributes of
a durable good, thereby appraising the pros and cons of
different brands. The same amount of inter-household and
retailer-household discussion will take place for both types
of decisions (Downham and Treasure, 1956). The
consumers disagree that brand choice is a reflection of self
image (Wood, 2007).
Brand serves a different role than other attributes. It lowers
the time of choice as the consumers who are familiar with
the brand take less time in choosing a brand. Consumers
with high knowledge of brands can choose brands from the
market with ease. The roles can vary for different products
such as search and experience products. In search products
like TV or computer, the features of the product may be
sufficient for a consumer to reach a quantitative decision in
customization but the qualitative aspect of the decision is
represented by the brand name. In case of experience
products the constituents are non-quantifiable, the quality
information available about customization attributes is large,
and therefore, in this situation the importance of brand name
is reduced. There is a positive and significant effect of brand
names in consumers decision-making during customization
process. Brand name has stronger effects in customization of
search products than experience products. There is a positive
relation in brand name effects and consumers product
knowledge. There is a positive and significant relationship
between brand name effects and preference match and
further positive and significant relationship between
consumers preference match and willingness to pay
premium price. The consumers, if find that the search cost is
greater for getting relevant information, may rely on the
prior information. In such a situation brand name is not a
considerable quality symptom. In case of search products,
the acquisition of information regarding the quality of
individual attribute is either not easily available or very
costly as compared to experience products. Therefore, brand
name that represents the composite enriched attribute
becomes increasingly important (Jiang, 2004).Gregory
(1999) concluded that brand loyalty had the direct
relationship with consistency between subjective norms,
relative attitudes and actual purchase behaviour. Brand
switching behaviour was expected to be lower for cultures
that were rated high on uncertainty avoidance. The
consumers base of the company consists of three categories
of consumers: stayers (who had never switched from the
previous brand), satisfied switchers (who switched to other
brand for reasons other than dissatisfaction), and dissatisfied
switchers (who switched because they were dissatisfied with
the previous brand) (Nasir et al, 2006). The consumers age
group of 18-24 years is less brand-loyal (Wood, 2007).
Alpert and Kamins (1995) observed that consumers
generally had positive perception about the brands, which
emerged first and it continued even after the entry of
follower brands. The consumers above 46 years of age are
not carried away by brand names (de Rada, 1998).
As regards to the relationship between needs and brand loyal
behaviour, it was observed that the Chinese consumers

remain loyal to the brand first to satisfy their experiential
needs, next social needs and finally functional needs. In case
of Korean consumers, functional and social needs were
stronger determinants of brand loyalty than experiential
needs. Therefore, Korean consumers were more brand-loyal
as their two needs social and functional needs get satisfied
to the large extent and at the same time there is fulfillment
of experiential needs to the reasonable extent. Further there
was a strong positive relationship between volume purchase
behaviour and brand loyalty as the brand loyal consumers
tend to spend more (Kim et al, 2002). Many companies of
consumer products (both durable and non-durable) are
making their efforts in rural areas. This is so because of
increase in rural purchasing power over the past decade due
to increase in support prices for the farm produce. Maharaja
Appliances have launched a range of products with no
frills especially for rural and semi-urban areas. Sony has
also introduced its models in the rural areas. Increase in
infrastructure and change in lifestyle due to proliferation of
television have changed the buying habits of the rural people
Shivakumar and Arun, 2002). Sharma (2004) examines the
human behaviour with respect to urban Indian youth. The
study finds association of brands with status; precedence of
money and symbols of social stature over everything else;
considering smart work as key and hard work obsolete;
harboring individualism and selfishness; and adopting
contemporary western setting among todays youth. Young
consumers are competent consumers and influence
consumption choices of the family to the great extent
(Gronhoj, 2007). The role of understanding urban markets is
also very important, as it will be the benchmark for
understanding the unknown behaviour of the rural
consumer. Little attention had been paid to rural consumers
buying behaviour (Home, 2002). Urban consumers being
more exposed to the advertising messages had been found
more brand conscious. Brand recall too of urban consumers
was better than rural ones (Sun and Wu, 2004).
III
METHODOLOGY ADOPTED
The study, which is descriptive in nature, has been carried

out in Punjab state of India in 2008-2009. Three durable
goods from three different product categories; Television
(entertainment product), Refrigerator (home appliance), and
an Automobile (two-wheeler, motorcycle and car/jeep) have
been selected for study. A sample of 407 (204 from urban
and 207 from rural areas) households across the state have
been selected based on non-probability convenience
sampling. The data about current ownership or likelihood of
purchases in the next 24 months on the select durable goods
(television, refrigerator, and any type of automobile) were
obtained. In case of additional purchase/replacement or their
likelihood in near future about the select items, the
respondents were asked to give their responses only to the
latest/likely buying. All respondents had been found
possessing at least one item of each select product. Rural
consumers are those who live in villages and those residing
in cities (district headquarters) are urban consumers. The

consumers residing in towns (semi-urban areas) have not
been considered in the study.
A household includes the related family members and all the
unrelated persons who occupy a housing unit. The
households may include either a family or a non-family or
both (Louden and Della Bitta, 2002). The study here
includes only family households.
In-depth interviews have been conducted to look into
insights of the consumers behaviour with the help of a
bilingual questionnaire that was served to the respondents to
obtain important information as regards to the prime
objectives of the study. Downham and Treasure (1956) has
emphasized on indirect questioning and subtle psychological
approach to obtain information regarding intrinsic factors.
This is so because conventional techniques can take us only
up to a point. In understanding cross-cultural differences,
depth interviews with the respondents are necessary because
such an exploratory research will provide valuable insights
regarding the variations across different cultures
(Maheswaran and Shavitt, 2000). Ordinal scale has been
used which has been converted into 5 point interval scale (1
for strongly disagree and 5 for strongly agree) at the time of
data analysis. The questionnaire has been pre-tested before
going for final survey. Following hypotheses have been
tested in the study.
H1 Rural and Urban consumers differ in terms of brand
decisions.
H2 Rural and Urban consumers differ in terms of brand
influences.
The p-values have been calculated for all the variables
statements and on comparing with central value (3
representing indifference to the statement), their significance
has been checked at 95% confidence level. Similarly, pvalues have also been calculated to observe the significance
(95% confidence interval) of differences between the
responses of rural and urban consumers. The significant
values have been marked as *.
Discriminant analysis has also been carried out to observe
the differences between rural and urban consumers. Twoway ANOVA (Analysis of Variance) has been applied to
test the independent effects and the interaction effects of
habitat (rural or urban) and income, and habitat and select
durables.
IV
RATIONALE FOR STUDY
In spite of tremendous potential in the rural areas, the
marketers of national and international corporations are
committing the same mistakes as multinational corporations
did while entering into the developing countries with the
same practices as that of their own country. The rural
consumer is socially, psychologically, and economically
different from his urban counterpart. They are significantly
different in terms of their lifestyle from their urban
counterparts. Therefore, rural India should not be treated as
an extension of urban India (Mano Raj and Selvaraj, 2007).

LIMITATIONS OF STUDY
The sample size is too small to generalize the findings.

Moreover only three products (only one product from three
categories) have been selected. However there are large
number of consumer durables such as washing machines,
water purifiers, air conditioners, generator sets, and kitchen
appliances etc. There is again a variety of items within a
product category and they carry different utilities at different
values for different strata of consumers. The study has been
carried out in one state and therefore, cannot be generalized
for whole of the country. The different states may exhibit
different consumption patterns (Halan, 2003).
VI
DATA ANALYSIS
The data collected have been presented and analyzed here as

under:
A. Television
Though quality is a primary concern for both rural and
urban groups while choosing their brands (X4); yet the
brand choice of rural consumers is significantly governed by
the price (X3). The urban consumer on the other side
considered the price to the moderate extent while choosing
the brand. The concern for quality had been found
significantly greater among the urban consumers than the
rural consumers. Both the groups had not found following
their friends choice of television brands (X5). Both the
groups had the strong tendencies to stick to the brand once
they find a good brand (X6). However this tendency had
been significantly greater in rural consumers as compared to
their urban counterparts. The significant differences between
behaviors of the rural and urban consumers could be
observed for the variables X2, X3, X4, and X6 (Table T 1).
Two-way ANOVA reveals no interaction between income
and habitat of consumers for all the select variables. No
differences could be observed among different income
groups for all the select variables. There had been
significant differences between rural and urban consumers
for all other select variables except X1 and X5 with the
highest F value for X3 (Table T 1.1). The structure matrix of
the discriminant analysis reveals X3 to be the most
discriminating variable followed by X6 and X2 (Table T
1.2). Overall, both the groups have distinct behaviors as the
same is revealed from the classification results, according to
which, 73.5 % of original groups and 72.7% of crossvalidated groups have been found correctly classified.
In terms of the roles of the brands on the consumers buying
of television sets (X7 to X12), the urban consumers
irrespective of price, had strong preferences to buy their
favorite brands whereas; the rural consumers had such
preferences to the moderate extent (X7). The tendency to
buy the brand of good reputation had been found among
both the rural and urban consumers (X8). However such
tendencies had been significantly higher among urban
consumers as compared to their rural counterparts. The
brand makes a lot of difference for the urban consumers

(X12) whereas; it makes an impact to the moderate extent
on the buying of the rural consumers. The rural consumers
believed that all the brands of television sets are almost alike
quality wise (X9) whereas; the urban consumers did not
think so. The urban consumers were most likely to buy the
most advertised brands (X10) whereas; the rural consumers
are moderately influenced by the advertisements for their
brand selections. Both the groups had been found
considering the other features of the product important
besides brand (X11). However, such tendencies had been
found relatively higher among rural consumers as compared
to their urban counterparts. There had been significant
differences between the behaviors of rural and urban
consumers for all the select variables (Table T 2). Two-way
ANOVA reveals no interaction between income and habitat
of consumers for all other select variables except X11,
where there had been significant interaction. No differences
could be observed among different income groups for all
other select variables except X8. There had been significant
differences between rural and urban consumers for all the
select variables with the highest F value for X9 followed by
X8 (Table T 2.1).
The structure matrix (Table T 2.2) of the discriminant
analysis reveals X9 to be the most discriminating variable
followed by X8 and X10. Overall, both the groups have
distinct behaviors as the same is revealed from the
classification results, according to which, 82.5 % of original
groups and 82% of cross-validated groups have been found
correctly classified.
B. Refrigerator
In terms of branding decisions (X1 to X6), it has been
observed that both rural and urban consumers had more than
one preferred brands of refrigerators (X1). The urban
consumers had a strong tendency to change brands for the
sake of variety and novelty (X2) whereas; the rural
consumers had the same to the moderate extent. Though
quality is a primary concern for both rural and urban groups
while choosing their brands (X4), yet the brand choice of
rural consumers is significantly governed by the price (X3).
The urban consumer on the other considered the price to the
moderate extent while choosing the brand. Both the groups
had not found following their friends choice of refrigerator
brands (X5). Both the groups had the strong tendencies to
stick to the brand once they find a good brand (X6).
However this tendency is significantly greater in rural
consumers as compared to their urban counterparts. The
significant differences between behaviors of the rural and
urban consumers could be observed for the variables X2, X3
and X6 (Table R 1).
and habitat of consumers for all the select variables. No
significant differences could be observed among different
income groups for all the select variables. There had been
for variables X2, X3 and X6 with the highest F value for
variable X3 followed by X2 (Table R 1.1). The structure
matrix (Table R 1.2) of the discriminating analysis also

reveals X3 to be the most discriminating variable followed
by X2 and X6. Overall, both the groups have distinct
behaviors as the same is revealed from the classification
results, according to which, 69.6% of the groups have been
found correctly classified. In terms of the influence of the
brands on the consumers buying of refrigerators (X7 to
X12), both rural and urban consumers irrespective of price,
had strong preferences to buy their favourite brands,
regardless of price (X7). This preference had been found
significantly greater among the urban consumers as
compared to their rural counterparts. The tendency to buy
the brand of good reputation had been found among both the
rural and urban consumers (X8). However such tendencies
had been found significantly higher among urban consumers
as compared to their rural counterparts. The brand makes a
lot of difference to both rural and urban consumers (X12).
However, it had been found making significantly greater
difference for the urban consumers than the rural ones. But
there had been significant differences in the extent of
perceptions of these groups. The rural consumers strongly
believed that all the brands of refrigerators are almost alike
quality wise (X9) whereas; the urban consumers did not
think so. Both rural and urban consumers were most likely
to buy the most advertised brands (X10). However, this
tendency had been found significantly greater among urban
consumers than their rural counterparts had. Both the groups
had been found considering the other features of the product
important besides brand (X11). However, such tendencies
had been found relatively higher among rural consumers as
compared to their urban counterparts. There had been
significant differences between the behaviors of rural and
urban consumers for all the select variables (Table R 2).
and habitat of consumers for all other select variables except
X11. No significant differences could be observed among
different income groups for all other select variables except
X8. There had been significant differences between rural
and urban consumers for all the select variables with the
highest F value for variable X9 followed by X12 (Table R
2.1).
The structure matrix (Table R 2.2) of the discriminant
analysis reveals X9 to be the most discriminating variable
followed by X12 and X8. Overall, both the groups have
distinct behaviors as the same is revealed from the
classification results, according to which, 81% of original
groups and 80% of cross-validated groups have been found
correctly classified.
C. Automobiles
In terms of branding decisions (X1 to X6), it has been
observed that both rural and urban consumers had more than
one preferred brands of automobiles (X1). This propensity
had significantly been observed among the urban consumers
as compared to their rural counterparts. The urban
consumers had a strong tendency to change brands for the
sake of variety and novelty (X2) whereas; the same had
been significantly less among rural consumers. Though
quality was a primary concern for both rural and urban

groups while choosing their brands (X4); yet the brand
choice of rural consumers was significantly governed by the
price (X3). The urban consumer also considered the price to
the significantly greater extent while choosing the brand.
However comparing with rural consumer, the urban
consumer considered the price comparatively less.
Both the groups had been found following their friends
choice of automobile brands (X5) and such tendency had
been found significantly greater among the rural consumers
as compared to their urban counterparts. Both the groups
had significantly less tendencies to stick to the brand once
they found a good brand (X6). The significant differences
between behaviors of the rural and urban consumers could
be observed for the variables X1, X2, X3 and X5 (Table A
1). Two-way ANOVA reveals no interaction between
income and habitat of consumers for all the select variables.
No significant difference could be observed between
different income groups for all the select variables. There
had been significant differences between rural and urban
consumers for all other select variables except variables X3
and X6 with the highest F value for variable X2 followed by
X5 (Table A 1.1). Both the structure matrix and the
standardized canonical discriminant function coefficients
(Table A 1.2) of the discriminant analysis also reveal X2 to
be the most discriminating variable followed by X5 and X3.
Overall both the groups have moderately distinct behaviors
as the same is revealed from the classification results
according to which; 67.4% of the original groups and 66.7%
of cross-validated groups have been found correctly
classified.
In terms of the roles of the brands on the consumers buying
of automobiles (X7 to X12), both rural and urban consumers
irrespective of price, had strong preferences to buy their
favourite brands, regardless of price (X7). The tendency to
buy the brand of good reputation had been found between
both the rural and urban consumers (X8). However, such a
tendency had been found higher among urban consumers
than rural ones. The brand makes a lot of difference to both
rural and urban consumers (X12).
There had been significantly greater agreement among the
urban consumers as compared to their rural counterparts.
The rural consumers strongly believed that all the brands of
a particular category of automobiles are almost alike quality
wise (X9) whereas; the urban consumers did not think so.
Both rural and urban consumers were most likely to buy the
most advertised brands (X10). However this tendency had
been found significantly greater among urban consumers
than their rural counterparts. Both the groups had been
found considering the other features of the product
important besides brand (X11). There had been significant
differences between the behaviors of rural and urban
consumers for all the select variables except X7 and X11
(Table A 2). Two-way ANOVA reveals no interaction
between income and habitat of consumers for all other select
variables except X10. There had been significant differences
between different income groups for all the select variables
except X7 and X8. There had not been significant
differences between rural and urban consumers for all other
select variables except variable X9 (Table A 2.1). The

structure matrix (Table A 2.2) of the discriminant analysis
also reveals X9 to be the most discriminating variable. The
classification results revealed that 15.9 % of original groups
and 65.7% of cross-validated groups have been found
correctly classified. In branding decisions, no interaction
between habitat and the product categories had been
observed for all other variables except X6. There had been
for all the select variables with the highest F value for X2
followed by X3. There had been significant differences
between the behaviour of these consumers for the three
different select products in terms of select variables X3, X5
and X6, with the highest F value for X6 followed by X5.
In terms of brand influence, there had been an interaction
between habitat and the product categories for all the
variables with the highest F value for X11. There had been
for all the select variables with the highest F value for X9
followed by X8. There had been significant differences
between the behaviour of these consumers for the three
different select products in terms of all select variables with
the highest F value for X12 (Table T-R-A 1).
VII
DISCUSSION AND CONCLUSIONS
Following conclusions can be drawn from the study.

A. Brand Decisions
Both rural and urban consumers have more than one
preferred brands of the select products. In case of
automobiles, this tendency is significantly greater among
urban consumers than the rural ones. The urban consumers
have a strong tendency to change brands for the sake of
variety and novelty whereas; the rural consumers have the
same to the moderate extent in case of television and
refrigerator. In case of an automobile, this tendency exists to
the less extent among rural consumers. Shivakumar and
Arun (2002) have also found that rural consumers consider
only selected brand before making a purchase decision. The
study reveals that brand decisions are taken with equal
participation of all family members (including youngsters)
in majority of urban households; therefore, the brand loyalty
is relatively lesser among urban households as per the
revelations of the study conducted by Wood (2007) that
found the age group of 18-24 years less brand loyal.
Moreover, their role within the household is more
pronounced in deciding the brand (Shoham and Dalakas,
2003). Wood (2007) further found that the brand loyalty is
more among laggards, probably due to which rural
consumers are relatively more brand loyal. Quality is a
matter of prime and equal concern for both rural and urban
groups while choosing their brands except in case of
televisions, where the same is greater among urban
consumers than their rural counterparts. The brand choice of
rural consumers is significantly governed by the price. The
urban consumer on the other side considers the price to the
moderate extent while choosing the brand of television and
refrigerator whereas; in case of automobile, the urban

consumer considers to the large extent but less than the rural
consumer. In case of televisions and refrigerators, both the
groups do not follow their friends choice of brands.
Nevertheless, in case of automobiles, both the groups do
follow considerably. Moreover, the rural consumers have
this tendency to the large extent as compared to their urban
counterparts. This is probably due to overweighing of
psychological aspects over performance aspects in case of
probably low both general and specific self-confidence of
rural consumers (Bell, 1967).
Both the groups have the strong tendencies to stick to the
brand once they find a good brand in case of televisions and
refrigerators. However, this tendency is significantly greater
in rural consumers as compared to their urban counterparts.
But in case of automobiles, both the groups do not have
such tendency. Considering all the select products, there
have been differences between rural and urban consumers
for all the select variables. Product based differences do
exist for price based brand choice, following friends buying,
and sticking to a brand on finding a good one. In the later
case, the differences vary between rural and urban
consumers. Overall, there are considerable differences
between rural and urban consumers for the buying of
television and refrigerator. However, these differences are
moderate for the buying of an automobile.
B. Brand Influence
Both rural and urban consumers irrespective of price, have
strong preferences to buy their favorite brands, regardless of
price for all other select products except television; where
the rural consumers have preference to the moderate extent.
These preferences are greater among the urban consumers as
compared to their rural counterparts for all other two select
products except automobiles where it is at par. The tendency
to buy the brand of good reputation exists among both the
rural and urban consumers. However, such tendencies are
higher among urban consumers as compared to their rural
counterparts. This is in conformity to the findings of Sun
and Wu (2004) that revealed greater brand consciousness
among urban consumers as compared to their rural
counterparts. As brand decisions are taken with equal
participation of all family members (including youngsters)
in majority of urban households, therefore, brand
consciousness is relatively greater among urban households
as per the revelations made by Gronhoj (2007). There are
also differences between different income levels of the
habitants for such tendencies in case of television and
refrigerator. The rural consumers strongly believe that all
the brands of select products are almost alike quality wise
whereas; the urban consumers do not think so. There are
also differences in the perceptions among the different
income levels of habitants in case of the buying of an
automobile. Both rural and urban consumers are most likely
to buy the most advertised brands for all the select products
except television; where such tendency is moderate among
the rural consumers. However this tendency is greater
among urban consumers than their rural counterparts. In
case of an automobile, such differences also exist among

different income groups. However, these differences differ
among rural and urban consumers. Similarly, the brand
makes a lot of difference to both rural and urban consumers
for all the select products except television; where such
difference is moderate to the rural consumers. In the other
two products as well, urban consumers have greater
consideration to brand as compared to their rural
counterparts. In case of an automobile, there are differences
among different income levels of the habitants to this
variable. Both the groups consider the other features of the
product important besides brand. However such tendencies
had been found relatively higher among rural consumers as
compared to their urban counterparts for televisions and
refrigerators. These differences between rural and urban
consumers vary among their different income groups. In
case of automobiles, such considerations are equal between
both the habitant groups. However, these vary among
different income groups of these consumers categories.
Considering all the select products, there have been
differences between rural and urban consumers for all the
select variables. However, these differences differ with the
product category. Overall, there are significant differences
between rural and urban consumers for the buying of
television and refrigerators. However, these are moderate for
the buying of an automobile.
VIII
RECOMMENDATIONS
The rural consumers are more brand-loyal as compared to

their urban counterparts. Their decisions are largely decided
by price of the brand. However, they have a tendency to
stick to the brand provided they find a best suited brand.
Therefore, the marketers must take proactive measures in
terms of ensuring brand loyalty. The brands should be
positioned in such a manner to give feeling among the rural
consumers as these have been tailored specific to their
requirements. The same measures can also be taken for
urban consumers by regularly introducing newer models and
raising the quality of the products.
The brand building measures can prove effective for
targeting urban consumers for all the products as they have a
tendency to buy reputed, most advertised brands. They buy
their favorite brands because brands make a lot of difference
to them. The brand building measures by the automobile
companies will help their penetration into rural markets as
well. In case of televisions and refrigerators, they should
focus more on the other features relating to the utility and
functionality of the products and should offer the same at
reasonable prices while approaching the rural markets.
IX
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Table T 1 Brand Decisions (Mean Values).

S. No.
Variables
p (1 t)
p (1 t)
X1
More than one preferred brand.
X2
X4
To change brand for the sake of

variety and novelty.
Your choice of brand was/will
be largely based on price.
Quality as a primary concern.
X5
Buying what friends buy.
X3
U-R
p (2 t)
3.37
<0.0001
3.20
0.0023
0.16
0.1039
3.39
<0.0001
2.93
0.1677
0.45
<0.0001
2.93
0.1970
3.78
<0.0001
-0.85
<0.0001
4.02
<0.0001
3.86
<0.0001
0.16
0.0451
<0.0001
X6
0.6315
2.69
<0.0001 2.73
-0.05
Stickiness to a brand if find a
good one.
3.33
<0.0001 4.03
<0.0001 -0.71 <0.0001
U = Mean Urban, R = Mean Rural, p (1 t) = p value one tailed, and p (2 t) = p value two tailed.
Table T 1.1 Brand Decisions (F ratio).

S.
No.
Variables
X1
X2
X3
To change brand for the sake of variety and novelty.

Your choice of brand was/will be largely based on price.
X4
X5
X6
Stickiness to a brand if find a good one.
F ratio
R/U
(df =1)
IG
(df =4)
R/U*IG
(df =4)
2.793
12.513*
0.232
0.485
1.694
1.340
43.490*
1.168
0.183
4.825*
0.589
1.131
0.249
0.391
1.331
30.968*
1.192
0.976
R/U = Rural-Urban, IG = Income Group, and R/U*IG= Two-way interaction between R/U and IG.
S. No.
1
2
3
4
5
6
Variables
X1
X2
X3
X4
X5
X6
Constant
Table T 1.2 Brand Decisions (Discriminant Analysis).

Standardized Canonical Unstandardized Canonical
Discriminant Function Discriminant
Function
Coefficients
Coefficients
Structure Matrix
-0.196
-0.192
X3
-0.355
-0.349
X6
0.630
0.593
X2
-0.412
-0.496
X4
0.164
0.163
X1
0.646
0.662
X5
-1.188
Table T 2 Brand Influence (Mean Values).
U
p (1 t)
R
p (1 t)
S.
No.
Variables
X7
Buying of favourite brand, regardless

of price.
X8
Buying a brand of good reputation.
X9
Most of the brands in this product

class are all alike quality wise
X 10
Buying of one of the most advertised

brands.
X 11
Importance of other features than

brand.
X 12
The brand makes a lot of difference

to you.
0.638
0.579
-0.358
-0.159
-0.129
0.038
U-R
p (2 t)
3.73
<0.0001
3.08
0.1281
0.65
<0.0001
3.89
<0.0001
3.14
0.0168
0.75
<0.0001
2.76
0.0024
3.87
<0.0001
-1.10
<0.0001
3.75
<0.0001
3.09
0.0978
0.66
<0.0001
3.70
<0.0001
4.22
<0.0001
-0.52
<0.0001
3.67
<0.0001
3.07
0.1968
0.60
<0.0001
S.
No.
X7
X8
Table T 2.1 Brand Influence (F ratio).

F ratio
R/U
IG
(df =1)
(df =4)
Buying of favourite brand, regardless of price.
30.862*
1.074
Variables
X9
Most of the brands in this product class are all alike

quality wise
X 10
Buying of one of the most advertised brands.
X 11
Importance of other features than brand.
X 12
The brand makes a lot of difference to you.
R/U*IG
(df =4)
1.793
42.021*
2.738*
1.078
75.561*
0.610
1.031
27.865*
1.401
1.093
25.578*
0.477
3.65*
18.089*
1.088
0.172
Table T 2.2 Brand Influence (Discriminant Analysis).
S. No.
1
2
3
4
5
6
Variables
X7
X8
X9
X 10
X 11
X 12
Constant
Standardized Canonical
Discriminant Function
Coefficients
-0.225
-0.354
0.708
-0.216
0.399
-0.192
Variables
X1
X2
X4
To change brand for the sake of

variety and novelty.
X5
X6
S.
No.
X1
X2
X3
X4
X5
X6
Structure Matrix
X9
X8
X 10
X7
X 11
X 12
Table R 1 Brand Decisions (Mean Values).

U
p (1 t)
R
p (1 t)
U
R
S.
No.
X3
Unstandardized Canonical
Discriminant
Function
Coefficients
-0.214
-0.404
0.705
-0.222
0.469
-0.181
-0.681
U-R
p (2 t)
3.37
<0.0001
3.20
0.0023
0.16
0.1039
3.39
<0.0001
2.93
0.1677
0.45
<0.0001
2.89
0.0877
3.76
<0.0001
-0.87
<0.0001
4.02
<0.0001
4.00
<0.0001
0.02
0.8182
2.69
<0.0001
2.76
0.0004
-0.07 0.4779
good one.
3.33
<0.0001
3.65
<0.0001 -0.32 0.0012
Table R 1.1 Brand Decisions (F ratio).
F ratio
R/U
IG
R/U*IG
(df =1)
(df =4)
(df =4)
2.793
-0.232
1.694
12.513*
0.485
1.340
45.086*
1.070
0.152
0.435
0.409
1.023
0.442
0.367
1.282
7.335*
0.658
0.218
Variables
Table R 1.2 Brand Decisions (Discriminant Analysis).
S. No.
1
2
3
4
5
6
0.640
-0.496
-0.397
-0.359
0.356
-0.328
Variables
X1
X2
X3
X4
X5
X6
Constant
Coefficients
-0.265
-0.459
0.812
-0.117
0.247
0.242
Unstandardized Canonical
Discriminant
Function
Coefficients
-0.259
-0.451
0.756
-0.133
0.244
0.240
-1.205
Structure Matrix
X3
0.807
X2
-0.445
X6
0.319
X1
-0.161
X5
0.071
X4
-0.022
Table R 2 Brand Influence (Mean Values).

U
p (1 t)
R
p (1 t)
U
R
S.
No.
Variables
X7
Buying of favourite brand, regardless

of price.
X8
X9
X 10
X 11
X 12
S.
No.
X7
X8
X9
X 10
X 11
X 12
3.79
<0.0001
3.15
0.0205
U-R
p (2 t)
0.64
<0.0001
4.01
<0.0001
3.42
<0.0001
0.59
Most of the brands in this product class
are all alike quality wise
2.70
0.0003
3.93
<0.0001
-1.23
Buying of one of the most advertised
brands.
3.80
<0.0001
3.47
<0.0001
0.33
Importance of other features than
brand.
3.73
<0.0001
4.24
<0.0001
0.51
The brand makes a lot of difference to
you.
3.94
<0.0001
3.19
0.0077
0.75
<0.0001
<0.0001
0.0005
<0.0001
<0.0001
Table R 2.1 Brand Influence (F ratio).

F ratio
R/U
IG
R/U*IG
(df =1)
(df =4)
(df =4)
27.675*
1.126
1.441
27.809*
2.397*
0.454
quality wise
86.575*
0.813
0.819
7.236*
1.549
1.301
25.107*
0.581
3.167*
30.578*
1.677
0.279
Variables
Table R 2.2 Brand Influence (Discriminant Analysis).
S. No.
1
2
3
4
5
6
Variables
X7
X8
X9
X 10
X 11
X 12
Constant
Coefficients
-0.333
-0.231
0.750
-0.057
0.400
-0.310
Variables
X1
X4
More than one preferred

brand.
To change brand for the sake
of variety and novelty.
X5
X3
Structure Matrix
X9
X 12
X8
X7
X 11
X 10
Table A 1 Brand Decisions (Mean Values).

U
p (1 t)
R
p (1 t)
U
R
S.
No.
X2
Unstandardized
Canonical Discriminant
Function Coefficients
-0.310
-0.242
0.716
-0.060
0.461
-0.293
-0.980
0.691
-0.416
-0.369
-0.351
0.348
-0.204
U-R
p (2 t)
3.43
<0.0001
3.17
0.0076
0.25
0.0121
3.43
<0.0001
2.82
0.0056
0.61
<0.0001
3.29
<0.0001
4.09
<0.0001
-0.79
<0.0001
4.07
<0.0001
3.96
<0.0001
0.11
0.1909
3.33
<0.0001
3.67
<0.0001
-0.34
0.0007

X6

good one.
2.69
<0.0001
2.72
<0.0001
-0.03
0.7415
Table A 1.1 Brand Decisions (F ratio).
S.
No.
Variables
X1
X2
X3
X4
X5
X6

F ratio
R/U
(df =1)
7.957*
21.796*
3.841
4.461*
10.394*
0.166
IG
(df =4)
0.140
0.383
1.000
0.481
0.979
0.608
R/U*IG
(df =4)
2.117
0.821
0.078
2.371
0.473
1.877
S. No.
1
2
3
4
5
6
S.
No.
X7
X8
X9
X 10
X 11
X 12
Variables
X1
X2
X3
X4
X5
X6
Constant
Table A 1.2 Brand Decisions (Discriminant Analysis).

Standardized Canonical Unstandardized
Discriminant Function Canonical Discriminant
Coefficients
Structure Matrix
0.283
0.278
X2
0.771
0.762
X5
-0.364
-0.133
X3
0.178
0.205
X1
-0.475
-0.466
X4
-0.311
-0.306
X6
-1.167
0.721
-0.405
-0.349
0.299
0.155
-0.040
Table A 2 Brand Influence (Mean Values).

U
p (1 t)
R
p (1 t)
U-R
U
R
Buying of favourite brand,
regardless of price.
3.89
<0.0001
3.71
<0.0001
0.18
Buying a brand of good
reputation.
4.05
<0.0001
3.76
<0.0001
0.29
Most of the brands in this
product class are all alike
<0.0001
quality wise
2.65
<0.0001
3.38
-0.73
Buying of one of the most
advertised brands.
3.84
<0.0001
3.56
<0.0001
0.28
Importance of other features
than brand.
3.63
<0.0001
3.69
<0.0001
-0.05
The brand makes a lot of
difference to you.
4.04
<0.0001
3.66
<0.0001
0.38
Variables
Table A 2.1 Brand Influence (F ratio).

F ratio
R/U
IG
(df =1)
(df =4)
S.
No.
Variables
X7
X8
X9

2.926
1.980
0.919
2.556
1.447
1.403
quality wise
13.646*
3.555*
1.547
1.577
3.226*
2.423*
2.567
2.480*
1.993
2.007
2.911*
1.096
X 10
X 11
X 12
R/U*IG
(df =4)
p (2 t)
0.0880
0.0010
<0.0001
0.0029
0.5488
0.0001
S. No.
1
2
3
4
5
6
S.
No.
Variables
X7
X8
X9
X 10
X 11
X 12
Constant
Variables
Table A 2.2 Brand Influence (Discriminant Analysis).

Standardized
Canonical Unstandardized
Discriminant
Function Canonical Discriminant
Coefficients
Structure Matrix
-0.155
-0.147
X9
0.743
-0.249
-0.281
X 12
-0.468
0.766
0.643
X8
-0.396
-0.246
-0.257
X 10
-0.359
0.377
0.418
X7
-0.205
-0.396
-0.400
X 11
0.072
0.674
Table T-R-A 1 Two-Way ANOVA (Habitat and Product Categories).
F ratio
R/U
(df =1)
PC
(df =2)
R/U*
PC
(df =2)
X1
11.145*
0.029
0.254
X2
76.233*
0.172
0.751
66.410*
5.249*
0.051
X4
To change brand for the sake of variety and

novelty.
Your choice of brand was/will be largely
based on price.
4.071*
1.011
0.748
X5
7.153*
81.885*
2.683
X6
38.600*
110.260*
11.643*
X7
65.669*
16.305*
6.669*
X8
111.169*
18.576*
6.765*
X9
273.069*
10.415*
5.864*
X 10
Most of the brands in this product class are all

alike.
60.494*
9.254*
4.784*
X 11
52.943*
17.302*
9.608*
X 12
94.964*
22.778*
3.220*
X3
R/U = Rural-Urban, PC = Product Category, and R/U*PC= Two-way interaction between R/U and PC.
Management of the Modernization Projects from

the Technical-Economic Systems
Ph.D. Associate Professor CAMARDA ADINA
Ph.D. Professor PLEEA DORU
University George Baritiu of Brasov Romania
Abstract- Lately, as we witness an explosive proliferation of
the human beings, of their increasingly complex and numerous
desires, as well as of the frequent armed conflicts and of the
scientific and technical progress in certain directions, man
finds himself on the verge of becoming a true opponent of
nature who either threatens to exhaust its resources or
maintains within it causes that lead to major deterioration and
unbalance, whose consequences are among the most unwanted
on the medium- and long-run.
While witnessing the partial effects of industrialization, man
realized that it is for his best interest to control his demands
and satisfactions so that these do not conflict with the laws
which govern nature and ensure its so much needed balance.
Keywords-
Modernization, Technical Environment,

Technological
Environment,
Product
Progress,
Implementation, Dynamic Process.
I
INTRODUCTION
The Earth is polluted states the famous researcher

Barry Commoner, director of the Centre for the Biology
of Natural Systems from Chicago neither because man is
some kind of especially dirty animal nor because there are
too many of us. The guilt belongs to human society and to
the way it understands to obtain, distribute and use the
richness that man labour extracts from the planets
resources'[1].
The numerous alarm bells rung by scientists with respect to
the potential consequences of a development lacking in
control have lead to the institutionalization of the
environmental issue on a global level. Consequently,
innovative ideas have been promoted in relation to potential
development patterns.
II
PECULIARITIES OF THE MODERNIZATION

PROJECTS
Within the framework of the technical-economic systems,

the modernization-related expenses are more judiciously
assigned, in that they are mainly oriented towards building,
adapting and structurally improving the active fixed capital,
meaning that capital that is directly involved in the attaining
of the economic results, such as: the equipments, special
constructions, technological lines, etc. In the case of
modernizations, the passive fixed capital (buildings)
requires a smaller volume of resources since it gets only
[1]
Brown, L. State of the World, 2002. Teora Publ. House,

Bucharest, 2002, p.36.
slightly modified - sometimes for ambient purposes - or not

at all modified, a fact that creates the premises for the funds
allocated to modernization to be particularly oriented
towards those activities which trigger the amelioration of the
company's economic results, more precisely the increase in
the fixed active capital.'[2]
Irrespective of the level at which it is achieved, new ideas
and solutions get applied by means of modernization, since,
in its very essence, modernization is innovative in character
in the same way as a 'carrier and generator of technical
progress. Modernization ensures the reduction in the
specific material and labor consumption, a fact that entails
the decrease in the modernization and production-related
effort. In the same time, modernization ensures the
reduction in the scrap non-compliance, as well as the
diminishing of the losses by increasing the degree of
processing of the raw materials, because of using better
technological equipments and solutions.
The main influence of the modernization process is related
to the impact on the qualitative aspects of the factors that
take part in the social-economic life. The modernization also
puts pressure on the quality of the technologies by
modernizing the existent flows, finding new technological
solutions, or adapting the existent ones. The increase in the
qualitative level of the labor force, both from the viewpoint
of its content and of its structure, is closely connected with
the improvement of the equipments and technologies'
quality. Because of the improvement of the mentioned
factors, the product quality is enhanced, this serving as the
final purpose of the modernization activity.
The quantitative and qualitative improvement of the
economic effects appears because of the advantages put
forward by the modernization activity. One of its direct
effects is the increase in the obtained production resulting
from an extra-production, which can be achieved due to the
higher equipment parameters and to the improvement of the
quality of the finished products and their structure.
The increase in the value of production and of all economic
effects in general is also due to the improvement of the
consumed resources' structure, meaning the use of well
proportioned raw materials and materials of an adequate
quality and observing the requirements of the technological
process, but also of human resources capable of living up to
the expectations of the operating equipments' technical level
[2]
Vasilescu, I., Romnu, I., Cicea, C. Investments,

Economic Publishing House, Bucharest, 2000, p. 87.

and of the products qualitative level[3]. Any incongruity
between the three qualitative levels (the capacity of the
equipment, the quality class of the products and the
employee qualification) may have negative effects on the
production process.
The modernization of all economic activities is one of the
main ways to achieve economic efficiency improvement on
all levels, since it can ensure the modification of the balance
between efforts and effects. Efforts face a relative decline
while the economic effects increase both in volume and in
structure.
Modernization is also a pre-requisite for the increase in the
economic efficiency at the micro- and macro-economic
level, an objective factor sufficient to itself, as well as a
sine qua non condition for economic growth projected on
the development background that characterizes todays
world.
Some of the main objectives of the modernization process
are:
i. The sizing of the industry components and,
implicitly, of the relationships between these
components, in accordance with the internal and
external market demand, determined by statistical
and marketing analyses;
ii. The superior utilization of the existing potential:
production capacities, experience, reputation,
personnel qualification;
iii. The reduction in the consumption of raw materials,
especially of energy and fuel, in accordance with
the availabilities (internal and export-related) and
the global levels of specific consumption;
iv. Ensuring high competitiveness, since the first
competitiveness factor is the renewal of the
technology or of the product;
v. The re-orientation of the flows from the labor
market towards activities from the fields of the
infrastructure,
services,
constructions
and
agriculture;
vi. The computerization and expansion of the
computer use for the purpose of transmitting realtime useful information as well as for decisiontaking at the right moment;
III
The timing for the implementation of the modernization

processes within the technical-economic systems must be
the right one and shall be determined according to various
factors[4]. These factors mainly depend on the anticipation
capacities of the organizations management with respect to
the market evolution, the technological progress, and the
existing and potential competition. The field of activity is
another factor that influences the modernization moment;
thus, the fields, which witness a rapid evolution of the
technological progress, also require modernization actions to
be performed over short periods. The market position, the
competitive capacity and the market potential are other
markers for the beginning of the modernization activity, any
disregard of any of these factors being able to significantly
affect these actions' success.
According to the final destination of the modernization
process, the corresponding strategies may be oriented
towards products or technologies and technological
processes. To be able to measure the extent of the
modernization impact, as well as its organizational and
competitive implications, one must assess the degree of
novelty introduced in accordance with the market and its
demands. The main ways of organizing the modernization
processes are:
A. The Product Modernization allows the technical
Economic systems to offer the best products/services on the
market and increased functionality, or to allow the same
functionality in a more efficient, simple and low-cost
manner. The implementation of the product modernization
process may take several forms:
The concept modernization, which can be the answer to a
new product idea or to a new function of an existing
product;
The modernization of the raw materials and materials that
shall be part of the future products;
The design modernization, which implies plain
modifications in the products shape and design performed
based on certain functionality and ergonomic requirements;
The modernization of the services that accompany the
products of the economic agents, meaning the quantity and
quality of the pre- and after-sales services.
WAYS OF ORGANIZING THE

MODERNIZATION PROJECTS
The modernization activity imposes the adoption of some

technical-organisational measures that ensure the
organizations sustainable development. The improvement
and optimization of the management systems also play an
important role since they have to ensure a stimulating
context for all the resources involved. It is time for the
organization to rely more on integrating and using computer
technologies to assist the decision, but also to monitor the
technological processes.
B. The modernization of the technological processes

The modernization of the technological processes is destined
to improve and increase the rate, smoothness, quality,
flexibility, etc. performance of the technical-economic
system. This involves the optimization of the manufacturing
processes by means of investments that lead to the
promotion and introduction of the technical progress in the
current activities and to the more efficient use of the earned
experience. The implementation of the technological process
[4]
[3]
Vasilescu, I., Romnu, I., Cicea, C. Investments,

Economic Publishing House, Bucharest, 2000, p. 88.
Lasfargue, Yves, - Techno jolies, techno folies. Comment

russir les changements technologiques. Les Editions
dOrganisation, Paris, 1991.

modernization strategy also implies an increase in the
quality of the human resources involved in these processes
and technologies.
Irrespective of its dimensions, extent, object and purpose,
the modernization activity can only be performed by means
of investments as the material support for the economic
growth. The correlation between the volume and structure of
the investments and the modernization process is
fundamental for all economic activities, no matter their
field.
IV
TENDENCIES AND PERSPECTIVES IN THE

MODERNIZATION OF THE TECHNICALECONOMIC SYSTEMS
Though, initially, the modernization actions focused on the

improvement and growth of the organizations technicaleconomic parameters, the current tendencies, the dynamics
of the technical and technological progress that floods into
the current activity and the increasingly important needs
require a multiple perspective systematic approach.
Any modernization measure must be approached from the
viewpoint of the heterogeneity of its implications on the
main actors of the social-economic life, namely
institutions, local and central authorities, the internal and
external technical and technological environment (tools,
equipments, technologies, human resources) and the
organizations management team. This is because any action
entails modifications that have a bearing on each of the
involved factors. Thus, the modernization of a system may
signify for authorities the increase or decrease of the
financial contribution, the development of new activity
sectors, the possibility to get authorities involved in publicprivate partnerships, etc.
The management team of the technical-economic system
senses the influence of the implemented modernizations by
means of the new business dimensions, from the viewpoint
of the activity conforming to the national and international
requirements and standards, because of the need to observe
the environmental performance, etc. This same team must
manage the issues related to the presence of competent
human resources for the purposes of the project execution
and operation, or to the organization of the training and
instruction programs focusing on the personnel needed for
the technological transfer.
The substantiation of such a development project must also
rely on the analysis of the information regarding the
promoter's economic interest, the characterization of the
project's external environment, the project's place and role in
the general strategy of the initiating company, and the
projects potential risks[5].
The synthesis of the criteria that I suggest should be taken
into consideration on the substantiation of such
modernization projects is presented in figure 1 hereinafter.
[5]
Stoian, Marian Investment Management, A.S.E.

Publishing House, Bucharest, 2004.
Fig. 1 Table of criteria proposed for the substantiation of the modernization projects
Modern tendencies in the organization of these projects
require the definition, from the very project design stage, of
the responsibilities corresponding to each existing phase or
stage, as well as the definition of deadlines associated with
this phase/stage, aware of the fact that any delay may affect
the global result of the project. In the case of the
modernization projects, time is an extremely important
variable to which the project team must permanently relate.
Starting with the identification stage of the modernization
needs and until the project completion, time must be
carefully justified due to aspects such as:
i. If modernization implies the seizing of a market
opportunity, then the project identification, design,
implementation and completion time must perfectly
correlate with the existence of the respective
opportunity;
ii. If modernization implies a technological transfer,
namely the implementation of a new technological
solution, then the identification and implementation
of the optimum solution must be carried out as
soon as possible, since the optimum notion is
time-limited;
iii. The delays with respect to the time needed for the
completion of a modernization project can cause
changes in the projects substantiation conditions
taking into account that certain considered
premises may no longer be relevant.
In my opinion, special attention should be paid to the
quantification of all the modernization project's parameters,
as well as to the determination of the measuring units both
for the needed efforts and for the anticipated effects. If the
solution to the problems related to the economic and
financial elements can be easily found (the current
assessment systems include numerous quantification
options), the evaluation of the social and ecological costs

and benefits proves more difficult.
From this perspective, modernization projects should rely
both on quantitative as well as on qualitative analyses,
aware of the fact that in certain contexts it is impossible to
quantify all the aspects involved.
V
CONCLUSIONS
The transfer from plain modernization activities to complex

projects that are well substantiated and oriented causes the
technical-economic systems to face certain challenges and
constraints. These mainly refer to the dimension of the
needed efforts, the relevance of the activities projected on
the background of the micro- and macro-economic level
tendencies, as well as the rate and coherence of the
implementation. From this point of view, I estimate that,
prior to the design of a modernization project, technicaleconomic systems must realize their necessity and capacity
to face the efforts generated by the viability and longlastingness of the estimated results.
VI
REFERENCES
1) Brown, L. State of the World, 2002. Teora Publ.

House, Bucharest, 2002, p.36.
2) Vasilescu, I., Romnu, I., Cicea, C. Investments,
Economic Publishing House, Bucharest, 2000, p.
87.
3) Vasilescu, I., Romnu, I., Cicea, C. op. cit., p. 88.
4) Lasfargue, Yves, - Techno jolies, techno folies.
Comment russir les changements technologiques.
Les Editions dOrganisation, Paris, 1991.
Sensitivity and Uncertainty Analysis: Applications

to Small-land Scale Agriculture Systems in Nigeria
*
Ayinde, O. E, Ayinde K; Omotesho O.A. and Muhammad-Lawal. A

Department of Agric Economics and Farm Management
University of Ilorin, P.M.B.1515, Ilorin, Nigeria.
*
E- mail: opeayinde@yahoo.com
Abstract- Sensitivity and uncertainty analysis is useful in

providing information about local and global change tendency
of the management of enterprise mixtures to the choice of
target return level. Hence, the study examines the sensitivity
and uncertainty analysis in small-land scale agriculture in
Nigeria. The study used both primary and secondary data
(time series). A structured questionnaire was employed to
obtain information from the five hundred (500) randomly
selected small-land scale farmers in central part of Nigeria.
Descriptive statistics and Target-MOTAD (Minimization of
Total Absolute Deviation) model were used to analyze the data.
The result reveals the normative plans for the small-land scale
agriculture system in Nigeria. The sensitivity analysis reveals
that there is a positive relationship between capital and returns
and negative relationship exists between risk level and returns
in small-land scale agriculture systems. Hence, policies and
programmes that increase returns and reduce risk level should
be put in place in order to shape the small land scale
agriculture system.
Keywords- Small-land scale, sensitivity, Nigeria, TargetMOTAD model

I
INTRODUCTION
Nigeria is blessed with various climatic zones, enormous

resources and the potentials of producing, processing,
marketing and exporting of different output and
commodities from agriculture (Babafada 2003). Agriculture
is an indispensable real sector in Nigerian economy. The
roles of agriculture remain significant in the Nigerian
economy despite the strategic importance of the oil sector.
Agriculture provides primary means of employment in
Nigeria (Ogundari and Ojo, 2007), and accounts for more
than one-third of total Gross Domestic Product (GDP)
(World Bank, 2003). Nigerian agriculture is characterized
by: a multitude of small land scale agriculture systems
scattered over wide expanse of land area, with smallholding
ranging from 0.05 to 3.0 hectares per farmland, rudimentary
farm systems, low capitalization, and low yield per hectare
(Ogundari and Ojo, 2007).
Nigeria agriculture has for decades depended largely on
these small-scale landholders farmers, in spite of the
existence of urban agriculture. This set of small land scale
holders representing over 90% of the farming populace,
cultivate produce as much as 85% of the total agricultural
production and 87% of export crops (Adubi, 2000). More

so, these small-land scale farmers will continue to constitute
the backbone of Nigeria agriculture for the next twenty-five
years. Despite the importance of the small- land scale
farmers, they still operate largely under risk and uncertainty
and are inadequately equipped against risk and uncertainties
(Adubi, 2000).
Risk and Uncertainty may result from one or a combination
of four factors which may be endogenous or exogenous
(Anderson, Hardakier and Huirne 1997). These factors
include prices or markets, production inputs, farm outputs
and institutional factors. Invariably, these result into the
different types of risk and uncertainty faced by farmers.
Production risk could emanate from the unpredictable nature
of the weather and uncertainty about the performance of
crops or livestock. Price or market risk comes from
imperfect knowledge about prices of farm inputs and
outputs at the time that a farmer takes decisions.
Financial risk may result from unexpected risk in interest
rates on borrowed funds, and the possible lack of
availability of loan finance when required. While
institutional risks emanate from the instabilities in
government and its policies, and socio-legal uncertainty
within which the farmer operates. The international
environment also creates uncertainties because of
unpredictability. For examples, the merging of Eastern and
Western Europe definitely had an effect in the world market;
so also was the outcome of Europe 92 on commodities. In
addition, Globalization has caused the East Asian countries
to enjoy remarkable increases in per capita income but subSaharan African countries have had effect of low rates of
economic performance (LeBel, 2003). And World Trade
Organization, although creates free trade, has results into
high inequality internationally and within the countries.
Given this setting of the small-land scale agriculture in
uncertainty, their aforementioned importance and with the
expectation that developing countries such as Nigeria is
expected to experience increase in economic growth,
Nigerian governments have over time tried several strategies
and introduced numerous policies and programmes aimed at
shaping the Nigeria agriculture production, increasing the
level, grade and varieties of their export crops. These
policies and programmes include Agricultural Credit
Guarantee Scheme, Operation Feed the Nation, Green
Revolution, River Basin Development Authorities, National
Accelerated Food Production Programme, Guaranteed
Minimum Price Scheme, Marketing Board System,

Agricultural Development Projects (ADPs), etc. However,
the success of all the various agricultural programmes has
been minimal (Ukpong, 1993). This is may be because the
factors at which the small land scale agriculture is
responsive are still yet to be considered in the various
programmes. This couple with the fact that this small-scale
agriculture is more expose to risk and uncertainty than other
segment of economy may cause the results of the various
programme been minimal in its impact on agricultural and
economics growth. Hence a need to understand the factors
that can result into the small land scale agriculture stability
on the efficiency frontier through a sensitivity and
uncertainty analysis. Therefore, the study examines the farm
plan(s) that would adequately provide the small-scale
farmers with improved income under uncertainty and
explores the sensitivity and uncertainty analysis that will
consequently raise the efficiency of the small-land scale
agriculture in Nigeria.
This study will not only help policy planners but it will also
provide useful information to small-scale land agriculture
especially on farm size plan, budgets and returns to
investments. It will also offer suggestions on how risk
efficiency in small-scale agriculture could be improved such
that it would have greater impact on agricultural and
economic growth.
II
THEORETICAL AND EMPIRICAL

FRAMEWORK IN UNCERTAINTY ANALYSIS
The concept of uncertainty in any application depends on

the behavioral decision model employed. The popular
Bernoullian (1738) expected utility criterion utilizes an
objective function that is a function of all the statistical
properties of the outcome of risky actions ai, (i = l - - - - - n)
available to the decision makers. In practice, it is popular
among empiricists to assume that the underlying utility
function is quadratic and that profits are normally
distributed yielding the simpler function of mean and
variance only (Young 1979).Thus,
Max (E U) of ai = f (a, 2ai)
(1)
With equation (1), variance or standard deviation or
coefficient of variation is clearly the appropriate measure
of uncertainty and risk.
Different sets of risk concepts are implied by various nonBernoullian decision models. For example, the minimax
model would identify the maximum loss of an action
(regardless of how remote the probability of its occurrence)
as a measure of riskness of an action. The lexicographic
safety first model identifies the probability () that
random net income (Y) will fall below some critical or
disaster levels (d) as risk,
i.e. Pr (Y < d) =
(2)
There are many criteria in decision making under risk and
uncertainty. These are Walds Maximin, Maximax,
Huriwicz Laplace, Salvage Minimum Regrets, and Excess
Benefit.
Walds maximin criterion is associated with strategy, which
maximizes its minimum while maximax criterion is

associated with strategy which gives the highest possible
outcome. Hurwicz criterion is a hybrid of the maximin and
maximax criteria. It considers the weighted average of the
minimum and maximum payoffs under each of the
strategies. Savage Minimum Regret criterion aims at
selecting a strategy, which minimizes the opportunity cost of
marking decision. The Excess Benefit is associated with
subtraction of the minimum element from original matrix
and applying the maximin criterion to it.
Laplace criterion assumes that each state of nature is equally
likely to occur. Equal probabilities are, therefore assigned to
the various states of nature and the decision maker selects
that strategy which gives the highest expected income. This
study employed programming model developed from the
laplace criterion model with modification given to the
Lexicographic safety first principle. This study utilized a
programming model called target-MOTAD model under
safety first principle.
III
TARGET MOTAD MODEL
This study employs the linear programming model called

Target-MOTAD (Minimization of Total Absolute
Deviation) programming developed by Tauer, (1983). There
are other risk programming such as Mean-Gini model which
has been criticized based on the fact that some stochastically
efficient solutions that would be preferred by strong riskaverse decision makers may be excluded from the efficient
set and its tableau is much larger than that for Target
MOTAD and direct maximization of expected utility and
utility-efficient which are non- non-linear programming
models and are superior to linear programming model.
However, they are not widely used as they have been
criticized because they can only be applied when an
individual decision maker exists who is risk averse and
whose utility function is available. Moreover, they are not
applicable to a group of farmers considered in this study
(Anderson et al 1997). The Target MOTAD model is
superior to other programming model under risk because it
is computational efficient and generates solutions that meet
the second-degree stochastic dominance (SSD) test (Tauer,
1983).
IV
SENSITIVITY ANALYSIS
Sensitivity analysis is the study of how the variation in the
output of a model (numerical or otherwise) can be
approached qualitatively or quantitatively to different
sources of variation (Wikipedia 2007). Sensitivity analysis
can be used to determine model resemblance with the
process under study, quality of model definition, factors that
mostly contribute to the output variability, region in the
space of input factors for which the space of factors for use
in a subsequent calibration study, and interaction between
factors (Wikipedia, 2007). It is in fact described as been
useful in providing information about local and global
sensitivity of the enterprise mixture(s) to the choice of target
return level (McCamley and Kliebenstein, 1987)
Sensitivity analysis is popular in financial application, risk
analysis, signal processing, neutral network, and model-

based policy assessment studies and any area where models
are developed (Saisana et al, 2005). The conventional
methodology to account for risk and uncertainty in project
appraisal analysis adopted by Gittinger, 1972, and little and
Mirrlees, 1974. However, sensitivity analysis based on this
method is surely inadequate because it is based on the
subjective judgment about possible increments in project
costs of otherwise reduction in project benefits.
Hiller (1983), developed a project appraisal model for
estimating the probability distribution of present value (PV)
by using expected value E(PV). He relied on the Central
Limit Theorem for approximately normal distribution of PV.
By estimating the mean and variance of PV, the decision
makers can evaluate the risk consequences of a particular
investment. This model, however, is criticized for statistical
dependencies and potential correlations of covariance.
Stochastic simulation model was also used for evaluating
uncertainty in project appraisal (Anderson, 1983). Monte
Carlo sampling technique for estimating distribution of PV
and internal rate of return (IRR) was also examined by
Reutlinger, 1970. This approach as developed and applied
by Reutlinger is based on identifying the most applied
critical components of the project and simulating the
probability of IRR under different assumptions underlying
the critical components. However the most common
sensitivity analysis is sampling-based. A sampling-based
sensitivity is one in which the model is executed repeatedly
for combinations of values sampled from the distribution
(assumed known) of the input factors (Cacuci, 2003, Cacuci,
Mihaela and Navon, 2005). In general sampling-based
method performed the sensitivity analysis jointly with
uncertainty analysis by executing the model repeatedly for
combination of factor values with some probability
distribution (Cacuci, 2003).The steps involved are as
follows: Specify the target function and select the input of
interest; assign a distribution function to the selected factors;
generate a matrix of inputs with that distribution(s) through
an appropriate design; Evaluate the model and compute the
distribution of the target function; and select a method for
assessing the influence or relative importance of ach input
factor on the target function. Risk programming models
such as Target-MOTAD used in this study perform a
sampledbased sensitivity analysis. Hence the study
employed The Target-MOTAD in perform the sensitivity
analysis.
V METHODOLOGY
The study was carried out in Kwara state of Nigeria. The
state lies in the central part of Nigeria. It comprises of
sixteen (16) Local Governments with a population of about
1.8 million (1991 census). It has a total land size of 3682500
hectares (F0S, 1995). Agriculture is major occupation in the
state with over 70 percent of the population being farmers
and majority of the farmers in the state are into small land
scale agriculture. The climatic pattern, vegetation and the
fertile soil make the state suitable for the cultivation of a
wide range of food and tree crops. The major food crops
planted are Cassava, Yam, Maize, Rice, Soyabeans,
Cowpea, Guinea-corn and millet. The sixteen Local

Government Areas have been divided into four zones by the
Kwara State Agricultural Development Project (KWADP)
in consonance with ecological characteristics and cultural
practices (KWADP 1998).
SAMPLING DESIGN
VI
The population for this study consists of small scale farming

households of Kwara state of Nigeria. A three - stage
stratified random sampling technique was utilized to select
the sample for the study. In the first stage, the nonoverlapping four zones divided by the KWADP as Zone A,
Zone B, Zone C and Zone D zone were utilized. In the
second stage, half of the blocks in each zone were randomly
selected. While in the third stage, proportion allocation
technique was utilized to distribute a sample size of 500 into
each zone using proportion allocation technique.
Consequently, a random sample of 64 respondents was
taken from zone A, 128 from Zone B, 132 from Zone C and
176 from Zone D based on the farming household
populations proportion of the zones.
VII
SOURCE AND METHOD OF DATA COLLECTION
Both primary and secondary data were collected for this

study. The primary data were collected during the 2006
production year through a survey with the aid of interview
schedule administered to the heads of the selected farming
household heads with the assistance of well trained
enumerators. Input-output data were collected on individual
farms. The secondary data were collected from the yearly
agronomic field records of KWADP to determine the past
performance of crops. A seven-year (1999-2005) record
was synthesized for all crops. Other information was
obtained from the records of the National Bureau of
Statistics, journals and relevant texts to supplement the
primary data.
VIII
ANALYTICAL TECHNIQUE
The study employed Target MOTAD Model and Sensitivity

analysis for it analysis. Mathematically, the model is stated
as
n
c x
j 1
Max E (Z) =
(1)
a x
Subject to:
i 1 j 1
T-Yr+-Yr - 0
ij
bi
(2)
(3)
PrY-r =
(4)
= (M
0);
X, Y > 0
Where E (Z)=expected returns of the plan or solution to the
plan in Cj; cj =expected returns of activity j; Xj = level of

activity j; aij =technical requirement of activity j for resource
i; bi =level of resource i; T = target level of returns in naira
(it was derived from mean absolute deviation); Crj=returns
of activity j for state of nature or observation r (N); Y+=
deviation above expected returns; Y- = deviation below
expected returns; Pr = probability that state of nature or
observation r will occur; = a constant parameterized from
M to 0; i =1, ----------, m; j = 1,----, n.
c
n
Yr =
j 1
ij
c j x j

1
S 2
2
S
Std Deviation =
(5)
Where, S = number of states of nature; D = estimated mean

absolute deviation of return to the farm. The mean absolute
deviation (MAD) or D for an activity (j) and for the whole
farm over all states of nature (years) is estimated
respectively as
S 1 Crj CJ X j
Follows;
m = number of constraints or resource equation; r =

number of state of nature or observation;
M = large
number (represents the maximum total absolute deviation of
return of the model). Points on the risk efficiency frontier
are obtained by arbitrarily decreasing the value (y)
parametrically. Along the efficiency frontier, the TargetMOTAD model minimizes the mean absolute deviation
(MAD) for any given expected gross margins. Essentially,
this minimizes the standard deviation of returns to the farm
measured by the estimator.
IX
Dj =
(6)
1 n
Dj
n
j
1
D=
(7)
All variables are as defined earlier in this risk model;

magnitude of standard deviation allows the model to
determine a set of efficient farm plans along the E-V
efficiency frontier. Furthermore, sensitivity analysis was
carried out using the Target MOTAD programming model.
RESULTS AND DISCUSSION
Table 1: Availability of Different Resources for the Small Scale Farms

RESOURCES
(a) Average Cultivated Area (Ha)
ZONE A
2.49
ZONE B
4.4687
ZONE C
3.6154
ZONE D
2.8I68
(b) Average Available Labor (Mondays/Ha/

Growing Season).
( c) Capital (N/Ha/Growing Season)
300.00
380.00
214.82
270.54
71,038.46
60,331.3
37907.69
41,442.1
(d) Minimum Food Requirements (MJ)
145.908
118.944
92.484
144.569
(e) Target Level(N)
32,416.22
27,767.78
36,795.80
43,576.1
Source: Field Survey Data 2005/2006

The framework for this study is based on incorporating such
stochastic elements to evaluate the planning process in a
risky agriculture environment. This study assumed that risk
in returns arises from price and yield factors. In the risk
model, the farmer decides between possible crop
combinations on the basis of expected returns and the
absolute deviation of returns for each crop from its expected
value. Table 1 presents the resource position of small land
scale crops farms.
The result of the risk programming model gives the
normative plans. The normative plans are divided into risk
minimizing plans and profit maximizing plan. The profit
maximizing plans for all the zones are only profit

responsive, they are therefore likely to be selected by a risk
neutral decision maker. The plan has the highest risk
expected returns and hence the highest risk. Any risk level
higher than that of the profit-maximizing plans risk level
will give no different plan. Also any risk level lower than
that of the lowest risk minimized plan will result in no
feasible solution. Hence the lowest risk minimizing plan and
profit-maximizing plan fall on both extremes and therefore
forms the risk efficiency frontier.
Table 2: Normative farm plans.

ENTERPRISES
NORMATIVE SITUATION
PLANS
RETURNS
YAM(Ha)
MZE(Ha)
GNC(Ha)
MZE/GNC(Ha)
RICE(Ha)
GNT(Ha)
CSV (Ha)
CWP (Ha)
MZE/CSV
PLAN
TOTAL
CROPPED AREA
CROPPED AREA
RISK LEVEL
RISK MINIMIZING
I
II
288,793.4
296,050
0.4828
0.4778
(29.44)
(29.13)
___
___
___
___
___
___
____
0.0632
(3.85)
___
___
___
___
___
___
___
___
0.4828
0.5410 (32.99)
(29.44)
1.64
1.64
33246
45000
III
311,489.9
0.4671
(28.48)
___
___
___
0.1912
(11.66)
___
___
___
___
0.6583
(40.14)
1.64
70000
IV
330,015.5
0.4541
(27.69)
___
___
___
0.3506
(21.38)
___
___
___
___
0.8047
(49.07)
1.64
100000
PROFIT MAXIMAZING
VI
370,257.4
0.4263
(25.99)
___
___
___
0.7095
(43.26)
___
___
___
___
1.1358
(69.26)
1.64
165167.06
V
360,891.4
0.4328
(26.39)
___
___
___
0.6280
(38.29)
___
___
___
___
1.0608
(64.68)
1.64
150000
NOTE: Figures in parenthesis represent the percentages of Cultivated Area.

Source: Programming model Output
Table 2 presents normative plans for the small-land scale
agriculture in all the zones. This is done by pooling all the
resources together and getting the average of their risk
coefficient. The result shows that profit-maximizing plan
suggests the cultivation of both 0.4263-hectare of yam and
0.7096 hectare of rice which gives N370, 257.4 as returns
whereas the lowest risk minimized plans is cultivation of
only 0.4828 hectare of yam N288, 793.7 as returns.
limiting resource in all the normative plans. Hence, the

response of the optimal farm planning under risk solution to
changes for capital was also explored by using the
sensitivity analysis of the risk-programming model. Figure
1-4 show the efficiency frontier of risk minimizing plans
with increased capital of zone A, B, C, and D respectively.
700000
600000
SENSITIVITY ANALYSIS
Original Frontier
Frontier With Increased Capital
400000
Return
Value
The sensitivity analysis of the optimal farm planning under

uncertainty solution varying the target level was explored
using the risk programming model (see appendix1). It is
observed that the lower the target income level the higher
the returns and the lower the risk level. In another word,
there is a positive relationship between target income and
risk level and a negative relationship between target level
and income.
It is observed that generally, in all the zones the highest
return (which is of profit maximizing plans) with the lowest
risk level is found in frontier with lowest target (T =
N10,000 see appendix 1). For instance in zone A, the
highest returns of N611,011.80 with the lowest risk level of
N32,592.11 is found in frontier with the target of N10,000.
Furthermore, in all the risk-minimizing plans, the lowest
target has higher returns accompanied with lower risk level.
For example the risk level of N30, 520 gives a return of
N566, 683.90 in the frontier with target of N10,000.00
which is higher than all other targets used.
However, it is further observed that this negative
relationship between target and returns is associated with an
increase in return which correlates with less risk level. This
is more obvious in zone A. This may be due to high amount
of available capital since capital resource only becomes a
limiting factor in the last risk minimizing plan and profit
maximizing plan. This is further shown in Figure1-4.
Generally, in the other zones, amount of capital is the only
500000
300000
200000
100000
29000
31000
33000
35000
37000
39000
41000
43000
45000
Risk Level
FIG. 1: Sensitivity Analysis: Efficiency Frontier of Risk

Minimizing Plans with increased capital of Zone As
Farm.
350,000.00
330,000.00
310,000.00
290,000.00
270,000.00
Return
Value
Original Frontier
250,000.00
230,000.00
210,000.00
190,000.00
170,000.00
150,000.00
25000
27000
29000
31000
33000
35000
37000
39000
41000
Risk Level

Minimizing Plans with increased capital of Zone Bs
Farm.
education service at reduced cost to decrease target income

level, which in turn increases returns with a lower risk level.
350000
300000
XII
Return
Value
250000
200000
Original Frontier
150000
100000
50000
0
26000
26500
27000
27500
28000
28500
29000
29500
Risk Level

Minimizing Plans with increased capital of Zone Cs
Farm.
300000
250000
Return
Value
200000
Original Frontier
150000
100000
50000
20500
21000
21500
22000
22500
23000
23500
24000
24500
25000
Risk Level

Minimizing Plans with increased capital of Zone Ds
Farm.
Generally in all the zones, the sensitivity analysis with
increased capital shows an extension of the range of riskreturn possibilities available to the decision maker except in
zone A where the extension is minimal. It further revealed
that an increase in amount of capital increases the plans
returns.
XI
CONCLUSION AND RECOMMENDATION
It can be concluded that there is a positive relationship

between capital and returns and negative relationship exists
between risk level and returns in small-land scale agriculture
systems. Hence, it is recommended that policies and
programmes that increase returns and reduce risk level
should be put in place in order to shape the small land scale
agriculture system. Given that capital is a limiting resource
and the use of credit on the farm reduces risk, a concerted
effort should be made by government to facilitate access of
small farmers to small-scale credits. There should be a
concerted effort by the farmers, their societies, government,
and private stakeholder to provide better sources of capital
in order to increase the agricultural crop output and returns.
The government can stand as guarantor for the farmers who
should be organized into Unions or Cooperatives. There
should be a concerted effort by the farmers through their
societies, government, and private stakeholder to provide
better infrastructures amenities, health services, and
REFERENCE
1) Adubi, A.A.: (2000) The Economic of Behaviour

Nigerian Small Scale Farmer Implication for Food
Policy in the 1990s. Discovery Innovation. 12
(3/4):199-2002
2) Anderson, J. R. (1983) Forecasting, Uncertainty
and Public Project Appraisal
World
Bank Working Paper 1983-4, July 1983.
3) Anderson, J. R, Hardakier J. B. and Huirne R.B.M.
(1997) Coping with Risk in
Agriculture.
CAB
INTERNATIONAL Wallingfor U. K.
4) Cacuci, D. G. (2003) In Sensitivity & Uncertainty
Analysis, Volume 1: Theory; Chapman & Hall.
5) Cacuci, D. G., Mihaela Ionescu-Bujor and Michael
Navon. (2005) Sensitivity
And
Uncertainty Analysis: Applications to Large-Scale
Systems
(Volume II), Chapman & Hall
6) Gittinger, J. P. (1972) Economic Analysis of
Agricultural Project. A world Bank Publication,
99-155
7) Hiller, F. S. (1983) The Derivation of
Probabilistic Information For Evaluation
of
Risky Investments. Management Science. 9:443457
8) KWADP (1995-2001) Staff Appraisal Report.
Kwara State Agricultural Development
Project
(1998-2004)
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Comparative Analysis of African and Asian
countries in 7th International Conference on Global
Business and Economic Development. Bangkok.
Thailand.
10) Little, I. M. D. and J. A. Mirrlees (1974) Project
Appraisal and Development Planning For the
Developing Countries. Heineman London.
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Describing and Identifying the Complete Set of
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Uncertainty and Sensitivity analysis techniques as
tools for the quality assessment of composite
indicators. Journal Royal Statistical Society A,
168
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13) Tauer, L. W. (1983) Target MOTAD American
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Efficiency of smallscale Food crop production in
Nigeria: A stochastics frontier Approach Journal
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16) Wikipedia,
(2007)
Wikipedia,
the
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http://en.wikipedia.org/wiki/sensitivityanalysis.,last
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CD-Rom.
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Risk Preferences of
Agricultural Producers Their use in Extension and
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American Journal of Agric
Economics.61: 1063 -1084.
APPENDIX 1
Zone
Target level = N10,000

Risk level
Return( N)
8,157.31
45,064.44
8,500.00
65,194.96
10,000.00
110,352.50
A
26,520.00
482,368.00
30,520.00
566,683.90
32,592.11
611,011.80
10,000.00
103,204.20
11,640.00
148,666.70
12,150.00
157,642.90
B
15,361.10
200,745.40
20,000.00
205,037.30
26,675.20
205,445.20
7,149.50
76,481.53
7,300.00
84,638.11
8,000.00
110,450.60
C
8,565.00
121,477.00
10,000.00
135,164.80
12,331.60
135,164.80
10,000.00
85,273.68
12,000.00
128,122.80
13,000.00
141,297.80
D
16,500.00
176,739.70
17,500.00
185,910.50
18,315.90
191,271.20
Source: Programming Output
Target level =
Risk level
16,314.31
17,000.00
20,000.00
26,520.00
30,520.00
36,542.50
20,000.00
20,300.00
21,000.00
22,000.00
27,767,80
33,689.60
14,628.90
14,800.00
15,500.00
16,500.00
17,500.00
18,149.3
20,000.00
20,721.10
21,041.40
22,800.00
24,000.00
24,334.50
N20,000
Return( N)
90,195.55
130,389.90
220,705.00
280,074.00
477,357.60
611,011.80
147,594.00
156,778.20
167,338.50
180,760.80
205,055.00
205,445.20
126,568.00
127,568.00
129,779.40
131,812.10
133,884.90
135,164.80
100,758.60
156,766.60
160,240.30
177,198.00
188,203.20
191,271.20
Target level = N30,000

Risk level
Return( N)
24,472.00
135,251.50
26,520.00
238,721.00
30,520.00
343,279.10
35,120.00
454,825.00
40,120.00
567,057.80
42,078.20
611,011.80
30,000.00
170,697.00
31,327.40
196,854.80
32,500.00
202,720.50
35,000.00
205,037.30
39,725,00
205,348.70
41,675.20
205,445.20
23,238.60
131,499.00
23,990.00
134,332.80
24,000.00
134,553.10
24,100.00
134,556.40
24,300.00
134,962.90
24,399.30
135,164.80
30,000.00
161,427.50
30,100.00
176,423.00
30,200.00
178,515.30
30,300.00
180,349.00
30,500.00
184,016.90
30,961.70
191,271.20
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Extras
life interest 132
A
Adedeji 67
Afonja and Pearce 67
Afrinvest 65
Agip 68, 70
AIDC 7
Alavi and Leidner 123
Allam 149, 150, 155, 157
Allam and Lymer 150
Amat 149, 157
Amro takeover 93
Analysis 17, 23, 24, 35, 36, 40, 45, 46, 47, 59, 62, 78, 79, 82,
87, 121, 135, 137, 146, 157, 161, 167, 168, 169, 170, 171,
176, 180, 181
Anderson 99, 102, 176, 177, 178, 181
Andreassi 75, 79
Anyadike, 68
Applications 55, 176, 181
arguably 129
Argyris and Schon 128
Armed Robbery Claims Data 11
Arshanapalli 33, 35, 38
artifacts 75
Asian-Pacific 31, 33, 36, 157
Assessing 78, 140, 147
asymmetric 29
attractions 21, 22, 23, 25
B
Baerns Barbara 85
Bahari Lamongan 132, 137
Bailesteanu 141
Balasubramanian 81, 82, 87
Bammeke 69, 72
bankruptcy 88, 95, 106, 140, 141, 142, 143, 144, 145, 147
barriers 29, 30, 81, 86, 100, 102, 104, 106, 109, 111, 112
Bashir and Ramay 75
Beijing Zhongguancun 105
Bernoullian 177
Berry and Zeithaml 42
billion Naira 69
Blimbing 132
Bormann & Birjulin 77
Box-and-Whisker 12, 13
Brand 26, 81, 85, 86, 87, 98, 100, 101, 102, 103, 105, 159, 160,
163, 164, 165, 166, 167, 168, 169, 170, 171
Brand Decisions 159, 163, 166, 167, 168, 169, 170
Brand Influence 159, 164, 167, 168, 169, 170, 171
Branding Opportunity 97
Brundtland 116, 117
bunkering 66, 71
Butler Destination 21
C
Capital Financing 2, 6, 7
capital market integration 29, 30, 32, 40
capital structure 140
chaotic 127
Chittagong 41, 150
Choudhry and Lin 33, 40
Click and Plummer 33
clinical trial and opinion leader 97
Clinical Trials 97, 100
cointegrating structure 33, 38
Collongues model 141
conflicting work life policies 74
Confort 144
Consequently 14, 43, 172, 178
constellation 11
Construcii 144
contradictions 66
Co-opettion in Peripheral Surroundings 27
Corporate Tax Holiday 7
Corruption 26, 72
Ct 75, 78
Couger 128
cronbach alpha 135
Cropanzano 77, 79
D
Danemark 109
Davenport and Prusak 128, 129
Debreceny 149, 157
decomposition analyses reveal 32
Deductible 11, 17
deep crisis 72
degradation 66, 68, 69

Demand and Supply 104
democracy 26, 111, 130, 131
demographics 111
demonstrates 58, 115, 118, 119
destination marketing organization 21
destinations 21, 22, 23, 26, 27, 67
devastation 70
Dharmmesta 137
Dhuha 132, 137
Dickey-Fuller test 59
discrepancy 67
disinherited 71
dissatisfactory 41, 44, 46
dissemination 126, 148
distinctively 27
diversification 8, 29, 30, 31, 34, 38, 40
DMOs 21, 22, 23, 27
Dominance 57, 106
Doukas 33, 35, 38
Durable 159
dynamic linkages 29, 31, 34, 36
E
Economic Development 56, 65, 181
Economy 36, 56, 59, 60, 62, 63, 65, 66, 79, 113, 148, 165
EDA 12, 15, 17
Eden and Aviram 133
Edmister models 141
E-government 104, 105, 109, 110, 113
eigenvalue 62
Elf 70
emerging tourism destination 21, 22, 23, 24, 26
Emerging tourism destination 21
Emerging tourist 21
emphasises 126
empirical finance 17
empirical models 141
entrepreneurial 3, 6, 8, 21, 58
ethically-charged 82
Ettredge 149, 157
exhaustion 74
exigible 142
Expert Model Mining System 11
F
fairly predictable 43
federal 9, 66, 67, 69, 70, 71, 72
Felmingham 34, 36, 40
festivals 21, 26
Financial Competitiveness 140

Financial integration 29
financial modelling, general leverage 140
financial performance 120, 140, 141, 142, 143, 144, 145, 146
Firestone 124, 131
Flow of Funds 56
fragmentation 81, 82
Frayne 133, 137
Frechet 18, 20
frivolous 72
Fuzzy logic 48
G
gasflaring 70
General Babangida 71
General Crime Insurance 11
generated 5, 43, 62, 97, 98, 128, 145, 146, 175
Glitnir 91
Government Policies 56
Gowthorpe 149, 157
Granger causality 34, 40
Gremler and Bitner 42
Griffeth & Gaertner 78
Gumbel 18, 20
Gyandoot 105, 113
H
Hardakier 176, 181
Hibah 132
Households 159
Hybrid flow shop 48, 55
Hypertext markup language 148
I
Implementation 47, 65, 172
inadequacies 106
inadequate 22, 68, 71, 112, 178
inappropriate 41, 44, 45, 46, 107
indigenes 71
infrastructural indicators 105
Innovation 9, 113, 115, 116, 117, 118, 119, 120, 121, 131, 137,
181
institutionalization 172
institutionalizing 70, 127
insurmountable 94
interaction 29, 30, 35, 44, 109, 115, 116, 124, 129, 161, 162,
163, 166, 167, 168, 169, 170, 171, 177
Internet financial reporting 148
JEL Classification 140

Jenderal Pendidikan 132
job satisfaction 74, 75, 76, 78, 111
judiciously 69, 172
Macroprudential Management 88
Malarvizhi 150, 157
Manecuta 141
manipulation 70, 134, 148
marginalization 66, 69
marketing 7, 21, 22, 23, 24, 25, 26, 27, 28, 42, 81, 85, 97, 98,
99, 101, 102, 103, 110, 148, 173, 176
Marketing Organisation 23
Marston 149, 150, 155, 157
Martennson 124, 129, 131
Matennson 123
Medical Device 4
Mendonca 78
Merchandising 25
mobilized 69, 72
Modelling 11, 140, 146
modernization 112, 172, 173, 174, 175
Modernization 172, 173
modernizations 172, 174
modesty 72
Moldovulcan 144
Morgan 75, 78
multinationals 69, 72, 116
multivariate Cointegration analysis 34
K
Kanungo 78
Karatepe and Kilic 74, 75
Kaupthing 91
Keeble 130
Kenexa Research Institute 74, 77, 79
khadaroo 155
Khadaroo 148, 150, 157
kidnapping and hostage 71
Killough model 141
Kliebenstein 177, 181
Knowledge Management 123, 124, 125, 127, 128, 129, 130,
131
Kolmogorov-Smirnov 14, 15
Kompetitif 132
Konrad 75, 77, 79
Konrad and Mangel 75
Kreitner 137
K-S test 15
Kwara 178, 181
L
Lamongan 132, 135, 137
Landsbanki 91
laplace 177
Lately 71, 172
Lathan 133, 137
Laursen and Mahnke 115
legislation 33, 94, 119
Liebowitz and Beckman 128, 129
Life Interest 132, 134, 135, 137
life skills 132, 134, 135, 136, 138
Life Skills 132, 134, 138
listen and willingness 72
loglogistic distributions 13
log-Normal 12
Lognormal Model 11, 16
Looking Beneath Statistics 104
low visitor arrival 22
Lundstrom 98, 99, 100, 103
Lymer 148, 149, 150, 155, 157, 158
N
Naqvi 75, 77, 79
Nebenzahl 82
Niger Delta region 66, 68, 71
Nigeria 11, 12, 17, 21, 22, 56, 57, 58, 60, 63, 64, 65, 66, 68, 69,
70, 71, 72, 73, 176, 178, 181
Nigeria private sector 64
Nonaka 125, 128, 129, 131
Notwithstanding 71, 95
Nowicki and Smutnicki 48
O
Obasanjo and Mabogunje 66
Oesterreichische 36
Ohlson model 141
Oil Politics 66
Okilo 70
Okpara 75, 79
opportunities 7, 8, 25, 29, 30, 34, 38, 40, 67, 75, 86, 101, 102,
115, 117, 118, 130, 132, 148
Oyekanmi 72
P
Pakistan 34, 40, 74, 77, 78, 79
Panda 85, 87
parasitic state 72
Pasewark 148, 157
Patric and Julia 81
penalise 93
Penelitian Sesuai Prioritas Nasional 132
perception 4, 23, 25, 26, 69, 70, 81, 82, 83, 84, 89, 98, 100,
108, 118, 135, 137, 160
Perilaku 137
persistent 32, 124, 190
Petravick 149, 157
Petroni 48, 55
Petrovic and Duenas 49
Pharmaceutical 7, 48, 97, 98, 99, 100, 102, 103
Phylaktis and Ravazzolo 33, 39
Pirchegger 149, 150, 157
polie 155
political patronage 72
postponing 107
Premises 123
prescribe 25, 69, 98, 99
prioritizing 49, 75
Private Sector 56, 58, 64, 65, 73, 107
Process 9, 79, 100, 113, 115, 116, 118, 123, 128, 131, 146,
172, 186
Product Progress 172
Projects 172, 177
PROLOGUE 2
Promises 123
promotional strategy 21, 23, 24, 25
Promotional strategy 23, 27
Prottas 75, 79
psychomotorics 136
Q
Quazi, 74, 79
R
Rahman 75, 77, 79
Raiffeisen 142
Rayleigh 18, 19, 20
recapitalisation 57
reduction 32, 39, 57, 65, 67, 74, 111, 133, 143, 172, 173, 178
retained profit ratio 140, 141
returns on equity 140
risk of bankruptcy 140, 141, 143, 144, 145
Risk Premium 17
risk programming 177, 179, 180
robustness 15, 107, 108
role behavior 132, 133, 134, 135, 136
Role Behavior 132, 134, 135
Rural 115, 159, 160, 161, 165, 166, 167, 168, 169, 170, 171
rural counterparts 161, 162, 163, 164
S
Sanda 67, 73
Scheduling 48
Schroff 99, 103
Search 190
SEBI regulations 8
Self Esteem 132, 134, 135, 137
self-efficacy 132, 133, 134, 135, 136
Self-Efficacy 132, 135, 137, 138
self-esteem 132, 133, 134, 135, 136
sensitivity 32, 176, 177, 178, 179, 180, 181
Sensitivity 176, 177, 178, 180, 181
Sharma and Wongbangpo 33
Shell 68, 70
Shirata model 141
Sikap 137
Skewness 12
Small-land scale 176
Small-land Scale Agriculture 176
SME 7, 65, 140
social inequalities 66
sparingly 43
spillover 74, 75, 90
spontaneous 45
Stakeholders 115, 116, 118, 119, 120
Stochastic 35, 36, 37, 178
Strategies 28, 104, 122, 181
Sunan Drajat Grave 132
Surprisingly 64, 104
Sustainable Development 115, 116, 118, 119, 120, 121
Systems in Nigeria 176
T
Takeuchi 125, 131
Tapan K 85
Target utilization 48
Target-MOTAD model 176, 179
Tauer 177, 181
Tay & Kelly 74
Technical Environment 172
Technical-Economic Systems 172
Technological Environment 172
Technology-Readiness 104
Tetreault 42, 43
Thaden 74, 79
Thompson 75, 79
Tinggi 132
tourism business environment 21
Trajectory 2
Tremblay & Lalonde 76, 77, 80
triggers 81, 98
Turnover intentions 74, 76, 80
U
Uncertainty 176, 181
undercapitalisation 57
unidirectional 33, 34, 39, 40
unobtrusive 81, 82
unsubstantiated claims 72
urban 41, 159, 160, 161, 162, 163, 164, 165, 176
Urban 159, 160, 161, 166, 167, 168, 169, 170, 171
Uriel Ezequiel 36
Utomi in Solanke 64
V
Valcour 74, 75, 78
vandalisation 71
VCF 2, 5, 6, 7, 8, 9
VCF ENVIRONMENT 6
vector autoregression 32
Venture 2, 3, 4, 5, 6, 7, 8, 9, 10
venture capital 2, 3, 4, 5, 6, 7, 8, 9, 10, 102, 198
VICE 24
W
Wagenhofer 149, 150, 157
Wainwright 123
Wallmart 93
WAPIC 12
Waterhouse Coopers 4
Wenner and Lawrence 86
Wensley 134, 137
willingness 4, 21, 45, 74, 108, 136, 160
Wisata 132, 137
witness unimaginable 66
Wongbangpo 33, 37
working students 74, 77, 78
X
xenophobia 11
Y
Yaqoob 74
Youth 72, 132, 134

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Copyright by Global Journal of Management and Business Research 2009. All rights reserved.

John A. Hamilton,"Drew" Jr.,

Dr. T. David A. Forbes

Dr. Wenying Feng

Dr. Carlos Garca Pont

Dr. Fotini Labropulu

Dr. Lynn Lim

Dr. Mihaly Mezei

Dr. Miguel Angel Ario

Dr. R.K. Dixit (HON.)

Er. Suyog Dixit

20. Management of the Modernization Projects from the Technical-Economic

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he research activities among different disciplines of natural science are backbone

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reversing the trend in both private equity investment

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From the above analysis, the following outcomes were

high-technology enterprises although do not offer

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